AerialAir - Setting Low-Cost Carrier Services in Europe - Case Study Example

Setting Low Cost Carrier Services in Europe Introduction AerialAir is a successful full service international and domestic airline that aspires to be a global leader in the aviation industry. As a means of expanding the company’s horizons, the Board of ArialAir is considering setting up low fare domestic and international subsidiaries in Europe. This paper will discuss the options available, which when utilized will ensure that AerialAir achieves its objectives. The discussion will involve the strategic plan of expansion and a review of past ventures of other full service airlines in provision of low cost air travel services. Overview of the operations of full-service airlines and low-cost carriers As the name implies, full service airlines offer full services to passengers. Traditionally, full service airlines have been non-competing or have faced very little competition, hence, they paid more attention to products and services more than to costs (Graham, Papatheodorou & Forsyth 2008). Thus they are characterised by high operating costs and complexity of services, which in turn translates to high costs of the services offered right from a passenger’s point of booking to the point of disembarking from the plane at the destination. On the other hand, low cost carriers have paid more attention to providing air travel services at lower cost (O’Connell & Williams 2005). Thus, they have eliminated most of the luxurious services offered by full services airlines in order to reduce costs chargeable to passengers. Provision of low cost service has proved to be a milestone in the aviation industry. This is because unlike full service airlines which mostly rely on loyal customers, low cost carriers are out to cater for the needs of everyone, hence increasing competition considerably. It is for this reason that many airlines which traditionally operated as full service carriers have diversified to provide low cost services. Even then, provision of low cost services is not easy. High cost of fuel and increased competition caused the collapse of twelve low cost carriers (including the famous Volareweb) in Italy in 2004 (Pleul 2008). This means that AerialAir will need to be cautious and implement strategic plans as models in order to benefit from provision of low cost air travel services in Europe. Options for maximizing benefits of low cost services in Europe Europe is a large air travel market featured by many full service airlines as well as low cost carriers. Some of the giant full service airlines in Europe include Air France, British Airways, KLM, Scandinavian Airlines, Polish Airlines, Spanair, Swiss, Lufthansa, and Turkish Airlines. The region also has giant low cost carriers such as Virgin Express, Ryanair, easyJet and EZY (Pleul 2008). In order to cushion competition, the full service airlines have formed alliances such as the Star Alliance to which Polish Airlines, Spanair and Swiss among others are members; the OneWorld Alliance led by British Airways; and the Sky Team that includes Air France, KLM and Czech Airlines among others as members (Iatrou & Oretti 2007). A number of full service airlines also offer low cost services through subsidiaries with which they form hub and spoke models instead of full connections (Pleul 2008). The above information is important in view of identifying the best mechanisms to be used by AerialAir in venturing in an already highly competitive market. The information will be used as the foundation for laying out a strategic plan. The strategic plan should not be rigid, but as noted by Shapiro (2007), should give the parameters within which to work. Additionally, Shapiro notes that the strategic plan should be based on a real understanding of the external world as noted in the preceding paragraph. Thus, the experience already gained by AerialAir should be used in collaboration with external findings to generate a robust plan. By venturing in low cost air travel services, AerialAir will have to shift from its conventional operations and assume relatively different roles as shown in table 1 which highlights the features of full service airlines versus low cost carriers. Table 1: Key attributes of services provided by full-service carriers and low-cost carriers Service features Full-service carrier Low-cost carrier Brand Brand extended to fare and service One brand: generally low fare Fares Complex fare structure Simplified fare structure Airports Primary Secondary (mostly) Distribution Online, travel agent and direct booking Direct and online booking Connections Interlining, global alliances, code share Point-to-point Check-in Operated under IATA ticket contract Ticketless Turnaround time Low turnaround: congestion/labour Mostly 25-minute turnarounds In-flight Complementary extras such as hot meals availed Passengers pay for extra amenities Class segmentation Two class (seating capacity diluted ) One class (treated as high density) Aircraft utilization Medium to high: union contracts Very high Ancillary revenue Advertising, on-board sales Focus on the primary product Aircraft Multiple types: scheduling complexities Single type: commonality Seating Generous pitch, offers seat assignment Small pitch, no assignment Customer service Full service to passengers, offers reliability Limited passenger service Operational activities Extension services e.g., maintenance, cargo Main focus on flying Product Multiple products incorporated One product: target on low fare Source: Adapted from O’Connell and Williams (2005), Chowdhury (2007) and Holloway (2008) As it ventures into low cost air travel, AerialAir will have to understand and focus on the attributes of low cost carriers as shown in table 1. Nevertheless, since the European market is highly competitive, the company will have to go an extra mile in provision of services in order to capture a significant share of the market. According to Piga, Filipi and Bachis (2001), most low cost carriers in Europe fly short distances (in most cases less than 1500 km) and utilize one type of aircraft. Most of these airlines have adopted Boeing 737 aircraft since they provide large crew flexibility, have higher aircraft to pilot ratios, need lower training and maintenance costs, and require fewer standby crews. Along with considering purchasing Boeing 737 aircraft (due to its popularity among low cost carriers), AerialAir should also consider the Brazilian-made Embraer jets since they are cheaper (Mburu 2009). Cheaper aircraft will mean lower initial cost hence and an earlier opportunity to make profits. According to Piga, Filipi and Bachis (2001), a traveller is a judicious decision maker who actively explores options that meet his or her travel needs and plans, assesses the options identified, and chooses the option that provides the highest utility. Therefore, AerialAir should ensure that its services, both domestic and international, are unrivalled. This objective should be in line with the notion that the probability of an individual selecting a particular option indicates that the option offers the greatest utility among a list of alternatives. Thus, in order to be a leading low cost air travel service provider AerialAir should consider the following factors that relate to services and customer commitment: Offering the lowest fare available. This will be instigated by purchasing the least expensive jets. Notifying customers immediately in case of any delays in order to build a good reputation at early stages (Scovel 2007). Have consideration for disabled people and people with special needs. This aspect has been overlooked by many low cost carriers since they fill their aircraft with more seats to encourage high passenger carrying capacity (Scovel 2007). Be more receptive to customer complaints (Scovel 2007). Essentially, the model adopted by AerialAir should be an intermediate between full service and low cost carrier before the low cost service is fully embraced. This will depend on the market situation. Market changes caused giant full service airlines such as Air France and British Airways to start offering low cost services on some routes (Lee 2006). As such, the two airlines are good exemplars to AerialAir. Past successes and failures in provisions of low cost services The move by Air France and British Airways to offer low cost air travel services is an epitome of how airlines can use both models of service provision. British Airways has been instrumental in offering low fare services as a mechanism to reduce expenses. An example is the decision that was reached in 2008 to exclude meals in short-haul flights, thus making the company similar to established low cost carriers such as Ryanair and easyJet which charge separately (thus lower) for in-flight meals (Pleul 2008). The move to low cost transport should however be taken cautiously since the past has also recorded failures by major full service airlines venturing in low cost models. British Airways had to withdraw its Go subsidiary; USAirways withdrew its MetroJet; whereas Continental Airlines withdrew Lite and United Shuttle which operated under it as alternatives to full service operations (Pleul 2008). Thus is order to avoid failure, AerialAir should consider alliances with other low cost airlines that are already established in Europe. Such alliances can include creation of hub and spoke models to increase efficiency at lower costs. An example in this model is SN Brussels, a full-service airline which merged with Virgin Express, a low-cost carrier (Rhoades 2008). Conclusion Having addressed a number of factors affecting both full service airlines and low cost carriers, it is worthwhile noting that AerialAir should not be in a haste to venture fully in low cost services in Europe. Rather, it should assess the market and begin by offering intermediate services (services characteristic of both full service and low cost airlines). Additionally, alliances will help the airline to penetrate the already highly competitive market. References Chowdhury, E 2007, Low cost carriers: How are they changing the market dynamics of the U.S. airline industry? Unpublished Honours essay submitted to Carleton University. Forsyth, P; Gillen, D W; Mayer, O G & Niemeier, H 2005, Competition versus predation in aviation markets: a survey of experience in North America, Europe and Australia, Ashgate Publishing, Ltd., London. Graham, A, Papatheodorou, A & Forsyth, P 2008, Aviation and tourism: implications for leisure travel, Ashgate Publishing, Ltd., London. Holloway, S 2008, Straight and level: Practical airline economics, Ashgate Publishing, Ltd., London. Iatrou, K, & Oretti M 2007, Airline choices for the future: from alliances to mergers, Ashgate Publishing, Ltd London. Lee, D 2006, Competition policy and antitrust, Emerald Group Publishing, New York. Mburu, C 2009, Ill-prepared, African airlines could be caught offside come the World Cup, Daily Nation, Nairobi, August 21 2009 O’Connell, J F & Williams, G 2005, Passengers’ perceptions of low cost airlines and full service carriers: A case study involving Ryanair, Aer Lingus, Air Asia and Malaysia Airlines, Journal of Air Transport Management, 11:259–272 Piga, C A, Filipi, N & Bachis, E 2001, Booking and flying low cost airlines, Available from http://www.nottingham.ac.uk/ttri/pdf/2001_2.pdf (22 August 2009). Pleul, A 2008, How to survive the skies over Europe - European low cost carriers, GRIN Verlag, London. Rhoades, D L 2008, Evolution of international aviation: Phoenix rising, Ashgate Publishing, Ltd., London. Scovel, LC 2007, Refocusing on efforts to improve airline customer service, Statement of the Honourable Inspector General of US Department of Transportation Available from http://www.oig.dot.gov/StreamFile?file=/data/pdfdocs/WEB_FILE_Senate_Airline_Customer_Service_Testimony.pdf (22 August 2009). Shapiro, J 2007, Strategic planning, Available from http://www.civicus.org/new/media/Strategic%20Planning.pdf (22 August 2009). Read More