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Will the LCC model sustain in future?

Posted on: 27 January '11

We often ponder what the world would have been without low cost airlines….It changed the travel world completely…Sasta, sundar, aur tikaoo (cheap, beautiful and durable) is the ethos of a value for money person and the same is true when we travel by air.

Few years back, we middle class people could not dare think of travelling by air….but today…. it is a dream come true with the emergence of this new airline business model. Ever contemplated which airline started this low cost model and what it is all about? Let’s glance who started it and the principles of LCC models.

In 1971, the Grand Daddy of Low Cost Carriers (LCCs), Southwest Airlines created a history by first starting the LCC model. Today there are a numbers of low cost carriers across the globe. In India itself there are around 5 to 6 low cost carriers, together having more than 55% of market share.

Are these low cost carriers (LCCs) working on strong economic principles and business models to make them sustainable in the long run?

To answer this, let us probe into the business model of LCCs. All LCCs work on one common principle and that is to reduce cost. Low cost airlines tend to focus on short haul routes (of generally less than 1,500 km). To achieve low operating costs per passenger required, this type of carrier needs to have as many seats on board as possible, to fill them as much as possible, and to fly the aircraft as often as possible.

Competitive advantage derived from greater aircraft productivity is of paramount importance and is achieved by using uncongested secondary airports and not offering anything other than point-to-point services. Secondary airports have two main advantages over larger airports: they tend to charge airlines less for using their services; and, as they are less busy, delays due to congestion are less. In addition, low cost airlines operate a single type of fleet. By having only one aircraft type, pilots and cabin crew can operate on any aircraft in the fleet.

Another key area where a low cost airline gains a cost advantage is in distribution. They make significant cost savings by selling directly to customers via the Internet, call centers and by using e-ticketing. By not selling via travel agents, they avoid travel agency commissions and computer reservation system fees. Lastly, the area of cost savings that is perhaps most apparent to passengers of low cost airlines is in the on-board service.

At this point in time, we need to really ask the question “Is it sufficient?

We see various challenges that are being faced by LCCs across the world, of course, with a few obvious exceptions. These include a lack of price differentiation, volatile oil prices, issues with irregular operations, competition from high-speed rail in certain markets, lack of customer loyalty since the customer base is an extremely price sensitive one. Majority of LCC subsidiaries of Full service carriers did not do very well, as the airlines business model was not modified with changing consumer behavior and the management did not comprehend LCC models by the book.

So what’s next for LCCs?

We believe that this market will see further consolidation across the world similar to the recent announcement of the acquisition of AirTran by Southwest Airlines. There are several initiatives that an LCC must take up and sustain in order to retain competitive advantage. A few suggestions include:

  • Optimizing technology investment by operating in the SaaS/PaaS(Software as a Service/Platform as a Service) mode.
  • Implementing dynamic fuel surcharge
  • Alliance amongst LCCs – Targeting connecting carriers
  • Flying to non-competing destinations
  • Better customer service through customer experience management
  • Service to long haul routes
  • Generating ancillary revenue by providing value added services
  • Providing CUSS and mobile-based check-in
  • Integrating hotels, taxis, sponsors etc.

According to Virgin America CEO David Cush:
“The low cost carriers were putting the legacy airlines out of business through innovation. He said that back in 1993, 7 percent of seats were offered by low cost airlines, but this year that should be 35 percent. By 2015, it will be 50 percent. So how can the legacy carriers survive without innovation? Cush claimed “this is a train that isn’t gonna stop.”

In conclusion, we believe that LCC models are here to stay. As long as customers are willing to travel in low cost carriers nobody can stop them from growing. LCCs are experimenting new innovations which will help them nurture and strengthen themselves in the airlines market.

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