The world's love affair with low-cost carriers (LCC) continues to blossom.
Through the allure of cheap fares, sustained by lower costs and consumer-friendly brands, LCCs now provide 23 seats out of every 100 produced by the world’s airlines – up from just 8% in 2001. The number is all the more remarkable in that these carriers barely participate in long-haul operations.
In a consumer world increasingly obsessed by who produces, not where, national carrier brand value is declining. In its place, identifiers not anchored to a single country proliferate and consumers are flocking to them to deliver cost-effective short-haul solutions.
British, Irish and Italians select Ryanair or easyJet much more than British Airways, Aer Lingus or Alitalia. Singaporeans increasingly fly short-haul with Tiger Airways, Jetstar Asia and AirAsia, over Singapore Airlines. Lion Air transports millions more Indonesians domestically than flag carrier Garuda Indonesia. Iconic Australian airline Qantas has downsized as subsidiary Jetstar attracts droves of passengers. American carriers have diminished as JetBlue and others have surged; Malays travel more with AirAsia than Malaysia Airlines. There has been no net capacity growth whatsoever on legacy airlines over the past decade.
Some new airline brands that incorporate their homeland or base are also successful: Cebu Pacific in the Philippines, Air Berlin in Germany or Jeju Air in Korea. All are growing, all are taking market share from incumbents.
This suggests that brand is only part of the equation. Like a newborn, new entrant airlines are lightweight, nimble and flexible. They don't own many expensive things, get others to do the non-core work for them, use their toys all day, have quick turnarounds and generally only operate short sectors. As such, their average cost bases in their tightly focused operations are anything ranging from 20-50% below their older rivals.
Global LCC Capacity Share (%): 2001 to 2010
The biggest challenge for adolescent airlines is staying slim. Only a few have managed it, as others adapt and modify the basic concepts to seek competitive niches. Ryanair is probably the best example of a gangly adolescent “pure” LCC anywhere today, where cost remains truly king. It is powering the European LCC explosion that has seen the sector rise from a 5% share to 35% in 10 short years.
Just four years ago, many experts suggested the LCC share of Europe's skies would cap out at 25%. This was quickly surpassed, though even Ryanair's rambunctious leader is apparently now suggesting a plateau is nearing.
But Ryanair and friends are intent on launching a full-frontal attack on Europe's (much) higher cost flags. CEO Michael O'Leary is shifting tack to put Ryanair into every major European hub (with the possible exception of Heathrow, Paris CDG and Frankfurt am Main) by the middle of the decade, as airports adapt their services and prices to participate in growth. But does anyone really believe Ryanair won't keep growing its fleet beyond 2014?
Europe's flag carriers can gain protection in their long-haul operations and alliances, but unless they can continue to shelter in the protective embrace of alliances and bilateral entry and ownership controls, that territory too may be under threat.
LCC Capacity Share (%) within Europe: 2001 to 2010
Asian LCCs account for about 18% of intra-regional seating capacity, according to OAG, up from 1% in 2001 - a remarkable growth story for an international market where expansion was supposedly impossible. Much of this has been feasible thanks to tacit acceptance of cross-border joint ventures by non-flag carriers.
This 18% figure corresponds neatly with the current LCC proportion of narrowbody fleets in the Asia Pacific region.
Roughly half of the future narrowbody deliveries are destined for the region's LCCs. This means their fleet share will rise to roughly 33% of the total by 2015. This will equate to a combined Asia Pacific narrowbody LCC fleet of about 985 aircraft in 2015, from 465 at present.
But China's "big three" state-owned carriers are heavily represented in the narrowbody order books for Airbus and Boeing. Excluding mainland China (where homegrown LCCs are not sanctioned and most of those aircraft are destined to cover domestic Chinese growth), the Asia Pacific LCC expansion story is even more dramatic.
Excluding the Chinese orders, Asian LCCs account for about 55% of the narrowbody orders. This would take their share of the region's operating single-aisle fleet to more than 45% by 2015. If that translates directly to market share (and more, with typically higher load factors), the implications are profound - on yields, earnings, government policy settings, airport strategy, tourism strategy - not to mention the region's flag carriers.
In all probability, the number and proportion of LCC aircraft is likely to grow beyond even that level, as Indian - and eventually Japanese, Korean and Chinese - low-cost airlines enter new markets, and as liberalisation spreads across the fast-expanding Asian market. Indonesia's Lion Air (a low-cost full service airline that holds a 40% domestic share) is also planning to spread its wings through Asia, with two A320s due to arrive each month for the next four years.
LCC Capacity Share (%) within Asia Pacific: 2001 to 2010
A different scenario is playing out in North America, where the LCC share is struggling to break above 28% of the total market, 10 points up on a decade ago. Weighed down by weak economic conditions, effective cost reduction by network carriers via Chapter 11, high fuel prices and a wave of consolidation in the airline sector (that extends to the LCC segment), the changing of the guard appears to have halted, at least for now. South America is consolidating too. Perhaps taking inspiration from their counterparts in North America, network carriers in Central and South America are also joining forces.
But the horse may have bolted. LCC penetration across the continent is touching 30% - up from a humble 3% in 2001 - and some big markets, such as Brazil, are witnessing rapid LCC expansion, including cross-border operations.
LCC Capacity Share (%) within North America: 2001 to 2010
LCC Capacity Share (%) within Central/South America: 2001 to 2010
The Middle East and Africa are just getting started. LCCs are also charging into these high potential markets, growing within the space of a few years to represent 12% and 10% of total intra-regional capacity, respectively. With the exception of the UAE, Lebanon and Kuwait, protectionist policies still dominate much of the region; but even highly conservative countries such as Saudi Arabia have moved to allow LCCs to establish domestically. Change is afoot.
In Africa the main activity is at the southern tip. But some north African countries are encouraging, or at least tolerating, locally established start-ups; inbound operations by European LCCs have stimulated tourism, while the EU is steadily opening up liberal “bilateral” regimes. Even easyJet has gone medium-haul to service Egypt's tourist destination of Sharm el Sheikh.
LCC Capacity Share (%) within Middle East: 2001 to 2010
The LCC trajectory seems oblivious to regulatory or market conditions, imprinting its stamp on every new global market as it arrives. In the process it stimulates growth on existing routes and forges new city pair links.
A facilitator of liberalisation, LCCs thrive in open markets, where even conservative governments grow willing to relax entry restrictions as the wider economic benefits spread through the system.
A later stage of expansion, as seen in North America, Europe and Australia, could result in the carriers becoming serious contenders for short-haul business traffic, which is where the incumbent full service operators confront an increasingly serious threat, especially in Europe. The major network carriers, with their higher costs, are now forced to heavily subsidise their connecting short-haul spokes, an unstable equilibrium, where clearly another phase in this competitive evolution must roll out in the medium term.
Incumbent carriers in the fast growth markets still have an opportunity to adapt to these challenges. Many Asia Pacific flag carriers already have a low-cost subsidiary of some kind, offering them some long-term sanctuary, as well as an opportunity to participate in the booming point-to-point leisure market expansion.
Intercontinental LCC penetration is the obvious next frontier. Market share levels are still low, mostly in the single digits. But carriers such as AirAsia X and Qantas subsidiary Jetstar are already active and finding a strong response to their offerings. These quasi-network low-cost airlines continue to push the battlefront along which this global war is being conducted.
This article is taken from Issue 3 of Airline Leader. Click here to view and subscribe to the full publication.