19-Feb-2019 5:05 PM

LCCs: global market share gains led by emerging markets

Analysis

The global LCC sector has grown at a staggering pace since the beginning of this decade. There are now more than 100 LCCs operating a combined fleet of 6,000 aircraft.

The LCC fleet has doubled in size since the end of 2009, when it consisted of only 2,900 aircraft (source: CAPA Fleet Database). Global LCC seat capacity has also doubled since 2009, reaching nearly 1.7 billion in 2018 (source OAG).

Asia Pacific is now the world's largest LCC market, accounting for nearly 600 million seats, or 35% of the global LCC seats in 2018. The Asia Pacific LCCs have expanded from a fleet of only 400 aircraft at the end of 2009 to 1,900 aircraft currently and are poised for more rapid growth, given their massive order book of 2,400 aircraft.

Summary

LCCs have grown rapidly since the beginning of this decade and now account for one third of intra-regional seat capacity.
The LCC growth rate has been the fastest in Asia Pacific, where the LCC penetration rate is now approaching the global average.
Latin America has also experienced rapid LCC growth, while Africa's LCC growth has been relatively modest.
LCC growth in the Middle East market has been rapid but the region's LCC penetration rate remains low.
The more mature markets of Europe and North America have experienced slower LCC growth than the emerging markets, although there have been significant gains between the two regions.

How low cost airlines have developed in different markets over the past two decades and what is in store over the next decade will be discussed at CAPA's Global LCC Summit in Singapore on 25/26-Feb-2019. For more details on the event click here.

Globally, LCCs are expanding much faster than FSCs

LCCs accounted for 33% of intra-regional seat capacity in 2018 and 13% of seat capacity between regions, according to CAPA and OAG data. The gains this decade have been similar in both segments.

In 2009 LCCs accounted for 25% of intra-regional seat capacity, equating to a gain of 8ppts. Annual LCC intra-regional seat capacity had doubled over the nine year period (from 753 million to 1.564 billion), while FSC capacity has increased by a more modest 41%.

Global LCC (red) and FSC seats (green) within regions: 2009 to 2018

In 2009 LCCs accounted for only 6% of seat capacity between regions, equating to a gain of 7ppts.

LCC capacity between regions has quadrupled over the past nine years, although on a low base (from 26 million to 101 million), while FSC capacity has grown by 61%.

Global LCC (blue) and FSC seats (yellow) to/from regions: 2009 to 2018

LCCs expand rapidly within Asia Pacific

Among all the regions, Asia Pacific has had the biggest gain in intra-regional LCC penetration rate this decade. LCCs accounted for 29% of seats within Asia Pacific in 2018, compared to 16% in 2009 - a gain of 13ppts.

LCC (red) and FSC seats (green) within Asia Pacific: 2009 to 2018

The gain in LCC penetration rate to/from Asia Pacific was a more modest 4ppts, from 4% in 2009 to 8% in 2018. This is not surprising, given that the long haul low cost model is still developing and most widebody aircraft that are operated by Asia Pacific LCCs have so far been used on routes within the vast region.

LCC (blue) and FSC seats (yellow) to/from Asia Pacific: 2009 to 2018

Asia Pacific's LCC penetration rate approaches the global average

Asia Pacific has accounted for the largest growth in terms of total LCC seats. Asia Pacific LCC seats have nearly quadrupled since 2009, while FSC seats have grown rapidly (but not nearly as fast) and more than doubled.

In 2018, LCCs accounted for 586 million seats in Asia Pacific - consisting of 575 million within the region and 11 million to/from the region.

In 2009, LCCs had 159 million seats - consisting of 156 million within the region and only 3 million to/from the region.

As CAPA highlighted in a separate analysis report in Jan-2019, there is significant variation in the Asia Pacific LCC penetration rate and in the growth rate over the past decade, depending on the market. However, the overall trend is clear.

The LCC penetration rate in Asia Pacific has grown consistently and is now approaching the global average, which is quite an accomplishment, considering that LCCs proliferated in Asia much later than in Europe or North America.

By some measures, LCCs in Asia Pacific are already punching above the global average. For example, of the 20 largest international markets in Asia Pacific, 16 are above the global international average.

Latin America's LCC penetration rate increases rapidly

After Asia Pacific the region that has experienced the largest gains in intra-regional LCC penetration rates this decade is Latin America.

LCCs accounted for 36% of seats within Latin America in 2018, compared to 25% in 2009. This equates to a gain of 11ppts, in comparison with the 13ppts for Asia Pacific.

LCC (red) and FSC seats (green) within Latin America: 2009 to 2018

LCCs are now well established in the three main domestic markets of Brazil, Colombia and Mexico. Over the past couple of years LCCs have started to penetrate the domestic markets in Argentina, Chile and Peru and to expand on regional international routes, which are still dominated by FSCs.

The LCC penetration rate to/from Latin America is relatively high, driven primarily by a large presence in the Mexico-US market. LCCs accounted for 23% of seats to/from Latin America in 2018, compared to 10% in 2009.

The 23% figure is by far the highest to/from LCC penetration rate among all regions but is distorted by US-Mexico, which is a huge short haul market.

LCCs have also started to penetrate several other Latin America-North America country pairs and are now operating a limited number of services from Latin America to Europe.

LCC (blue) and FSC seats (yellow) to/from Latin America: 2009 to 2018

Middle East LCCs grow rapidly but the penetration rate remains low

Middle East has had the third highest gains in intra-regional LCC penetration rate. LCCs accounted for 17% of seat capacity within the Middle East in 2018, compared to 8% in 2009.

LCC (red) and FSC seats (green) within the Middle East: 2009 to 2018

While the 9ppts gain is respectable, the 17% achieved in 2018 is still well below the global intra-region average of 33%. There are currently only five LCCs operating within the Middle East - Air Arabia, flyadeal, flydubai, flynas and Salam Air. The Saudia LCC subsidiary flyadeal and Oman-based Salam Air only launched their operations in 2017.

The rapid expansion of the existing players should continue to drive up the LCC penetration rate within the Middle East.

Flyadeal CEO Con Korfiatis is giving a keynote presentation at the CAPA Global LCC Summit on 26-Feb-2019 outlining the airline's ambitious expansion plans.

LCCs accounted for a relatively high 13% share of seat capacity to/from the Middle East in 2018. Although this matches the global average for to/from regions, the Middle East figure should be much higher, given the small size of the region.

There is a particularly significant LCC presence between the Middle East and South Asia, which also accounts for a large share of Asia Pacific's to/from LCC seats. Several LCCs from both the Middle East and South Asia compete in the Middle East-South Asia market. Middle East-Europe is a smaller market in terms of LCC seats, but is growing.

LCC (blue) and FSC seats (yellow) to/from Middle East: 2009 to 2018

Africa LCC growth has been painfully slow

Africa is another emerging market with huge LCC potential. However, so far LCC expansion in Africa has been extremely slow, leaving Africa with by far the lowest intra-region LCC penetration rate.

LCCs accounted for only 12% of seat capacity within Africa in 2018. The LCC penetration rate has only increased by 3ppts since 2009, when LCCs accounted for 9% of total seat capacity within Africa.

LCC (red) and FSC seats (green) within the Africa: 2009 to 2018

Almost all the intra-Africa LCC capacity is in the domestic South African market. There are three LCCs competing in South Africa (Mango, Kululu and FlySafair). There are another five LCCs based in Africa but they are all tiny, with each operating less than 10 aircraft.

Total seats within Africa have grown by only 40% over the past nine years. More LCCs are needed to accelerate the growth rate and raise the LCC penetrate rate closer to normal global levels, but successfully starting an LCC in Africa has proven to be more difficult than in any other region.

LCCs have made more inroads to/from Africa. LCCs accounted for 16% of seat capacity to/from Africa in 2018, compared to 8% in 2009.

LCC (blue) and FSC seats (yellow) to/from Africa: 2009 to 2018

European LCCs account for most of the LCC capacity to/from Africa and LCCs are particularly strong in the Morocco-Europe market.

Ryanair has a leading 14% share of total LCC capacity in the African market, although it only serves Morocco and does not operate any services within Africa.

The three South African LCCs (Mango, Kululu and FlySafair) are the next largest LCCs in Africa and each account for 11% to 13% of total African LCC capacity but almost all their capacity is in the domestic South African market.

There are clearly huge opportunities for LCCs in Africa. However, several attempts by start-ups to penetrate domestic markets other than South Africa and the regional international market have failed. Regulatory constraints and high taxes remain a major impediment.

Europe has the world's highest short haul LCC penetration rate

Europe has the highest LCC penetration rate in the world, but growth is slower than in most of the other regions - as would be expected for a mature market.

LCCs accounted for 41% of seats within Europe in 2018, compared to an already high 34% in 2009. LCC seat capacity within Europe has increased by 78% over the past nine years, whereas FSC capacity has increased by 31%.

LCC (red) and FSC seats (green) within Europe: 2009 to 2018

LCCs accounted for 9% of seats to/from Europe in 2018, compared to 4% in 2009.

LCCs have started to penetrate the trans Atlantic market in recent years but there are still ample opportunities for growth in this segment. The recent introduction of new generation narrowbody aircraft, which have a potential game-changing impact on six- to eight-hour routes, could particularly have a major impact on the LCC penetration rate to/from Europe.

LCC (blue) and FSC seats (yellow) to/from Europe: 2009 to 2018

North American LCC growth slows to a crawl

North America has had the slowest rate of LCC growth this decade. This is not surprising, given that it is a mature market and is the only market that until recently did not have any LCC start-up activity.

The last start-up in the US, Virgin America from 2007, was acquired by the full service airline Alaska Airlines in 2016. Canada has had a spate of new LCC start-ups over the past year but these airlines are not yet of significant size.

LCCs accounted for 32% of seat capacity within North America in 2018. In 2009 the LCC penetration rate within North America was 28%. Over the nine-year period, LCC seat capacity within North America has grown by only 35%.

LCC (red) and FSC seats (green) within North America: 2009 to 2018

LCC capacity to/from North America has grown at a much faster rate. LCC capacity to/from North America has quadrupled over the past nine years, resulting in a 9ppts increase in the LCC penetration rate - from only 6% in 2009 to 15% in 2018.

LCCs based in Latin America and Europe have accounted for most of this growth. As outlined earlier in this report, Mexican LCCs have expanded in the transborder market and European LCCs have been expanding in the trans Atlantic market.

US LCCs have not yet launched services across the Atlantic, although they have been pursuing some expansion to Latin America. Canadian LCCs are now operating across the Atlantic as well as to Latin America, but are relatively small.

LCC (blue) and FSC seats (yellow) to/from North America: 2009 to 2018

Emerging markets to drive LCC growth

The US LCC sector could be on the cusp of a new expansion phase as JetBlue will likely become the first US LCC to operate across the Atlantic and JetBlue founder David Neeleman is preparing to launch a new airline (under the project name Moxy). However, these developments will have a relatively small impact on global LCC seats.

The emerging markets have clearly become the markets to watch.

The LCC penetration rate in Asia will soon approach the global average and should be able to exceed the global average, given the dynamics of this market (with a rapidly expanding price sensitive middle class population). With the overall growth rate in Asia faster than in other regions, LCCs are well positioned to expand.

Market share gains in Africa and the Middle East are inevitable. Latin America's LCC penetration rate is already above the global average, but opportunities still beckon as several of the region's markets remain unpenetrated.