The airline business model of a low-cost carrier (LCC), also known as no-frill/ budget carriers has played a very important role to the growth of the airline industry since its emergence in 1949. These low cost carriers have brought great degree of increase in capacity and decrease in fares into the industry. As per the study by Doganis (2006 2), the operational cost of a low-cost carrier is only 49 percent of a full service carrier’s operational costs.
How do they do it?
There are a few strategies that low cost carriers adhere to offer low air fares by achieving low operational costs, most strategies focus on simplifying the business mode hence decreasing labour costs; which takes up around 30 per cent of the total operational costs for a full service airline. The table below compares the products in general between full service, charter and low-cost carriers; although not all difference apply to all airlines in that category. Some major characteristics of the LLCs are discussed latter.
|Full service airlines||Charter||Low cost|
|Free newspapers, food, drinks||Free food, drinks||For sale|
|Seat allocation||Seat allocation||Free seating|
|Business class||One class||One class|
|Low seat density||High seat density||High seat density|
|Low load factor||High load factor||High load factor|
|Hub city airports||Resort airports||Secondary airports|
|Day flights||Some night flights||Day flights|
|Interlining available||Point to point||Point to point|
|Business lounges||No lounges||No lounges|
|Ticket purchase near flight date||Advanced purchase||Near flight date|
|Ticket sales at own agents||Tour operators||Internet booking|
|Ticket sales by travel agent||Not available||Not available|
|Flexible one way tickets||Not available||Available|
|Unbundled tickets||Package holiday||Unbundles tickets|
|Frequent flyer programme||None||None|
|High frequency service||One-two week trip||High frequency|
|Nil no show penalty on higher fares||No show penalty applies||No show penalty applies|
(Barrett, 2008 1)
Single aircraft type
- Low maintenance cost as only one engineering group will be sufficient to maintain the entire fleet, and there is a high degree of flexibility in rotating the use of aircraft in case of maintenance, cleaning or disrupts;
- Simple staff training for both pilots and cabin crew will increase the flexibility of staff rosters allowing the same staff members to be capable in taking up any route in short notice; and low staff training costs as only one type of simulation facilities and training staff are required;
- Consistence use of a cost-efficient medium-sized aircraft allows LCCs make most use of the range and capacity; at present the A320 and B737 aircraft are the most common choices for low-cost carriers (Newhouse, 2007 ((Newhouse2007))). The mid-sized aircraft that is moderate in capacity, fuel-efficient and is capable to run a mid-range is the perfect type of aircraft for the low-cost carrier as most of their routes are short-haul point-to-point services.
- Low cost for staff training and labour as there is no differentiation of skills sets, or hierarchy between economy and premium cabin service levels as a uniform no-frill service is provide, where in-flight services are to the basic and minimal;
- Allows simple fare structures for easy compliance to local and international ticketing rules, eliminates the complex fare structures that require staff to monitor and service customers for changes, etc;
- More cost effective with increased capacity on each aircraft as more seats are available compared to a multi-cabin aircraft on a full service carrier, also allows more room for cargo transport.
- Passengers self-service from ticketing (online bookings) to check-in (online or kiosk check-in) reduces labour cost and commissions distributed to travel agents;
- Allows simple and strict fare structures such as “use it or lose it” rules as the passengers are their own ticketing agents, they can change their tickets online, or have tickets that are strictly non-changeable to eliminate the need for ticketing staff training for ticket changes and compliance to international ticket changing rules and practises;
- Reduces passenger’s time at terminal, reduces congestion and enhances a quick check-in process; achieving efficient turnaround times;
- As the service must enable passengers to make their own bookings, the journey construction must be short and simple; therefore the majority of LCCs operate short-haul point-to-point flights. This enhances short point-to-point services where there is no demand to transiting or interlining between airlines and passenger bags, this reduces the labour cost for luggage transfer, saves cost against airline interlining facilities and decreases costs involved with mishandled, delayed or lost baggages.
No frill services
- Extra charge for luggage, passengers pay for their own weight put on the aircraft;
- All meals and beverages need to be purchased, this generates extra revenue to the airline and also reduces the weight of food products as it is less likely that a customer will order meals for short haul flights if they had to pay extra, and reduces waste of meals and packaging material cost;
- No Frequent flyer programmes that contribute towards redemption flights will decrease the budget for marketing purposes and every passenger onboard would be a revenue passenger.
- No in-flight entertainment systems such as movies and music, reduces copyright and screening license fees paid to entertainment companies; currently all airlines must pay a screening fee to entertainment companies per movie played per passenger on a flight!
Use of secondary airports
- The airport fees for secondary airports are usually a fraction lower than major hub airports as they are otherwise left idle. Low cost carriers can easily dominate some smaller secondary airports and become their main or only carrier, being the major source of income and have beneficial bargaining power against the airports for fixed terms on fees;
- Smaller airports have simple check-in and baggage systems, which will allow LLCs to operate a simple and efficient baggage system with the minimal man power required. Many larger hubs are unable to accommodate these needs as their existing systems are too complicated and their check-in system is designed more integrated to deal with long queues and complicated manual check-in procedures;
- Due to the low traffic at secondary airports, LLCs can achieve a very efficient turnaround time of their aircraft allowing more scheduled services, and fewer delays incur less airport penalties.
How has low-cost carriers affected air travel patterns?
The major impact to the general air travel pattern is that LLCs offer more capacity at a lower fare rate, which broadens the travelling market as it has become more affordable, and travellers can travel more frequently due to the lower fares available. Therefore, the general demand in air travel has increased. As mentioned by Li (2008 4), the consumer behaviour is reflected against a trade-off between paid work and unpaid leisure. This means that an individual would only be interested in leisure travelling when their income has reached a certain level where they have enough disposable income to cover that of when they are not working for; and when they are interested in travelling, the changes in alternative leisure travel products are most likely to affect the leisure travel demand. This means if airfares or travel packages are offered at a lower price, the amount of disposable income that one needs before they can afford travel is lower; and also as there are increased options and alternatives in the market (i.e. LCCs, full service airlines and charter airlines), the emerging of LCCs are most likely to affect the demand of the other alternatives.
What are the implications to full service airlines?
As mentioned, 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.
What are the implications to airports?
There have been various affects of the LCCs to airports. The emerging of LCCs has favoured secondary airports and the nearby area economically. As travellers are picking up the trend to fly into secondary airports that are often at the fringe of larger cities, rental cars, airport hotels, transit coaches and even nearby restaurant and cafes benefit by the traffic brought by these LCCs. Therefore many secondary airports offer low airport fees to LCCs to attract them into the hub to boost up the local economy and the tourism boards often support airports in doing so (Echevarne, 2008 3). The simple airport system of secondary airports favour LCC’s preferred way of operation as mentioned earlier. This is very important to the choice of airports, as a complex travelling system will not be cost effective to LCCs.
On the other hand, the growth of LCCs means increased competition against nearby secondary hubs where they shed off a portion of the major hub’s capacity between a few smaller airports. This is because existing facilities in larger hubs often cannot offer such simple travelling system to LCCs, and also are not able to offer such low airport fees due to the agreements with their full service carriers. However LCCs can be beneficial to major hubs as they have a very short turnaround time and are often very prompt to avoid any delay penalties, and can schedule their flights in less busy periods if they can take advantage of lower airport fees, therefore would be great revenue to fill in idles slots where air space is not so busy during the day.
As a result, some hubs expand their airports with additional terminals dedicated for LCCs in order to compete with secondary airports. An excellent example would be the Hong Kong International Airport where an extra terminal has been built especially to accommodate short-haul flights between south-east Asia and China only; the design and marketing of the terminal has been specific to the LCCs. By simply observing the terminal one can see that there are less luxurious shops and airport lounges, instead practical travel essential stores and food courts are set up to meet the needs of their targeted customers.