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The Impact of the Low Cost Revolution

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Low-cost average for Buzz, DBA, easyJet, Germania and Ryanair ... easyJet started STN-VLC on 3 November 2004, LGW-VLC on 1 March 2005 ... – PowerPoint PPT presentation

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Title: 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
4
EUROPEAN LOW COST CARRIERS Annual Growth in
Pass-Kms 2000-2004
Geographical Europe plus domestic N.B. 2003
growth includes purchases of Go (easyJet) and
Buzz (Ryanair)
5
Operating Profit or Loss 2005 Intra-European
and domestic operations
6
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
7
AVERAGE DAILY UTILISATION Airbus 319 (2005 Year
Round)
  • i.e. 4 easyJet aircraft do the work of 5 BA
    aircraft or 5.5 Alitalia

8
Pushing the limits Ryanair's five B 737-800s
at Rome Ciampino - 2005
Average utilisation 5 aircraft 1356 hours per
day
9
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
10
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
11
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

12
Total Operating Costs on Intra-European Services
in 2005
13
Unit Costs (Euro cents per ASK) on European plus
Domestic Services of Scheduled Airlines 2005
14
Impact of Seat Factor on Unit Costs Intra-Europea
n Services 2005
15
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!
16
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
17
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
18
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 PRICING e.g. Return Fare
on London-Toulouse (US) (Prices requested 6
weeks before)
operated by British European
21
Airline Shares London-Italy Markets 2005
Ryanairs Share London Italy was 43
Alitalia only flies LON-Rome Milan 18 by
third LCC
22
Total scheduled seats to other EU states
or domestic offered by low-cost carriers - Sept
2006

23
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

24
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

25
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
26
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
27
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

28
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
29
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

30
For these and other current issues see new 2006
edition of The Airline Business by Rigas
Doganis Publisher Routledge, UK, and
available through www.amazon.co.uk
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