Low-cost carriers (LCCs) are an established and evolving part of the aviation industry, we have previously asked what are they? Here we take a fresh look at this firmly established sector – which already dominates markets in some regions of the world - and how its changing.
If you haven’t travelled with a Low-Cost Carrier (LCC) yet, chances are you’re still familiar with some of the major operators in this sector of the aviation industry, as four of the current top ten airlines now operate as LCCs. Today, LCCs produce around 33% of all scheduled airline seats a week and operate 30% of all scheduled flights, making them the fastest growing sector in the industry in recent years.
In this article, we look at the basics of a low-cost airline, what makes them different, how they are evolving and how the current phase of evolution is creating a new sub-sector of LCCs, it’s certainly never dull looking at low-cost airlines!
The Basics of Low-Cost Carriers
At the very heart of LCCs is a simple proposition: they provide the most basic service between two markets and the lowest possible basic air fare - although that is not always the case!
Simplicity and efficiency are at the very heart of an LCC's operating model, often they will:
• Operate one single type aircraft
• Operate aircraft with the maximum number of seats
• Fly aircraft as long as possible each day
• Charge for additional services (like preferred seating or upgraded Wi-Fi)
Low-cost airlines will explore every possibility to cut costs; for the traveller that may mean landing at an airport sixty miles from the city centre, or being bussed around an airport on a free "sightseeing" tour before departing. With a ruthless obsession on costs, LCCs also typically deal directly with their customers - tending to avoid OTAs and intermediaries where possible.
As LCCs operate one-third of all airline seats globally, you would think that there are hundreds of such airlines in existence. However, there are currently 114 airlines defined by OAG as LCCs, out of 741 operating flights every week.
So, with LCCs accounting for just 15% of all airlines but 33% of all seats it’s very clear that LCCs are larger than your average airline and there is a key reason for that difference:
• For any LCC to be successful it must have a level of operation that allows it to maximise its operational efficiency.
For the larger LCCs this typically means operating at least a hundred aircraft and just one type of aircraft.
Are Low-Cost Airlines Global? Not Quite.
While it is generally agreed that the LCC was originally developed in the United States with Herb Kelleher, peanut fares and Southwest Airlines - the concept caught on very quickly elsewhere…
• In Europe, the original Ryanair airline was saved from collapse by flipping from a regional airline to a low-cost airline - completely changing their business model.
• In Asia, it took a musical entrepreneur and West Ham supporter, Tony Fernandes, to create AirAsia with the small Malaysian airline and two very old B737s as the starting point.
Today, four of the largest ten airlines in the world are LCCs:
• Southwest
• Ryanair
• Indigo
• easyJet
And more LCCs exist within the top twenty-five global carriers. In recent years, their pace of growth has been staggering as the chart below shows. Since 2019, and the pandemic crisis, LCCs have increased their global share of capacity by 13% whilst legacy airlines have yet to fully recover back to 2019 capacity levels. For the LCCs timing was everything with new aircraft orders being delivered both during, and in the immediate years after the pandemic. And while all airlines are currently struggling for on-time aircraft deliveries, it seems to be impacting legacy airlines more than their LCC competitors.
The expansion of LCCs might have been greater since the beginning of the decade if China and Japan had embraced the concept. Below are the ten largest country markets in the world and their respective shares of low-cost airline capacity. The USA is right on the global average for share between the two segments. However, major markets such as China (12%) and Japan (22%) remain well below the global average as a combination of regulatory structures, available airport capacity, and existing airline dominance have prevented a greater LCC share.
A major part of the success of LCCs has been their creation of new demand through a combination of low fares, new routes and appealing to a new generation of travellers. The rising disposable incomes, widespread use of digital technology, and credit card adoption among the new generation play to the low-cost business model. In that context it is no surprise that emergent aviation markets such as India, Brazil and Indonesia have a large share of their capacity in the hands of LCCs.
Ruthless Efficiency Drives Productivity and Profit
All airlines are efficient, but some are more efficient than others and LCCs are ruthless in driving efficiency in their business. Every percentage point, second or ounce of efficiency can equate to lower fares and larger profits for the airlines. But how do they manage this on a constant basis?
One Class Democracy – operating a single class of travel makes for simplicity of service and operation. A thirty- inch seat pitch, compared to a thirty-two-inch seat pitch can result in more than twenty extra seats or opportunities to sell for a LCC. And as for two abreast seating, that’s purely for the flight deck!
Aircraft Utilisation – it's widely accepted that aircraft make no money when parked on an airbridge or while waiting an hour for a take-off slot, so LCCs are certainly attracted to airports with operational flexibility. Maximising the hours that an aircraft flies is central to the LCC operating model, early starts and late finishes are all part of the operation and waiting for connecting passengers just doesn’t happen, unless they happen to be the flight crew! If a LCC airline can achieve an average of 13 hours flying a day, with 20% more seats than a legacy airline, then some very quick cost and revenue advantages begin to play out for the carrier.
Operational Efficiency Is Key – as a traveller, two things distinguish an LCC, the obligatory queue in a stairwell before boarding and having to put your rubbish in a bin bag shortly before arrival. Adopting practices from other industries, including Formula 1, LCCs can turn an aircraft around very quickly, frequently within 35 minutes, while legacy carriers are still waiting for the aircraft catering or that missing last remaining passenger.
Through detailed microscopic analysis of their entire operating process LCCs have challenged every aspect of the traditional airline operating model. They create marginal gains wherever possible, resulting in lower cost per seat compared to their competitors. And of course, those extra seats on every flight create more opportunities to sell!
The LCC E-Commerce PLatform
Every seat on a LCC is a platform on which to sell more and more to the passenger - termed ancillary revenues:
• Ancillaries are the additional services and products airlines offer beyond the base airfare, such as premium seat selection, priority boarding, additional baggage, and even hotel bookings and car rentals.
LCCs have become experts at offering such services. For some low-cost airlines the ancillary revenues generated per passenger are now greater than the fare paid for the original ticket, creating an interesting concept of “revenue per seat sold” rather than the “yield per seat”. And, in case we hadn’t realised, airlines are now just shops with wings in many cases!
Such is that focus on e-commerce that many LCCs are now part of a traveller’s lifestyle. Many LCCs now have their own holiday companies that compete against the mainstream tour operators and credit cards, mobile phone contracts and even hotels and cruises are all becoming aligned by airlines willing to sell a complete product experience rather than just an airline seat. All of these e-commerce activities and more are part of the evolution of the LCC model and its future fragmentation is inevitable as each carrier competes and importantly increasingly competes with other LCCs for a share of your cash.
The Evolving LCC Model
As with any product the basic LCC model must evolve and that evolution at its simplest is the addition of new destinations and routes that appeal to the existing customer base. However, in recent years that evolution has begun to blur the distinction between legacy and low-cost airlines to a point where perhaps a new model of airline has been created. And there are classic signs of that evolution to look out for across all LCCs which will put more and more pressure on the model.
Strategic Partnerships, Codeshares and Opportunities
Many LCCs have strayed into a grey area of operation by developing commercial partnerships with legacy airlines that can provide valuable connecting traffic in both directions.
JetBlue, the US-based LCC, have multiple codeshare agreements in place. easyJet similarly have partnerships with Emirates and other (what they describe as “like minded”) airlines. Whilst Virgin Australia have codeshares with nearly every airline flying to Australia outside of the oneWorld Alliance, and that’s a lot! When such arrangements are strictly limited to connectivity, and no interline acceptability, they make a degree of commercial sense. However, when they involve through-connecting and baggage handling, cost complexity creeps back into the business.
A deep set of strategic alliances exists when two partner airlines share the same ultimate owner. For example, FlyDubai and Emirates have the same ultimate owner, as do Saudia and FlyNAS, and Singapore Airlines and Scoot. Strategists in these businesses claim that the respective airlines serve different markets and segments. However, when the two airlines compete on the same route, with schedules within an hour of each other, it becomes a difficult one to accept - especially when they have the same operating codes on the service. While the LCC airline in such relationships can operate more cost effectively in markets that otherwise are too price sensitive, the blurring of positions edges closer and closer every day.
Flying Further For New Markets
The long-haul low-cost airline model has always been fashionable, but whether they are profitable is another question. There have been a number of launches and subsequent failures around the world. Long-haul LCCs are at their best in very large markets with no seasonality and where competitors offer low levels of frequency. It will always be challenging for a long-haul LCC competing in a seasonal market against seven flights a day from legacy airlines with attractive frequent flyer programmes, whatever fare they offer to stimulate demand. Nevertheless, in the future next generation single aisle aircraft with extended flight ranges may change the reliance on more expensive wide-bodied B787 type services. Long-haul LCC services are always an interesting area to watch.
And Finally The Ultra Low-Cost Airline
From a product positioning and brand perspective if you can’t compete in a sector then create a new category! In the last few years, we’ve seen the development of the ultra-low-cost-carriers (ULCCs) who may (or may not) have spotted a gap serving secondary cities to secondary cities with a no-frills service. This new segment developed in the US with airlines such as Spirit, Allegiant and Frontier the most active. However, the concept of low frequency services between secondary markets is perhaps proving harder to sustain than they had hoped for, and the cost advantages are now evaporating as labour and operating costs increase. The LCC sector is already a cut throat sector, but the purported ULCCs may just end up blurring with the LCCs who in turn are blurring with the legacy carriers.
In Conclusion
The aviation market is huge, by the end of 2024 there will have been 5.9 billion seats and 36.7 million flights operated, providing today’s travellers with a choice of airlines, products, and scheduling options. LCCs may have been able to hang on to the “low-cost” tag but when you sum up the cost of the ancillaries compared to a legacy airline’s air fare, sometimes it’s a close call.
