Low-cost carrier

Monday, June 20, 2011

Low-cost carrier

A low-cost carrier or low-cost airline (also known as a no-frills, discount orbudget carrier or airline) is an airline that generally has lower fares and less comforts. To make up for revenue lost in decreased ticket prices, the airline may charge for extras like food, priority boarding, seat allocating, and baggage etc.

The term originated within the airline industry referring to airlines with a lower operating cost structure than their competitors. While the term is often applied to any carrier with low ticket prices and limited services, regardless of their operating models, low-cost carriers should not be confused with regional airlines that operate short flights without service, or with full-service airlines offering some reduced fares.

Business model

Low-cost carrier business model practices include:

a single passenger class

a single type of smaller, newer, more fuel efficient aircraft (commonly the Airbus A320 or Boeing 737 families), reducing training and servicing costs.

development of one or more hubs to maximise destination coverage and defend their market

a minimum set of optional equipment on the aircraft, further reducing costs of acquisition and maintenance, as well as keeping the weight of the aircraft lower and thus saving fuel:

often pilot conveniences are excluded such as ACARS and autothrottle
no in-flight entertainment systems made available
no seat recliners, seat pockets, window blinds or seat headrest covers

a simple fare scheme, such as charging one-way tickets half that of round-trips (typically fares increase as the plane fills up, which rewards early reservations)

flying to cheaper, less congested secondary airports and/or flying early in the morning or late in the evening to avoid air traffic delays and taking advantage of lower landing fees

fast turnaround times (allowing maximum use of aircraft)

unreserved seating (encouraging passengers to board early and quickly, thus further decreasing turnaround times)

simplified routes, emphasizing point-to-point transit instead of transfers at hubs (again enhancing aircraft use and eliminating disruption due to delayed passengers or luggage missing connecting flights)

encourage the use of direct flights. Luggage is not automatically transferred from one flight to another, even if both flights are with the same company.

generation of ancillary revenue from a variety of activities, such as à la carte features and commission-based products

emphasis on direct sales of tickets, especially over the Internet (avoiding fees and commissions paid to travel agents and computer reservations systems)

employees working in multiple roles, for instance flight attendants also cleaning the aircraft or working as gate agents (limiting personnel costs)

a disinclination to handle Special Service passengers, for instance by placing a higher age limit on unaccompanied minors than full service carriers

aggressive fuel hedging programs

passengers paying charges for extras, such as hold luggage, online check in and priority boarding

avoiding using jetways wherever possible to board and alight passengers by using a mobile stairway which is a cheaper alternative.

not supplying meals in a flight, but offering snacks, sandwiches and drinks instead to purchase on board

no refunds or transfers to later flights in the event of missed flights, i.e. if the aircraft leaves on time without a passenger who arrived late, he will have to buy a wholly new ticket for the next flight.

Not every low-cost carrier implements all of the above points. For example, some try to differentiate themselves with allocated seating, while others operate more than one aircraft type, still others will have relatively high operating costs but lower fares. JetBlue for instance has in-flight entertainment (i.e. LiveTV) in every passenger seat. Other airlines are limited on what points the can implement based on local laws, such as Ryanair cannot remove window blinds from its aircraft as they are required to be fitted by the Irish Aviation Authority.

As supply increases, this sort of differentiation by brand is one of the most important criteria for the future success of low-cost-carriers, since price-competition alone will not be enough given the number of carriers.

The price policy of the low cost carriers is usually very dynamic, with discounts and tickets in promotion. Even if the advertised price may be very low, sometimes it does not include charges & taxes.

As the number of low-cost carriers has grown, these airlines have begun to compete with one another in addition to the traditional carriers. In the US, airlines have responded by introducing variations to the model. Frontier Airlines and JetBlue Airways advertise satellite television. Advertiser-supported Skybus Airlines launched from Columbus in 2007, but ceased operations in April, 2008. In Europe, the emphasis has remained on reducing costs and no-frills service. In 2004, Ryanair announced proposals to eliminate reclining seats, window blinds, seat headrest covers, and seat pockets from its aircraft.

The budget airlines frequently offer flights at low prices – often flights are advertised as free (plus applicable taxes, fees and charges.) Perhaps as many (or as few) as ten percent of the seats on any flight are offered at the lowest price, and are the first to sell. The prices steadily rise thereafter to a point where they can be comparable or more expensive than a flight on a full-service carrier.

Additional expenses charged can border on the fraudulent, such as levying a credit card charge where credit card is the only payment method accepted.

Traditional perceptions of the "low-cost carrier" as a stripped-down, no-frills airline, as seen on Southwest Airlines, have been changing as new entrants to the market adapt the business model in new ways. AirTran Airways and Spirit Airlines offer a premium cabin while Frontierand JetBlue offer live in-flight television, sometimes for an extra fee. AirTran has XM Satellite Radio available at every seat. Frontier, JetBlue, and AirTran all use assigned seating. Some airlines even have services not available on some legacy carriers, such as mood lighting, found inVirgin America.

Criticism

Some elements of the low-cost model have been subject to criticism by governments and regulators, and in the UK in particular the issue of "Unbundling" of ancillary charges by both low-cost carriers and other airlines (showing airport fees, taxes as separate charges rather than as part of the advertised fare) to make the "headline fare" appear lower has resulted in enforcement action. Believing that this amounts to a misleading approach to pricing, the Office of Fair Trading (OFT) in February 2007 gave all carriers and travel companies three months to include all fixed non-optional costs in their basic advertised prices. Although the full service carriers had complied within the specified timescales, the low-cost carriers have been less successful in this respect, leading to the prospect of legal action by the OFT.

Many low-cost carriers show a zero cost for some flights. Most charge additional fees for airport check-in, baggage check-in, 'handling charges', seat allocation and credit card processing. These charges are non-refundable even in the case of cancellation by the airline. Ryanair requires that passengers' airport purchases fit within their carry-on bag.

History

While tour and package operators have been offering lower-priced, lower frilled traveling for a large part of modern airline history, not until during the post Vietnam War era did this business model really escalate and take off. Through various ticket consolidators, charter airlines, and innovators in lower frills flying, such as Channel Airways, and Court Line, the traveling public had been conditioned to want to travel to new and increasingly further away and exotic locations on vacation, rather than short-haul junkets to nearby beach resorts.

The first low-cost airline was Southwest Airlines which started flying in 1971.

The first airline offering no-frills transatlantic service was Freddie Laker's Laker Airways, which operated its famous "Skytrain" service betweenLondon and New York City during the late 1970s. The service was suspended after Laker's competitors, British Airways and Pan Am, were able to price Skytrain out of the market.

In the United States, airline carriers like America West Airlines which commenced operations after 1978, soon realized a cost of available seat mile advantage in relation to the traditional and established, legacy airlines such as Trans World Airlines and American Airlines. Often this CASM advantage has been attributed, solely to the lower labor costs of the newly hired and lower pay grade workers of new start up carriers, such as PeopleExpress Airlines, Valuejet, Midway Airlines, and their like. However, these lower costs, can also be attributed to the less complex aircraft fleets, and less complex route networks these new carriers began operations with, as well as the vastly less costly and freshly trained labor force.

To combat the new round of low cost and start up entrants into the very competitive and deregulated United States airline industry, themainline major carriers and network legacy carriers strategically developed no frills divisions within the main airlines brand and corporate structures. Among these were Metrojet and Continental Lite. These so called airlines within an airline however, proved to be very short lived, for the most part and a financial burden which were quickly disposed off when economic rationalization or competitive pressures subsided.

Among these low cost carrier survivors are US Airways, the product of a merger of a low-cost deregulation startup air carrier named AmericaWest and the post 9/11 reorganized through chapter 11 bankruptcy and national network carrier US Air, which markets itself as a low-cost airline and conducts long-haul flights. Usually though, its long-haul international fares are equal to other United States major carriersrather than offering the cost saving advantages of what are normally thought to be of a lower cost carriers offerings and services.

No-frills long-haul flights

It has been suggested that the Airbus A380, able to hold up to 853 passengers in an all Economy layout, would enable true low-cost long-haul service. While the per-seat costs of such an aircraft would be lower than the competition, there are fewer cost savings possible in a long-haul operation and therefore a long-haul low-cost operator would find it harder to differentiate itself from a conventional airline. In particular, low-cost carriers typically fly their aircraft for more hours and flights each day, scheduling the first departure early in the morning and the last arrival late at night. However, long-haul aircraft scheduling is more determined by timezone constraints (e.g. leaving the US East Coast in the evening and arriving in Europe the following morning), and the longer flight times mean there is less scope to increase aircraft utilization by adding one or two more short flights each day.

In 2004 the Irish company Aer Lingus lowered its prices to compete with companies such as Ryanair on shorthaul, however they maintain a full service on transatlantic flights. Late in 2004 the Canadian airline Zoom Airlines also started selling transatlantic flights between Glasgow, UK; Manchester, UK; and Canada for £89.

Australia's Jetstar has operated international flights since 2005, when they began service to Christchurch, New Zealand. In late 2006, more international services began. Departing from Sydney, Melbourne and Brisbane, they fly to popular tourist destinations within 10 hours of Australia such as Honolulu, Japan, Vietnam, Thailand, Malaysia and more. With the delivery of new planes, they hope to fly to the continental US and Europe.

In April 2006, the industry magazine Airline Business analysed the potential for low-cost long-haul service and concluded that a number of Asian carriers, including AirAsia, were closest to making such a model work. On November 2, 2007, AirAsia X, a subsidiary of AirAsia andVirgin Group flew its inaugural flight from Kuala Lumpur, Malaysia to Gold Coast, Australia. AirAsia X claims that it is the first true low-cost long-haul carrier since the end of Sir Freddie Laker era.

In August 2006, Zoom Airlines announced that it was to establish a UK subsidiary probably based at Gatwick Airport, to offer low-cost long-haul flights to the USA and India. The company suspended all its operations from 28 August 2008 due to financial problems related to high fuel prices.

On 26 October 2006, Oasis Hong Kong Airlines started flying from Hong Kong to London Gatwick Airport (delayed by one day because Russia suspended fly-over rights for that flight an hour before the flight's scheduled departure). The cheapest prices for flights between Hong Kong to London could be as low at £75 (approximately US$150) per leg (not including taxes and other charges) for economy class and £470 (approximately US$940) per leg for business class for the same route. From 28 June 2007, a second long-haul route to Vancouver, British Columbia was started. The company ceased operations on 9 April 2008, after over 1 billion HKD of losses.

In late 2007, Cebu Pacific, the Philippine based low cost carrier, announced intentions to launch non-stop Pacific flights from the Philippinesto the United States West Coast and other US cities by around mid-2009.

On March 11, 2009, AirAsia X started its first low cost long-haul service into Europe to London Stansted, England. The daily flights to Stansted are operated by two leased Airbus A340-300 aircraft. A one way economy class ticket often costs £150 and the Premium class one way often costs £350.

Low-cost business only carriers

A trend from the mid-2000s was the formation of new low-cost carriers exclusively targeting the long-haul business market, with aircraft configured for a single class of service, initially on transatlantic routings. Probably best described as "fewer frills" rather than "no frills", the initial entrants in this market utilised second-hand, mid-sized, twin jets such as Boeing 757 and Boeing 767 in an attempt to service the lucrative London-US Eastern Seaboard market: