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Old 11th Jan 2019, 19:10
  #11 (permalink)  
Rated De
Join Date: Sep 2017
Location: Europe
Posts: 1,418
Originally Posted by ATC Watcher View Post
It is a bit more complicated than that ,in a nutshell the previous management wanted to create a new airline in between low cost and mailstream , and use their old 340s. This was in the middle of the dispute over salaries with SNPL so quickly the crews were going to be AF pure vanilla , with same salary conditions , Ground/ops/maintenance done by AF, so only saving cost was going to be on cabin crew, recruited specially at lower salaries/conditions.
The new Canadian boss inherited the baby , and decided ( wisely say some insiders) to stop the experiment. The CC will most probably be integrated into AF ( so the rumor goes) The only ones that benefit from that are the painters. The decision to stop was not as the title of this thread suggest, due to the downturn , but rather to a management decision to standardize. .
For those interested, the "low cost model" is a blue print requiring adherence to strict operating criteria. These include, but are not limited to:
  • Fleet commonality
  • Point to Point flying
  • Secondary airports
  • Very specific flight time limits
  • Very tight turns (allowing increased utilisation.
Europe has started and lost many Low Cost Airlines. Seed Capital usually equates to around $40-60 million, and the rush is on to ensure that the cash flow is quickly built to provide returns. That they struggle to adhere to the core requirements is likely in part to exuberance and competitive pressure such that the failure rate, even when using leased fleet is high. The successful models adhere usually to most if not all of the conditions, those like Southwest focus on the effective relationships between staff, with respect a cornerstone. That Southwest has done as well as it has for as long as it has, is the subject of many research projects. The factor missing in Ryanair is the focus on relationships, thus while it has lower unit cost, it lacks the TFP (factor productivity) multiples of Southwest. Focus on relationships and respect seems to add a factor that others have (largely) failed to replicate.

With the two cost items labour and fuel consuming 60+% of airline operating expense, given that any airline can initiate 'fuel saving measures' and given that the ICAO and IATA program both want CO2 reduction targets, most airlines do the same thing. It is therefore not surprising that airline management have 'cherry picked' the labour unit cost reductions the 'Low Fare Model" offers.

Qantas is without parallel growing a leisure carrier model to the fleet size of the parent. This is an interesting study.
The Qantas CEO Joyce was appointed to administer Jetstar. Upon his ascendancy to Qantas CEO he quickly grew its fleet from 36 aircraft to now operate more aircraft than the parent. Flying around half (48%) of the ASK (FY17) of the parent, this model produces only around 25% of the revenue of the parent.
The Qantas experiment is not replicated. The now convicted felon, former Qantas CFO Peter Gregg stated during a parliamentary hearing that the presence of Jetstar would "add competitive wage tension, across the group" There is the labour unit cost focus.
In the search for lower unit cost, given the scant detail provided about Jetstar, one only has clumsy accounting rules in Australia, with Qantas management very selective on the data they chose to release, chances are better than even that the sole focus was to lower the labour unit cost, replacing substantial numbers of Qantas services with Jetstar. Over time it was probably hoped the customer accepted the change. More nefariously a failure of "Qantas" could have led to a rise of Jetstar, repainted to resemble Qantas, with a lower cost base, but this is a digression! The "Low fare model" escaped the paddock with Jetstar destroying many premium routes in the drive to provide a solution to management perceived and fixation with staff costs. The problem with this approach is that it ignores the revenue component of an airline's profit margin. Borrowing form the late gentleman Herb Kelleher and apologies for the paraphrasing "you can have the lowest cost or highest revenue airline and still go broke, I focus on the gap between the two"

This is the 'Achilles heel' of the Low Fare model: Demand elastic consumers. Leisure consumers, stimulated at the margin by low fares are price not BRAND loyal.
As established airlines struggled with wave after wave of "low Fare Airlines" targeting them on specific routes, they did notice the pricing and yield management dimension to their business model. They adapted their own yield management strategies to eat into attempts to build yield the closer to departure a flight was. As an airline like Ryanair approached a departure date, seats became more expensive. The other airlines would add capacity at a close or slightly lower price. The result was erosion of ability to generate yield. It is not surprising that Low Fare Airlines needed to attempt to reduce the unit costs further, by stripping out weight, taking off fixtures, or stupidly announcing that passenger pay to use the restroom.

It is probable that the AF tried to lever some labour unit cost reductions, perhaps with the eventual aim of replacing higher unit cost Air France services.
To use the excess (older) A340 is admirable. Qantas had a government bought and paid for 'legacy' fleet prior to privatisation, that they could have made a 'Qantas-lite' using the surplus (fully depreciated) 737-400 and even 767, whilst re-equipping the Qantas fleet. That they chose to lever the Qantas balance sheet with over 100 completely different (labour tension) aircraft for Jetstar is suggestive that a prime driver was not cost but rather industrial relations.

That Air France struggled with branding and target markets in part is explained with perhaps as others pointed out, a desire to focus on labour unit cost.
That Air France have abandoned the experiment, rather like British Airways did with Go Fly is perhaps a realisation that it can destroy the Operating profit margins, however slim that a brand and product rather than just a price can deliver.

If only Qantas had the courage.
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