Recorded at CAPA Global LCC Summit, 1-2 Mar 2018

LCC Subsidiaries In FSC Airline Groups. What Are The Secrets For Success – And The Pitfalls?

Competitive pressures on short haul routes have prompted many full service airlines to create LCC subsidiaries, but ensuring the new carrier aligns with the parent strategy poses a key challenge.

  • Do LCCs created by FSCs have a competitive advantage?
  • How does the LCC child operate while maintaining management independence from their parent?
  • Conversely, how does the LCC work with its parent to maximise group profitability? Can the FSC avoid creating just another product line – without the lower cost base to match?
  • Is it possible to introduce seamless interlining despite their different service levels, in order to maximise group network coverage?
  • Should network carriers be prepared to launch Long Haul LCCs – at the expense of, or to complement, their existing operation

Moderator: Crucial Perspective, CEO, Corrine Png

  • Aviation Performance Consultants, Executive Advisor to Peach Aviation, Patrick Murphy
  • DDG International, Independent Airline Executive, Patee Sarasin
  • flyadeal, CEO, Con Korfiatis
  • Scoot, Head of Sales & Distribution, Trevor Spinks


Corrine PngOkay I've been covering Cathay Pacific for 16 years, and every time I see them I'll ask them when are they going to start a budget airline. And, two weeks ago John Slosar, who is Cathay's Chairman, mentioned during his speech that part of the reasons why he has been against starting a budget airline is that he took away some advice from United Continentals former ... United Airlines former CEO, Jeff Smisek ... Sorry if I pronounce his name wrongly. That, basically, he said that, "It is a false assumption that you could have a separate budget airline, and your main brand doesn't compete." And Jeff told John that, "Don't go down the path of setting up all these different airlines. Figure out how to make your main brand compete in the main markets, because, that is ultimately what you have to do."

So, my first question to our panellists here is, do you think low cost carriers created by full service airlines really have a competitive advantage? How can we drive the low cost carriers cost structure much lower than a parent airline? And, I was very surprised when I saw that Scoot's cost structure, unit costs, is actually 50 percent lower, 40 percent than Singapore Airlines' mainline business.

Trevor SpinksShould I start then? Everyone I think knows that my parent airline is Singapore Airlines. Should you set up a low cost subsidiary or not? It's not really my place to say, but I think there's a lot of success when you look at Scoots, there's a lot of success when you look at Jetstar as well. So, I think the proof's in the pudding. If you had that discussion with the café guy again now, he might be sorta of kicking himself. Specially giving the constraints that are going on in Hong Kong as well. So, to me, I come from a very pure low cost background. Not much full cost in me at all, except for the last two or three years where the Singapore Airlines and the Scoot brands have started to get closer and closer. To me, if you can keep them separate, and you really can keep them separate, there's no reason why they can't work.

Patrick MurphyOn behalf of Peach Aviation, which is the one I've been advising, you have to know only five years ago when it was set up it was only a minority shareholder by ANA. Since then, the minority shareholders have sold out, and ANA is now a majority shareholder. So we have Peach, which is still a independent company, but operating separately from ANA and certainly not a part of Vanilla. They're two different entities and everything else. So things have already begun to change in the way things are happening.

But, fundamentally, I see it the other way around that low cost airlines don't get any competitive advantage as a rule from being a subsidiary of FSC, because you're driven by some of the traditions and the practises that exist in a full service airline, and that's present entity. And, that's totally contrary to the fundamentals in what the low cost airline has to do. Which is to focus on cost, absolute clear focus on doing so. The independent might are not being force to driven it to doing things that practises in the full service airline. So I say it's actually the other way around.

It's a disadvantage, probably, but nowadays you have to coordinate, and you have to make things happen. And, you've heard results from this morning, but Jetstar and Qantas, it works.

Corrine PngThank you.

Con KorfiatisI guess I have to start. Good morning, by the way everybody. Hope you're well, hope the coffee's kicked in. It's just starting to kick in for me. Perhaps, at first I need to fess up and say, I'm a low cost airline that does belong to a legacy airline. So, you can call it a conflict of interest or you can call it wisdom.

I guess a few comments. Firstly, it's a fact that statistically mass full service airlines who've started a low cost airline failed. It's a statistic, there are many, many reasons why some successful and some aren't. Try telling Gareth he can't have a successful low cost airline inside of a group, and he's just given us a very eloquent presentation and background on how it can be extremely successful. And, both airlines are widely profitable and really a tremendous success story. So, if that isn't evidence that it can work, I don't know what is.

From my ... From the Cathay perspective, I have a very cynical view. I mean they're still living in yesteryear, and they're about keeping the airport constrained and monopolies. Therefore, no interest in a LCC, I guess, but that's old school. From my point of view, a slightly differing opinion to Patrick's comments. I've found incredibly powerful having a strong Legacy Airline supporting in a start up. First and foremost, capitalization. Many low cost airlines have suffered from lack of capitalization. You've got a strong parent behind you that does give advantages.

But, what we've also found in setting the airline up with a clean sheet of paper they would've been able to drive incredible, greater cost efficiency than if we were a start up. In a sense if the para, for example, if we going to source with the strong backing, we've probably been able to get much better lease rights than what we otherwise would have got. The deals we've got out of our suppliers, our passenger service system and everything else, the fact that we've had that background in the leverage of the group has given us tremendous bargaining power and really driven very, very good cost outcomes better than I've been able to do when it's been a standalone airline and other roles I've done before.

Patee SarasinGood morning. Everyone's going to wonder why the hell is DDG and not Nok airlines. Actually it's a name my kids, it's still a really fun name. But my experience with the 14 years running Nok Airlines, I've just left only five months ago. I would give you a real story about working with Legacy Airlines, on the plus and minus side. On the plus side, when you have Thai Airways as your major shareholder, you have the credibility and the money, the feeling comfort to all the lessors, so when you deal with airlines, you know, the aircraft, companies, you get the kind of benefits.

Though the negative part of working with Legacy Airlines is that if they impose their strategy on you in terms of how to operate an airline, you're sort of going to fail, and you're going to suffer for it as well. So I've been through all this stuff. Nok Airlines has always been sort of independent from Thai Airways in terms of how we function until we became public company. Then suddenly everything starts going haywire. They put a lot more efforts into what they're trying to do with us, and hence everything's sort of stay in one place, it doesn't move as fast as we used to do. So this is the benefits and the negative part of being a part of Legacy Airlines.

So the key elements, why Jetstar is successful and why Scoot is successful is the fact that the visionary from the original Legacy Airlines understands how the low cost actually works and can support as well. In many ways, there's lots of technologies where they Legacy Airlines have on the learnings or the connections that they have that can help to stimulate the success of low cost airlines. However, when that doesn't come into play and the visionary starts changing, you have to imagine, for 14 years I've been through five or six chairmen of Thai Airways, and about six or seven CEOs of Thai Airways, and each of them have different ideas of how to actually deal with Nok Airlines at that point.

So today, there's a lot more supportive, obviously, now. But I'm not so sure in the near terms when there's changes again, how it's gonna come across. So it's a bloody headache for low cost airlines having to deal with the Legacy Airlines at the same time trying to establish its own position. We've done very well. We carry about ten million passengers per year. And the aircraft, the number's about 30 aircraft, and maybe about 28 now. But things are sort of coming back together.

The beauty part is that I've actually had the pleasure of actually setting up part of NokScoot, as a joint venture between the Nok Air and Scoot Airlines, to initiate the whole thing. The thing is we start seeing the differentiation between working with NokScoot, the idea of working with SQ, and the Thai Airways side as well. So on those two sides, they're totally different in the way they function. Why the NokScoot is doing very well now, it's going to be very profitable this year, I think, because of the visionary from the Scoot side and the SQ side has been much more supportive in making things happen in a fast way.

Whereas on the Ty side, working with Thai Airways is totally different animals. If anyone's working with Thai Airways, they're gonna say, "Oh my gosh," I don't have to explain further than that. It's crazy, you know, and it's very much government like, it's very, very, very stiff, and they don't make any decisions. So when you actually go to the board meetings, and they don't actually make any decisions. You can't move. Innovation can't go on. And that's the things that I'm striving to do. And that's partly why I left the company itself, running airlines 14 years. I'm sick and tired of all the Thai Airways style in a way, as well, to be very honest. Don't put that in the news, please, because I'm gonna be in deep s*** again, you know.

So that's how it works, in the Legacy Airlines. So plus and minus, we can see both ways, but I think at the end of the day, if the vision is shared from the Legacy and the low cost airlines, how they work independently or not doesn't really matter. The point is, it will complement one another, and we see lots of success seeing Jetstar and also NokScoot and Scoot as it performs today.

Corrine PngSo how do you manage potential conflicts of interest anyway?

Patee SarasinAre you asking me?

Corrine PngThe all four panellists, please, thank you.

Patee SarasinYou better ask somebody else, first.

Patrick MurphyFirst of all we have to differentiate between policy and action, right? Policy is a board level type activity, and yes, ANA are involved in the policy review, so they get their opportunity to set the vision for the company, to set up what he wants to do with the low cost airline as distinct from its own operation, and to work in harmony with the existing operation, with the two independent activities, and that can't be dealt with. So conflict is usually at a policy level, but that's all it is, and it can be resolved, and it is dealt with at least once or twice a year when the full board are meeting and talking about that policy issues. So it's not an issue.

Patee SarasinMay I add, one of the reasons why Jetstar works very well it's because Alan Joyce was one of the starters of Jetstar, and he became the CEO of Qantas, so he actually understands absolutely how things work. For the Scoot, we have Campbell today is now the chief commercial in SQ. He actually always tries to help the way the Scoot's gonna function with the SQ. So I mean, you see how these people from runnings are starting new low cost airlines are moving on to the real, the Legacy part of it, can understand how these two function very well.

For Thai Airways, we don't have anyone from low cost segment onto the, I mean, running the airlines itself, not that I'm going to run Thai Airways, God forbid. But I'm just saying that if they had somebody from the Nok Airlines understanding the low cost works upward into Legacy part, they can actually help to minimise the conflicts between the two.

Trevor SpinksThat's also something Singapore Airlines has seen, is where recently, so when I joined Scoot, it was five years ago, it was very much in the startup phase. We had Campbell Wilson, never met the gentleman before, my worry was, when I was approached for the job, I did the Wikipedia, there's nothing about Scoot. There was nothing there. So with a leap of faith from leaving a company like easyJet and coming to a startup, but, again, having the parent company of Singapore Airlines, I was feeling quite confident that I'm not gonna get really sort of thrown under the bus quite quickly.

What Campbell did very well very early on, is really keep the two separate. So when Scoot was up and running and making its decisions, whenever it was kind of like doing cheeky morning glory sales, or the new root networks, or something similar, Campbell kept the Singapore Airlines guys in their way of thinking to one side, and that benefited the company hugely. Obviously it took a lot of pressure on himself, but what happened at that point is what over the years they started to appreciate the, it kind of works, it helps. Now we have a new CEO, Lik Hsin, who's running, I sort of say. Singapore Airlines is, what you're saying, they're picking up obviously the chief people in the company and they're putting them into the key positions with inside Scoot. So Singapore Airlines isn't going forward thinking that it's the full service way of doing things. That's how it works here, et cetera, et cetera. They're going, we can learn from Scoot. I'm learning a lot on the full service side by being my low cost background from the Singapore Airlines as well.

So Singapore Airlines has kind of, there's this kind of arrogance that you could say for full service carriers around the world, whether you're BA or United, et cetera, but it's the ones who think a bit more differently, whether it's Qantas or Singapore Airlines, sort of go, there is two very, very different business models here as well. Keep them separate. Keep them keep people making sure that you don't over influence the low cost into the full service or the full service into the low cost.

Naturally you will be separate, but you have to sort of be working at some point as well, so the big thing at Scoot now is interline and connectivity and coaches going with Scoot and Singapore Airlines, obviously, it's a very fine line to walk. Getting it right is a tricky, tricky, tricky decision and business to be made.

Con KorfiatisI agree with everything that my colleagues up here on stage have said. Perhaps one other dimension to add to it, and that's the people factor. I think an organisation needs a level of maturity, and a lot of it will come down to the CEOs of the low cost, the full service, and if there's a holding company involved as well. You know, that relationship between those three individuals, and there are examples you can look at around the world, but that's been a very destructive relationship, and therefore very bad business outcome.

And you know, if you look, you know, the Qantas, Jetstar group, and I look at our organisation now, there is a cohesiveness between those three individuals and their view on the business. And it's not to say it stops one or the other going from rogue, it does involve at times a level of compromise, but at the same time, you know, you've gotta have a clear focus on not compromising. The standalone nature of the two separate businesses and the business models.

Corrine PngOne more question, well because of my background, I clearly can differentiate between full service and the low cost carrier type of service, but how do you face the consumer, the customer, how do you boost your ticket sales while convincing them it's not the same when you travel on a low cost carrier owned by a full service airline? You should not expect the same level of service standards as the parent company. I remember when Tiger Air was started and there were hiccups, there were phone calls and complaints made to Singapore Airlines constantly. Of course, in Asia we have learned in the last 15 years we have learned about this industry, but do you face any challenges there?

Con KorfiatisI think it's just time. Time fixes everything. Anything you people, it doesn't matter what industry you're talking about, any new consumer product there will be an element of people needing to understand it, get used to it, learn it, and they're fine with it. The two different models, Gareth touched on the different customer segments, there are separate customer segments. So at the end of the day the consumer does pick it up and pick it up reasonably quickly. I haven't seen that be a major issue anywhere, really.

Patrick MurphyAll right, because what we're really doing is focusing in on individual markets. I mean the Peach market is young generation, millennials, it's 21 to 34, mostly female, and they're going leisure travelling, they're going on parties and they're going on events, and that kind of thing. ANA has a totally different philosophy in terms of what it has to do, and they would like that segment of the market, but they're prepared to accept to have another airline commit, and in the domestic market of Japan in five years, we have seen a situation where the full service airlines, who have been traditionalists six or seven of them, have all static, relatively small growth, but all the growth has appeared on the low cost airlines. And it just shows it's a differentiated market, and they're doing different things. And the future is directed under ANA policy, it's clear cut in terms of differentiating between the two, so using Peach and using Vanilla as the vehicles to develop a particular market as independent of what they do themselves.

First of all, for example, and Gareth just talked about it, the whole issue of the new low cost, long haul aircraft is a big one, and ANA policy still direct it towards getting the low cost airlines, Peach, to get into the business of medium haul, at least in the short term, so can get that A331, and we can do the operational services from Japan all the way down to Bangkok, Singapore, Bali, Jakarta, all of these places, and now becoming in range, which up to now, Hong Kong is as far as you can go. It's a four hour range. It's a totally different market segment, and a totally different approach.

Patee Sarasin2004 was the launch of pretty much major, all the low cost airlines in Asia at the same time, simultaneously, basically. AirAsia, Ty AirAsia, Nok Airlines, you know, loads of them. So what happened is that the media took this by the storm, I mean, the low cost airlines really took it by the storm, and the Legacy is sort of left behind a bit, especially Thai Airways that time. The media is much more focused on the low cost segment and everything else. So Thai Airways never got the brunt of all the crap that we did, all the delays that we delivered. No complaints there. But then what happens today now, is that again, from four million people per year in Thailand is up to about 20 or 30 million fly low cost airlines now in Thailand alone on a yearly basis. So I don't see an issue, I never saw the issue that when the low cost airline screws up, Thai Airways will get the brunt of the complaints from us at all, never did.

Corrine PngSo my next question is a follow up point on what Patrick mentioned. If a full service airline has a number of low cost carriers, subsidiaries, then what happens, how do you manage the various different interests within the whole airline group?

Patrick MurphyIn our case, in the Japan market it's a case of saying, first of all we differentiate by the base point. Peach operates from Osaka and Vanilla operates from Narita, right? The whole philosophy of root development and everything else is all about Peach expanding out of the regional airports and serving domestic and international from those, so the services from Hokkaido over to Koshin and Taipei and all of those is part of the programme that they're doing. And that's different to trying to do it out of Narita, which is a much more complex market. But you still have to develop both, and they're independent, but you can cooperate and work together to make sure that you're doing the best thing possible.

Con KorfiatisFrom my point of view, unless you've got different customer segments, I think you know, you're only the risk of duplicating the costs, infrastructure, diluting the brand, because you know, the larger brand could be far more powerful than having a range of subsidiary brands. I think Japan is a little bit different perhaps in their objectives, but the other ones I've seen, and Scoot and Tiger have come to give their own, I don't want to steal your thunder, mate, but just a quick view on that. I think sometimes if the airlines, the Legacy Airlines, sort of making the investments aren't really sure what's gonna work or what's not gonna work, and they place a number of bets, and they say, "Let's see what's gonna work." But ultimately common sense prevails, and you know what Scoot and Tiger have done are bringing it together and common branding it is very smart, and ultimately that's where you end up.

Trevor SpinksYes, I mean, leading on from that, Tiger Airways Singapore is a 10, 12 years, or something similar, so Scoot wasn't even a thought process then. So Singapore Airlines five years ago, six years ago, used to start the long haul LCC with Tiger already there, but not owning as much shares as they did. There's time, it's a learning process, et cetera, et cetera, and there's a point where they actually go, well, you've got Singapore Airlines is still a premium site in terms of the long haul and the low cost, and then you have Scoot as for the long haul, and Tiger's the short haul. Too many brands, what were you doing before the et cetera, et cetera, so the decision was made round about, sort of three years to merge the Scoot and Tiger. Lead on sort of 12 months you'll get in the PSS back end's kind of ready and functioning, and that's a task in and of itself.

And I think everyone else is probably aware that sort of the Tiger, which is the older brand, had some baggage for various reasons across Asia. They merged into Scoot, so Scoot is the newer brand. It's more different, it's very separate from the Singapore Airlines brand, it's a bit cheeky, it's very millennial based. Some of the marketing we get away in Singapore. It's something you probably never would have imagined 10 years ago, 15 years ago as well, but now we've got one slowly brand. You are still seeing the Tiger aircraft running around in Tiger stripes, et cetera, as we were painting the fleet, et cetera, but it's just time and experience that's led to like, well, why do you need the two separate entities as well, and it's becoming more and more about feeder traffic.

Gareth was speaking this morning sort of jet stuff, feeding into Qantas, and we've got Scoot short haul network feeding the long haul network. But we've got the Scoot network feeding into Singapore network, and vice versa. So time moves these things on as well, and what seemed a good idea 10 years ago, or five years ago, can rapidly, rapidly change, and a few people over this conference, is sort of, the speed of the airlines, and the industry at the moment, it's moving so much more faster than everyone's seeing over along period.

Patee SarasinI think there's going to be more changes as we go along. Part of the reason why Nok Airlines decided to work with Scoot into creating NokScoot is because of the fact that we didn't have the know how onto the long haul business, and the wide bodies. And that's why when me and Campbell sat down together, and Hsin Lee as well, sit down and sat down and said, "Look, we can actually work together to create this brand so that it would be absolutely focused on the long haul business. With your experience, and also with the Nok in there, also, it creates the awareness in Thailand." So that's the sort of complement to one another. And of course, we don't have to put more expendage in terms of trying to invest into the people, we know the long haul business. So hence, we saw AirAsia X come into play, and that's the reason why we sat down, let's work together to create this phenomenal. And I think, given the ICAO, all the red flags gone from Thailand, I think you're going to see a phenomenal move for NokScoot.

And also to China. Give the China market right now, if you look at it, you think it's big, it is big, but the infrastructure is still very limited, mean the slots and everything else. So having sort of narrow bodies flying in frequents is going to be an issue. We know that from Nok Airlines too. So with NokScoot, with one, you know, wide body planes, less frequent, but carry more passengers, would create a real big killer for Lion Air right now. They're suffering. When NokScoot gets there, they actually suffer quite a bit. And we love that, you know, by the way. That's how it works.

Corrine PngSo how do you ensure or execute seamless interlining with more feeder traffic, and some of the carriers have adopted common mileage programmes, how do you do that?

Patee SarasinWe've started with a Value Alliance project. It was again initiated between Scoot and Nok Air. And yes, it's in its infancy stage. And I think we're still learning how to do this. Actually I've just got an idea I'm going to tell Value Alliance how to do this, but I think it's going to be phenomenal when it works. But it requires a lot of effort in terms of between different airlines, different philosophies, different thinking to somehow interline this thinking behind this. And once it works, it's going to be fantastic. But it just requires a lot of patience to make it work. I think we've just started Value Alliance about two to three years ago, just initiated this, and I was trying to still putting everything together in a way, and I'm not part of it now directly, but because I'm still an owner of this airline, I'm still trying to help to make things work.

Trevor SpinksSeamless is a very dangerous word.

Patee SarasinYes.

Trevor SpinksVery dangerous word. Scoot and Tiger set up through Changi Airport, an initial concept called Changi Connects because you couldn't operate the iarchi, the free check in bag, where it happens automatically in the full service carrier world. And basically it just meant that literally it was a group of people. The aircraft would land, would run and get the bags, and pick up the bag and run and put it at the back of the aircraft. That's how Changi Connects works. And it's 20 dollars for people to pick up that. It was wonderful, but it only had a certain economy of scale, and at the time Scoot was five aircraft, Tiger was 20 aircraft, and it kinda worked.

But at that point you know that it's only gonna go so far. But the customers and the consumers wanted this, queue the low side, the cost side of it, we had to invest in iarchi, and understanding how iarchi worked with Navataire, who typically didn't work with those systems as well. So again, we are pushing the boundaries in terms of if we're gonna get serious, and in this way we're gonna be a bit more like the full service carries, we now are fully enabled iarchi check in for the bags. And that works with the full service carriers as well.

So moving from interlining with chiliarch to the full coaches, there's lots of little pitfalls with the PSS systems that don't talk quite well. And the full service codes on the Amadeuses and the Sabres have a very sort of robust system that's been around for a long time. Navataire has got 70 airlines or so, or something similar. It's developing and changing all the time to try and catch, they're kind of missing each other in terms of how they connect, but they're starting to talk a little bit. Give it another five years, ten years, you'll find that the Navaitaires are talking exactly in the same way as the Amadeuses of the world.

Con KorfiatisYeah you're talking about the technology along Navitaire, I agree. Seamlessness is a very dangerous word to use, because if you're talking about changing your operating model to facilitate this, then you'll run into all sort of trouble, and then you start damaging the business and the cost base and you're moving away from being a low cost. But it is about the technology, it's about the technology coming together, while still keeping the integrity of the operating model of the businesses and the independent brands, and once you've got that type of seamlessness, you get those three factors right, then you've got a seamlessness in the product.

Patrick MurphyI think for you to have seamless is really a very expensive business. And again, back to being a principle of the low cost airline, that's not what we do. But here's the fact, when Peach, the 15 percent are doing self connect. Part of that has to do with terminal and separations and equally priced combinations. We don't offer you could buy the independent first. If you did a combination service and tried to put a seamless, you take on reliabilities, responsibilities, you have to take systems that will integrate and enable you to do all of the booking, and make all of these things happen. So it's quite an expensive business. At the moment we're not anticipating it, we're not planning it at this point in time. It seems to be focused on what we're doing. Millennials, low price, minimal operation, low cost the whole process, right? And give people the opportunity to do that, and if they want to connect, it's simple and easy. Many people who wanted it will actually go ahead and do it.

Corrine PngIn the interest of time, I'll now open the floor to questions. Do we have any Q and A?

Audience MemberHi everybody. Thanks a lot. It's very useful and very interesting. I think one thing that stands out to me is judging on passenger numbers and penetration market share, LCCs in this region have done excellent, but I suppose if you step back and look at the bottom line and you think of profitability, it's been a lot more challenging environment, especially when you think about how well LCC's doing the rest of the world, compared to their full service has, with sisters and brothers. So how do you see that evolving from the LCCs in this region? Can you step up the profitability?

Patee SarasinThe key problems of the LCC market is that of the supplies growing so fast. And everybody seems to like to get aircraft. And then at the end of the day, the price war sort of comes into play. So it's not between Legacy and low cost anymore. It's low cost versus low cost. Just keep on dumping the price to be so cheap, and the size going below cost. Now the fuel price is going up right now, so that's a whole new challenge for us all, as well. So the key element that prevents Nok Air, we're suffering from this, is the fact that, what our revenues comes in, but the cost is US dollars.

So that's the key element of the exchange rates, it's going to be one of the key issues, actually have always been an issue for us over the years that we had. Now when you have a competition coming into the market, let's say in about 20 or 30 percent increase in one year, 30 percent you start seeing price dumping issue starts going into play. So right now, I think, Nok Airlines is suffering from that particular part of the terms of the yield that we're losing from all the cost base and the revenues that we getting, it's not going to be weight enough for this.

So there must be ways, actually trying to work in such a way that we gonna have to reduce more cost. That puts the complete pressure. Because when the cost is structured right from the contracts, whatever you create five years ago does not apply anymore, but it still continues with the actual revenues coming down so quickly, so that's going to be the suffering point. I think a low cost airline's gonna find it very difficult, even the Legacy ones, to get that particular yield, so everything now depends on the ancillary revenues.

So innovation instead of coming into try to low cost, only lowering the cost side, you have to come up with ancillary revenues in such a way that makes sense, and generate more profit and better yield. I mean, I'm talking for companies to make money. And it's not just pure suitcases. It has to be a lot more. And that's where I come in with the DDG, so that's the future.

Trevor SpinksSo I think you hit the key word there at the end of what you were talking about, it's ancillaries, it's been mentioned in some of these conferences. It's an LCC word that we've been talking about for years and years and years. So much for the fact that in the full service carriers are now starting to check your bags, or certain select seats, et cetera, et cetera. The big word for us, and everyone's been saying for us, the price of the seat will go down, and down, and down, and that's not new. The CEOs across LCCs and across the world have been saying that for a long time as well. But the profit will come from the ancillaries. Scoot themselves, I don't know what the number is now, I see 25, 27 different ancillary products that we will sell. It's unbundled, and our job is to try and make it as attractive for the passenger to buy the ancillaries as well, and that's the important side for the LCC, and it's that important that the full service guys are getting in on the ancillaries as well.

Con KorfiatisPerhaps just to very quickly add, I think it's also an element of market maturity. I know for example, in 2003 and '04 when the low cost was kicking in Southeast Asia, three low cost airlines launched at once in Singapore once in the same year. Insanity, okay?

Trevor SpinksYeah.

Con KorfiatisIt's just complete insanity, so and if you look at the US, the US is sort of had record profitability over the last year or two, it's taken them a long time to get there, but a lot of it is being driven by the market sort of right sizing the right number of airlines, the right profit motivation, and I think what we're seeing parts of Southeast Asia, we're not quite there yet. The old adage of monopoly makes a lot of money, two airlines, you're still doing pretty well. Three, you're kind of okay, and you get four and above, and it's tough for everybody, because that's when you get into price discounting, regardless of your business model. So I think there's an element there to play in this, and we'll probably see more consolidation in this part of the world in new years going forward, and that will fix and address that issue.

Patrick MurphyAnd in our case, in Peach, from the very start we have focused on the ancillary, knowing that the price pressure was always to be that kind of pressure. So we want to have the prices in the domestic lower than the train. And lower, obviously, than all the other carriers, and we have done that pretty well, so we're still five years in business, four years profit, is no mean achievement, but we're not up at the top end, but remember, eight out of the top 10 LCCs in the world today are all non FSC, not full service airlines. They're coming independently of doing that. And I think that's one of the factors that you have to take account of that the different approach. I mean, Legacy carriers are now beginning to adopt and change and get one to these things that the low cost airlines have been doing, which would create other pressures that the low cost airline has to produce even more and get more non ticket revenue, and that's the way to go.

Corrine PngWe had another question, a gentleman over there. I think we'll have to wrap up here. Before we do that, can we have a show of hands, I would like you to take a vote. If you had a choice, would you prefer to be the CEO of an independent LCC, or the CEO of and LCC owned by a very prestigious full service airline, so the first, option one, anyone? Wow. Okay, option two, please. Option two. Okay, thank you so much for your participation and most importantly, thanks very much, our distinguished guests for sharing your wonderful insight. You all have a great year ahead. Thank you.

Want More News Like This?

CAPA Membership provides access to all news and analysis on the site, along with access to many areas of our comprehensive databases and toolsets.
Find Out More