The Impact of the Low Cost Revolution

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The Impact of the Low Cost Revolution
AOA Annual Conference

Professor Rigas Doganis Rigas Doganis and
Associates Visiting Professor Cranfield
University
14 November 2006
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EUROPEAN LOW COST CARRIERSAnnual Growth in
Pass-Kms 2000-2004
Geographical Europe plus domestic N.B. 2003
growth includes purchases of Go (easyJet) and
Buzz (Ryanair)
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Operating Profit or Loss 2005 Intra-European
and domestic operations
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Cost Advantage of European Low-Cost Carriers on
short-haul routes

• Cost Cost
• Reduction per Seat
• CONVENTIONAL SCHEDULED CARRIER 100
• LOW-COST CARRIER
• Operating advantages
• Higher seating density -16 84
• Higher aircraft utilisation - 2 82
• Lower flight and cabin crew costs - 3 79
• Cheaper secondary airports - 4 75
• Outsourced maintenance/Single aircraft type -
  2 73

Source Rigas Doganis Airline Business in the
21st Century, pub. Routledge, 2005
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AVERAGE DAILY UTILISATION Airbus 319(2005 Year
Round)

• i.e. 4 easyJet aircraft do the work of 5 BA
  aircraft or 5.5 Alitalia

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Pushing the limits Ryanair's five B 737-800s
at Rome Ciampino - 2005
Average utilisation 5 aircraft 1356 hours per
day
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Short-haul pilot productivity - Europe 2002
Network average, short-haul pilots AF, BA, IB,
LH and SK Low-cost average for Buzz, DBA,
easyJet, Germania and Ryanair Source Compiled
using data from European Cockpit Association
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Cost Advantage of European Low-Cost Carriers on
short-haul routes

• Cost Cost
• Reduction per Seat
• CONVENTIONAL SCHEDULED CARRIER 100
• LOW-COST CARRIER
• Operating advantages
• Higher seating density -16 84
• Higher aircraft utilisation - 2 82
• Lower flight and cabin crew costs - 3 79
• Cheaper secondary airports - 4 75
• Outsourced maintenance/Single aircraft type -
  2 73

Source Rigas Doganis Airline Business in the
21st Century, pub. Routledge, 2005
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Cost Advantage of European Low-Cost Carriers
(continued)
Cost Cost per Reduction Seat
CONVENTIONAL SCHEDULED CARRIER 100 LOW
COST CARRIER (operating advantages) -
27 73 Product/Service Features Minimal
station costs/outsourced handling - 7 66
No free in-flight catering - 6 61
Marketing differences No agents
commissions - 6 55 Reduced
sales/reservation costs - 3 52 Other
advantages Smaller administration -
3 49 Assumes 100 per cent direct sales and
none through agents

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Total Operating Costs on Intra-European Services
in 2005
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Unit Costs (Euro cents per ASK) on European plus
Domestic Services of Scheduled Airlines 2005
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Impact of Seat Factor on Unit CostsIntra-Europea
n Services 2005
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Revenue advantages of low-cost carriers

• Simple fare structure and sales in only one or
  two currencies facilitates yield management
• All revenue in advance - if 100 direct sales
• No yield dilution from multi-sector tickets
• No refunds for cancellations
• High ancillary revenues from
• on board food sales
• ticket changes
• cross sales on website (e.g. hotel commisions)
• e.g. 2004-05 Ryanair ancillary profits Euro
  7.55 per pax or c 40 of profits

BUT no freight revenue or costs!
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easyJet's yield management London (Luton) -
Nice in January 2005
N.B. Fares did not include taxes which were
14.50 for a round trip
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Market stimulation Mature market
London to Barcelona Scheduled Traffic
(1997-2005)
Ryanair (STN-GRO, LTN-GRO, LTN-REU, STN-REU)
easyJet (LTN,LGW,STN-BCN)
Iberia
British Airways
Source UK CAA
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Market stimulation Secondary market
London to Valencia Scheduled Traffic (1997-2005)
Ryanair (STN-VLC)
easyJet (STN,LGW-VLC)
Iberia
British Airways
Source UK CAA
easyJet started STN-VLC on 3 November 2004,
LGW-VLC on 1 March 2005
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IMPACT OF "LOW COSTS" on PRICINGe.g. Return Fare
on London-Toulouse (US)(Prices requested 6
weeks before)
operated by British European
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Airline Shares London-Italy Markets 2005
Ryanairs Share London Italy was 43
Alitalia only flies LON-Rome Milan 18 by
third LCC
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Total scheduled seats to other EU states
or domestic offered by low-cost carriers - Sept
2006

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What Low-Cost Carriers need from Airports

• ?Fast turn-rounds require
• efficient uncongested taxiway system and
  operations
• pre-boarding zones for fast boarding
• dedicated gates and high gate utilisation
• Rapid ground-handling with competing providers
• Grab and go shopping concept
• No airbridges short walk to aircraft
• ?LCCs Do not require
• airline lounges
• in-flight catering
• baggage/pax transfer system
• large airline lounges
• Old airports are over-designed
• But low airport charges critical

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Risks to the Low Cost Model in Europe

• ? Increasing face-to-face competition between
  low cost carriers
• ? Too rapid growth leads to over-capacity
• ? Charter airlines hit back - "dynamic
  packaging"?
• Upward pressure on costs?
• as airlines increase in size
• as labour/airport agreements unwind
• Pax become more demanding!
• need for product improvements

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What can Conventionals learn from Low-Cost
Carriers?
Product Simplify fare structure Sell direct -
mainly via internet Single class cabin No free
meals -- but sell on board eg Iberia Operations
Higher seat densities on short haul Reduce
aircraft types in fleet, e.g. Aer
Lingus Simplify network reduce hubbing Faster
turn-rounds More flexible labour
practices Minimum cabin crew Maximise pilot
hours More out-sourcing fewer suppliers
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Can legacy carriers reduce the unit cost
advantage of LCCs?
Network Model imposes higher costs Two-class
cabin Connecting passengers and bags More ground
staff Passenger lounges Slower turn-rounds More
expensive airports Higher Staffing
levels Out-dated work rules More expensive
distribution (e.g. agents and GDSs) Some
in-flight catering Mixed fleets
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Can legacy carriers respond to low-cost threat?

• Four choices
• Match LCC costs - but difficult to close gap eg
  Aer Lingus
• Transform themselves into LCC
• i.e. Independence Air, US Air/America West, Duo
  
• Spin off a low-cost subsidiary, e.g. Jetstar,
  (Qantas)or Tiger (SIA), but few succeed Buzz ,
  Go, Snowflake, Song
• Refocus on long-haul markets and
  reduce/outsource short-haul

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Southwest dominates its major markets

• Largest carrier in 90 of SW's top 100 OD markets
• 65 share of its top 100 OD markets (second
  largest American with 7)
• 77 share of intra-Texas traffic
• 71 share of intra-California traffic

Will Europe , India and S.E.Asia go same way?
Source Debbie Ackerman Geneva Aviation Forum,
February 2004
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Future Shape of European Airline Industry ???

• ? 3-5 Long-haul Network Dominators
• ? Low-cost Service Providers
• - No Frills (2 to 3 majors)
• - Charters (2 to 3 majors in Europe)
• ? Niche Carriers
• - Regional or national
• - Cargo and Integrators

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For these and other current issues see new 2006
edition of The Airline Businessby Rigas
Doganis Publisher Routledge, UK, and
available throughwww.amazon.co.uk