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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Transavia part 2: still constrained by unions and forced into high degree of overlap with Air France
Air France's recent draft agreement with pilot unions over the future growth of its Transavia France LCC operation puts the Air France-KLM Group in a better place than it was before the deal was struck. This is particularly so in view of the damaging strike that preceded the accord.
However, the deal comes with some major compromises. Instead of adding new Transavia routes across Europe via the now abandoned Transavia Europe, Air France will put all its LCC growth into Transavia France. In our first in this series of two reports analysing Transavia, we concluded that the abandonment of its plans to establish a pan-European LCC vehicle was a high strategic price to pay.
In this second report, we highlight the extent to which Transavia France will still face significant constraints as a result of management concessions to unions. We also question the merit of the high degree of overlap between Transavia France's network and that of Air France.
Air France and unions representing its pilots and those of Transavia France have reached an agreement over the future development of the LCC subsidiary's French arm. This deal with SNPL Air France ALPA and SNPL Transavia needs ratification by the unions' membership, which Air France-KLM expects in mid-Nov-2014.
A key element of the deal is that Transavia France may increase its fleet beyond the current limit of 14 aircraft, which it has reached. Moreover, Transavia France pilots will continue to have Transavia France contracts. However, a crucial concession to the unions is the abandonment of plans to launch Transavia Europe, which was to have started up at bases outside the home markets of France and the Netherlands.
In this first report on the new draft deal to grow Transavia France, we consider the competitive environment and suggest Air France-KLM may one day rue the scrapping of its Transavia Europe plans. Part two will focus on how Transavia will develop alongside Air France's own medium-haul operations.
Lufthansa's recent confirmation that it is adding premium economy cabins to its entire widebody fleet is one of a number of recent initiatives aimed at making its long-haul operations more competitive. The most radical, and certainly the highest profile, of these developments is its plan to establish a new lower cost airline, under a new brand and aimed at the long-haul point to point leisure market.
First announced in Jul-2014, Lufthansa's Executive Board presented more details of this long-haul plan to its Supervisory Board in Sep-2014. Although operating a fleet of only seven aircraft out of a Lufthansa-branded widebody fleet currently in excess of 100 aircraft, the success (or otherwise) of this new operation could have far-reaching consequences across the group.
A recent CAPA report suggested that Lufthansa's short-haul LCC, Germanwings, has too many legacy issues, but that the more flexible and lower cost pilot contract at its Eurowings subsidiary gives it options for growth. Lufthansa must ensure that its new lower cost long-haul airline avoids all legacy issues that might be a drag on its cost efficiency.
Last month, Lufthansa confirmed plans to extend its low-cost operations under what it terms its 'Wings concept'. Short haul LCC subsidiary Germanwings will continue to expand, with a renewed emphasis on using group company Eurowings to provide it with capacity. Eurowings' pilots are under a separate (more flexible) contract from those of Lufthansa and Germanwings and its 23 Bombardier CRJ900s are to be replaced with an equivalent number of A320ceo aircraft.
Perhaps referring to this, and to Lufthansa's low cost long haul plans, Ryanair CEO Michael O'Leary* said that Lufthansa "has some bizarre plan about establishing a new low-fare airline.” He added: “Unfortunately they started with a high-fare airline called Germanwings and they’ll need to do a lot more than call it that and paint it yellow to make it a low-cost carrier.”
Lufthansa began transferring all its European point to point routes that do not serve its Frankfurt and Munich hubs to Germanwings in Jul-2013. Just over 15 months on, we review its capacity growth and the impact on the market share of Lufthansa/Germanwings in this segment.
In the first part of our analysis of Croatia Airlines, we examined its finances and highlighted an improving trend. The Croatian government's attempts to find a buyer for a 49% stake in the airline met with insufficient interest in 2013, but it is easier to sell a business where there are clear signs of profit returning than it is to sell a perennial loss-maker.
The potential privatisation has come back onto the agenda.
However, airlines rarely make a good investment on purely financial grounds and Croatia Airlines' prospects are likely to depend on finding a bidder with a strategic interest.
This second report looks into Croatia Airlines' network and market position and considers their possible appeal.
Croatia Airlines celebrated its 25th anniversary this summer, after reporting a return to profit in 2013 and a narrowing of losses in the seasonally weak first half of 2014. It also underwent a recapitalisation in 2013 and the Croatian government now appears to be ready to restart the on-off privatisation of the airline.
Potential acquirers will be encouraged by the improving profit trend, driven mainly by cuts in unit costs (CASK). However, Croatia Airlines still has one of the highest levels of CASK in Europe.
Moreover, the balance sheet may be out of intensive care after the recapitalisation, but it is in need of further strengthening, given that the airline has four Airbus A319s due for delivery in 2015 and is considering a further order of aircraft to fill the gap between its Airbus fleet and its Bombardier Q-400s.
In this first of two reports, we analyse Croatia Airlines' finances and its track record of unit revenue versus unit cost. This analysis will be followed by a second report looking at its network and market position.