Spot the difference between legacy and LoCo

[farci]

LEGACY AIRLINES are increasingly indistinguishable from their low-cost rivals in terms of the fares they charge and the service they offer, according to research published last week by KPMG, a consultancy. The Airline Disclosures Handbook reveals that the cost gap between traditional and budget airlines has fallen by an average of 30% in six years, partly because legacy airlines have abandoned old differentiators like free baggage and in-flight catering on short-haul flights. “The service being offered by low-cost and legacy carriers is now more or less the same,” says one analyst.

An article in The Economist argues that legacy airlines have not benefited by adopting LoCo's policies.

Discuss.......

[MCDU2]

MOL has stated on numerous occasions that his strategy is to now increase fares and chase yield. So the question is are the locos now closing the gap or the legacies?

[ManUtd1999]

It's an interesting point. A decade ago when low cost flying really took off, flights were a lot cheaper than they are now. Even the last-minute bargain fares on Ryanair are at least £10 now, back in the day they marketed £1 flights. At the same time BA and other legacy carriers have stripped away the service to the bare minimum of a drink and snack and reduced the price accordingly. They are even trialling a 'without baggage' fare from LGW. This has reduced the gap between them dramatically.

In terms of route network, low cost carriers have been battling with charter airlines. Most loco's, especially EZY, now offer a lot of flights to Spain, the Canaries, Greece etc and target holidaymakers. This has never really been the legacy market and they're happy to target mostly long haul feed and business traffic. The charter airlines have lost out, resulting in Monarch trying (somewhat slowly) to become a low cost scheduled carrier and Thomas Cook nearly going bankrupt. Charter routes are now the ones where they can't be replaced as easily (Egypt, Cape Verde, Turkey, Florida, Caribbean). The other aspect of this is LHR. Had Easyjet/Ryanair been able to get access to LHR like they have at Barcelona, Schiphol and Paris then they might have put more pressure on BA short haul.

[racedo]

then they might have put more pressure on BA short haul.

BA shorthaul is effectively LHR shorthaul as BA have pretty much given up elsewhere.

Difference between legacy and LoCo is the mindset of being willing to try new things and new ways of both doing business and attracting passengers.

Legacy now copying but snobbishly trying to tart it up to look different because it would mean admitting they were way behind the market.

BA went from being a leader to being a follower either by Lowcos or by Emirates / Etihad etc.

I remember a senior BA director claiming 10-12 plusyears ago that BA didn't need LoCo as its passengers didn't travel that way and never would......

[Phileas Fogg]

A decade ago when low cost flying really took off, flights were a lot cheaper than they are now. Even the last-minute bargain fares on Ryanair are at least £10 now

Not neccessarily so, in this part of the world here's a recent booking of ours, round trip SUG/CEB/SUG for two of us, 4 flights and at today's exchange rate equates to £7.46 per flight including the add-ons.

SUMMARY OF CHARGES
FARE:
Base Fare PHP 4.00
TRAVEL FEES AND TAXES:
Other Taxes PHP 48.00
PH-VAT PHP 144.48
Aviation Security Fee PHP 60.00
Fuel Surcharge PHP 1,200.00
OTHER FEES:
Web Admin Fee PHP 400.00
TOTAL: PHP 1,856.48

[Capetonian]

The fundamental difference remains in the structure of their services. Whereas legacy airlines offer interline/online services with through check-in, alliance partners, through fares, lounge facilities and loyalty scams, the LoCos generally only offer point to point services.

In terms of pricing for ancillary services, the distinction is increasingly blurred.

[PAXboy]

farci

An article in The Economist argues that legacy airlines have not benefited by adopting LoCo's policies.

And they could not be expected to benefit!

Firstly, all the legacies that tried it as a separate line 'GO' etc. failed because they had the wrong mindset.

Secondly, all the legacies that try LoCo style short haul are going to have difficulty because they still have not slimmed down the main structure of people and buildings enough. i.e. they have the wrong mindset.

I do have sympathy for the legacies and can see why such good carriers as BMI/BD closed as they could not hope to survive in that market. More will close/merge in the next five years.

The legacies cannot hope to win for as long as we have the recession (another five years) but even then people will still want to fly for less money and will put up with discomfort. To many (most?) it's just a bus.

[The SSK]

The biggest single differentiator is seating configuration. BA 737s - 143 seats, Ryanair 737s - 189 seats. That gives FR a 25% per-seat advantage on any given cost.

[Lord Spandex Masher]

Not quite because they also pay higher airways charges etc.

[dwshimoda]

737-400 Vs 737-800...

The biggest single differentiator is seating configuration. BA 737s - 143 seats, Ryanair 737s - 189 seats. That gives FR a 25% per-seat advantage on any given cost.

Not really - you are comparing different aircraft types, and therefore different operating costs so it's not as simple as just saving 25%.

[Jack1985]

An article in The Economist argues that legacy airlines have not benefited by adopting LoCo's policies.

Tend to agree, if you look at Aer Lingus which went from Legacy to purely low-cost after 2001 it seen short-term benefits between 2002 and 2007 fueled by a growing home-economy, it quickly became unsustainable and had to adapt and change its model to survive which it is now doing well using a hybrid type business model.

[The SSK]

My point was that if BA, AF, LH chose to configure their aircraft to the same seating density as FR they would reduce their costs per seat/km by 25% at a stroke. This would go much further in closing the cost gap than tinkering with baggage, catering or crew costs.

[EI-BUD]

This is a very interesting and worthwhile discussion, a couple of key things spring to mind as I read:

• The decline in the number of airlines in the market (many factors driving this down including competition from loco airlines/impact of same and fuel prices etc.)
• The cost of fuel
• The recession and reduction in disposable income

It feels like the whole thing is going full circle with the reduction in the number of airlines in the market and the growth of a few loco's the fares they can chase are much higher, capacity is being matched much more closely to demand.

MOL's view was some time ago that we will have more consolidation and Europe will have 1 or 2 big (legacy) carriers, plus Ryanair and Easyjet.

Given this concept which when we see the level of consolidation in the US market post deregulation, what lies ahead for Europe considering scale and viability, we should expect the needle to move yet again to fewer airlines on the particular routes offering services that match demand and fares that give much better shareholder returns.

In terms of looking at the airlines in a spectrum from Full Service to Pure low cost, it is clear that in the extreme we have Ryanair, with easyJet certainly moving up the spectrum offering 'convenient airports' and pre assigned seats, and Ryanair staying true to its cost leader strategy.

As the pure loco's cannot get after the long haul business (or rather none have quite cracked this yet), the legacy carriers can use this to support filling seats on short haul (for interlining), hence often the legacy carrier can compete with say easyJet but not be solely reliant that point to point, moreover, this fact may in itself drive the legacy carriers to be over reliant on long haul routes and shy away from sort haul where loco's reign supreme. If looks like this in many cases, IB on the South American market, and interestingly airlines like LH reforming its own short haul outside of its main hub and transferring services to Germanwings, Iberia transferring some services to Vueling and IBexpress.

As someone has said earlier about airlines like BA , LH and to a lesser extent AF all retreating to their main hub airports, it would seem that many legacy carriers are focussing on routes/markets that the loco's cannot adequately penetrate, it seems that for the mean time these markets will be the domain of the legacy carriers while other accessible markets will become loco... the question is as the airlines attempt to differentiate from the competition will we simply see more hybrids of locs/legacy ...i.e a continual evolution up this spectrum?

That would be my take on the situation...

[Phileas Fogg]

Just as an example ... BHX/FCO/BHX,

A few years ago this was a regular business route of mine, Jet2 operated once a day direct services yet, somewhat cheaper, Swiss operated three times a day cheaper indirect (via ZRH) services and on each and every sector one was served with a complimentary snack/sandwich/coffee/beer and an exemplary friendly and professional cabin service ..... Why on earth would one want to "LoCo" it?

[MCDU2]

And as an aside lets not be comparing apples and oranges either. MOL got his 189 seat aircraft at rock bottom prices and has accelerated their depreciation taking advantage of a lucrative company tax regime in Ireland. Legacy carriers would have paid a lot more for smaller aircraft eg: BA. Taking a USD10m price differential as an example that is a lot of extra seats to be filled. Then there are lower maintenance costs on newer machines, air stairs etc etc.

[racedo]

has accelerated their depreciation taking advantage of a lucrative company tax regime in Ireland.

Companies get Capital Allowances from Govts to offset investing in new equipment / buildings all allowed against tax. Every EU country gives capital allowances.

Its why Tesco in UK is continually investing in new stores as means they pay little tax.

Depreciation has no impact on tax so writing aircraft down in 5 years or 10 years matters little as this is ignored for tax purposes.

[racedo]

MOL got his 189 seat aircraft at rock bottom prices

Ryanair bought favourably because everybody else not interested in buying, they bet the farm.

Of course the fact that the dollar has tanked in the last 10 years has helped as $1 was worth €1.22 at its highest and now worth €0.78.

Means you get a massive benefit as Boeing sell in $ and a €25M plane cost €30M when Euro weak but €20M when Euro strong.

[stormin norman]

Easy to tell the Locos from the legacys.

Go into the terminal .

Passengers with no baggage, a bag from mc donalds, a tin of drink in their hands and a copy of the Sun are on loco's.

Those with baggage, having a latte and reading a copy of the times with a seat number are not.

[racedo]

Easy to tell the Locos from the legacys.

Go into the terminal .

Passengers with no baggage, a bag from mc donalds, a tin of drink in their hands and a copy of the Sun are on loco's.

Those with baggage, having a latte and reading a copy of the times with a seat number are not.

Really so Gatwick .......local to you, sells few Times and thousands more Suns since BA pretty much abandoned it.

Wonder has anybody told WH Smiths........

[ZFT]

racedo

Depreciation has no impact on tax so writing aircraft down in 5 years or 10 years matters little as this is ignored for tax purposes.

Has a very significant impact on Corporation Tax