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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In a 10-Jun-2016 presentation to equity analysts in London Lufthansa's Karl Ulrich Garnadt, the executive board member responsible for Eurowings, talked of his excitement for this "very ambitious, far reaching, very important" project for the Lufthansa Group. The group is developing an innovative partnership approach to allow other airlines to join its LCC activities under the Eurowings brand.
In 2011 the combined Lufthansa/Germanwings non-hub point-to-point network served 110 destinations and offered 24 million seats, of which only approximately nine million were operated by the LCC subsidiary. In 2016 the new Eurowings network has 135 destinations and offers 26 million seats (this comprises those operated by Eurowings and those yet to be transferred from Germanwings, while none are operated by Lufthansa).
The transfer of traffic from Lufthansa to Germanwings helped to turn around losses of more than EUR200 million. Germanwings' traffic and fleet are now progressively being transferred to the lower-cost Eurowings – the umbrella brand for the group's LCC operations. Germanwings/Eurowings achieves a RASK premium compared with other European LCCs. However, its low margin suggests that this is not enough by comparison with its CASK, which will remain higher than those of other LCCs.
The rapidly growing Icelandic LCC WOW air began a new chapter in its short history on 9-Jun-2016. Just over four years after its inaugural flight – from Reykjavik to Paris on 31-May-2012 – the airline has launched its first widebody service from Reykjavik to San Francisco. This route will be joined on 15-Jun-2016 by a Los Angeles service, also deploying A330-300 aircraft and taking its North American network to six destinations.
With 20 European destinations it is developing a role as a provider of low cost trans-Atlantic connecting services to sit alongside its point-to-point offering. In this respect it is providing growing competition to its larger compatriot Icelandair, which is also growing fast (and profitably).
However for now, at least, there appears to be room for both: Icelandair is not present on 12 of WOW air's European city pairs, or on three of its North American routes. Certainly the North Atlantic needs new competition, and both Icelandic airlines are helping to provide it.
Air Malta: perennial loss-maker struggles with rising LCC competition. Alitalia considers investing.
On 27-Apr-2016, Alitalia signed an MoU with the Maltese government over the possible acquisition of up to 49% of Air Malta. The two airlines are linked through geographical proximity and by cultural and commercial ties between Malta and Italy. However, both are perennial loss-makers and Alitalia is focusing on its own turnaround eighteen months or so after receiving investment from Etihad. The Italian national airline will only proceed if it is confident that Air Malta can both complement its strategic development, yet not compromise its own restructuring programme.
Air Malta is now a Europe-only airline. Under its Nov-2015 three year plan, it is cutting overall capacity in 2016 and has discontinued its North Africa routes. Compared with 2013, when CAPA last analysed Air Malta in detail, its seat capacity this summer will be lower by 9% and it has reduced its fleet size by two, to eight aircraft. Air Malta's highly seasonal and strongly leisure-focused network is facing growing competition from LCCs. It has struggled to compete profitably with a short haul, non-premium, point-to-point product that has little with which to differentiate itself.
airberlin's 2015 losses highlighted its ongoing struggle to find a successful model. In 2012 airberlin received investment from Etihad (also entering into a close commercial partnership with it) and joined oneworld. These moves have brought it benefits in terms of traffic and revenue, but traffic and revenue continue to shrink and airberlin has remained loss-making.
Since 2011 airberlin has cut capacity heavily on the short/medium haul network (particularly in domestic markets). Short/medium haul still dominates airberlin's operation, but it is now growing its long haul network aggressively by adding capacity to North America and the Caribbean. Squeezed between lower-cost LCC competition on short/medium haul routes on the one hand, and legacy airlines with bigger long haul networks on the other, it is also now facing low cost long haul competition from Lufthansa's Eurowings.
On 31-May-2016 the Etihad Aviation Group CEO, James Hogan, said: “airberlin has faced greater challenges and has taken longer than we expected to reach sustainable profitability, but the underlying fundamentals of the business are trending in the right direction." Etihad's investment has been critical to airberlin's survival and the airline has, so far, remained committed to the relationship. However, there is only so much that Etihad can do from the outside. airberlin needs internal solutions.
Wizz Air: city pair overlap with Ryanair on one third of seats. Opportunities for both; CASK crucial
Wizz Air and Ryanair are Europe's two lowest cost airlines, and most profitable airlines by operating margin. Together with Pegasus they form a small group of European ultra-LCCs. Unlike Pegasus, whose business concentrates on Turkey-Europe and domestic Turkey, both Wizz Air and Ryanair have bases in several countries.
However, while Ryanair is Europe's largest airline by seats, with a pan-European network and 84 bases, Wizz Air focuses on the niche between Central/Eastern Europe and Western Europe. All of Wizz Air's 25 bases are in Central/Eastern Europe, where it is the largest airline and Ryanair is number two. This superiority in CEE is based on Wizz Air's greater share of capacity in most of the larger country markets in the region (but not Poland), while in fact Ryanair is bigger in more (mainly smaller) countries.
In Jul-2016 Wizz Air faces Ryanair competition on 14% of its city pairs, covering 30% of its seats. Moreover, Ryanair is expanding rapidly in CEE, with five new bases this winter, increasing this overlap to around one third of Wizz Air's capacity. For Ryanair, the overlap represents a higher proportion of its CEE capacity, but only a very small share of its total seat numbers.
Over 20 years the responses of Europe's big three legacy groups to the short/medium haul LCC revolution have all been through phases of denial, submission, retreat, and counter-attack.
Now all three now have a more clearly defined LCC strategy than in the past. IAG, with Vueling and Iberia Express, has the largest, most pan-European and most profitable LCC, helping the group to grow its short/medium haul traffic. The Lufthansa and Air France-KLM LCCs are more defensive, to preserve market share. Both have only recently started LCC bases outside their original home markets. Lufthansa (after a false start with high cost Germanwings, now transferring to Eurowings) has replaced mainline capacity with LCC capacity, route-for-route. Air France-KLM has grown Transavia while cutting mainline capacity, but without substitutions route-for-route.
Only Lufthansa has taken its LCC onto long haul routes, albeit on a limited scale. Facing the more complex challenges on long haul, all three are developing a growing range of partnerships with other airlines. They have also sought to improve labour productivity in their legacy network airlines, with varying degrees of success, but again led by IAG. A next step may even be to connect with their arch rivals.