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Role & Impact of LCC in Aviation Market

Abdul Ahad (BAM-13227)Kainat Durrani (BAM-13218)Bilal Munir (BAM-13216)Khushbakht Safdar Khan (BAM-13249)

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What is LCC (Low Cost Carriers)?

• LCC is defined as:“A low-cost carrier or low-cost airline (also known as a no-frills, discount or budget carrier or airline, or LCC) is an airline that generally has lower fares and fewer comforts. To make up for revenue lost in decreased ticket prices, the airline may charge for extras like food, priority boarding, seat allocating, and baggage etc.”

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Introduction

The concept of a low cost airline was started in the seventies by the American domestic carrier Southwest with the sole objective of offering cheap airfares to the consumers. This created a situation where already established flag ship carriers or legacy airlines to lose a significant amount of the market share to these newly formed low cost airlines, purely because of their ability to charge a lower price over traditional full cost airlines.

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Brief History Around The World

• North America:From the deregulation in the 1970’s till the early 2000’s the transformation of the low cost concept in the United States can only be described as a series of innovations, proliferations and consolidations where many other low cost airlines (e.g. Pacific Southwest, New York Air, Jet America) entered the market of which, some survived the competition and others did not.

• Europe:In Europe the low cost concept was originated in the UK and Ireland based on the Southwest model with the introduction of easyJet and Ryanair in 1995. Their success was attributed to the favourable economic framework that encouraged the low cost airline industry.

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Cont.…• Australia:

After the deregulation of the Australian domestic market in the early nineties, airlines such as Compass Airlines and compass Mk II started low cost operations. However they were absorbed into the Qantas group as a result of the financial strength Qantas had over the low cost airline.

• New Zealand:In New Zealand, although the deregulation movement was implemented in 1984, low cost operations did not start until 1995. However, unlike most other countries it wasn’t in the domestic sector but short haul, started by Kiwi Airlines. The response for this by the New Zealand flag ship carrier Air New Zealand, was to create their own subsidiary Freedom Air to gain a market share in the low cost airline sector.

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Model of LCCs

Low Cost Model

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Greater Efficiency lower Price

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What underlies the LCC success story?

• First: The growth of LCCs has gone hand-in-hand with market liberalization. As domestic aviation markets have been progressively deregulated in many countries and as market-oriented air services agreements have increasingly became the new international norm, LCCs have seized the opportunity to offer innovative air services that have spawned new passenger demand, the so-called “Southwest effect”.

• Second: A second observation: although LCCs have pursued a number of different business models, common to all is a laser-focus on the customer: identifying what prospective airline passengers value—that is, what they are willing to pay for—and then offering them products to meet that demand.

• Third:  in a cyclical industry subject to surges in the cost of fuel, not to mention crises such as terrorist attacks and health scares, LCCs have understood that maintaining a competitive advantage requires a relentless drive to cut costs, expand revenues, and maximize efficiency.  

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Impact of LCCs on European Air traffic• The European Air Transport market has been recently

swamped by the low cost airlines.

• Currently there are 50 such airlines operating in the Europe and their number is increasing daily

• The share of low cost carriers is expected to rise by the end of 2015 to more than 55 percent among air carriers.

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Impact of LCCs on European Air traffic

• Characteristics of Operation of LCA:Great expansion of LCA is favoured by their extreme adaptability regarding the market. The low cost airlines base their operation on constant elimination of non-profitable lines and introduction of new ones:

• Characteristics of the concept of LCA:1. Using secondary and regional airport2. Point to point service3. Single fare class4. Direct service between regions5. Short haul flights6. No service on board7. Younger and environment-friendly fleet 8. Low operative cost 11

Impact of LCC on Southeast Asia

• SOUTH-EAST ASIA’S low-cost airlines have gone from feast to famine. Cheap, short-haul, no-frills flying came late to the region, but people have taken to it eagerly. In just ten years, according to the Centre for Asia Pacific Aviation (CAPA), a research firm in Sydney, low-cost carriers’ share of the region’s aviation market has soared from almost nothing to 58%.

• In Europe, where cheap airlines have been flying for much longer, easyJet and its fellows account for only about 40%. Now South-East Asia’s skies are looking crowded. In South-East Asia growth has been particularly strong: many of its 600m people live in large archipelagic countries, such as Indonesia and the Philippines, where flying is the easiest way to get around.

• Of the world’s 15 busiest low-cost international routes, nine are in South-East Asia.

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LCC in Japan

• Japan is the most interesting example of a stagnant market stimulated by the launch of low-cost carriers. "Japan has the unenviable distinction of being the only major market in the world to have about the same traffic today as 15 years ago,". With the launch of three low-cost carriers in 2012 -- Peach, Jetstar Japan and AirAsia Japan, domestic passenger numbers increased by 8.7% in 2012, the largest percentage growth in 20 years.

• LCCs command only a 1% share of air traffic in China and 4% in Japan, their share climbs as high as 65% in the Philippines, 61% in Thailand, and 52% in Malaysia.

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How low cost airlines dominated the global market?• Europe- low cost flights account for 38% of all Europe 2012 air traffic, a

rise on the previous 36.5%. Spain has the highest share of LCC traffic in Europe at 57%, followed by the UK at 52%. This LCC penetration represents the biggest market share, regionally, in the world. Europe was the second biggest and fastest growing region with a total of 680m passengers.

• America- 30% of air traffic in North America was from budget airlines, the second highest LCC penetration after Europe. North America was also the third biggest and fastest growing region with 597m passengers. Some of the most significant growth was in Latin America at 6%.

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How low cost airlines dominated the global market? (Cont.)• Asia- Low cost carrier penetration is 18.6%, however, Asia is

the biggest and fastest growing region with 787m passengers and 9% growth. Most of the busiest routes of last year were in Asia at 7/10. Asia is also the world's most competitive aviation market with 75% of routes served by three or more airlines.

• Middle East- Low cost carriers represent 14% of all air travel in the Middle East. The region is growing rapidly as a flight hub with European and Asian traffic routed via the Middle East growing by 20% from 2011-2012. The three key airports: Doha, Abu Dhabi and Dubai all showed high traffic volumes, serving around 15% of all air traffic between Asia and Europe and from Europe to the Southwest Pacific.

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What are the implications to full service airlines?

• The changes in the LCC market affect its alternative products. As there is an increase in the demand of LCCs, the competition that it has given has pressured full service airlines to change or improve their product in order to compete. In many examples, where the full service carrier does not want to “cheapen” their brand, a subsidiary LCC is created to compete directly against the regional LCCs. For example, Jetstar by Qantas; and Tiger Air by Singapore Airlines.

• Other strategies by full service airlines are to change the product that they offer into a more flexible or innovative matter. For example, Air New Zealand and Virgin Atlantic have eliminated their traditional “First Class” and introduced a “Premium Economy Class” in between the traditional “Economy” and “Business Class”. This strategy is to deliberately give the impression to the customers that the fares are now more competitive to low cost carriers as they have eliminated the luxurious First Class, however the passenger will still enjoy the perks from their full service airlines, i.e. complimentary meals and drinks, baggage allowance, seat allocations, etc. Moreover, Air New Zealand offer flexible fare to their customers where they can choose to travel without the extras and pay a lower fare that is directly compatible against the low-cost carrier rivals. 16

How can low cost airlines compete?

• Amadeus head of travel intelligence Pascal Clement, Head said: "The rapid pace of change and increasing competitiveness of the global airline industry, as evidenced by this data, means airlines and the wider travel industry increasingly need to base operational decision-making on data insights and analytics, in order to identify opportunities and risks as they emerge.

• "This data provides good news for the airline industry, showing that passenger air traffic has increased in every region of the world from 2011 to 2012. As in 2011, this growth is led by Asia, however, the data points to a further opportunity in the region, where the majority of traffic is on a small number of busy routes."

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Role of LCCsPrice:•The main advantage of low-cost airlines is the price of tickets. Low-cost airlines may not have all of the amenities that other airlines have, but their tickets are reduced by a considerable percentage. In the United States, low-cost airlines can save $100 or more per flight.

•Major hubs often have one-way flights from $50. In Europe, low-cost airlines have rates as low as $20 one-way. If your budget is the main consideration, low-cost airlines provide the best deals

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Role of LCCs (Cont.)Locations•Low-cost airlines fly to many locations in the world. In the United States, they go to most major cities and some smaller ones. Flights are often less expensive out of major hubs such as Los Angeles and New York.

•Europe has a few well-known low-cost airlines that offer flights all over the continent. The larger European cities such as Paris and Madrid provide flights to more locations than the smaller cities. Additionally, flying is faster than taking the railway system that goes to many of the same locations.

•Low-cost airlines also exist in India, Jamaica, New Zealand and many other countries.

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Role of LCCs (Cont.)

Promoting Travel•People will travel more often when they can save money. They go to locations that they might not have gone to otherwise because they can afford the airfare. This means that more people are able to travel the world than ever before.

•Airline travel used to be for the elite, but with low-cost airlines, it is becoming an option for more people. Travel packages that include low-cost airlines often encourage travel to certain destinations and may include both airfare and hotel in the price.

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Summary of all is:-

• Next image shows the impact of LCC around the globe how LCCs are growing rapidly

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Conclusion

• Consumers have benefitted from the rise of the low cost sector in terms of more competition, more destinations, greater frequencies, and a greater diversity of fares. While there has been some impact on the major airlines, around 50% of the traffic carried by low cost airlines is newly generated, and there is little evidence that the hub and spoke networks of the major carriers are being adversely affected to any great extent. The feed of the major carriers may be squeezed on certain routes that are subject to point-to-point competition from low cost carriers, but indications are that they are more likely to respond by reducing aircraft size than by withdrawing from routes altogether.

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