What is low cost?
- History of the LCC
- How LCC can offer such low fares?
- Why can't the full service carriers match LCC fares?
- How low cost fares are structured
- Common misconceptions on LCC
|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 LCC 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.
1. High aircraft utilisationAircraft 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 of 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; compare that against 1 hour for a FSC. 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 frillsThe underlying business for a LCC is to get a person from point A to point B. Everything else is considered to be luxury item or "frill", of which can be acquired for a small fee. Among many of the frills that AirAsia has do away are;
3. Streamline OperationsMaking the process as simple as possible is the key of a successful LCC.
4. Basic Amenities
5. Point to point networkPoint to point network. LCC shuns the hub-and-spoke system and embraces the simple point-to-point network. Almost all AirAsia flights are short-haul (3 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 SystemDistribution costs are something that FSC most often ignore. Very often, FSC relies on travel agents and from their posh sales office. Furthermore, FSC always blows the budget by complicating their distribution channels by integrating their systems with multiple Global Distribution Systems. 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 (±65%) are done via the airline's website, whereby the fares are paid using a credit card. This is the most cost effective distribution channel.
|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: