Components of LCCs

Chapter- 2

1. High aircraft utilization• A/C is kept flying as much as possible, the first flight starts as early in the morning as commercially possible and final flight ends at midnight• A fast turnaround is critical to ensure time spent on ground is minimal – an airline makes money when the aircraft is flying, not when A/C is parked• For example, AirAsia’s turnaround time is 25 minutes; compare that against 1 hour for a FSC• On average, AirAsia’s utilization per aircraft is 12 block hours per day, a FSC might do about 8 block hours per day

Components of LCC Business modal?

2. No frills• Underlying business for a LCC is to get a person from point A to point B• Everything else is considered to be luxury item or “frill”, of which can be acquired for a small fee• Among many of the frills that AirAsia has do away are;

• No free food & beverages. Why give away something that you don’t appreciate? Passengers are most welcome to purchase food & drinks at an affordable price from the cabin crew

• Free seating. There is no assigned seating. Passengers receive a generic boarding pass and they will have to take any of the available seats

Components of LCC Business modal?

2. No frills• Ticketless airlines.

Less hassle for the customer, who doesn't have to worry about collecting tickets before traveling, and cost-effective for the airlines (paper, printing, distributing).

• No refund. Airlines waste a lot of money when passengers do not show up for a flight due to refunds and rescheduling. Whether a passenger shows up or not, the cost of flight to the airline is the same. LCC are unforgiving to no show passengers and do not offer refunds for missed flights

• No loyalty programme. We believe our customers are loyal to our low fares, so who needs frequent flyer miles programme then

Components of LCC Business modal?

3. Streamline OperationsMaking the process as simple as possible is the key of a successful LCC. • Single type of aircraft.

Pilots, flight attendants, mechanics and operations personnel are specialized in a single type of aircraft, which means, among others, that there is no need for costly re-training of staff, for maintaining a stock with parts for different types of aircraft, for knowledge and skills in order to operate and maintain different types of aircraft with their own characteristics, or for new work requirements.

• Single class seating. There is only one class seating, i.e first class, and passengers are free to sit where they choose. Should you want to have the privilege to choose your seats, you can by purchasing Xpress boarding.

• Standard Operating Procedures. SOPs are important to ensure same level of competence among all the staff. This way we can ensure the homogeneity of service throughout the company.

Components of LCC Business modal?

4. Basic facilities• LCC requirement of Airport Terminals•Emergence of Low Cost Carrier (LCC) industry has created new challenges for A/Ps to consider splitting up their services and offer a different product to different A/L since LCCs have different needs to have quick turnaround times, raise productivity, and cut down costs• Their focus is on point-to-point services and avoid passenger/baggage handling sys.

Components of LCC Business modal?

LCC Needs and Requirements of Airport TerminalsService/facility LCC needs and requirementsOverall terminal design Simple, functional with low construction/operating costsCheck-in Fewer desks than full service airlines Airline lounges Not neededSecurity Efficient processes so boarding may not delay aircraft Transfer facilities Not neededAirbridges Preference for steps for quicker boarding and deplaneAirfield buses Preference for passengers to walk to/from A/C to save costsOffice accommodation Simple and functional

4. Basic AmenitiesUse of Secondary airports. • Low cost carriers mostly fly to and from airports that are not necessarily the busiest, for example, London - Stanstead rather than London – Heathrow• These are often referred to as secondary airports. Operating from so called secondary airports is cheaper than from the bigger major airports and they are also a lot less congested and “turnaround times” for aircraft are a lot shorter• For small regional A/Ps, the arrival of LCCs has been useful to fill up underutilized existing infrastructure while A/Ls have benefitted from uncongested facilities which help them achieve fast turnarounds• Such a strategy may have problems if demand grows to such a level that new

facilities are needed and the A/P revenues are not sufficient to fund further

investment

Components of LCC Business modal?

• Examples of regional A/Ps include Liverpool and Prestwick in the UK, which have decided to focus purely on serving the LCC market and have developed the simplified facilities these A/Ls require• Other examples include Finland, where Finavia, the governing body of the Finnish A/Ps, introduced a ‘low cost concept’ at the small A/P

• Outside Europe, this practice is generally not so common • Avalon near Melbourne in Australia is a rare example of an A/P that has been developed for the ops of the LCC Jetstar

Examples

1. Use of secondary Airports

• In some cases, old unused military A/Ps have been developed primarily to serve the LCC sector• This has been the case of London Manston A/P and Robin Hood Doncaster airport in the UK

2. Use of Unused Military Bases

Frankfurt–Hahn (former US airbase) is another

example where passenger

terminal was a converted

officers’ club

Ryanair began services from the A/P in 1999 and then in

2002 it set up a base there and give services to 27 destinations

A/P is served by three other LCCs, namely

Blue Air, Iceland Express, and Wizz Air

Passenger numbers have gone from 90

000 in 1999 to over 4 million in 2007

During this time the A/P authorities have invested €17 million

to give the A/P a capacity of 5 million

passengers

This is equivalent to an investment cost

per passenger of €3.50 compared to €18.25 at Hamburg, €32.40 at Cologne–Bonn, and €60.00 at

Munich

Example

2. Use of Unused Military BasesLow

Cast

Carrier

(LCC)

Industry

Frankfurt–Hahn (former US airbase) is another example where passenger terminal

was a converted officers’ club

Rental space has increased from 180

square metres in 2002 to 3300 in

2005, whilst parking spaces have risen from

3433 to 9736

This means that non-aeronautical

revenue now accounts for 35% of

all revenues

A/P does not charge a landing fee to airlines with fast turnarounds to minimize the fixed cost per turnaround and the passenger

charge varies between € 5.35 for less than 100 000

passengers and €2.48 for 2 to 3 million

passengers

Beyond 3 million passengers, further discounts is offered

for a turnaround time of 25 minutes

Example

• When an A/P serves both full service and LCCs, it is a difficult task to meet the different and conflicting needs of these two types of A/Ls

2. Use of Unused Military Bases

One option which is growing in popularity is to develop a specialized low cost facility or terminal with simple design & lower service standards than in

conventional terminals

Certain costs associated with the R/W, nav equipment, fire/rescue, and security, will be same for all

• For example, Amsterdam A/P built which has a simple design with no airbridges and functions within a 20-minute turnaround time• Marseilles had a separate low cost terminal that was converted from an old cargo facility • Budapest has also developed an LCC terminal to accommodate Wizz Air and Sky Europe who have bases there, and in 2004 Warsaw A/P opened its Etiuda terminal, which originally had been an arrivals hall but more recently was used as a supermarket, furniture shop, and storage space• At all these A/Ps, the passenger charge is lower for the low cost facility except at Amsterdam where there is a differential landing charge depending on whether an airbridge is used or not

Table-4.2 Examples of LCC Facilities and TerminalsAirport Date of Type of Passenger Gross area A/P charges Airline users

opening terminal capacity policyMarseille 2006 Refurbished l3.5 7532 Cheaper EasyJet, Flybe, MyairAmsterdam 2005 Piers off terminal 4 6150 Cheaper No airbridges Budapest 2005 Refurbished N/A 7990 Cheaper Wizz Air, Sky Europe,

Table gives details of some presently existing low cost terminals and facilitiesSome of these are refurbished existing facilities and some are dedicated new terminals

LCC facilities & Terminals in EUROPE

• There are two LCC facilities in South East Asia (Singapore A/P, Kuala Lumpur A/P) opened in 2006• At both the A/Ps, the passenger charges for the low cost terminal are lower and the rental charges at Singapore are half of those charged in the main terminal•

LCC facilities & terminals in South East AsiaTable-4.2 Examples of LCC Facilities and Terminals

Airport Date of Type of Passenger Gross area A/P charges Airline usersopening terminal capacity policy

K’Lumpur 2006 New terminal 10 35290 Cheaper Air Asia,Pacifi c Air, Singapore 2006 New terminal 2.7 25000 Cheaper Tiger Airways

• There is Plan for providing similar facilities in Bangkok, the Philippines, Indonesia, Dubai, and Delhi• In Mexico, at Monterrey A/P, Terminal C is an LCC terminal• Southwest in the US has low cost facilities at Baltimore–Washington, and at JFK A/P in New York

5. Point to point network• Point to point network.

• LCC shuns the hub-and-spoke system and embraces the simple point-to-point network

• Almost all AirAsia flights are short-haul (3 hour flight or less)• No arrangements have been made with other airline companies on

connecting flights, on possibilities of flight transfers, nor on having the luggage labeled and passed through from one flight to another

Components of LCC Business modal?

6. Lean Distribution System• Distribution costs are something that FSC most often ignore. Very often, FSC relies on travel agents and from their posh sales office• Furthermore, FSC always blows the budget by complicating their distribution channels by integrating their systems with multiple Global Distribution Systems• LCC will keep their distribution channel as simple as possible and will cover the whole spectrum of the clientele profile• For example, AirAsia can cater to the most sophisticated European traveler via internet and credit card sales. And at the same time, AirAsia has an established system to sell our tickets to the most remote and technology deprived locations, such as in Myanmar. (a) Internet Sales. The bulk of sales (65%) are done via the airline’s website, whereby the fares are paid using a credit card. This is the most cost effective distribution channel

Components of LCC Business modal?

6. Lean Distribution System (b) Sales office. AirAsia only has a few sales offices. We only establish a call centre if we are confident the sales derived from the centre will be worth it. Furthermore, we are not fixated with having our sales office in the posh side of town.

(c) Travel agents. LCC avoids reliance for sales via travel agent as much as possible. This means that the airlines do not pay any commission to a travel agent, which would otherwise have been reflected in the fares. Also, as they do not use travel agents, they do not use, nor participate in the world wide reservation systems and thus save costs, which again are reflected in their pricing.

(d) Call centres. Ticket sales can be done via telephonically; this is a simple and cost effective method

Components of LCC Business modal?

Competitive Strategy for Low Cost Airlines

SWOT Analysis is a tool to figure out those internal factors such as strengths and weakness and external opportunities and threats to objectives. The following table lists respective area from selected Low cost carriers as followings

SWOT Analysis of LCC

Strengths Weakness

Low cost operations Fewer management level could do effective,

focused and aggressive management Simple proven business model that

consistently delivers the lowest fares in the industry

Penetrate & stimulate to potential market Multi-skilled staffs means efficient and

incentives workforce Single minded focus on cost reduction

positions the Group as industry’s lowest cost producer

Strong balance sheet and strong cash generation gives it resources to weather short-term difficulties

Single type fleet minimize maintenance fee and easy for pilots dispatch

Point to point model is lower unit cost and uplifts aircrafts utilization

Distinctive corporate culture

Service resource is limited by lower costs Limit human recourse could not handle

irregular situation Exposed to regulatory interference on airport

deals and passenger compensation Government interference and subsides have

undermined industry profitability on a structural basis and delayed the much-needed consolidation of the industry.

Non-Central location of secondary airports Brand is vital for market position and

developing it is always a challenge Heavy reliance on outsourcing leaves it

exposed to 3rd party delivery Market remains hugely price sensitive, as

service has become commoditized and open to new entrants

Lack of contingency plan

Competitive Strategy for Low Cost AirlinesSWOT Analysis of LCC

Opportunities Threats

Long haul flight is an trial to get undeveloped market share Differentiation from old LCC models by

adding customer service or operation as full service airline with low fare

Ongoing industry consolidation has opened up prospects for new routes

and airport deals Demand is price driven and should grow

irrespective of economic cycles Dominant/monopoly position in many routes

will offer some pricing power (albeit seasonal) High fuel prices will squeeze out unprofitable

competitors

Legacy airlines start cut costs to compete with those LCCs

Entrance of other LCCs Some major airlines have attempted to reposition themselves as low cost carriers with varying degrees of success

High fuel price decreases yield A serious accident could undermine

confidence in low cost carriers As subsidiary of legacy airline could be risky

due to ambiguous market Heavily reliance on the internet as sales

channel exposes them to risks associated with system disruption

Environmental taxes could disrupt the cost equation

Accident, terrorist attack and disaster Aviation regulation and government policy From no frills to limit frills will increase

operation cost