Quo Vadis?

The post-recession aviation scenario looks bright and promising. The question is whether the changing fortunes of the airline industry are going to impinge on the low-cost model?

The story of the low-cost carrier (LCC) is characterised by inbuilt contradictions with phrases such as ‘premium economy’ and ‘economy business class’, being used lavishly. In the emerging business model, these may sometimes be difficult to reconcile with. A refrain at the recently held LCC Conference in London was that LCCs continued to compete with legacy carriers as the differentiation between the service levels provided by the two types of carriers and the customer expectations continued to become increasingly blurred by current market dynamics.

The last decade or so has been significant for the aviation industry worldwide. The environment itself has been experiencing vibrant changes, market forces have pushed and pulled in several directions simultaneously, and historically significant events have occurred at frequent intervals of time. These include terrorist threat and attack, steep rise in the price of oil, and fierce competition at domestic and international levels. Expectedly, the most significant events concerned the US; 9/11 delivered a debilitating blow to the US aviation industry, and the deep recession commencing in 2008 further added to the distress in the industry. A few players in the US are yet to recover while the European aviation industry did little better with some quick-thinking improvisation and strategic shifts. Challenging times demand innovation and the aviation industry’s response to the challenges it faced was the modifications it made to low cost airlines to conjure up attractive business models based on minimum operating costs. EasyJet and Ryanair led this trend towards low-cost operations and thrived. The post-recession aviation scenario looks bright and promising. The question is whether the changing fortunes of the airline industry are going to impinge on the low-cost model?

However, all indications are that this is not the case. For example, Malaysia-based low-cost airline AirAsia, which commenced operations less than nine years ago with two aircraft and 200 employees, crossed a significant milestone of having carried 100 million passengers recently. It is now Asia’s largest LCC and is still growing. Group Executive Tony Fernandes expects the airline to reach the 200 million mark by 2013 which will make it Asia’s largest carrier, surpassing the full service ones too. AirAsia currently carries 30 million passengers every year. Full service airlines flying in the region are noticeably lower. While Cathay Pacific carries 18.1 million, Thai Airways International carries 17.9 million and Singapore Airlines 16.3 million. AirAsia’s exponential growth to a fleet of 96 aircraft flying to 22 countries is one facet of the low-cost model’s establishment as a worthy (and strong) competitor for legacy airlines. Interestingly, Tony Fernandes’ aspirations about AirAsia’s future is, “to be the world’s best LCC, to be as good as the economy service of any full service airline.”

Essentially, what the market has been witnessing is the creation and development of a market by the low-cost model with emphasis on opening of new routes as well as inroads into the existing traditional routes dominated by legacy carriers. The trend is for the low-cost carrier to move up in terms of what they offer in comparison with full service carriers. Interestingly, in simultaneity with the low-cost offer becoming more attractive in terms of service, the legacy carriers are moving down in order to compete on price while holding back on service. This trend has been referred to in aviation industry jargon as ‘unbundling the legacy airline offer’ by charging for elements of the package such as seat selection, baggage fees and queue jumping. Consequently, the gap between low cost airlines—sometimes being referred to as ‘new model airlines’ and full service or legacy carriers is becoming negligible. The value of ancillary revenue, including duty free and travel retail sales, is diminishing, and the trend is towards higher average fares to maintain profitability. The Association of European Airlines believes that in the last decade, Europe has become the most developed market for penetration by LCCs. The combined market share of EasyJet and Ryanair has increased during this period from 20 million to 105 million passengers. This is primarily because following 9/11, legacy carriers were traumatised and the LCCs were able to move in on routes abandoned or neglected by the former. The fact that LCCs were able to exploit the market for excellent deals on new aircraft was to their advantage.

Meanwhile, the Indian aviation industry really came of age with the inception of Deccan Aviation and its low-cost model Air Deccan, which caught the fancy of a whole nation while setting the template for the Indian air travel scene. Five years ago, low-budget or economy travel meant journeys over long distances by rail only. The surge in air travel in general and LCCs in particular, changed all that. Indians are travelling like never before, and that too, by flight. This change is partly on account of the resurgent economy and partly because of the emergence of a band of LCCs in India with IndiGo Airlines, Jet Konnect, Spice- Jet, JetLite, Kingfisher Red, Air India Express and GoAir; air travel is now within the reach of even the lower middle class. Indian LCCs are rapidly gaining ground, and are soon expected to enjoy 70 per cent of the share of the domestic market despite the challenges of high cost of aviation fuel and operating from private airports, as well as the non-availability of low-cost terminals. The figures look appealing and bear testimony to the fact that for most people, the benefits that accrue from travel by LCCs outweigh the compromise in quality of service and absence of frills. If you are not looking for expensive frills during the flight and your only intent is to reach your destination at affordable cost, LCCs are the solution. The fact that LCCs do not offer complimentary food and beverages is easily forgiven by the traveller, who saves substantially on the air ticket. It must also be borne in mind that a large proportion of air travellers in India have actually graduated to air travel only when the LCC option was made available to them; air travel was unaffordable till then. Thus they have no full service experience to compare with.