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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Irish Airline Pilots Association: Ryanair five-year pay agreement 'misrepresents the real situation'
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CEO Carsten Spohr is building the Lufthansa Group's strategy on three pillars. The first and largest consists of its hub airlines Lufthansa, SWISS and Austrian, where he is seeking to grow margins. The other two pillars are formed by its point to point airline and its aviation services businesses. For both, the focus is on profitable growth.
Lufthansa says its short/medium haul point to point airline will be profitable in 2015. Nevertheless, it is progressively transferring the operation to its Eurowings subsidiary from Germanwings, which itself had been the beneficiary of point to point routes transferred from Lufthansa. Moreover, Eurowings is now also adding long haul routes, with capacity operated by SunExpress.
Germanwings has never been truly low cost, whereas Eurowings' more flexible pilot contract offers the potential for unit cost more like that of other European LCCs, according to Lufthansa. Eurowings was previously almost invisible as a wet-lease supplier of Lufthansa regional capacity, but Lufthansa now aims for it to be the number one point to point airline in the group's home markets – Germany, Austria, Switzerland and Belgium – and the number three in Europe, behind Ryanair and easyJet.
When talking of a "low cost airport" (LCA) the temptation is to consider only those that are situated some distance from the city they serve, are used only by budget airlines and general aviation, have few routes and handle relatively small numbers of passengers, usually in the category 0.5 to three million ppa. There are some well known examples where that is certainly not the case, for example KLIA2 in Kuala Lumpur (though that is a terminal, rather than an airport) and Don Mueang in Bangkok for example. The latter has become the leading LCA in the world as judged by passenger numbers. In Europe London’s Stansted Airport vies with it for that title.
But within Europe there are several other LCAs that punch well above their weight, or have the potential to, and which merit examination. Four of them are examined here. While most are thriving now, evolving airline models may threaten their comfort zone.
Ryanair's "bumper summer" delivers 41% operating margin; 2016 target raised. 180 million pax by 2024
Ryanair CEO Michael O'Leary has said that the airline's strong 2Q financial performance was the result of a "bumper summer". Although the major legacy airline groups also reported improved profits for the quarter, Ryanair's operating margin of almost 41% sets it in a class of its own.
Moreover, its improvement was not mainly the result of lower fuel prices: Ryanair managed to increase unit revenue, in spite of double digit passenger growth and in contrast to the legacy airlines. This again demonstrates the success of Ryanair's customer service and network improvements. The airline has now raised its FY2016 traffic and net profit targets, thanks to higher load factors than previously expected.
In spite of the strength of its 2Q results and its positive outlook, Mr O'Leary attempted to inject a note of caution by noting that the revised profit guidance was "heavily dependent" on 4Q bookings, where there is "almost zero visibility". Nevertheless, his underlying confidence in Ryanair's strategic direction was illustrated by an increase in its FY2024 passenger target from 160 million to 180 million, which would represent a more than doubling of traffic over 10 years.
In late Oct-2015, ultra-LCC Wizz Air carried its 100 millionth passenger, just 12 years after its 2003 launch. In a further sign that it has joined the ranks of Europe's well established airlines, this year also saw its Feb-2015 floating of its shares on the London Stock Exchange. Wizz Air's 1H results for FY2016 confirmed the ongoing strength of its performance in its first full financial year after its share listing. Wizz Air's underlying net profit grew by 34% and its operating profit increased by 28%. Revenues grew by 15%, with passenger numbers up 20%, and the operating margin gained 2.6 ppts to reach 25.4%.
Wizz Air's success has been built organically and with a largely stable management team under founding CEO Josef Varadi. In this respect, the recent departure of long-serving CFO Mike Powell creates some uncertainty pending his replacement.
Nevertheless, as CAPA's analysis of Wizz Air's strengths, weaknesses, opportunities and threats highlights, the airline is strongly placed to drive further profit growth, provided that it can continue to live with competition from Ryanair.
Brussels Airport: Ryanair tests itself against Vueling and Gulf airlines offer long haul connections
Brussels Airport's passenger traffic was badly hit in the global financial crisis. Although it recovered in 2011, it was only when two leading LCCs established bases at the airport in 2014 that traffic growth really took off. Ryanair's battle with Vueling at Brussels, also played out in a number of airports across Europe, provides the Irish LCC with a meaningful calibration of its attempts to improve customer service and its appeal to business passengers. It also seems to have stimulated the airport's leading airline Brussels Airlines into its own European route expansion.
Although there has been an increase in traffic to intercontinental destinations over the past decade, this rapid growth of LCCs has further sharpened the airport's already high focus on European traffic. Long haul accounts for fewer than one in five seats at Brussels and is mainly centred on North America and Africa. Destinations in Asia Pacific are reached mainly via other airports (principally Frankfurt and other Lufthansa Group hubs). The growth of Gulf airlines at Brussels provides competition to these hubs in providing long haul connectivity to the Belgian capital.
In 2006 and 2009 CAPA published a popular management report on Low Cost Airports and Terminals (LCATs). At the time, LCATs were very much in favour within the budget airline business as that segment grew rapidly worldwide.
Less than a decade on the Low Cost Carrier (LCC) segment is still growing, albeit a little less rapidly now as markets increasingly reach maturity, and as can be observed from the chart below.
Accordingly the construction of LCATs has slowed in some regions. Overall, while there some new LCATs on the planning board, the trend more recently has been and is to move away from building these facilities in some parts of the world.
CAPA's LCC Airports Congress, attended by some 20 CEOs of Asian LCCs and airports, is to be held in Bangkok on 15-Sep-2015. The full CAPA Low Cost Airports Report 2015 is available for download.