CAPA 12-Point Survival Plan for LCCs
Like any business, airline management is expected to manage the airline prudently through a downturn to minimise the impact on profitability and shareholder returns.
Given the inevitability of a downturn in the industry – whether it’s this year or next – that expectation becomes more telling.
Generally speaking, LCCs should be better placed in times of heightened price sensitivity, as their lower cost base should give them an edge. But that alone is not enough.
In this report, CAPA offers some key tactics that LCC management can deploy when things get tough. Many of them are common sense, but in tough times the sense may not be so common.
Preparing for a Gathering Storm
This report sets out key strategies to deploy during a downturn, broken down into two sections:
1. Commercial Opportunities
During a time of recession, the first cost line to be scrutinised in most businesses is travel – an opportunity for LCCs as corporate travellers are encouraged to trade down from full-service carriers to LCCs. Those LCCs that are able to position themselves as “business friendly” by accommodating to corporate traveller behaviours and seeking ways to effectively monetise offerings without necessarily changing their core LCC business model, will enjoy the greatest success.
With increased business travellers using LCCs, ancillary revenues are the ideal means to provide them with some of the product attributes they want to avoid “pain points” and differentiate from other LCCs.
However, air travel is not the only part of the travel budget that is scrutinised during a recession, accommodation, ground transportation etc. are also reviewed, which lies an opportunity for LCCs to add value to not only business travellers but all customers, and capture more of their share of wallet by providing better deals.
2. Operational/Financial Opportunities
While daily utilisation is a key value driver for most airlines, load factor trumps utilisation in terms of value creation, especially in a recession. As such, load factor should be managed by taking out capacity. In order to achieve this, fleet order deliveries should be deferred as far as possible – the worst possible time to be levering up the balance sheet with expensive new aircraft is during a recession – but it is a good time to place orders (just not take deliveries).
As with any airline, LCCs need to maintain open communication to ensure labour understands the actions being taken by management to weather the storm.