Low Cost Carrier Characteristics

Low Cost Carrier Characteristics

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The idea to enter the world of the full cost carriers by low prices isn’t a new one. Already in 1977 Laker Airways founded the “Sky Train” between London and New York. Even if this service was never successful, more and more low cost carriers were founded during the progress of deregulation and the development of an own low cost strategy began.
When we today have a look at the homepages of low cost carriers we cannot but state that nearly all of them are operating successful despite the issues of September 11th in 2001, SARS in 2002 and the war in Iraq in 2003.
Southwest for example has shown a positive net income for the period of 1990 to 2002 (Appendix A) and is nr. 5 of America’s most admired companies in 2005 (Homepage). Also Ryan Air was able to enhance its number of passengers transported from 5000 in 1985 to 24,635,000 in 2004 (Appendix B).
The success of the low cost carriers had major competitive effects on the mainstream full cost airlines of whom many reacted to the new competitor by founding their own “low cost carrier”, namely Shuttle by United, Continental Lite, Delta Express, Germanwings and so on.
But what is it that makes low cost carriers such unbeaten? In this essay I would like to demonstrate some of the key success factors that have made carriers like easyJet, Ryan Air and Southwest so successful.

First it has to be mentioned that no unique low cost strategy exists, it is more that every airline has its own concept, so that the service offered varies between No Frills-Airlines and “quality airlines with lower prices”. Moreover the idea of differentiation has also entered the low cost carrier market in resent times as the competition in this market grows. Nevertheless there are some basic characteristics every low cost carrier has:

similar destinations to the full cost airlines
similar cost structures to charter airlines
a new product- and service concept
concentration on the factor price

(Pompl, 2002)
The main purpose of low cost carriers with this characteristics is to gain a significant cost advantage to be able to undercut the ticket prices of the full cost carriers by nearly 50%. Therefore it is necessary to introduce several new concepts in the route management, operations, distribution and service management.
Lets have a closer look to the concepts and therefore to the key success factors of the low cost carriers:

Flight Plan: Low cost carriers fly mainly in the short-haul to medium-haul market.

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Basically they connect cities with a high route traffic density by point-to-point services from secondary airports with high frequencies and short turn around times. To work efficiently either the traffic density of a city has to be very high or the number of passengers willing to fly can be enhanced significantly by the low cost carrier in order to get the appropriate load factor. As a result and due to the short turn around times from about 20 minutes the routes can be flown with a very high frequency. Consequently low cost carriers have a high aircraft and crew utilisation and therefore lower unit costs (Doganis, 2002). For example the aircrafts of Southwest fly an average about seven flights per day, or about 12.5 hours (Homepage). Additionally to avoid a direct competition with the full cost carrier serving the same destination, low cost carriers often choose secondary airports which are easy to reach from major cities. This also has the advantage of lower airport charges and good available slots (Maurer, 2003).

Type of Aircraft: Most low cost carriers follow the principle of a homogenous fleet of cost efficient aircrafts that can be used throughout the network, at any time by any crew. Often these aircrafts are leased, have a high seat density and only one booking class, popular is the Boeing 737 or the Airbus 320 family. Because of this facts it is possible to achieve significant cost reductions in staff qualification costs (flying and maintenance) and inventory spare holding costs. Also the aircraft productivity is enhanced as the load factor grows through the high seat density. For example the seat density of easyJet in their new Airbus A319 is so high that they had to install one more emergency exit as usually necessary (Homepage).

Maintenance: As maintenance costs are a typical economy of scale business it is only possible for full cost carriers to run it cost-effective. Hence low cost carriers mostly outsource their maintenance (Pompl, 2002). But the low cost carriers make strong efforts to find new maintenance concepts that are more appropriate for their needs and even more cost efficient e.g. through cheaper labour costs. As Allan Marking, chief engineer at easyJet says: "I'm not looking for the minimum maintenance performance, I'm looking for the best value where maintenance is an investment in the reliability and longevity of the aeroplane" (Pilling, 2004).

Labour costs: “ For most airlines wage costs and associated social security and pension payments for staff represent the largest single cost element” (Doganis, 2002, p.115). Appendix C gives an overview of the great differences in average annual remuneration. In the low cost business it is normal to get lower wages by higher duty times for the crews as low cost carriers aim to make the pilots most productive. “The average Southwest Pilot produced 800 block hours in 2000. In comparison, the average United Airlines’ pilot produced only 54% of the output produced by the average Southwest pilot” (Gillen & Lall, 2004, p.44). Despite this fact the staff of Southwest is highly motivated. For instance does the cockpit crew of Southwest help to load the baggage if necessary. In my opinion one reason for this motivation is the profit-sharing system and the clear structured earning scheme of Southwest which also other low cost carriers use for their favour.
But low cost carriers do not only save labour costs by lower wages, they also:

Fly with the minimum staff required
Minimize the proceedings and overnights
Minimize social security payments
Avoid trade unions federations

The table below which compares a Lufthansa Boeing 737 with an Air Berlin Boeing 737 in the points mentioned above should make clear the differences:

Boeing 737 Lufthansa Air Berlin
Cabin attendants 4 3
Overnights per month 12 4
Loss of licence insurance Half paid by company Paid by employee
Union VC cockpit none

(Personal communication, August 13th, 2005)

Sales distribution: “Ticketing, sales and promotion represent around 14 per cent of the total operating costs of scheduled airlines of ICAO member states…” ( Doganis, 2002, p.143) . To avoid distribution costs in such significant height low cost carriers do not require expensive ticket facilities like travel agencies which claim commissions but sell their tickets mainly through direct channels like the internet or call centres. Additionally most low cost carriers use their own reservation system. That makes it needless to be connected with one of the large computer reservation systems like AMADEUS. At last they save money through the benefit of electronic ticketing which makes the ticket-less travel possible. Accordingly the passengers of easyJet receive a mail instead of a ticket containing their travel details and booking references. (Homepage)

Service features: Service features are another possibility to save costs for example by doing operations without some extra on board service, frequent flyer programs, lounges or seat reservation systems because all of them require complex management systems. Most low cost carriers have neither costless magazines nor newspapers on board or in the waiting halls and do offer only cold meals or even none at all. In addition the alcoholic beverages can be only purchased and seats are not pre-assigned on board. Low cost carriers have no complex frequent flyer programs like the ‘miles and more’ system of the Star Alliance as the administration of those is very expensive. Low cost carriers proceed from the assumption that the low price ensures a high customer loyalty.

Administration: The administration structures of low cost carriers are very slim and often outsourced. As a result only the core business remains, and other capacities are bought externally. Special features like the paperless operations of easyJet bring additional cost savings with them. (Homepage)

Summarizing the concepts above a clear cost advantage is possible as the cascade study of Doganis, comparing British Midland as full cost carrier and easyJet as low cost carrier, shows:
As we have just learnt the average unit costs of low cost carriers are 40-50% less than those compared to full cost carriers. Let’s move on to the last concept and most critical key success factor.

Price and promotion policies: The Ticket Price is the most critical product feature for the market segment of the low cost carriers as the prices are significant cheaper than those of the full cost carriers and the price elasticity of demand is low (Pompl, 2002). Pricing is the point where the customer profits of the previous cost advantages through low ticket fares and clear price structure. Consequently the low cost carriers have a great interest in communicating their prices to the customer. Therefore they commit intensive promotion with the ticket fare being the centre of attention. In Appendix D I have attached some advertising examples of Southwest an Ryan Air.

Additionally to the basic concepts of low cost carriers two new trends become apparent, namely differentiation and low cost alliances.

Differentiation: As the competition between the low cost carriers rises they are forced to differentiate from each other in order to gain a competitive advantage. Jet Blue for example offers in flight digital entertainment with 36 channels and Southwest started a simple frequent flyer programme. Virgin Blue in contrast offers the possibility to use lounges while waiting for boarding. Of course everything from the beverages to the newspapers has to be purchased. Nevertheless they are the low cost carrier with the creates marked share worldwide, namely 30% (Flottau, 2004).

Low cost alliances: The latest attempt of founding a low cost alliance here in Germany was between Germania and DeutscheBa. The routes they serve overlap only minimal and it seemed to be the perfect partnership. But as Germania is a real low cost carrier and DeutscheBa is the “quality airline with lower prices” they were not able to agree about the labour costs and productivity of the crews. Hinrich Bischoff, the manager of Germania explained in an interview that DeutscheBa would operate to expensive in most of their businesses (Wirtgen, 2004, p.128).
A new successful promotion gag concerning low cost alliances is the one between DeutscheBa and Aldi a German low cost grocery store. Aldi offered blank tickets for 100€ to be redeemed at DeutscheBa. Obviously the customers of both companies were pleased about the new gag.

Thus it remains to be seen if these new trends will become established as key success factors.

Finally taking all these points into consideration one often may come to the conclusion that the low cost carriers service is a poor one. But I hold the opinion that in most cases the service level is focused and the product is highly reliable and convenient for passengers. Most low cost carriers have awards for their simple service model and can show excellent punctual statistics. Nevertheless the success of the low cost carriers is young and many went into bankruptcy before reaching positive operating results. I guess that the merciless competition between full cost carriers and low cost carriers will go on for a long time and that we will see a “survival of the fittest”.
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