Low Cost Carriers (LCCs)
33,515 total articles
857 total articles
Allegiant's business model seems to fly in the face of conventional wisdom. A fleet of old, fuel-inefficient aircraft, flying with low frequencies and at low daily utilisation rates in markets with a high degree of seasonality. Yet the ultra-LCC is consistently profitable and generates free cash flow (operating cash flow in excess of capital expenditure), unlike most of the airline industry.
Allegiant's Vice President for Fleet and Corporate Finance told CAPA's Airline Fleet and Finance Summit in Mar-2014 that his airline was "built to be different". Of course, no business proceeds entirely smoothly and Allegiant faces some challenges, including labour relations issues and successfully taking its business model outside the contiguous United States.
Nevertheless, its return on capital employed is consistently the envy of most carriers. How does Allegiant achieve its strong financial results and what can the rest of the airline industry learn from its approach?
Russia’s parliament, the Duma, recently adopted a bill allowing Russian carriers to offer different fare classes and non-refundable tickets. The law will enter into force 60 days from its official publication, effectively creating the conditions to allow low-cost carriers to establish in the domestic market. Meanwhile, Aeroflot's planned new LCC subsidiary, Dobrolet, is nearer to its planned launch, reported to be in May-2014 with a service from Moscow to St Petersburg.
At Aeroflot's Capital Markets Day (13-Mar-2014), it provided more details of Dobrolet's business model (close to a pure LCC) and of its planned network development (11 destinations in 2014, rising to 36 after five years). With plans to price its tickets at a discount of 20% to 40%, we assess if and how it can achieve the necessary cost savings to ensure profitability.
El Al's return to a net profit in 2013 should not be allowed to hide a wide range of challenges facing the newly appointed management team of CEO David Maimon and CFO Dganit Palti. The list is long: an ageing fleet, stagnant traffic growth, falling market share, a high cost structure, an open skies agreement between Israel and the EU, growing competition from European LCCs and network carriers such as Turkish Airlines and an under-capitalised balance sheet all need urgent attention.
El Al is clearly aware of its challenges. Its summer 2014 timetable sees more aggressive growth than for some years and it has reduced average headcount over the past two years. More importantly, its new LCC subsidiary UP commenced operations on 30-Mar-2014 with five destinations in Europe.
However, it is not yet clear whether UP will be a genuinely low-cost operation. Its establishment should certainly not be used as an excuse to avoid a radical cost restructuring programme in the core airline.
In 2013, the Aeroflot Group achieved a 38% increase in net income. ASKs and passenger numbers grew by 14%, reflecting both the strong underlying growth in the Russian market and Aeroflot's powerful market position. Revenue growth, at 12%, did not quite match this, but the Group managed to lower its unit costs and hence drive the improvement in profit.
As the leading airline group in the Russian Federation, Aeroflot has benefited from its government's smoothing of the path to consolidation, while keeping LCC competition at bay. The government is now ready to allow the development of LCCs domestically and foreign LCCs are making their presence felt on international routes.
With Aeroflot now on the verge of setting up its own LCC subsidiary, Dobrolet, CAPA reviews the Group's strengths, weaknesses, opportunities and threats.
Air China, like most of its domestic peers, remains focused on the long term outcome of China becoming the world's largest aviation market. It is the short term that is challenging.
Domestic economic growth lags the targets set for aviation under previously stronger years. Airport slots remain in short supply and competition is fierce amongst China's airlines, even though the majority of capacity is from state-owned carriers.
The response has been to grow as space becomes available, not as demand requires. This helps satisfy national objectives, where any increase in throughput makes a larger economic contribution than would capacity discipline designed to boost a carrier's financial position.
The outcome of these seemingly conflicting goals is that Air China has performed well in difficult conditions. Its 2013 load factor held up while yields decreased 9%, some of this offset by a change in accounting. Top level results show a 51% decrease in group operating profit to RMB4.1 billion (USD785 million), a 4.2% operating margin, helped along by forex gains. Although 2014 ASK growth will slow compared to previous years, it is still high at 14% overall, driven by 9% domestic growth, 22% international growth and 12% regional growth.
Airlines embarking on dual-brand full-service and low-cost strategies tend to place much focus on the low-cost unit. While discipline there is needed, often overlooked is ensuring the other component – the full-serve carrier – can attain a yield premium and does not suffer as the LCC sibling gains ground.
This is the concern in Taiwan with TransAsia Airways, whose newly-named V Air LCC subsidiary comes with a logo depicting a smiling bear (with a heart for a nose) making a familiar peace-symbol pose, which may be too cute and cuddly for some but should bode well in the regional leisure markets V Air will target. The question is where that leaves TransAsia, whose brand is nondescript compared to V and whose markets are largely better suited to a low-cost operation than full-service. Scale is a challenge: Taiwan is a small market and TransAsia only has 11 jet aircraft while V Air intends to launch with three A320/A321 aircraft and grow by two aircraft a year. V Air could quickly overshadow TransAsia, or alternatively, trying to make both brands sustainable could artificially constrain V Air.