Low Cost Carriers (LCCs)
A key structural change in aviation over the past decade has been the proliferation of low-cost carriers (LCCs). The low-cost model has overwhelmingly been the favoured mode of airline start-up over the period, and their spread around the world, into both short- and long-haul markets, has caused a fundamental shift in the competitive dynamic of the industry.
'Classic' characteristics of the low-cost model include:
- High seating density;
- High aircraft utilisation;
- Single aircraft type;
- Low fares, including very low promotional fares;
- Single class configuration;
- Point-to-point services;
- No (free) frills;
- Predominantly short- to medium-haul route structures;
- Frequent use of second-tier airports;
- Rapid turnaround time at airports.
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AirAsia Group CEO to focus on improving performance and recovering debt in Indonesia and Philippines
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Reporting its first financial results since its Feb-2015 IPO, Wizz Air announced that its underlying net profit jumped by two thirds in FY2015. In another year of double digit capacity and revenue growth, it managed to grow its unit revenue while simultaneously lowering its unit cost.
Ranked by operating profit margin for the 12M period to Mar-2015, Wizz Air is equal second with easyJet and behind only Ryanair in the list of Europe's most profitable airlines. The IPO has also left it with a robust balance sheet, a useful attribute in the volatile airline industry.
Wizz Air's guidance for FY2015 implies much slower profit growth of less than 20%. Lower fuel prices and a competitive market backdrop look likely to put unit revenue under pressure. Moreover, further unit cost reduction is harder when costs are already very low. Nevertheless, Wizz Air's low cost base and impressive ancillary revenue performance, together with strong market share in Central and Eastern Europe, position it to remain one of Europe's more successful airlines.
Ryanair's FY2015 net profit jumped 66%, a return to profit growth after a rare dip in FY2014. It was helped by lower fuel prices, but, unlike many other European airlines, Ryanair would still have reported improved FY and 4Q results with no change in its average fuel cost per seat versus last year.
Average fares barely changed (up 1%), but load factor jumped to 88%, from 83% in FY2014, driving up revenue per seat, even in Q4 when average fares fell sharply. Ryanair's new customer service initiatives and improved airport network may not yet be attracting consistently higher fares, but they are persuading more passengers onto its aircraft. What's more, revenue per seat growth outpaced the resultant increase in cost per seat.
Ryanair is being cautious about fares into FY2016, but still expects another 10% growth in profit. Moreover, the combination of product and service improvements and a wide discount to competitor fares should benefit pricing in the longer term, even as further load factor gains become less dramatic.
Norwegian narrowed its losses in 1Q2015, the first quarter in over a year when its adjusted operating result improved on a year-on-year basis. This was achieved as growth in unit revenue was higher than growth in unit costs although the loss was still its second highest first quarter loss.
Moreover, the containment of unit costs was entirely due to lower fuel prices, whereas non-fuel unit costs increased. Norwegian can point to costs related to a pilot strike as contributing to this, and adverse currency movements also hurt its result, but it does underline the need for cost efficiency improvements.
Meanwhile, Norwegian is still awaiting a definitive decision regarding its Ireland-registered subsidiary Norwegian Air International's US foreign carrier permit application. Approval would be positive for labour productivity on its long haul network. As the US DOT continues to drag its feet, Norwegian may soon be forced to consider alternative plans.
Ryanair CEO Michael O’Leary’s recent musings about a possible low-cost transatlantic project indicate that he believes any such operation would need average fares below EUR100.
This raises the question of just what is a sustainable fare in this market?
Until recently the exclusive preserve of legacy full service carriers, the North Atlantic has seen the entry of LCC Norwegian over the past year.
However, it was always possible to find relatively low fares and Norwegian’s pricing, while lower than that of premium airlines such as British Airways, does not appear to be substantially lower than the average all-inclusive economy fare of Association of European Airlines (AEA) member airlines between Europe and North America.
This report explores some of the key factors in establishing viable pricing for this model.
The US has few new-build airports, even fewer low cost airports, but remedial and expansion work is extensive. The US has not constructed a new airport of real economic significance since Denver, two decades ago and, prior to that, Dallas-Fort Worth in 1974.
CAPA Americas Aviation Summit: Congresswoman Dina Titus & AirAsia’s Tony Fernandes join speaker list
CAPA is pleased to announce Congresswoman Dina Titus, a member of the House Committee on Transportation and Infrastructure, will give a keynote address on Day 1 of the CAPA Americas Aviation Summit in Las Vegas on 27-28 April 2015, introducing a high level panel on US aviation infrastructure.
Tony Fernandes, Founder and CEO of the AirAsia Group, the LCC which transformed Asian aviation - and whose sister company, long haul LCC AirAsia X, has just announced a new service to the US - is also joining the Day 1 line-up to explain the Asia Pacific growth opportunities.
They join a premium speaker list including Sir Tim Clark, President and CEO of Emirates Airline, Willie Walsh, CEO of International Airlines Group, Bill Franke, Co-Founder and Managing Partner, Indigo Partners, Tewolde GebreMariam, CEO Ethiopian Airlines, David Scowsill, President, World Travel and Tourism Council, Tim Canoll, ALPA President and many others.