Low-cost carriers tweak their models

The traditional low-cost approach - no frills and simplicity in all things - has yielded to several blended models and a focus on quality that flyers are willing to pay for. And the tweaks keep coming

Low-cost, low-fare airlines have long followed the outline written down in someone else's book. But as the low-fares approach spreads around the world and as the first generation of low-cost airlines grows up, the page they read is not always taken from a predecessor such as Southwest or Ryanair. Instead, old models are yielding to new ways of doing business as a new paradigm is ­written, region by region, carrier by carrier.

A significant factor in the evolution and metamorphosis of the old-fashioned, undifferentiated low-cost carrier is the rise of low-cost to low-cost competition, says Brett Godfrey, chief executive of Virgin Blue. Things have changed since Southwest founder Herb Kelleher was able to say, as he did for years: "Our only competition is the car or the ­television set. People who fly us are people who weren't going to fly in any case."

Ron Kuhlmann, an analyst and consultant with Unisys, says Southwest "existed in isolation for a long time, and it often said that the only costs it cared about were Southwest's costs. Since then, some have 'out-southwested' Southwest", and now low-cost carriers must focus on their low-cost competition as much as on their internal standards.

Hence the continuous altering of what had been a previously rather monolithic business model with blended variants appearing around the world, according to David Lloyd, Virgin Blue's head of strategic development. Lloyd says: "What is universal for low-cost carriers? Really only two things: people productivity and asset productivity, not internet-only distribution, and not single fleet type, and not secondary airports, and not a bunch of other things."

"Everyone, from the chief executive on down, is involved in cleaning the plane at the airport" Richard Bartrem Vice-present of culture, WestJet

If the two mainstays of the new model are productivity in people and in physical assets, then the old management cliché about corporate culture takes on new significance. ­Richard Bartrem, vice-present of culture at Canada's WestJet, puts culture at the heart of being a low-cost carrier. While the phrase "corporate culture" is admittedly an ambiguous one and one that can disguise multiple sins of commission and omission, Bartrem insists that it is a very real issue for low-cost airlines. He says: "Having your people think low cost and as much as possible live low cost is central. So you'll see everyone, from the chief executive on down, be involved in cleaning and grooming the plane at the ­airport. That speeds up the turnaround and increases utilisation, but importantly it sends a real message throughout the workforce."

While that is clearly a corporate campaign, it may be significant that airline employees are buying in. For instance, Bartrem relates the tale of a WestJet crew driving to the airport who came upon a car broken down on an airport access road. The pilots pulled over, got out and helped the stranded motorist fix her flat tyre, even though she was not a WestJet passenger. Bartrem says WestJet took "this need for a shared culture very seriously, and directly, from Southwest when it was starting up. We were following their book."

But WestJet broke the Southwest model early on with frills such as lounges. "With the low-cost carrier variations, the AirTrans or the WestJets, once you have a platform based on minimal costs, you can do things like have a premium-seating section and so on," says Kuhlmann.

At the heart of the old model was the chant of productivity through simplification, and back in mainframe days this applied on a macro scale. But now, the advance of technology lets managers take simplification down to a micro level. Where Southwest ­simplified by having one type of aircraft, new carriers can simplify almost everything. ­Virgin America chief executive Dave Cush says that starting with low costs is achieved through "simplicity of business processes and technology. The complexity of the legacies' business processes, in almost any work area, makes their costs higher. This is not just in areas such as work rules and so on. The youth of our fleet and of our workforce" make this achievable.

The argument that a single fleet type is a core pillar of simplicity is one long made by Kelleher, but experience suggests that it is not necessarily so. Southwest may have standardadised around the Boeing 737, and Kelleher's belief was that having a complex fleet was a cardinal sin. AirTran, however, provides an example of fleet complexity, having added a second larger type, the Boeing 737, to its original 717 fleet as demand grew.

"We can manage any complexitiesof having multiple types in the fleet" Joachim Hunold Chief executive, Air Berlin

Elsewhere, Air Berlin has moved to add complexity, ordering at least 10 Bombardier Q400 turboprops to supplement its fleet of 124 jets. Air Berlin chief executive Joachim Hunold says the type's lower operating costs outweigh issues of added complexity: "We needed something to serve routes that we couldn't fill with our jets, and we needed something with lower operating costs." And, adds Hunold, the carrier has low enough overhead and overall costs that it can manage any complexities introduced by having ­multiple types in its fleet.

Another preaching of the gospel of low cost was about distribution: avoid intermediaries as much as possible. But this has changed, in part because the economies of distribution have changed along with the technology. For instance, when Southwest made a big break with low-fare orthodoxy and committed on a large scale to the global distribution systems and to internet-based online travel agencies, it was blunt: it needed the revenue, and in any case it could cut a better deal with these intermediaries after the distributors had reworked their business models. In the words of Southwest's distribution chief, Kevin Krone, the GDS business approach "has evolved to the point where it has become a cost-effective business opportunity". And as low-cost carriers compete against each other for higher-paying customers, "we have to be everywhere the business traveller is if we are to attract and serve the business traveller", says AirTran Airways chief executive Bob Fornaro.

Another orthodoxy, to paraphrase George Washington, the first US president, is to avoid "entangling alliances with any portion of the foreign world". This is changing, with JetBlue launching hook-ups with Aer Lingus and potentially Lufthansa, WestJet considering a link-up with Air France, and in Australia both Jetstar and Virgin Blue are forming link-ups.

Head-to-head low-cost competition is ­increasingly a factor, says Virgin B­lue's ­Godfrey. And that means low-cost carriers must differentiate their offerings from each other. In the USA, for instance, AirTran knew it had to differentiate itself not just from arch-rival Delta but from other low-fares entrants such as Southwest. So it designed itself from the very first stages as a "some-frills" carrier. Fornaro likes to boast that "we are the only low-cost carrier with business class on every flight". The airline, based in Orlando but hubbed at Atlanta's Hartsfield-Jackson, also sets itself apart from the Southwest approach with all-reserved seating and live satellite radio as in-flight entertainment.

Ancillary Trend

For low-cost carriers, ancillary charges are a point to differentiate themselves, to remind people that they are really not just like every other airline. As AirTran's Fornaro said as the airline was considering adopting charges for a second checked bag: "The price the big guys are charging is just a bit much. Price points are all important."

The ancillary charges trend allows low-cost carriers to maintain the basic offering of low fares while creating new revenue streams. The ancillary approach has always been a part of the anti-frills model that ­Ryanair began, although in North America it was not a low-cost carrier but a legacy carrier - Air Canada - that made ancillary charges the heart of its pricing philosophy.

Of course, "ancillaries can go only so far", said Skybus board chairman Ken Gile, just days before the "ultra low-cost" carrier shut down. Skybus, he said, was a straightforward application of the Ryanair model, with a lot of emphasis on airport incentives, ­community financial support and ancillaries.

A focus on ancillary revenues creates a slightly different public perception of the low-fares offer. At JetBlue, where ancillary revenues from sales of Live TV programming and preferred seating is expected to grow by 60% this year on top of the 50% increase recorded in 2007 over 2006, chief executive Dave Barger has begun calling the airline "a value carrier" rather than a low-fare carrier.

Question Of Perception

This speaks to the value of branding as part of any low-fares model: perception is all. As long as people perceive an airline as a low-fare brand, they will turn to it when price is uppermost in their mind. As low-cost carriers pursue higher revenues to pay for fuel, this will increasingly be a challenge. At Southwest, for instance, new business-oriented initiatives, including a revised fare structure, generated about $7 million in incremental revenues in their first seven weeks last year, Southwest chief financial officer Laura Wright says.

But, says Kevin Mitchell of the US-based Business Travel Coalition, "some business travellers still recoil at the thought of flying Southwest". Mitchell, who represents corporate travel managers, adds: "Southwest has done everything it can over the past three years to lay down the public relations marker that it is the low-fare carrier even when it isn't always the lowest fare player."

Southwest has recently begun seeking corporate accounts on a big scale, but it has a lot of catching up to do. In Asia, where low-cost carriers are blossoming, the sector has made considerable inroads to corporate accounts. AirAsia, for instance, has a programme that offers the things travel departments need besides savings: the data-reporting and tracking travel managers need to keep track of their people and their compliance with its rules.

AirAsia chief executive Tony Fernandes says it is using GDSs to access the high-yielding corporate customers but the GDS charges, which he complains are often higher than his fares, are passed to the customer and AirAsia will not offer these passengers preferred seats, lounge access or other frills. "The corporate market is coming to us principally because of our network and frequency."

Michael Mannix of Carlson Wagon-Lit's CWT Travel Management Institute sees low-cost carriers in Asia-Pacific as winning about 20% of the business-travel market. Australia in particular is a battle ground, with Virgin Blue aggressively breaking the low-cost model with volume-based discounts and even routes specifically designed for a government-travel contract. Virgin Blue and its rival Jetstar may have as much as 15% of the business travel market, according to Mannix.

The quest for the higher-yielding business traveller has even led start-ups to tweak their model. At South African low-cost carrier Mango, for instance, it took only a year to add a premium product it calls Mango Plus, aimed at small and medium-sized businesses. Even though Mango Plus, unlike Virgin Blue's premium economy or JetBlue's legroom plus seats, is not a separate section on the aircraft, it has grown to represent about one-third of the carrier's business, says Mango chief executive Nico Bezuidenhout.

Mango Plus gives passengers lounge access, an extra baggage allowance and vouchers to cover food and drink. The ticket is refundable. "We needed to diversify and make our target market broader," Bezuidenhout explains.

But now that low-cost carriers are trying to wrest business from each other as well as from the legacies, there are dangers. Kuhlmann warns: "If you 'out-southwest' Southwest and have the lowest costs and are not liked for any reason other than costs, when a slightly different face comes along, your ­people go away. The easyJet versus Ryanair competition shows that."

Perhaps it is the old airline goal - quality - that is the defining characteristic. As Virgin Blue's Lloyd points out: "The airline industry has always had a peculiar notion about low cost, equating it with low quality. This is quite at odds with other industries such as auto manufacturing where it is well recognised that the Japanese manufacturers deliver higher quality at lower cost than North ­American manufacturers."

Airlines may not be automobiles, but in an increasingly competitive marketplace, they face the same demanding customer, and must offer the quality that those buyers will buy.

 

Turboprops Return The lower-cost turboprop, which Air Berlin is adding to its fleet, is moving towards being a mainstay of low-cost carriers. Bombardier's Q400 has two key elements of a low-cost venture: it costs less to operate, seat per seat, than a comparably sized regional jet, and passengers say they like it. Carriers such as flybe of the UK, the largest operator of the type, or South Korea's Jeju Air, have made it a mainstay, while in North America, Frontier has added the Q400 to a new unit that complements its Airbus fleet. This is a particularly ambitious development because Frontier's mainline operation is very much a low-fares, low-cost operation, competing with United on price and with Southwest on service. But its new turboprop unit, Lynx, is aimed at higher-yielding, less-competitive markets that lie closer to its Denver hub, markets that have larger numbers of business travellers. That strategy of running a lower-fare mainline operation and higher-fare feeder had begun showing results, despite Frontier's recent Chapter 11 bankruptcy filing. In the quarter that ended in March, Frontier's Lynx turboprop unit was enjoying yields of more than 19 cents, while the mainline jet operation saw yields of about 12 cents.

 

To read more about low-cost carriers warming to the idea of codeshares, see: flightglobal.com/lowcostalliance

Source: Airline Business