Shakeel Adam is managing partner of Aviado Partners, a global consultancy specialising in airline commercial issues and assisting carriers to maximise their partnership potential; his Twitter handle is @shakeeladam

As global alliances continue to grow, the debate over how best to exploit partnerships between full-service airlines and ­no-frills carriers is proving most ­interesting.

Is the threat from no-frills carriers as big as many full-service airlines think? Is launching subsidiary no-frills carriers the right strategy for so many airlines?

No-frills carriers have primarily increased market share by growing the overall sector and stimulating demand for lower fares. Many North American and western European airlines overestimated the threat of no-frills carriers by moving to compete on price, lowering product and service quality to strip cost out of their own offerings.

This strategy backfired, leading to minimal differentiation between full-service and no-frills carriers – and driving passengers to choose on price rather than product differentiation. Realising that diluting the product and service was ineffective, these airlines subsequently launched their own no-frills carriers to compensate.

No-frills carriers have continued to spread successfully across Europe, Asia and Australia, leading full-service airlines in these regions to revisit earlier business models, driving cost reductions by stripping out product and service. Having realised limited success in productivity gains compared to their North American counterparts, these airlines increasingly look to subsidiary no-frills carriers as a means to lower production costs and increase productivity – especially facing competition from Gulf and Asian airlines with lower costs.

Air Canada, British Airways, Delta Air Lines and United Airlines ultimately exited or divested their subsidiary no-frills carriers after benefiting from significant productivity gains. Over the past 10 years, these airlines have realised tremendous success ­moving back up-market, delivering on product and service in order to justify higher fares than no-frills competitors.

Will this time around be better for airlines such as Qantas, Lufthansa, All Nippon Airways, Japan Airlines, Emirates, Kenya Airways, Singapore Airlines and Thai Airways – among others – now investing in their own no-frills carriers? There are emerging markets in Southeast Asia and the Gulf where buying behaviour is dominated by price, rather than product, so there may be an opportunity for airlines to invest in no-frills carriers in such markets before others do – but many have not done it well.

There are two possible strategies. Either two independent airlines serve different segments of the market or, secondly, two different product segments under a dual-brand framework of ­co-operation. To be effective, there should be limited cannibalisation.

A review of full-service/no-frills airline groups shows that Emirates/Flydubai is one of the few effectively following the first strategy.

Most groups try to follow the second strategy, but this leads to significant cannibalisation of the full-service business, overcapacity in the market and a structural destruction of group profit.

The greatest challenges for co-operation are complementarity of product and service, cost and complexity of interlining passengers and bags, and service recovery. Most of these can be overcome with strong policies, clear communication and price/product differentiation. However, there is often a significant difference in the product and service standard, which passengers notice when transferring between the two business models.

Most important from the airline group perspective, however, is how to manage the network deployment of the two brands to ensure they complement each other and maximise the benefit to the group, rather than cannibalising each other too much.

A review of dual-brand groupings shows most airlines struggle with this, usually leading the no-frills arm to take passengers from the group’s main operation at a lower cost, but with a greater loss of revenue. The no-frills business seems successful, but cannibalisation of the full-service airline yields a negative result for the group.

Twenty years of dual-brand experiments suggests the model is not ­working. Perhaps airlines should instead focus on serving their core market segments well – as Cathay Pacific, Emirates, Flydubai and Ryanair are doing.

Source: Airline Business