Long-Haul Low-Cost Airline Operation - Example

Long-Haul Low-Cost Airline Operation Student’s Name Abstract The gradual liberalization process has caused many structural changes in the aviation market. Among these changes has been increase in competition, increase in passenger volumes and decrease in flight fares. Airlines have adopted various measures in an attempt to overcome these challenges. Some of the reactions have been formation of alliances or even transitional mergers. Through alliances, airlines have been able to achieve major demand-size benefits like network integration. Another measure that has been adopted by the airlines is the establishment of long-haul low cost carriers. These carriers operate, often form secondary airports, in point to point network configurations thus reducing their costs and fares (Dresner & Windle, 1996, p. 20) . However, many airlines have had little success in the past while trying to implement the concept. The following report is aimed at uncovering the history of long-haul low cost airlines as well as why some airlines have failed while trying to maintain these operations. The report also covers emerging trends in the long haul low cost airlines and concludes by setting out a blueprint for a successful long-haul low cost airline model based on several factors. Glossary LCC: Low Cost Carrier LCLH: Low Cost Long Haul IFE: In-flight Entertainment FSC: Full Service Carrier Table of Contents Abstract…………………………………………………………………………………2 Glossary…………………………………………………………………………………3 Table of Contents………………………………………………………………………4 Introduction…………………………………………………………………………….5 Low Cost Airline Model………………………………………………………………..7 History of failure……………………………………………………………………….9 Emerging trends in Long - haul low - cost operations…………………………………12 Developing a successful Long-haul Low Cost Carrier model………………………….14 Conclusion………………………………………………………………………………18 References………………………………………………………………………………19 Introduction Overall, airline industry is an evolving industry. With the changing global economy, what is new today could be archaic in months, and potential never thought to work years back is being fully integrated now (Stenseng, 2012). Thus, to acquire sufficient revenue for operation and expansion, industry`s rates have drastically increased. The changes have been attributed to deregulation of world market in 1978, changes in fuel prices and technological advancement. Over the years low cost carriers have experienced a boon in their endeavors. By 2012, LCCs market had reached 26% from 8% in 2006, in number of seats (Dresner & Windle, 1996, p. 2). However, their markets only cover the short and medium haul itineraries. This move called increased response by FSCs to venture in low cost options in their operations. It also, triggered other stakeholders to come up with a question of whether; this success can be achieved if extended to long haul sector. Today, many airlines are experiencing financial difficulties in their operations (Najda, 2003). LHLC industry has not done well in the past either. The collapse of the pioneers like; Lakers Airways in the 70s and the zoom Airlines in the 2008, sends shockwaves anytime indulgence in LHLC business is mentioned. However, the industry`s researchers are optimistic that, further flexibility and intense innovation will act as fundamental pillars for LHLC business. The continued fruition in the airline industry and innovatory ideas spells a future for LHLC (Najda, 2003). This paper explores history of failure of past LHLC carriers, analyses features of successful LCC that can be employed in LHLC, emerging trends in this segment and concludes by outlining a design to help succeed in Long-haul Low Cost Carrier model. Low Cost Carrier Model According to Najda (2003), a low cost carrier is an airline that operates from one point to another, reimburse employees with salaries lower than indurstry`s standard, and do not offer add on service in order to offer the lower charges. Point to point airports have have no congestions that causes uneconomical delays and are cheap in leasing facilities unlike in major aiports. LCCs mainly aim at reducing the cost of production of service to enable the reduction of fares. Thus, charges includes only transportion while any additional demands by the clients is paid for then (Dresner & Windle, 1996). Though they may differ in some ways, generally, LCCs bear similar characteristics and features; Operates from one point to another in outer aiports attched to the main ones. Offers a single class of service Hold bargains with their supplers especially manufactures for common cheaper, easy to handle aircraft fleets. Do not offer add-on services like full service carriers. Passengers pay separately for meals and given small baggage allowances. They make extra funds for their operation by selling these services. Aim at incurring lowest production cost in terms of time, money and energy. So, they take shortest turnaround times, least cargo baggage handling, no seat pockets to unpack, cleaning the aircraft once per day and low wages to employees. Their bookings are mainly restricted and are done electronically. Figure 1 below illustrates the distribution of LLCs costs of production that enables them to offer low fares. (http://economics.stanford.edu/files/Theses/Theses_2003/Najda.pdf) History of Failure The business of long haul low cost carriers comes into limelight in the seventies (Arosio & Schoenecker, 2003, p. 55). Their operations did not succeed with several factors attributed to the same. Lakers airways took the lead to offer LHLC service in 1977 (Arosio & Schoenecker, 2003, p. 2). The carrier began as a charter flight company in the United Kingdom before indulging into the LHLC sector (Banks, 1982, p.14). It first LHLC flight operated between Gatwick airport in London to New York city. It further expanded it routes to both Los Angeles and later Miami in the US (De Neufville, 2008, 35). The airline offered several features which operational with some of the Low cost carriers even today; firstly, they operated from one point to another but they did not offer transfers in between the points, and had no interlined agreement with other airlines. Secondly, the carries provided on board cuisine paid upon ordering and thirdly, availability of a similar class of service in the entire carrier. By then, the only type of aircraft operated was The McDonnell Douglas DC10 with 45 seats of same class of service. It offered a considerably cheap fare of less than 35 pounds compared to other airlines in the market, with the cheapest one charging 100 pounds for the same services. Though, Lakers Airways operations did not yield much. The fact that they had no global distribution system to make advance bookings, passengers had to book their seats at the airport on the day of departure (Banks, 1982, p.15). Lakers Airways failed in 1982 due to the economic downturn that was experienced in the early 1980s. Downgrading of the carriers hub country currency and intense competition from other 9 Trans- Atlantic carriers too significantly contributed to its failure. As soon as Lakers Airline withdrew from the market in 1983, People Express emerged in attempt to carry on the LHLC operations. Originating from the U.S, its intercontinental flights began from the city of New York to Gatwick Airport in London. Later, the carrier added Montreal in Canada and Brussels in Belgium to it routes of operation. Having been a successful in offering low cost fares in the domestic market, it aimed to present connecting flights from its set of connections at it hubs at a reasonable cost. Unlike Lakers, People Express had first-class seats as well a charge of 3 dollars for every checked in baggage. Nevertheless, challenges in management and over expansion lead to failure of the airlines operations. Hence People Express ceased from the market in 1987 (Banks, 1982, p. 22). After downfall Express People, Oasis Hong Kong Airlines (OHKA) from Hong Kong took over the mantle. It flew from Hong Kong to the city of London. Its two class of services B747 and 400 were to offer the carrier’s best LHLC service. OKHA aimed to operate aircraft with high class of service and have low cost of interline connections from London onwards. Conversely, OHKA remained in the market for only about one year and six months. In a bid to save it operations, OHKA modified its aircraft to contain two classes of services. Then, it changed destination airport in London so as to fly direct to Gatwick airport. This was more of an international airport with major international connections compared of less effective Stansted airport (De Neufville, 2008, 41). Another airline that entered into the long-haul, low cost industry without success is Zoom Airlines based in Canada. It started long haul flights operation in 2002 and quit in 2008. Then, South African based Civair had projected to launch long-haul service from Cape Town to London in 2004 but cancelled the plans some days to its launch (Arosio & Schoenecker, 2003, p. 56). The emergence of internet and e-commerce has expanded the markets for travel industry. With the failure of previous long haul low cost carriers, the use of internet in selling air tickets has been increasingly evident. Should internet have been used then, airlines would have penetrated to their target market directly. There would have been no need to use the overcharging travel agents and unreliable due to their attachment to specific airlines of specific networks. Instead of selling seats on day of departure, Lakers Airways bookings would have been made in advance. Secondly, Low cost carriers have come up with various seasons’ fares. This is simpler way to differentiate the fares of different times compared to earlier systems used by network airlines (Banks, 1982, p. 14). Additionally, extensive research by travel industry has brought forth different thoughts and more tangible suggestions in regard to LHLC. This is because many of the carriers have failed to raise the needed funds for their operations. For instance, Civair failed to obtain sufficient financial backing just before it was to commence LHLC operation (Turner, 2005, p. 7). There are other full services or existing network carriers who have found success in starting their own low cost carriers elusive. Therefore, they are likely to have a desire of establishing the long haul low cost flights. Established LCCs with many of them in Europe and Air Asia efforts may lead to introduction long haul service in the near future. The low costs carriers intending to extend their services are may hold interline agreement with existing flights for long haul service. However, it may necessitate extra charge for transfer of baggage between connecting flights (Arosio & Schoenecker, 2003, p. 56). In addition to economic factors, many other issues have been attributed the failure of long – haul low cost airlines. Provision of premium services, so much time consumed at turnaround points and the general utilization of the aircraft rendered the airlines failure to obtain any tangible profit. As such, many had no capital for continued running of business and making profit. Therefore, for purposes of making profit and continued flow of capital to run their operations, LHLC airlines, requires charging a little higher fee to cater for further management and staff working overnight during its operation. This is the only way to be relevant in the market survive with short haul carriers who do not experience these extra expenses. Moreover, turnaround times on the ground should be minimized. The fact many of the previous LCLH carriers were on tarmac up to a maximum of 15 hours, and the cost high cost incurred through airframes considerably contributed to their downfall (Olson, 2003, p. 28). For that reason, these LHLC carriers ought to be in the air much longer rather than on the ground in order to make sufficient earnings. Some LHLC airlines have been seen to indulge and compete in the routes already occupied by other carriers. Those with both first and business class services well running in addition to their superior frequent flyer and loyalty programs. In this case, passengers will always prefer them to long haul carriers. Also, central airports are more convenient for business compared to non-central airports used by some LHLC (Arosio & Schoenecker, 2003, p. 56). Emerging trends in Long - haul low - cost operations There have been various trends that have emerged in the long – haul low – cost flights sector as the carriers attempt all the basic actions in order to ensure that they maximize load factors while at the same time keeping fares as low as possible. When LLC’s first made an appearance years ago, they were classified as full – service or following budget business models. However, the landscape has now become more complicated with the low cost carriers morphing into hybrid airlines, no – frill operators or new world carriers. This is as a result of the fast changing economic climate that is forcing carriers to adapt to the market. Another trend that is emerging is operational integration of Low cost carriers to form an effective regional airline group. The operational integration creates an airline network that has the scale and flexibility of increasing traffic and revenue significantly through improved flow of traffic across the network and also, the scale to permit reduction of unit costs to a competitive level that is sustainable. Also apparent are the cost benefits: one head office, one reservation system that is common to all carriers, one operation per city and one marketing organization. Common scheduling overlaps and increases connectivity and the scale of the larger network allows for increased productivity of the aircraft. Another emerging trend in the low cost aviation sector is the arrival of airline alliances. These are agreements between two or more airlines to work together for the foreseeable future on a level that is sustainable. Examples of alliances are those that took place between Star Alliance, SkyTeam and OneWorld. Using alliances, low cost carriers can extend their individual reach through co-operation with other airline companies (Banks, 1982, p. 14). Through participation in the alliances, an airline gets to increase its destinations while flight schedules and frequent flyer programs can be combined. The benefits may consist of an optimized or extended network: This is realized mainly through code sharing agreements. Most airlines initially started as a code sharing network. It is also possible for the airlines to buy jointly then share equally the cost of the various services as well as infrastructure. Low cost airlines are also increasing the number of routes in order to maximize the load factor. The main objective of this move is to maximization of profitability through development of a portfolio of routes with high and consistent passenger load factors, then managing the capacity carefully. Reduction in the price of air tickets is another trend that has emerged and is likely to continue for a long period of time. The long term annual reduction in price of the tickets comes as a result of increased competition to new models for cost saving. There has also been establishment of new business practices that have challenged carriers with old history to adapt in order to survive in the current aviation industry. Some of this business practices that have been raised are low cost carriers, hybrid low cost carriers and business class only carriers. Developing a successful Long-haul Low Cost Carrier model Despite all the factors discussed in this report that make it seem impossible to run a low cost long haul airline, there still lies a possibility of running a successful long haul airline. This type of carrier has great growth opportunities in the current world where the demand for cheap air travel is growing alarmingly. A long haul low cost model mainly appears to be the most promising model for price specialists in pure leisure markets. An example of this market is the visiting friends and family market. This model works well where legacy carriers cannot operate profitably or where there is excess demand where stimulation is only through airlines charging lower fares (Olson, 2003, p. 29). A successful LH LCC model is made up of correct fuel hedging, well thought out and planned routes which do not offer pitfalls, a well arranged flight timetable, a network, frequent flier and loyalty program that are well connected and a product offering something new to the customers. The following are factors which, if observed, would help in the development of a successful long haul carrier. (1) Faster turnaround times One of the key sources of cost advantage on short haul flights is the fast aircraft turnaround. This is partly due to airports that are less decongested and allows for more rotations per day and higher crew and aircraft utilization. Long haul flights would, on the other hand, require longer ground time from aircraft servicing and refueling. There should not be an increase in the ground time as this would run up against airport curfews and time zones, leaving aside the market reaction to 3 am departures. Secondary airports may have run ways that are not long enough and the maintenance and handling support of long haul aircraft may be unavailable or more expensive. (2) No frills Short haul LCCs offer paid catering and an all economy seating at a seat pitch slightly lower than network carriers. For faster turnarounds, no seat arrangement takes place. However, this could be offered on long haul as well as paid In-flight Entertainment. Hand-held devices could also work on long hauls and they could be booked in advance in order to avoid any unnecessary weight when incorporating them in seat backs (Turner, 2005, p. 7). (3) Higher production through increased seat densities. Majority of the productivity gains on long-haul flights will high seat densities. However, some of this productivity will be lost once a two class seating arrangement is adopted. The scope for working aircraft and crew will be more intensive than on short haul flights. Network carriers will have high density cabins in the Y class and will hence have the ability to lower costs in this cabin to marginal costs. (4) Passenger load factors In 2006 / 2007, easyJet achieved 85 % on short to medium haul services. This figure was not above the AEA of the member airlines’ load factor which averaged up to 82 % on all the long haul flights with 81 % being on the North Atlantic. It might also be difficult to achieve higher crew productivity. Therefore, it will be necessary to drop excess crews at outstations for long haul flights (De Neufville, 2008, 40). The choice of aircraft is also of vital essence in determining the success of a long-haul low-cost model. As a result, existing low cost carriers have ordered the Boeing 787 aircraft which according to Boeing will be 20 per cent more fuel efficient than the similarly sized jets in today’s long haul operations (Boeing, 2007, p.4). Some of the airlines that have ordered these models include Germany’s Air Berlin and TUI group. Other airlines have also been keen in choosing the kind of aircraft to purchase such as Fly AsianXpress which has made an order for 15 new Airbus A330-300s. In order to reduce costs, low – cost long-haul carriers may also choose to minimize, or where applicable abolish connecting flights. Alternatively, airlines may choose to identify and target non-stop services on its routes. This is because connecting carriers incur huge fuel costs unlike nonstop carriers. This occurs as a result of the excess and large quantity of fuel burnt during each take off and landing. When selecting a destination airport for successful long – haul flights, carriers ought to follow the following selection criteria: 1. The destination has to be a major business destination This way, the carriers will be certain of attracting business people who are frequent flyers and transport them to and fro this destination. 2. It has to be a major cargo destination This is because the long-haul carrier intends to carry cargo in the airline’s belly hold. The cargo will be carried at an extra charge and hence increasing the sales. 3. It has to be a low cost carrier hub (De Neufville, 2008, p. 36). Online ticketing and other technological aircraft developments are other factors that may create opportunities for this model to gain its market share. Online booking helps in utilizing the customer’s time when making bookings as it enables the booking to be carried out from any place. Conclusion A chief issue has always been whether the large success of short – haul low cost carriers can be emulated to work over the long-haul sector (Olson, 2003, p. 24). Various carriers have tried to venture into this sector without any success. It is the customer who has instead turned out to be the greatest winner as a result of more choice and lower prices. The above report has identified some of the factors that have contributed to the demise of various airlines which had ventured in the LCLH sector. However, all is not lost. With observation of the factors discussed in the report, it is still possible for a successful LCLH airline to be established. References Arosio, S. & Schoenecker, N. (2003). The Low Cost Long Haul Airline Industry. Rome: Universita Della Svizzera. Banks, H., (1982). The rise and fall of Freddie Laker. Faber & Faber. London, 88, 12-34. Boeing, (2007). Low cost long haul: The next big thing? Presentation to BCA Industry Trends Forum, March. De Neufville, R. (2008) Low cost airports for low cost airlines: Flexible design to manage the risks, transportation planning and technology, 31, 35-68. Dresner, M., & Windle, R., (1996). The Impact of low-cost carriers on airport and Route competition, Journal of Transport Economics and Policy, 30, 309-28. Najda, C. (2003). Low Cost Carriers and Low Fares: Competation and Concentration in the U.S. Airline Industry. Stanford: Stanford University Olson, P., (2003). Long-haul Low-cost – a long shot. Market Scan. Stenseng, H. 2012. The future of the hotel industry:. Oslo: Oslo School of Management, class of 2013. Turner, A., (2005). Ryanair looks to IFE, phones and gambling for extra revenue Viewed 27 September 2012. www.rati.com. Read More