Reworking the model

Low-fare carriers in both North America and Europe are adopting a wider variety of service options to ensure their product stands out from the crowd

According to airline folk wisdom, the low-cost carriers have all based themselves on a single model. The undoubted grandfather of the concept and drafter of the blueprint is Southwest Airlines. The Dallas-based carrier set the pattern for high aircraft utilisation, a single aircraft fleet, simplified boarding procedures and reduced on-board product. It also has features common among North American low-fare carriers but largely absent in Europe, such as offering connecting flights.

More recently, direct booking over the internet has been added to the standard package for the new carriers. Interestingly, however, Southwest lags the industry in this field. Compared with 74% at JetBlue Airways, Southwest has only 55% of its tickets booked over the internet, and relies heavily on call centre and traditional agency distribution (agencies accounted for 20% of sales in 2002). Neither of these US carriers however comes close to the highest European levels of internet booking penetration, which are around 94% at both easyJet and Ryanair.

The new model blueprint has frayed at the edges as newer carriers in North America and Europe have adopted differing business philosophies. Some use more than one type of aircraft. Some choose to operate mainly from primary airports rather than the secondary airports favoured by carriers keen to make the quickest possible turnrounds and reduce their airport costs. Seat assignment, rather than "first come first seated" boarding, has made its way into some new carrier offerings on both sides of the Atlantic.Additional products

In new carrier products, there is no simple "one size fits all" pattern. Product simplicity was thought to be a major driving feature of the new model carriers, but in reality there are now many variations. North American carriers have led the way in offering additional product features to their customers, with an array of extras which might surprise European low-fare travellers.

Every North American carrier has some form of frequent flyer programme (FFP), and some of the new carriers even have partnership links with legacy carrier FFPs. Many of the new carriers offer automated check-in on the web or via kiosks at airports and some form of complimentary food and drink, varying from Southwest's snack packs and peanuts to Frontier's hot bagel and cream cheese breakfast. Increasingly, they also offer sophisticated in-flight entertainment (IFE), led by JetBlue's satellite LiveTV.

New carriers continue to sign up for enhanced entertainment products that put them ahead of legacy carriers, such as the recent agreement by AirTran Airways to put XM Satellite Radio audio on all its aircraft and Canada's WestJet Airlines putting LiveTV video on new Boeing 737-700s.

Some North American new model carriers have even introduced the classic feature of full-service short-haul carriers, by having two cabins on board. Spirit Airlines, for example, although primarily serving leisure traffic, introduced a premium cabin in 2002 and ATA Airlines said it will install a business-class section on its 737 and 757 fleet by November. Elsewhere, America West Airlines, while transforming its operations to become a low-cost carrier, has retained airport lounges at its two primary airports as well as two classes of service.

Larger carriers have not sat idly by. In the past, when US majors set up low-cost operations to compete against the new entrants, their product offerings were also relatively basic. Now, the majors are following the trend. Their latest market entrants, Song and Ted, both have enhanced product offerings such as satellite audio and video entertainment and easy, automated check-in. Competition may be driven hard by price, but new and old carriers alike are prepared to invest in product to keep ahead of rivals.

By comparison, three of Europe's low-frills carriers - easyJet, Ryanair and Virgin Express - appear to offer only the most basic product; none offer complimentary food or drinks, premium cabins, an FFP programme or any form of automated check-in. Differentiation on-board comes mainly through higher quality food for sale in-flight or through seat pre-booking - an innovation which originated in North America and has been taken up by Virgin Express.

The accent for European new carrier competition has instead been largely on lower fares. Yet product differentiators are emerging, as they have done on the other side of the Atlantic.

At the most fundamental level, the choice of airport is a primary product differentiator for travellers and airlines. Ryanair is recognised for using mainly secondary airports rather than major ones, placing many little-known European cities on the airline map. EasyJet, on the other hand, uses several primary airports. So, while Ryanair flies to Beauvais, Girona and Prestwick, easyJet serves Paris Charles de Gaulle and Orly, Barcelona and Glasgow, aiming to attract passengers who prefer airports closer to the cities they serve and which usually have better surface transport links.

The choice of airport is also a major factor in the success of some of the newer European carriers. In the UK, the trend is towards more low-fare flights from regional airports, bringing scheduled service closer to where travellers live and work. There are currently at least 10 low-fare carrier bases at UK regional airports.

Charter carriers were the original European low-cost airlines. They too are playing a part in the pattern of product differentiation. Some have entered the scheduled market with full-service product features such as IFE, and complimentary hot meals on holiday routes at moderate fares. Air Berlin is using this approach combined with penetration of regional airports in its home country to bring higher product standards on both holiday and business routes. In a further break from the European blueprint, Air Berlin also operates a connecting hub at Palma in Spain.

The development of product differentiation among new carriers in the USA is therefore catching on in Europe, particularly for longer low-fare flights from northern Europe to Italy and Spain, though so far usually in a different form. Parallels elsewhere suggest the trend towards differentiation could continue.

Competitive network

In the hospitality industry, which like commercial aviation is a competitive network business, major hotel chains have built their portfolios of product offerings over the years. One chain can now offer a range of choice from budget motels through three-star city hotels to luxury properties, with more than one type of property in the same city. Customers are happy to pay for differing standards of hotel room and service according to their budgets or type of trip.

In the air, long-haul carriers set the airline trend towards product differentiation by introducing "mid- classes", starting with EVA's Evergreen Deluxe class in 1991, followed by Virgin Atlantic Airways in 1992 and BA's World Traveller Plus in 2000. US carrier moves in recent years to add more legroom for frequent and high-yield economy class travellers are also aimed at product differentiation.

Although the need for a wide range of on-board service may be less on short-haul than on long-haul flights, the evidence is that passengers want to have some choice, even if they are not willing to pay a large premium for product extras. The gradual demise of long-haul first class suggests, however, that customers are more prepared to pay for reasonably priced middle ground improvements than for extravagance.

If product differentiation is here to stay, it must bring commercial benefits to carriers. Early attempts among the new model carriers appear to have been unsuccessful, with Debonair and BA's Go both failing to turn product extras into long-term profitability.

Unit revenues

In fact, the North American evidence for driving higher revenue through product differentiation is mixed. GCW's research suggests that unit revenue can be higher for new carriers that offer a differentiated product. The table shows easyJet, Frontier and America West all achieving higher unit revenues than their peers for the passenger hauls involved. On the other hand, JetBlue - with its much-admired branding and in-flight entertainment - does not appear to derive greater unit revenues than rivals, relying instead on low unit costs on its longer sectors to achieve success.

But some of the added-service carriers also carry higher cost burdens. In easyJet's case, unit costs are as much as 50% higher than Ryanair's, even though its sector lengths are 10% greater. Frontier has until now had relatively little low-fare carrier competition at its Denver base, so it is perhaps unsurprising that its unit costs are 11% higher than Southwest's - even though its average stage lengths are nearly 50% greater than those of the low-cost patriarch.

A more important driver for product differentiation among Europe's new carriers may be the reaction of major carriers. BA for one has spent heavily on marketing the extras that its passengers can expect, even when they are paying a fare which may at times be as low as that available on newer competitors.

BA and easyJet currently operate side by side from London Gatwick to 11 destinations, so passengers have a clear choice between the two products. The outcome of this confrontation is not easy to predict, however, as BA's product offering comes at a unit cost that may not be able to stay the course against easyJet's comparatively lower costs.

As the Gatwick example shows, Europe's new carriers have to consider whether their products need to have added features to maintain competitive advantage as well as an edge on cost. In Asia, although the low-cost phenomenon is only in its infancy, product differentiation will also have a part to play. The existing major carriers in the region insist they will maintain competitive advantage through comparatively low unit costs from operating widebody aircraft; and superior on-board product and airport service, which they maintain passengers demand on the longer stage lengths encountered in the region. New low-fare carriers may therefore have to look at competing with legacy carriers on product as well as price.

Australia's Virgin Blue has already taken a step in this direction by offering pay-as-you-go airport lounges and the ability to pre-book exit- and front-row seats with greater legroom for an extra charge. Future new Asian carriers may have to add further product features to compete successfully in the region against entrenched full-service carriers.

There is one further product differentiator which matters to full-service and low-fare carriers alike - punctuality is always an important factor for travellers, particularly those on business.

Punctuality matters

Many of the new carriers seek to distinguish themselves through their on-time performance. The record bears this out. In September 2003, four of the top five carriers in North America for on-time arrivals were new carriers, led by WestJet of Canada with JetBlue, Southwest and ATA not far behind.

In Europe, Ryanair also trumpets its on-time performance, claiming that last year 91% of its flights arrived on time, compared with 76% for easyJet. Virgin Express also advertises a high level of punctuality, claiming that in August and September 2003 it beat Ryanair's on-time performance. High levels of punctuality like these distinguish the Ryanair and Virgin Express product not only from new carrier competitors but also from full-service rivals.

As product extras become part of the new carriers' armouries in Europe, the market may see more low-fare airline efforts concentrated on flights from regional airports, FFPs and check-in automation. But the two most fundamental product points for the new carriers everywhere are likely to remain their low fares and their ability to operate reliably and punctually.

Product offerings from low-fare carriers
Carrier	Loyalty scheme	Automated check-in	Airport lounges	Premium cabin	Free food/drink	IFE	Online sales %
AirTran Airways	Y	Y	N	Y	Y	Y	64%
America West Airlines	Y	Y	Y	Y	Y	Y	n/a
Frontier Airlines	Y	Y	N	N	Y	Y	n/a
JetBlue Airways	Y	N	N	N	N	Y	74%
Southwest Airlines	Y	Y	N	N	Y	N	55%
WestJet Airlines	Y	N	N	N	Y	Y	69%
easyJet	N	N	N	N	N	N	94%
Ryanair	N	N	N	N	N	N	94%
Virgin Express	N	N	N	N	N	N	55%
Notes: n/a = not available. Source: GCW research.

REPORT BY EDMOND ROSE AT GCW CONSULTING IN LONDON

About the author Edmond Rose is head of European practice at GCW Consulting. The firm is based in Washington and has offices in London, Beijing, Shanghai and Shenzhen. After 11 years as a British diplomat, Rose held positions at Virgin Atlantic and British Airways. He has worked recently on regulatory, alliance and network issues as well as low-cost carrier projects.

Source: Airline Business