Low Cost Carrier Characteristics
Essay Preview: 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. 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: “Im not looking for the minimum maintenance performance, Im 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: