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.
36,960 total articles
915 total articles
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.
The Lufthansa group reported an operating margin of 3.9% in 2014, up from 3.5% in 2013 (based on its operating result before restructuring and project costs). However, adjusting 2013 for the change in depreciation policy implemented in 2014, its margin would have been fallen by 0.7ppts year on year, the result of a damaging pilot strike and weak pricing. Lufthansa expects a significantly improved result in 2015, when ASK growth will be 3%, although it expects unit revenue to fall. All its capacity growth will be on the long haul network, where unit revenue was weakest in 2014.
The development of strategic joint ventures to resist growing long haul competition from Gulf-based airlines makes sense. Its growing use of lower cost platforms in both short haul and long haul point to point markets is also welcome, but Lufthansa faces an ongoing challenge in taking its pilots with it on this course of action. Moreover, Lufthansa's protectionist instinct as a response to competition may have short term delaying value - but if it is intended as a serious strategy, it is high risk.
We consider Lufthansa group's strengths, weaknesses, opportunities and threats in the context of these, and other, issues.
The last of Europe's stock market-listed airlines recently reported financial results for 2014, providing the opportunity to compare levels of profitability. Ranking them by operating margin, there is a wide range of performance from healthy double digit to negative figures.
LCCs typically performed better than legacy airlines. Most of the higher margin airlines improved in 2014, while most of those at the lower end of the scale suffered a fall in margins. Convergence of business models does not show itself in convergence of financial performance.
Beyond the listed airlines, Europe has a large number of mainly small and unprofitable airlines, which drag down the aggregate margin of the continent's airline sector. Europe's traffic growth and load factors are relatively healthy by world standards, but its margins are held back by its fragmented market structure.