The low-cost revolution has changed air transport forever. As the market matures, the range of low-cost products is increasing and the legacy network carriers are finding they can still justify a price premium if they offer value for money too
As the coverage in this month's issue demonstrates in spades, the low-cost carriers continue to dominate the airline industry's strategic landscape almost everywhere in the world. But here is a bold prediction. In the not too distant future, the idea of a low-cost carrier will look like a rather curious notion.
That is hardly because existing giants such as Southwest, Ryanair, jetBlue or easyJet will fade and die. There will be casualties, but we are well past the point when any network major could secretly hope that the problem would either run out of steam or fail to come their way.
Neither is it, as some low-cost enthusiasts are keen to suggest, that all other types of airline are destined for the scrapheap. It is true that the low-cost revolution has indeed begun to change the world and is already getting well beyond the point at which it could reasonably be looked on as a niche. On latest official estimates, no-frills operations already accounted for some 30% of domestic US passenger numbers by last summer and should account for more than 20% of total passenger miles within North America. In Europe too, the summer schedules suggest that the no-frills sector will take close to 20% of traffic. What is more, the sector is putting on growth at several times the rate of traditional rivals.
The real reason that the notion of a low-cost sector is unlikely to retain its currency is simply that, as the low-cost influence grows, the cost gap between it and the traditional carriers - a gap by which the sector has so far been defined - will begin to fill with a whole range of different fare and service options.
Many smart attempts have been made to define exactly what it is that makes a carrier low-cost - point-to-point service, no-food, secondary airports and many more. In reality, the truth is that there has been a blindingly obvious difference: the low-cost carriers offered everyday low fares at a fraction of the price available from the existing players.
How low-cost new entrants can make money on these lower fares is perhaps less mysterious than the question of how the traditional network carriers managed to charge so much for so long and to make so little money out of it.
In truth, the network majors are probably victims of their upbringing. In the days when supply was tightly regulated and demand boomed, then market access mattered more than market price. Costs were largely assumed to be fixed and the trick was to manage to extract the maximum revenues, particularly in the highest yielding business markets.
There are some dangerous, if unintended, consequences of such a model. First, carriers found themselves cast in an anti-consumer light as they put obstacles between the customer and the best available fare. Second, costly new service features were added as a substitute for good value, but customers paid whether they valued them or not. Finally, fares and service levels tended to converge as everyone pursued the same strategy.
It is exactly this legacy that allowed the new entrants their big break into the short-haul markets of Europe and the USA as they deregulated. In essence they saw some glaring white space to offer a low-priced product with none of the frills but none of the cost either. In other words, they focused on customer needs and built the service levels around them: and have emerged as fast-growing, pro-consumer heroes for their pains.
However, price is not the only differentiator, and as in any market there is a premium to be won. Even water, that most basic of commodity products, can be sold for a huge premium once it has bubbles added and the right label. Most rational markets have a spread of prices and products, and it would be strange if air transport were any different.
The market is already seeing differentiation between low-cost players, particularly in the USA, and there is no reason why traditional carriers cannot join the game and gain a price premium for their efforts. But, as chief executives like Willie Walsh of Aer Lingus recognise, the size of that premium has shrunk for ever.
To enter the game by launching a low-fare product may be no defence if the cost base of the core product is out of line. The business model will need to change to ensure the new premium that customers will pay can translate into a healthy bottom line. By then there won't be low-cost and high-cost carriers, there will be those that offer value for money and those that cease to exist.
Source: Airline Business