The low cost carriers were more resilient to the financial crisis because their business model is a more flexible and competitive one. Their weakness during the crisis was their profit margins; because they are run quite tightly there is less room to cut costs or sacrifice revenue during a downturn. However it seemed that customers were attracted to their low costs and the ability to control costs – for example a customer who chooses not to eat on a flight does not pay for food. Some smaller businesses also turned to low cost carriers to slash their travel bills without foregoing air travel completely. Although some of these customers are likely to be driven solely by price and will return to traditional carriers, some low cost airlines have taken the opportunity to try to retain some of the customers who made the switch when times were tough. There have been some news reports of (typically smaller) companies that intend to maintain low cost airlines as their carrier for staff because of the ongoing cost savings that can be achieved.
Importantly for low cost carriers, the most significant decline in air customers has been premium traffic. Premium traffic has been hardest hit with many large corporates reducing the number and costs of flights. Teleconferencing has been encouraged by some large companies as an alternative, and this has had added impetus due to the perceived environmental benefits of decreased air traffic.
Tiger Airways was a subsidiary of Singapore airlines, but floated on the SGX earlier this year.
Tiger was developed on a business model pioneered by Ryanair, which began in Ireland.
After a difficult FY2009, Tiger Airways has grown strongly in FY2010
Tiger Airways has a difficult year in FY09, but its core business in Singapore has remained profitable for the previous three years. The loss in FY09 and subsequent growth is largely due to Tiger’s aggressive expansion. The Australian business improved considerably in FY10 and, although still loss making, is close to breaking even. As shown in the table below, Tiger has gathered momentum out of the recession and continues to grow strongly. This reflects exciting growth prospects as Tiger continues to push forward since its successful IPO at the start of 2010.
Low cost carriers have increased their service offering, and taken advantage of roots that legacy carriers have neglected. Their low cost structure means they can target roots that are not attractive to other airlines.
Low cost airlines continue to be significant competitive pressure on legacy carriers
The low cost carrier market has seen significant growth since it was first started, and the low cost industry is beginning to mature. The strength of low cost airlines reflects the now more mature nature of the industry when considering the large number of failed low cost airlines in the past.
Low cost airlines have brought significant competitive pressure to legacy airlines. Older airlines have found it difficult to compete with the new carriers as their cost base has proved less flexible. Start-ups have found it easier to keep wage costs and maintenance costs relatively low because they have fewer seasoned staff (senior staff typically demanding higher pay) and newer fleets which require less maintenance. Legacy carriers have found it more difficult to match the cost reductions seen in the low cost carriers, and have been challenged to change as quickly as the low cost carriers. Although this has stabilised somewhat now, in the earlier years of low cost carriers legacy carriers found they were playing catch-up.
To some extent, low cost carriers do not expect to replace legacy carriers as such, but their presence in the market has ensured increased price and value competition. This competition is most fiercely seen when a carrier is trying to enter a market, and the other participants create barriers to entry with the hope of not allowing the new entrant to gain a foothold. When Tiger Airways Australia opened their first routes, Jetstar quite deliberately undercut Tiger’s prices on the same routes. Just before Tiger launched in Australia, Jetstar offered 5,000 seats for 5c each – costing the airline $25 per seat. The presence of new and fierce competition has forced other airlines to expand their offering, re-think their strategy and compete on price.
The rise of low cost carriers has hurt legacy carrier profitability but seems to have benefited consumers. It seems that low cost carriers are sustainable; this means that the benefit to consumers is likely to remain.
LCC airlines aim to compete head to head with legacy airlines for that part of the legacy airlines’ traditional market, domestic and commercial, that is prepared to sacrifice some level of service for reduced costs. A section of the business market is always likely to stay with the established airlines that provide a higher level of service at a greater cost and offer loyalty programs to their customers. Those airlines have larger profit margins than LCC but it is likely that LCC will become an increasingly larger part of the market with an increased share of routes and passengers, posing a real threat to the profitability of legacy airlines.
Bibliography
www.ryanair.com/
www.ryanaircampaign.org
news.smh.com.au/.../virgin-blue-named-best-lowcost-carrier-20100521-w1os.html
Newman, Geoffrey (1 June 2007). . . .
