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What is low cost?

In this section, we address the following subjects:


History of the Low Cost Carrier (LCC) back to top
The LCC boom began about 36 years ago when Southwest Airlines roam the skies of USA. Rollin King and Herb Kelleher got together and decided to start a different kind of airline with four set of principles: fly one type of aircraft to keep down engineering costs; keep overheads down; turnaround aircraft as quickly as possible; and abandon loyalty or air miles schemes. They began with one simple notion:

"If you get your guests to their destinations when they want to get there, on time, at the lowest possible fares and make darn sure they have a good time in doing so, people will fly your airline."

And you know what? They were right. Southwest Airlines is now the third largest airline in the world in terms of number of guests carried and also one of the most profitable airlines in the world. Southwest Airline's success spruced up interest in the LCC concept to all corners of the world. LCC now commands approximately 30% market share of the domestic USA traffic. In Europe, the LCC phenomenon spread much later with Ryanair in 1991, but the growth has been at a much faster pace. Southeast Asia embraced the LCC concept last, but the growth trajectory is the fastest. The LCC concept continued to spread throughout the world with WestJet in Canada in 1996, Virgin Blue in Australia in 2000, GOL in Brazil in 2001, AirAsia in Malaysia in 2002, Kulula in South Africa in 2003 and Air Deccan in India in 2004.

The reason for the success of the new low cost carriers is very simple - move the maximum number of guests at the minimum of cost. The concept of LCC is based on the idea that people would fly a lot more often if it were more affordable. LCC airline's main mission is to make air travel the most simple, convenient and inexpensive form of transportation in the world. The fare differential between the full service carriers (FSC) and LCC can be as high as 40%-60% cheaper.

How LCCs Offer Such Low Fares back to top

The key to delivering low fares is to consistently keeping cost low. Attaining low cost requires high efficiency in every part of the business and maintaining simplicity. Therefore every system process must incorporate the best industry practices. 

The key components of the LCC business model are the following;

1. High Aircraft Utilisation

Aircraft is kept flying as much as possible, the first flight starts as early in the morning commercially possible and the final flight typically ends at midnight. A fast turnaround is critical to ensure time spent on the ground is minimal – an airline makes money when the aircraft is flying, not when the aircraft is parked. AirAsia's turnaround time is 25 minutes; as compared to a Full Service Carrier (“FSC”) which typically has a one hour turnaround time. On average, AirAsia's utilisation per aircraft is 12 block hours per day, a FSC might do about 8 block hours per day. 

2. No Frills

The underlying business for a LCC is to get a person from point A to point B. Everything else is considered to be luxury items or "frills", of which can be acquired for a small fee. Among the many frills that AirAsia has excluded include;
  • No free food & beverages. Some of our passengers may prefer not to consume food & beverages when onboard. There are those who prefer to rest throughout a flight or those who prefer having their meals before flying off. Hence we do not force our guests to purchase something they do not want or need. Guests are most welcome to purchase food & drinks at an affordable price from our website before the flight, of from the cabin crew during the flight. 
  • Assigned seating. Guests receive boarding passes with pre-assigned seats and are not allowed to request for a seat change unnecessarily. If the guests have preferences on where or with whom they would like to seat on the aircraft, they are able to do so by paying a small sum when checking-in online. This feature is called “Pick-a-Seat”.
  • Ticketless airline. Less hassle for the customer, as guests need not worry about collecting tickets before travelling. This also allows AirAsia to keep our costs down (less paper, lower printing and distribution costs) and continue to offer low fares to our guests.
  • Online check-in. Guests are highly encouraged to check-in online so they do not have to waste time lining up at the check-in counters at the airport. This helps us to improve efficiency and reduce congestion in the airport.
  • No refund. Airlines waste a lot of money, time and resources due to refunds and rescheduling when guests do not show up for a flight. Whether or not a guest shows up, the cost of flight to the airline is the same. LCCs are strict when it comes to no show guests and do not offer refunds for missed flights.

3. Streamline Operations

Making the process as simple as possible is the key of a successful LCC.
  • Single type of aircraft. Pilots, flight attendants, engineers, mechanics and operations personnel are specialised in a single type of aircraft. This means, among others, that there is no need for costly re-training of staff, for maintaining stock with parts for different types of aircraft, for different knowledge and skills to operate and maintain different types of aircraft with their own specifications, or for new work requirements.
  • Single class seating. There is only one class seating, i.e first class. Should a guest want to have the privilege of choosing his or her seat, they can do so by purchasing “Pick-a-Seat”. 
  • Standard Operating Procedures. SOPs are important to ensure same level of competence among all staff. This way we can ensure the homogeneity of service throughout the company.  

4. Secondary Airports

Low cost carriers mostly fly to and from airports that are not necessarily the busiest. These are often referred to as secondary airports. Operating from secondary airports is cheaper than the major airports. They are also a lot less congested and "turnaround times" for aircraft are a lot shorter. For instance, to minimise fees AirAsia flies into Clark Airbase in the Philippines which is 70km away from Manila as appose to flying into Manila Ninoy Aquino airport. And in Thailand, AirAsia operates from Don Mueang instead of Suvarnabhumi airport.

5. Point to Point Network

LCCs operate simple point-to-point network. Almost all AirAsia flights are short-haul (4 hour flight or less). No arrangements have been made with other airline companies on connecting flights, on possibilities of flight transfers, nor on having the luggage labeled and passed through from one flight to another.

6. Lean Distribution System

Distribution costs are something that FSCs most often ignore. Very often, FSCs rely on travel agents and their sales offices. Furthermore, FSCs tend to complicate their distribution channels by integrating their systems with multiple Global Distribution Systems, which are very costly. LCC will keep their distribution channel as simple as possible and will cover the whole spectrum of the clientele profile. For example, AirAsia can cater to the most sophisticated European traveler via internet and credit card sales. And at the same time, AirAsia has an established system to sell our tickets to the most remote and technology deprived locations, such as in Myanmar.      
  • Internet sales. The bulk of sales (85%) are done via the airline's website (www.airasia.com), whereby the fares are paid using credit cards, debit cards or via online banking. This is the most cost effective distribution channel.
  • Sales office. AirAsia only has a few sales offices. We only establish a sales office if we are confident the sales derived from the centre will be worth it.
  • Travel agents. LCCs avoid reliance on travel agents as much as possible. This means that the airlines do not pay any commission to travel agents, which would otherwise have been reflected in the fares. Also, as LCCs do not use travel agents, we do not use nor participate in the world wide reservation systems. This allows us to save costs, which again are reflected in our pricing.
  • Call centres. Ticket sales can be done via telephone - a simple and cost effective method.

Why can't the full service carriers match LCC fares? back to top
FSC can offer fares as low as LCC and have been known to do so from time to time, but it is always a temporary measure. The answer to the obvious follow up question, FSC have no mathematical chance of matching LCC's operating cost. And without the most competitive cost structure, you can't price yourself to the cheapest every time, unless you have a nefarious intention to sink the company into Chapter 11.  

The rationale for the vast cost difference is quite simple. Imagine FSC to a 5-star hotel, it offers complete luxury for a sumptuous experience. And now equate LCC to a 3 star hotel, it is fairly basic but it get's the job done. It obviously cost much more to operate a 5-star hotel; you have to offer many facilities, hire many employees and not to mention a posh real estate to begin with. A 3-star hotel on the other hand does not need a posh location, less employees as most services are do-it-yourself and offer only basic facilities.

Market forces have it that when a player undercuts, the competitor will follow. In the end, those with the lowest unit cost and best cash resource will persevere. In the event of FSC engaging in a price war with LCC, conventional wisdom dictates that it is silly to go down that road. The products and clientele are vastly different, and there is little value proposition for FSC to capture LCC clientele as they are very low yield market. No matter how clearly history teaches us, there will be time again when we have to engage in a price war with a FSC. And that is exactly why AirAsia's main focus to lower cost perpetually, so that it can evade and fend off any sort of irrational competition.      

How are low budget fares structured? back to top
Unlike other airlines, low cost fares are not based on complicated restrictions. All fares are quoted one way to allow customers the flexibility to choose where and when they would like to fly. Also, where most traditional airlines will only offer cheap flights if the customer stays a Saturday night, or even a Sunday night, and therefore cheap fares will not be available for a one-way or a day-return business or shopping trip. Such a condition does not apply to low cost airlines.



LCC adopts a simplistic fare structure based on time value relationship for seats. Generally speaking, the earlier you book the cheaper the fare will be. There are a total of 12 fare buckets; each fare bucket is priced accordingly to our specification. The first few tiers are targeted to value conscious guests, but they can only get their hands to those extremely cheap tickets if they book way ahead of time. The mid tier buckets targets the captive market. Ones the revenue collected is sufficient to cover all the operational cost of the flight, the system will then move on to the top tier fare bucket. This is when prices start to creep up and our profit grows.

This is yield management from the perspective of a LCC. Want cheap fares, book early. If you book your tickets late, chances are you are desperate to fly and therefore don't mind paying a little more. Conversely, a FSC will do things totally apposite; they try to charge as much as they can early on and drop their fares in the last minute due to fear of flying empty seats.
  
Yield management is an exhaustive process that combines elements of science, psychology, market dynamics and most of the time basic common sense. Our yield management team continuously stress test the fare buckets in order to get the maximum revenue for every flight. Achieving the best mix (fare over load factor) is a never ending process and is a continuous learning process.

Common misconceptions on LCC back to top
When talking about AirAsia as a LCC, there are those who are still very pessimistic and unsure about the business model. Believe it or not, questions like whether a passenger must stand in a flight due to lack of seats or whether there will be chickens in the flight do come up. Such misconceptions are not surprising, given the fact that scheduled, low-fare flights are a relatively new phenomenon in the world. We list down below some of the most common misconceptions with regards to the LCC:

i. Are the aircraft safe?
  Absolutely! The number one priority for AirAsia is safety, and that’s a trait that we never compromise. AirAsia complies with the highest international standards and procedures with the best safety history in the world.
ii. Are they flying old planes?
  Our fleet consists of 100% brand new Airbus A320 aircraft. We have the biggest and youngest fleet among the LCCs in the region with 3-4 years average age.
iii. Do they have well trained and qualified personnel?
  Yes. Our pilots and cabin crew are among the best trained and well compensated. All of them are trained in our own Training Academy.
iv. What service can one expect?
  The airline’s key aim is to transport passengers from one destination to another, safely and comfortably. Any additional services may come at cost in-line with a Low Cost Carrier model.
v. Do they fly on time?
  Our on time performance is now above industry average. And we continuously strive to improve our performance to service our guests better. The safety of our passengers is important hence any unforeseen bad weather or airport congestion are beyond our control and the company will strive to operate based on the best safety practices.
vi. Do I have to stay through weekends to get the best fares?
  Our tickets are point to point and fares are based on the demand for a particular flight. There are no such restrictions to get the cheapest fare; you just have to be fast and grab the best fare before someone else snaps it up first. The fares and promotions are system generated hence there is no interference internally or externally.
vii. Do LCCs really offer the cheapest fare at all times?
  Yes for AirAsia. Our business model allows the airline to offer low fares hence most of our fares are priced below full service carriers. By having low fares, it allows the company to stimulate new and existing demand to fly AirAsia.