Rising Share of Low Cost Carriers
LCCs have been consistently gaining market share in the global airline industry. To get a sense of rising share of Low Cost Carriers, see US example below:
Exhibit 1: Network Carrier Share Fell From 73 Percent in 2000 to 53% in 2021; ULCCs carried ~13% of domestic pax in ‘21
Network Carrier Share Fell From 73 Percent in 2000 to 53% in 2021! In the same time, ULCCs (Allegiant/Avelo/Breeze/Frontier/Spirit/Sun Country) carried ~13% of domestic pax in ’21. This is driven by various factors. Leaner cost structures of LCCs allow for more aggressive pricing strategies. Additionally, the business model provides protection against rising fuel costs.
What are Low-Cost Carriers (LCCs)?
Low-Cost Carriers (LCCs) are airlines that operate on a low-cost business model, offering lower fares than traditional full-service carriers (Legacy airlines) while still providing scheduled air transportation services. LCCs are characterized by their focus on cost efficiency and simplicity, and their ability to offer lower fares to customers by reducing or eliminating certain services and amenities. LCCs are also known for their focus on point-to-point travel rather than hub-and-spoke networks, which allows them to operate out of smaller, less congested airports.
Key characteristics of the LCC business model
The key characteristics of the LCC business model include:
Low Operating Costs
LCCs strive to keep their operating costs as low as possible in order to offer lower fares to customers. This is achieved through a number of cost-saving measures, such as the use of a single aircraft type, cost-efficient maintenance practices, and the use of lower-cost airports.
Simplicity and Flexibility
LCCs operate on a simple and flexible business model, offering a reduced number of services and amenities to customers in order to keep costs low. This includes the elimination of certain services such as in-flight meals and baggage handling, as well as the use of self-service check-in and boarding processes.
Point-to-Point Network
LCCs typically operate on a point-to-point network, rather than a hub-and-spoke network. This allows them to operate out of smaller, less congested airports, which can offer lower costs for landing and handling fees.
Ancillary Revenue
LCCs rely heavily on ancillary revenue, which is generated from the sale of additional services and products such as baggage fees, seat selection, and in-flight meals. This helps LCCs to offset the lower fares they offer to customers and increase their overall revenue.
Airports Used
Utilization of secondary airports (for benefits like lower fees). LCCs typically operate out of smaller, less congested airports which offer lower costs for landing and handling fees, while Legacy airlines typically operate out of larger, more congested airports.
Outsourcing of Ground Handling Operations
LCCs tend to outsource ground handling operations to third-party providers in order to reduce costs and improve efficiency. Legacy airlines have begun to vigorously do it as well.
Other Elements
a) Low fares (compared to those for legacy carriers)
b) Higher flight frequencies
c) Limited differentiation in seating (e.g. Single seating class)
e) Absence of free on-board meals.
f) Operating a single aircraft type (in order to reduce operating costs & maintenance costs
g) Lower stage lengths (compared to that of legacy carriers
Cost Advantages of LCCs
These factors lead to tangible cost advantages. A comparison of the CASM for various global players (See Exhibit 2) shows the significant gap between the business models of LCCs and Legacy carriers.
To mitigate the impact, legacy carriers have been striving to ‘partially’ migrate to low-cost models. The legacy carriers have been attempting to improve ancillary revenues, to compensate for revenue and share migration.
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