Low Cost Carrier - Business Model

Low Cost Carriers – A very good Business model

The performance of Airlines is very  encouraging in 2023. All over the world, there is an increase in passenger traffic and IATA forecasted  good profit for many airlines in the world.

The International Air Transport Association (IATA) expects a return to profitability for the global airline industry in 2023 as airlines continue to cut losses stemming from the effects of the COVID-19 pandemic to their business in 2022. 

In 2023, airlines are expected to post a small net profit of $4.7 billion—a 0.6% net profit margin. It is the first profit since 2019 when industry net profits were $26.4 billion (3.1% net profit margin). 

In 2022, airline net losses are expected to be $6.9 billion (an improvement on the $9.7 billion loss for 2022 in IATA’s June outlook). This is significantly better than losses of $42.0 billion and $137.7 billion that were realized in 2021 and 2020 respectively. 

According to Precedent Research :

The global low-cost carrier market size was estimated at USD 200.18 billion in 2022 and it is predicted to be worth around USD 949.97 billion by 2032, poised to grow at a CAGR of 16.85% during the forecast period from 2023 to 2032. Asia Pacific low-cost carrier market size was valued at USD 145.7 billion in 2022.

Asia Pacific dominated the global market with the largest market share in 2022. In Asia, Low cost Carriers are doing well and they have a big share in the world Market.

The north American region is expected to expand thr market share between 2023 and 2032.

By Aircraft Type, the Narrow body segment led the market with the largest market share of 72% in 2022.

By Aircraft Type, the long-haul segment has held a revenue share of 28% in 2022.

By Application, the individual segment dominated the market with the largest revenue share in 2022. 

In the Comprehensive Consulting Assignment , we carried out for Thai Airways, We benchmarked Thai Airways against, Singapore Airlines , Qantas, Cathe Pacific and Malaysian Airlines. We took all the key parameters for comparison. Then suggested the way forward. Formulated and implemented  the planning budgeting and management control system including a system for calculating Flight wise profit. 

The concept of low cost Airlines was picking up very well in the Asian region. We looked at Business models like Southwest Airlines, Ryan air, etc and suggested Expansion of Low Cost Model in the areas Where Thai Airways was operating. While we were advising Thai Airways at Bangkok, it had very small operation in Low Cost Carrier Business. After our suggestion, they started hedging their fuel requirements to reduce the variability in profits due to change in ATF prices. 

The introduction of flight wise cost and profit calculations  helped the Airline to improve its profitability. Based on that experience, I was able to send a very detailed Turn around plan For Air India to  Government of India 16 years back. 

There are various Business models relating to Airline operations. The most profitable model is cargo operations. Many Airline related businesses are also profitable. Cargo Airline, Aircraft manufacturing, Hospitality Management, baggage handling, Airport management, MRO, etc 

In Passenger segment, we can classify the services into Full Service Carrier, Low Cost carrier and Air taxi services . The share of low cost carriers has shown an increasing trend over the years, especially in Asia. 

Difference between Full Service Carrier and Low Cost Carrier. 

They have different business models, service offerings, pricing strategies, and target audiences. Here are the key differences between the two:

Service Offerings:

Full-Service Carriers (FSCs): FSCs, also known as legacy carriers or traditional airlines, offer a comprehensive range of services to passengers. This includes amenities such as in-flight entertainment, complimentary meals and beverages, checked baggage allowance, and more spacious seating arrangements. They often provide premium cabin classes like first class and business class.

Low-Cost Carriers (LCCs): LCCs focus on providing a no-frills experience, offering the basic air travel service without many extras. They often charge extra for services like checked baggage, in-flight meals, and seat selection. LCCs aim to keep their operating costs low to offer cheaper fares to passengers.

Pricing Strategy:

FSCs: Full-service carriers typically have a more complex pricing structure that can include different fare classes based on factors such as flexibility, refundability, and booking class. Their fares might be higher due to the added services and amenities.

LCCs: Low-cost carriers usually operate on a simplified pricing model where the base fare is lower, but passengers can choose to pay for additional services as needed. This a la carte approach allows passengers to pay only for the services they actually use.

Route Network:

FSCs: Full-service carriers often have a wider and more diverse route network, including both major hubs and secondary airports. They may offer more international destinations and interconnected flights.

LCCs: Low-cost carriers tend to focus on point-to-point routes between popular destinations, frequently utilizing secondary airports or less-congested terminals at major airports. They may have fewer international routes and fewer connections. But Asia LCC’s have varied strategies.

Aircraft Fleet:

FSCs: Full-service carriers might have a more varied fleet that includes larger aircraft, such as wide-body planes, to accommodate longer-haul flights and provide various cabin classes.

LCCs: Low-cost carriers often use a standardized fleet of smaller, more fuel-efficient aircraft, which helps reduce operational costs and simplifies maintenance.

Business Model:

FSCs: Full-service carriers aim to cater to a wider range of passenger preferences, including business travellers who might require more amenities and flexibility.

LCCs: Low-cost carriers primarily target price-sensitive leisure travellers who are looking for the most affordable option to reach their destination. But from travellers from all segments of the society have started using the LCCs.

Labor Costs:

LCCs: Low-cost carriers often strive to streamline their operations, including staffing. They might employ more efficient crew scheduling practices and sometimes offer their employees compensation packages that are in line with their cost-cutting strategies.

FSCs: Full-service carriers might have larger cabin crews, more extensive training requirements, and potentially higher labour costs due to offering more services and amenities.

Economies of Scale:

LCCs: With a focus on high passenger volumes and frequency, LCCs can sometimes achieve economies of scale by optimizing their operations for maximum efficiency.

FSCs: Full-service carriers might not always benefit from the same level of economies of scale, as their varied services and amenities could lead to more complex operations.

In General these are the  differences between full-service and low-cost carriers, individual airlines within each category may have their own variations and strategies.

Low Cost Carrier is a very robust business model. The salient features of the model include.

A Low-cost carrier (LCC) in the airline industry typically involves strategies and practices that allow the airline to offer affordable fares while maintaining profitability. LCCs focus on cost reduction, operational efficiency, and revenue generation through ancillary services. Here are key components of a robust business model for a low-cost carrier:

Apart from the aspects discussed in difference between FSCs and LCCs, the following are the other aspects of the LCC Business Model.

Cost Leadership: The primary goal of an LCC is to minimize operational costs while providing safe and reliable service. This involves streamlining operations, optimizing routes, utilizing fuel-efficient aircraft, and negotiating favourable terms with suppliers.

Efficient Use of Capital : To reduce the need for Capex, the Aircrafts are bought and then Sold. The sold aircrafts are taken on lease again, which reduces the capital requires for Aircraft Acquisitions. There are also some tax advantages of Leasing.

High Aircraft Utilization: LCCs aim for high aircraft utilization rates by minimizing turnaround times at airports. This requires efficient ground handling and quick boarding processes. Apart from that they are utilised for 14 hours a day compared to 10n hours for a FSC. They are called block hours.

Direct Sales and Online Booking: LCCs rely heavily on direct sales through their websites and mobile apps. This reduces distribution costs associated with third-party travel agencies.

Ancillary Revenue Streams: LCCs generate additional revenue through ancillary services such as baggage fees, seat selection charges, in-flight services, priority boarding, and partnerships with hotels and car rental companies.

Lean Operating Structure: Keeping administrative and overhead costs low is essential. LCCs often have smaller teams, simple organizational structures, and effective cost management systems.

High Load Factors: Maintaining high seat occupancy (load factor) on flights is crucial for profitability. Pricing strategies, route optimization, and efficient marketing contribute to achieving this goal. Ideally, they should aim for a Passenger Load Factor of more than 85% for the whole year.

Operational Efficiency: Automation and technology play a significant role in LCC operations, from online check-in to self-service kiosks, reducing the need for excessive personnel. Now, even FSC’s have started adopting these practices.

Constant Cost Monitoring and Optimization: LCCs need to consistently monitor costs and identify opportunities for further optimization to maintain a competitive edge.

Risk Management: LCCs need to be prepared for external factors such as fuel price fluctuations, regulatory changes, and economic downturns. Effective risk management strategies are crucial.

Innovation and Adaptation: Staying adaptable and open to innovative ideas is essential to evolving the business model in response to changing market dynamics and customer preferences.

Operational strategies of a Low cost carrier

Operational strategies of a Low-Cost Carrier (LCC) are geared towards minimizing costs while maintaining operational efficiency and providing value to passengers. These strategies are designed to differentiate LCCs from traditional full-service airlines and allow them to offer lower fares to customers. Here are some key operational strategies that low-cost carriers  not covered in the above .

Secondary Airports: LCCs often use smaller, less-congested airports that may be located slightly outside major cities. These airports usually have lower landing fees and operational costs.

Lean Operating Model: LCCs implement lean practices to streamline operations and reduce waste. This includes efficient crew scheduling, minimizing downtime, and optimizing ground handling processes.

Cost-Efficient Marketing: LCCs often rely on cost-effective digital marketing and word-of-mouth referrals to attract customers, avoiding high advertising expenses.

High Load Factors: LCCs aim to maintain high load factors (percentage of seats filled on each flight). This ensures revenue optimization and spreads fixed costs across more passengers.

Standardized Cabin Layouts: LCCs utilize standardized cabin layouts to maximize seating capacity and reduce the time spent on reconfiguration between flights. Usually for the same size of Aircraft, LCCs have 30 % plus more seating Capacity compared to FSC’s.

Non-Unionized Workforce: Some LCCs prefer a non-unionized workforce, as this can lead to more flexibility in staffing arrangements and potentially lower labour costs.

Fuel Efficiency: LCCs often invest in fuel-efficient aircraft and adopt fuel-saving operational practices to mitigate the impact of fuel costs.LCCs like South West Airlines, hedge most of their fuel Requirements, which helps them to reduce the variability in Operations cost. Optimal use of Aircraft Engines while not flying also helps in low fuel consumption.

.

Continuous Cost Management: LCCs regularly assess and optimize their operations to identify areas where costs can be reduced or efficiencies improved.

High Turnover of Aircraft: LCCs might consider refreshing their fleet more frequently to take advantage of newer, more fuel-efficient technologies.

Navigation Charges : To reduce costs, they are fly to destinations where the traffic is less or during the time when the traffic is less. This reduces the navigation charges to be paid to airports.

Home Base :They come back to the home base on the same day. This helps to save  cost relating to overnight stay of crew and additional allowances to be paid to them .

Efficient Fleet Management: Assess and optimize the airline's fleet composition to ensure it meets the operational needs while keeping costs low. Using fuel-efficient aircraft and streamlining maintenance processes can reduce expenses significantly.

Route Optimization: Regularly evaluate the airline's route network to identify profitable routes and eliminate or modify unprofitable ones. Focus on routes with high demand and competition to capture a larger market share.

Employee Productivity: Motivate and empower employees to be more productive and efficient in their roles. Happy and engaged employees can positively impact customer satisfaction and service quality.

Cost-Effective Technology: Implement cost-effective technological solutions to improve operational efficiency, such as automated check-in systems, self-service kiosks, and advanced data analytics for better decision-making.

Maintenance Optimization: Adopt proactive maintenance practices to minimize aircraft downtime and reduce unscheduled maintenance events. Regularly review maintenance contracts to ensure competitive pricing and service quality.

Ground Operations Efficiency: Optimize ground operations to reduce turnaround time between flights. Efficient handling of baggage, quick boarding processes, and streamlined ground services contribute to cost savings.

Crew Utilization: Efficient crew scheduling and rostering can lead to significant cost savings. Ensure that crew members' duty hours are optimized to match flight schedules while adhering to safety regulations.

Training and Development: Invest in continuous training and development programs for employees to enhance their skills and knowledge, which can result in increased productivity and operational efficiency.

Inventory Management: Implement inventory control systems to manage spare parts and consumables efficiently. Avoid overstocking, which ties up capital, and ensure timely restocking to avoid delays due to part shortages.

Negotiating with Suppliers: Regularly negotiate with suppliers, including fuel providers, catering services, and ground handling companies, to secure favourable pricing and terms.

Lean Operations: Apply lean management principles to identify and eliminate waste in various processes, ranging from maintenance to ticketing, resulting in streamlined and cost-effective operations.

Technology Integration: Invest in advanced technology solutions for various operations, such as flight planning software, data analytics, and automated systems, to improve efficiency and reduce manual work.

Outsourcing Non-Core Functions: Consider outsourcing non-core functions, like IT services or certain maintenance tasks, to specialized service providers, which can often offer cost savings.

Sustainable Practices: Implement environmentally friendly practices, such as reducing single-use plastics, optimizing flight altitudes for fuel efficiency, and adopting sustainable supply chain practices, which can sometimes result in cost savings.

Rapid turnaround times: LCCs focus on minimizing the time between a flight's arrival and departure (turnaround time). This allows them to achieve higher daily aircraft utilization and reduce costs. Typically, turn around time for a LCC is 20 minutes compared to 35 /40 minutes for a FSC.

It's essential to conduct regular cost analyses, monitor key performance indicators (KPIs), and involve employees in identifying cost-saving opportunities. By continuously striving for efficiency and cost reduction while maintaining safety and service standards, a low-cost airline can enhance its competitiveness and profitability in the aviation market.

Revenue Management

Revenue management in a low-cost airline is a crucial aspect of their business model. The primary goal of revenue management is to optimize the revenue generated from the sale of airline tickets while minimizing costs and maximizing profitability. Low-cost airlines typically operate on thin profit margins, so effective revenue management is essential to their success.

Here are some key strategies and practices that low-cost airlines often employ in revenue management:

Pricing Strategies: Implement dynamic pricing models that adjust ticket prices based on demand and booking patterns. Utilize revenue management techniques to maximize seat occupancy and yield on each flight.

Customer Loyalty Programs: Launch a frequent flyer program or loyalty scheme to encourage repeat business. Rewarding loyal customers can increase retention rates and foster brand loyalty.

Digital Marketing and Distribution: Invest in a strong online presence and digital marketing to reach a broader audience. Partner with online travel agencies (OTAs) and global distribution systems (GDS) to expand distribution channels and increase ticket sales.

Competitive Pricing Analysis: Continuously monitor competitors' pricing and offerings to stay competitive in the market. Be agile in adjusting prices and packages in response to changing market dynamics.

Focus on Customer Experience: While maintaining a low-cost structure, strive to enhance the overall customer experience. Happy customers are more likely to recommend the airline to others, leading to increased word-of-mouth marketing.

Ancillary Revenue: LCCs can generate additional income by offering ancillary services like priority boarding, baggage fees, in-flight meals, and extra legroom seating. Ensure transparency in pricing and offer these services as optional add-ons during the booking process.

Peak and Off-Peak Pricing: Low-cost carriers often charge higher prices during peak travel times, such as holidays or weekends, and offer lower prices during off-peak periods to attract price-sensitive travellers.

Capacity Management: Effective management of seat inventory is crucial. They closely monitor booking patterns and adjust seat availability to ensure that the highest possible number of seats are sold at the most profitable prices.

Overbooking: Low-cost airlines may overbook flights to compensate for the number of no-shows they expect. However, they must be careful not to overbook too much, as this can lead to customer dissatisfaction and potential compensation claims.

Group Bookings and Corporate Deals: Low-cost airlines often offer discounted rates for group bookings and establish corporate deals with businesses to secure regular bookings.

Last-Minute Sales: Offering discounted prices for last-minute bookings can help fill unsold seats and generate additional revenue.

Data Analytics: Low-cost airlines heavily rely on data analytics to forecast demand, understand customer behaviour, and make data-driven decisions about pricing and inventory management.

Fare Bundling: They offer fare bundles that combine different services at a discounted rate compared to purchasing each service individually, encouraging customers to spend more.

Seasonal Pricing: Adjusting ticket prices based on seasonal demand patterns allows airlines to maximize revenue during high-demand seasons and attract more customers during low-demand periods.

Partnerships: Partnering with other airlines or travel agencies to expand their reach and tap into new markets.

Loyalty Programs: Low-cost airlines may have loyalty programs that reward frequent traveller’s with perks and discounts, encouraging repeat business.

Online Sales and Self-Service: LCCs heavily rely on online platforms for ticket sales, reservations, and check-in. This reduces the need for physical infrastructure and personnel, saving costs.

Cost-Efficient Marketing: LCCs often rely on cost-effective digital marketing and word-of-mouth referrals to attract customers, avoiding high advertising expenses.

The  revenue management in a low-cost airline requires a fine balance between maximizing revenue and keeping costs low. Through the use of sophisticated pricing strategies, data analysis, and ancillary revenue generation, low-cost carriers can effectively compete in the highly competitive airline industry.

In conclusion,  a successful low-cost carrier business model requires a delicate balance between cost efficiency, quality service, and revenue generation through complementary services .and creation of value for all the Stakeholders.