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The Report of Low-Cost Carriers Table Of Content 1. 2. 3.
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………………………… 2 The Low-cost carriers Business Model ………………………………………………………………………………………… Low-Cost Advantages ……………………………………………………………………………………………………………….. 5 Low-cost industry in Hong Kong ………………………………………………………………………………………………… 7 SWOT Analysis of Hong Kong Aviation Market …………………………………………………………………………. 9 Conclusions …………………………………………………………………………………………………………………………….. Recommendations …………………………………………………………………………………………………………………. 10 References…………………………………………………………………………………………………………………………….. 11 Page 1 of 12 1. Abstract The Low-Cost Carriers (LCCs), also known as no-frills airlines, the Low-cost carriers business model have been very successful operating throughout the USA, Europe and southern Asia since 1990s.They have completely changed the way of people fly, attracting new customers which would otherwise not travel at all, or use other modes of transport by land or sea. They also helped redesign the entire aviation world, sending a powerful wakeup call to the legacy airlines (Market Share Pte Ltd 02/2005). In this report we would like to provide you the essential background information, the typical low-cost carriers business model, low cost advantages between classic airlines and low-cost carriers.The final part of this report will look into the Hong Kong Market, a SWOT analysis can be conducted to figure out the internal factors such as strengths and weaknesses, and external opportunities and threats that may influence the success of low-cost carriers industry. 2. Background information In general, Low-cost carriers also known as No-frills or discount airline, which create totally new product and choice of services to customer, simple product, low fare, point-to-point markets.However, most Low-cost carriers differentiate themselves by providing passengers more services, like seat allocation; special meal, if they are willing to pay for it, or operating different aircraft model in order to extend their long-haul services. The concept of low-cost carrier originated in the United State in 1949. The first successful low-cost carrier was Pacific Southwest Airlines, which pioneered the concept. However, this credit has been incorrectly given to Southwest Airlines, which began service in 1971 (De Groote 2005).And Southwest Airlines is the only one airline to have been consistently profitable in every year of operations since 1973 (Southwest Airlines). Following the successful story in the United States, the expansion of Low-cost carriers to Europe occurred in 1990s. Successful operations began in Great Britain with the Irish company Ryanair. Not only in Europe, Low-cost carriers also developed in Asia and Oceania from 2000. In 2006, new Low-cost carriers were announced in Saudi Arabia and Mexico, which led the Low-cost carrier model to worldwide (De Groote 2005). Page 2 of 12 3.The Low-cost carriers Business Model In general, the typical low-cost carrier business model is based on: • a single passenger class • a single type of airplane • a simply fare scheme • free seating • direct, point to point with no transfers • flying to cheaper, less congested secondary airports • short flight (less than 4 hours) and fast turnaround times • No in-flight catering and other complimentary services, and replaced by optional paid-for in-flight food and drink. However, not every low-cost carrier adopts all features of the above model, some low-cost carriers differentiate themselves with allocated seating.Some others operate more than one aircraft type in order to extend to long-haul flight such as Air Asia (HKSAR). The low-cost carrier business design could be defined by three elements (MERCER Management Consulting, 2002). Page 3 of 12 Simple Product: It focuses on getting passengers from point A to B, no transfer which reduce the ground time. No meals, drinks served on board, but it can be arranged by extra payment and request in advance. The aircraft have narrow seating in order to greater capacity, offer only economy class flights.No seat allocations and no in-flight entertainment services. No sales promotions and no frequent-flyer programmes (De Groote 2005). Positioning: It targets non-business passengers, esp. leisure travel and price-conscious business passengers. The low cost model best works on short-haul point-to-point traffic with high frequencies. Fly to secondary airport which are cheaper landing and handling fee. They have aggressive marketing strategies and compete with other transportation carriers, like road and railway (De Groote 2005).Low Operating Costs: It keeps a very simple organization structure and operating costs are kept to the bare minimum with low wages, low airport fees by using non-primary airports, low costs for maintenance and cockpit crew training which are typically outsourced. No requirement for standby crews due to a homogeneous aircraft fleet. Requires less crews and provides greater flexibility, to achieve high resource productivity. No cargo, no hub services, short cleaning time in order to kept minimal ground time.Higher percentage of ticket sales thru online selling which can avoid handling and commission charges to travel agents (De Groote 2005). Page 4 of 12 4. Low-Cost Advantages Low-cost carriers must maintain a sustainable low-cost advantage over their full-service competitors. Low-cost carriers must ensure that their cost per passenger-km continue to be 50 per cent or more below those of full-service airlines and continuing to reduce their own costs (HONGWEI JIANG 2007). Below table lists the differences between low-cost and classic airlines in order to show you the low cost advantages.Low Cost Carrier Classic airlines Low Cost Advantages Utilization Fast turnarounds (up to Turnaround slowed down Higher aircraft 25 min. ), reduce the time by use of major airports reduced on ground traffic (approx. 45 min. ) with large amount of maximize profits utilization, fees, parking Frills No-frills services, no free Entertainment in-flight other catering, Lower ancillary costs, less additional and programme, quick check complexity, business-class, catering complimentary in, lounges, paper tickets, income services, no free luggage. AirportsPrimary and secondary International airports airports Avoid air traffic delays and take advantage of lower landing fees Page 5 of 12 Low Cost Carrier Classic airlines Low Cost Advantages Fleet Standardized fleet, only Various aircraft types Lower one aircraft type, usually (B747, economy A320), class simple light more B777, classes, maintenance, lower A340, fuel cost (more weight = more but spare parts and training costs, simpler swopping around of flight staff, higher capacity utilization (B737, A380) which can equip fuel = increased costs), lower usually bulky and heavy weight aircraftFare Simple fare scheme, such Round-trip fare as charging half one-way that of tickets Unlimited return date, lower reschedule costs round-trips Retail Direct Sales via Internet Most tickets sold via Lower as main distribution travel agencies and by agent the airline itself channel distribution commission) (travel costs, lower complexity Network Point to point services, Long haul and short Lower no transfers, short routes haul transfers routes complexity, higher with capacity utilization Personnel employees working in High basic salaries multiple outsourcing roles or reduceLower fixed personnel costs huge overheads Page 6 of 12 5. Low-cost industry in Hong Kong Hong Kong is a major international and regional aviation centre. The Hong Kong International Airport is one of the business airports in the world. In 2007, there were some 85 international airlines operating about 5700 scheduled passenger and all-cargo flights each week between Hong Kong and some 155 destinations worldwide. There were also an average of approximately 84 non-scheduled passenger and cargo flights operating each week (HKSAR 2008).Hong Kong is somewhat unique along with Singapore where both so called “flag” carriers Cathay Pacific; Singapore Airlines are so well entrenched and have virtual monopolies particularly in Singapore. Singapore airlines and Silkair are owned by the same holding company and such as help each other. Not so in the case of Cathay Pacific and Dragonair which are both legacy airlines for a low-cost carrier to succeed in Hong Kong it would need the support of one or both major operators in Hong Kong. Hong Kong is served by low-cost carriers particularly from China and Malaysia, Singapore and India.But with Page 7 of 12 Cathay Pacific and Dragonair monopoly it would be a daunting task. A startup low-cost airline must ask and answer some critical questions to enable it to define its strategies: • What destinations will most benefit to our target customers? • Are these passengers willing to travel to secondary airport which may cause them longer travel times to and from their desired destinations? • Do these passengers prefer no in-flight services, like food and drink? • Do these passengers prefer well-known branded airlines? How should we pace our growth? • How should we position our new airline versus the existing airlines? Having said that, especially at this particular time with the world economic downturn, there are some positive issues: a) aircraft availability is good and lease charges are cheap at this time; b) LCC would certainly be in better shape to recover after the economic recession as their overheads will still be considerably less than the legacy carriers; c) passengers will still be looking for cheap flights for holidays. Page 8 of 12 . 1. SWOT Analysis of Hong Kong Aviation Market SWOT analysis can assist to figure out the internal factors such as “strengths” and “weaknesses”, and external “opportunities” and “threats” that may influence the success of low-cost carriers industry. STRENGTHS WEAKNESSES Traditional strength as a seaport and maritime Hong Kong’s status as an aviation hub is facing keen centre, we have built a thriving logistics industry competition from the emergence of new airports that has become one of the pillars of Hong Kong’s economy.As an aviation hubs, it also helps another pillar of our economy, namely tourism, by bringing ever more visitors to Hong Kong and helping us become the world’s 7th most popular tourist destination, and the only single-city destination in the top 10. OPPORTUNITIES THREATS with large capacity in the region. To stay ahead we will continue to expand and upgrade our facilities, and enhance our operational efficiency to provide better services to the traveling public and the business community.To expand the “home-market” of the Hong Kong Hong Kong’s economy posed by the dramatic International Airport, we are pursuing initiatives to increase in oil prices – airline industry’s response to boost our surface connections with the Mainland. A new land connection with Shenzhen, one of the the fuel price increase, by reducing the number of flights and streamlining routes, we worried about most prosperous Chinese cities situated right across this, given the important role played by the aviation our border. This new link will more than triple the sector in Hong Kong’s growth. apacity for cross-boundary traffic, underpinning further passenger and cargo growth of our own airport. 6. Conclusions The low-cost carrier revolution has injected a dose of democracy into the travel world, created a totally new product for the market, no frills, no food, no drinks, but the most important is low fares. The low-cost carriers with targeted market and networks, have less ground time, increased aircraft utilization, reduced congestion, and significantly improve their productivity, and still maintain compliance with the required safety regulations and standards.The low-cost carriers would certainly be in better shape to recover after the economic recession as their overheads will still be considerably less than the legacy carriers. Besides, passengers will still be looking for cheap flights for business trips and holidays. Page 9 of 12 7. Recommendations Perhaps the most important point of all is that once the operator has chosen its “business model” for the way it wants to operate and the service levels it wants to provide for its customers, it should then adhere to its business model, unlike what we saw at Oasis Hong Kong Airlines (ceased operations on the 9 April 2008) where they went from he “low cost minimal free service operator” to giving more and more “goodies free of charge to passengers”. This significantly increased the overheads without increasing the yield from the ticket prices, all in all a recipe for disaster! I am not saying that the operator shouldn’t enhance or massage its product to suit market and operating conditions but radical changes do not work without increasing ticket revenue, which returns the low cost operator back to being a “legacy carrier”.Remember, all product enhancements are usually bulky and heavy and the increased weight that has to be carried on the aircraft will increase fuel burn and the fuel cost equation for the operator “MORE WEIGHT = MORE FUEL = INCREASED COSTS”! Engineering/flight crew “cockpit and cabin crew” are two of the biggest operating costs to an operator and as such must be the most vigilantly controlled without compromising safety. OUTSOURCING is the keyword and most cost effective solution for lost cost operations.For every staff member employed by the operator there are huge overheads e. g. salary, medical insurance and all the mandatory benefits for staff that may be required under the laws of the country where the operator is based and of the countries to which it operates. Page 10 of 12 8. References AIR SCOOP (APRIL 2007) SWOT Analysis of Low Cost Carrier Industry WWW. Available from: http://www. air-scoop. com/downloads/SWOT_Low-Cost-Carriers_Air-Scoop. pdf Accessed 21/06/09 AIRBUS S. A. S. (2007) Global Market Forecast 2007-2026, France. Downloaded 20/06/09 CENTRE FOR ASIA PACIFIC AVIATION (29/05/09) AirAsia SWOT Analysis: Tough second quarter ahead, but fundamentals solid WWW. Available from:http://www. centreforaviation. com/news/2009/05/29/airasia-swot-analysis-tough-second-quarter-ahea d-but-fundamentals-solid/page1 Accessed 05/08/09 CHERIE LU, CHANG JUNG CHRISTIAN UNIVERSITY IN TAINAN, Aerlines Magazine e-zine Edition, Issue 34, The Low Cost Model and Strategies for Taiwanese Airlines WWW. Available from: http://www. aerlines. nl/issue_34/34_Lu_et-al_Low-cost
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