Legacy vs Low Cost: Are Majors and LCCs Meeting in the Middle?
By Gary Bowerman
“We must adapt to the new realities. I am increasingly convinced that a low-cost carrier should be a key driver in our tool kit… an important means to achieving our ultimate goal of long-term, sustained profitability."
Those words of Calin Rovinescu, Chief Executive of Air Canada – a decade after a failed previous low-cost carrier (LCC) project – underscored the market conundrum facing major carriers.
Air Canada’s renewed low-cost ambitions coincide with a similar announcement by Japan Airlines, which is planning an LCC in collaboration with Australian budget airline Jetstar. The JAL-Jetstar team-up is responding to a “new reality” in the Japanese market; All Nippon Airways will operate a Kansai-based budget airline from the second half of 2011. Like Air Canada, JAL has a mixed history in the market, having operated JAL Express since the late 1990s. So why are major carriers revisiting the low-cost model?
Firstly, it’s necessary to remember how LCCs developed. From the outset, LCCs represented more than cheap flight tickets. Fast-growth LCCs built new routes and frequencies, often to/from short-haul destinations that made little economic sense for legacy carriers. They did this by developing a cost structure based on driving down labor and operational costs, and were helmed by an executive with proven experience in the sector.
Today, LCCs rely heavily on online booking and frequent promotional pricing, often use secondary airports and terminals, and operate high seat densities and rapid “at-the-gate” flight turnaround. Ancillary pricing delivers significant revenues from services such as baggage check-in, seat selection, flight insurance and ground transportation.
In short, LCCs brought point-to-point travel back into vogue. By shaking up long-held perceptions about journey purpose, booking methods, fare structures and destination networks, they ushered in a new era of consumer price sensitivity.
Clearly, the success of LCCs in Europe and North America, and more latterly in Asia and Latin America, where they compete directly with major carriers, has altered the airline landscape irrevocably. Or has it?
A report by Deloitte Touche, called Flight Path to Success, suggests aviation business models are blurring and network and low-cost carriers are converging on a “middle ground” model. “As low-cost carriers pursue ambitious expansion plans and move toward a full-service model, they risk losing their competitive advantages. At the same time, restructuring plans are taking network carriers toward a lower-cost model,” the report said.
Evidence for this low-cost ‘move to the middle ground’ is provided by the scale and vast route network of LCCs like Europe’s Ryanair and Air Asia, the latter of which completed a high-profile tie-up with Expedia, sponsors the Oakland Raiders football team and has launched a long-haul subsidiary, Air Asia X.
On the major side, the success of Australia’s Qantas merits consideration. It reported a 4.8 percent increase in passenger numbers in March, thanks largely to its Jetstar LCC brand (which encompasses a short-haul Asian operation and a longer route international LCC). Jetstar now handles 37 percent of Qantas’ total passenger load, and experienced a 14 percent year-on-year passenger increase in March.
"We will only proceed if we are satisfied it has the scale and scope to truly remain low cost," Air Canada’s Rovinescu has said.
With direct competition between full service airlines and no-frills carriers intensifying worldwide, he may not be the last airline CEO to seek scale in the new realities.
This blog has been commissioned by AmEx.
About Gary Bowerman: Oxford-born Gary Bowerman has travelled the world in search of a good story. After cutting his teeth in legal and tax publishing in London, Gary moved on to edit international business and travel titles before relocating to China in 2004. Resident in Shanghai, he has recently been a contributor to CNN Traveller, Business Traveler,CNBC Europe Business, New York Times, Travel & Leisure and South China Morning Post. Editor of the Singapore Highlights and Beijing Highlights guides, Gary is also one of the founders of Hong Kong and Shanghai-based media and marketing communications agency Scribes of the Orient.
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