low-cost v. tradtional carriers

[ka_pai]

I wanting to find out what makes low-cost airlines successful.

How do their business models differ from the non budget airlines?
How has this industry changed in the last year, 5 years, and what challenges do these airlines face in the future to stay successful?

It would be great to hear the opinion of those who work on the 'front line'.

:8

[Mooney12]

What makes makes them successful? - low airfares. Id rather travel from Glasgow to London return for £40 than BA's £250. People don't care about brand names or the quality of food served in the flight, especially on short point to point routes. Low price is the critical success factor in European short haul travel, this is why ezy and ryanair are successful. They have opened air travel to a whole new market.

They do this through a flat corporate structure, few levels of management, the Internet (i.e. they bypass the travel agent and lower admin fee's at the same time), the same standard aircraft type (i.e. the 737 or A319 exclusively) which allows for economies of scale. They also achieve low price through utilization of resources, which means budget pilots work very hard indeed, with not a lot of time off.

The European industry is heading in the low cost direction and a period of consolidation, which means only a few of the many low cost airlines will survive. The only two long term low cost airlines that will survive are Ezy and Ryanair.

This is bad news for pilots, the old days are gone, lower pay and harder work is the future....This is integral to this new airline business model, but will eventually cause problems in the form of a crash or something serious. Pilots will continue to work harder until something major happens I forecast unfortunately.

[Tudor]

ka_pai, you might want to get hold of the book "No Frills" by Simon Calder. That will give you an insight into the history of low cost operators from Laker up to the present day, it's a very interesting read.

[Young Paul]

Mooney12 is only right to a limited extent.

Even a few years ago, the airfares were not consistently lower than traditional airlines. However, their advertising gave the perception that they were lower-priced, and their lowest fares undercut the rivals. I've said it before, but if you want to see a more substantial comparison of fares done on a particular day chosen at random (i.e. when I had time!) have a look at www.spotfare.com - the difference in price is no longer the hundreds of pounds that they give the impression of, and if you want to travel tomorrow, you are probably going to be better off going to the traditional carriers.

The thing that made the difference was the other characteristic - "no frills" - no free catering (even water!), no through connections, no business class, no codesharing, no compensation for delays or cancellations, no cleaners, no early departures to get you to London for a 9am meeting (and hence crews in hotels) (sorry gross simplification, but you get the idea). Short turnarounds gets an extra two short sectors a day per airframe which increases revenue per frame; no nightstops allows all engineering to be concentrated at one base, which gives economies of scale. Single types, optimised to ensure that the ratio of cabin crew to pax is as small as possible (i.e. 149 seats, for A319's). In some cases, secondary airfields, who are happy to pay per passenger because they want the business.

Pay for crew is actually generally competitive - although you correctly say that they work for it. Although they generally are available for work for more days than traditional crew, they actually end up with more days at home, due to legal caps on duty hours and flying hours.

I don't agree with Mooney's forecast of a crash - though if they come to dominate, statistics are bound to catch up with them at some stage. Loco's know that safety has to be the highest priority - if they don't have a good reputation in that department, they won't last six months - and in my experience, even Ryanair (which is the most evangelical loco in Europe) had a very serious and professional attitude to training.

I would echo the suggestion that you find Simon Calder's book, which was excellent.

[Mooney12]

YoungPaul,

You make a very interesting point. You are perhaps right that the new no-frills carriers give off the impression that they are more dirt cheap than they really are. I believe Ive been sucked into that myself. But I think it all depends when you book the flight, as if you book it 4 months in advance you will get it for £5 or something stupid, whereas if you book it the day before it will be very expensive. Check out the Ezy website and have a go.

[Young Paul]

I know - that's why I set up spotfare.com. The point being that (to take a concrete example) if you booked today to travel between London and Edinburgh on 21st Sept, you could get £13.50 rtn plus taxes with Easyjet - but bmi is only £22 rtn and BA is only £30. You can't actually book Easyjet 6 months ahead at the moment; bmi is the same price currently on 21st Dec, as is BA.

In three months, you can get return tickets to DUB with FR for £2 plus taxes; BA from LGW is £27; EI is £38 and bmi is £26. However on 21st Dec (6 months) , the best FR price is £80 rtn, whereas bmi is £63, and EI is £30!

If you want to come back from DUB to London this time next week, the best value is EI (£25) follwed by BA (£37), bmi(£59) and FR(£80) - one way prices.

You can prove anything with statistics. The point I am making is that yes, locos are generally cheaper - but far from universally, and they certainly don't deserve the reputation they have as always having the best value. But that's marketing for you!

[colegate]

One of the biggest changes introduced by so-called low fare airlines was in ticket distribution. Traditional carriers have typically been wedded to the travel agency or CRS systems. These have been very expensive and have made it difficult for new airlines to start successfully. Internet booking results in a reduction in all costs in excess of 10%. A few years ago bmi was proud of the fact that 2% of its bookings at a time when EZY were getting over 85%. Load factors on LOCO's teend to be higher.

But BA in particular is fighting back on costs. Just look at the way their short haul fleet at LGW is now being scheduled. Morning departures are much earlier. They now have arrivals back after midnight and they have cut out several nightstops. Thus they have saved the cost of several aircraft and crews.

Please also remember that EZY charge staggering prices on board. Coffee is £2.50. In my experience they have got to the point that passengers are now rejecting such high charges.

[Scottie]

Interesting comments Colegate. Many times the cabin crew tell me they've sold everything from the bars, no kit kats, pringles, coffees teas etc......

[Oshkosh George]

Simon Calders, book IS available on Amazon here

http://www.amazon.co.uk/exec/obidos/ASIN/0753507706/ref=pd_sim_b_dp_1/202-7330004-3220642

[carbootking]

i work at stansted and ask the americans canadians and all the others who fly in to heathrow then come up by bus, why they use the lo.cos and not ba or others.they dont care that rynair or easy jet get bad publicity they just want cheap fares they dont even look at ba web site most of the time so unless the have a bad flight theyll keep flying cheap and pass on to their friends.

[Young Paul]

There you go, the power of marketing. Even though it would almost certainly be cheaper to use interline deals through alliance partners, than buy a separate ticket with separate taxes, pay additional transport fares etc ...

[cozzyboy]

Colegate!!!!
The coffee is actually £1.60......90p cheaper than the flight you were on!!!!

[Mooney12]

carbootking

What bad publicity do EasyJet and Ryanair get??

[BDANtheman29]

The big thing here is all of the major LCLFs (low cost, low fare) airlines have just one aircraft. Southwest, for example, has an entire fleet of B737s, with several types ranging from the B733 to the newer B737-700 varient that feels very similar to the A320 family aircraft. With just one aircraft, many different types of parts don't need to be held, less training of flight crews, ground crews, etc. US Airways has as many as 7 or 8 aircraft types and their costs were through the roof. JetBlue and SWA have found that keeping things simple pays off. According to Airways (July 2004), Southwest is now the no. 1 US airline in terms of passengers carried. Not bad for an airline consisting of only 137 seat B737s.

[thegoaf]

Southwest has around 400 737's and carries around 65 million peope per annum. Delta is actually yjr No 1 carrier with more than 100 million per annum.

[batninth]

Surely the LoCos are simply following the business practices that are drummed into every MBA:
(a) Contract out as much as possible - that way you don't have to incur cost of acquisition and cost of disposal. Also subcontract can scale easier and is easier to switch regularly to sustain low costs.
(b) Pass on the costs of each & every value-add ie Tea & Coffee

This isn't just a LoCo airline thing, look at distribution of retail goods, almost all retailers now use contract warehousing & distribution and if you want goods in a hurry then you pay additional.

A lot of the established carriers are still rooted in the organisational culture of doing everything in-house, or at least continuing to operate with a cost base as if everything was in-house - that's why BMIBaby, Buzz, GO etc were so interesting to watch. How much do/did they actually pay for and how?

Using one model of aircraft is good sense esepcially for HR strategy eg crewing etc, but I suspect that the "hardware" costs are now pretty level if comparing running a fleet of 737s (a la Jet2) vs running a mixed fleet eg 737 & A300.

Several years ago Harvard Business Review prepared a realluy good case study of SouthWest's entry into the market place and the battle on the Texas routes with Continental. Don't know if it's available on-line but interesting to see the business model that they created at SWA.

Now, at the risk of being flamed - Customer Service costs *nothing* Ryanair. If you don't understand this then stand in Terminal A at Dublin and listen to your own customer announcements, or rather lack of them. Then go to EMA and listen to BMIBaby, or any Texas airport and listen to SWA. That's not a question of fiscal probity, just going the decent thing and letting customers know what's going on.

[wangi]

Young Paul: There you go, the power of marketing. Even though it would almost certainly be cheaper to use interline deals through alliance partners, than buy a separate ticket with separate taxes, pay additional transport fares etc ...
Nah, honestly that's not the case! Try searching for flights from EDI (for example) to a long haul destination and then the same destination/time from LON. The EDI-LON connection can add on up to £200, which is a total rip off given you can book the same (BA or BMI) connectiing flight for about £60. And on check-in you hand over both sets of tickets and everything is through checked too, just the same.

The last two times I've done EDI-LHR-???-TRV i've booked the EDI-LHR leg independently due to the savings...

[PAXboy]

Mention of the various carriers on the standard comparions of LON to EDI/DUB etc. omit one factor. I have a very simple guide as to which airline is my first choice as I live:-

15 miles from LTN
36 miles from LHR
50+ from STN & LGW

The cost of that travel often negates the prive variance, not to mention the time that it might take to get to the distant destinations at busy times of the day. For those that live further distances the variance is greater.

As to the price of refreshments on EZY, since they give me a LARGE mug with a REAL teabag that I can allow to reach the strength I choose, rather than the BA/BD itsy bitsy cup of watery nonsenses - I cheerfully pay the price!

[Young Paul]

Operating two fleets does cost substantially more. You have to have two different sets of crew; two lots of standby cover that aren't interchangeable; two sets of parts that have little in common.

However, it is "horses for courses" - the A300 wouldn't serve the same type of market as the B737 - the reason for the almost exclusive use of twin narrow-body 150 seaters for locos is because you can operate with three cabin crew; they are well-adapted to short turnarounds, high numbers of sectors etc etc.

[BDANtheman29]

To me, it seems the best aircraft are the B757 and A321 for LCLFs. There is the capacity for around 180 people or so and both aircraft have avionics which make flying a dream (although, the B737-700 has caught up with them). The 737 and A320 seem to work for SWA and JetBlue but Song seems to be doing just fine with the 757. Who knows, maybe the 7E7 will be the next wave for LCLFs.

[codpiece face]

No the 757 is excellent at what it does ie 235 pax on hoilday chaters or transcon domestic flights in the us. but it it just to big for many lo co routes which is why jetblue have ordered erj190s and westjet and southwest are seriously looking at them.

[Torquelink]

BDANtheman29

I think you'll find that Song isn't doing too well just now - major cutbacks and review of the entire "airline within an airline" strategy.

YoungPaul,

I seem to remember attending some tedious fleet planning course years ago where it was said that the cost disadvantages of a two type fleet reduce as the number of each type increases - I think 25 of each was a fairly significant milestone after which the disadvantages of different crews, spares, simulators etc began to lose out to the fleet optimisation advantages (but don't ask me what they were cos I can't remember!) :confused: