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Low cost airline industry

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Air travel remains a large and growing industry. It facilitates economic growth, world trade, international investment and tourism and is therefore central to the globalization taking place in many other industries. The airline industry exists in an intensely competitive market.

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Low cost airline industry

  1. 1. 1 All contents © 2016 Effectus Solutions Pvt Ltd (CrossProf.com). All rights reserved. Airtravel remainsa large andgrowingindustry.Itfacilitateseconomicgrowth,worldtrade,international investmentandtourismandistherefore central tothe globalizationtakingplace inmanyother industries. The airline industryexistsinanintenselycompetitive market. Whenair travel startedinthe 20th century it wasveryexpensive.Onlythe richpeople could afford travellingbyplane.Astime wentonbetterplaneswere built.Theywere faster,quieter andcouldcarry more people overlongerdistances.Inthe 1980s a new type of airline emerged,Budgetairlineswhich offeredticketsthatwere muchcheaperthanthose of other carriers.The budgetairlinesare alsocalled as ‘lowcost airlines’ (LCA) or‘no-frills’airlines. They givepassengers verybasicfacilityof travelling throughair withno luxuryof entertainment,food,magazines,free internetduringthe journey.
  2. 2. 2 All contents © 2016 Effectus Solutions Pvt Ltd (CrossProf.com). All rights reserved. Ryanair,an Ireland-basedBudgetairline,hasbeenknowntogive ticketsawayforfree.How canthese LCA be so cheap,howtheyoperate inorderto sustain?They manage thisby cuttingcosts whereverthey can. To ensure theirsurvival andprosperity, manytry tocut costs aggressivelyto reduce capacity growthand to increase loadfactors. Whenan aircraftis delayedata gate eitherwithenginesoff oron, the airline notonlyincursoperational costsbutalsohasto foregorevenue. Hence,airlinesalwaystryto maintainthe schedulesof the plane. Generally,theyattractpassengersfromdifferentmode of transportlike passengerstravellingthroughTrain- firstclassACorthrough FirstclassAC bus. Some measureswhichtheytake toreduce theircost are:  homogeneousmedium-sizedfleet The usage of youngerhomogeneousmedium-sizedfleetresultsinhighcostsavings. UsuallyBoeing737- 700/800 or Airbus319/320 resultsinlowerfuel, maintenance andpersonnel costs. Higherseatdensity inthese aircraftalsoresultsinlowerunitcostsfor all cost categories
  3. 3. 3 All contents © 2016 Effectus Solutions Pvt Ltd (CrossProf.com). All rights reserved.  Provisionof One Class of service LCA eliminatethe differentclassesinthe aircraftwithonlyone economy classconsistingof all basic seatingarrangement. Theynearlyabolishedthe businessclass. Thisincreasestheircapacityof carrying passengerperride.  Landingon SmallerorUn-congestedAirports Uncongestion,smallerairportsusuallycharge lowerfeesthan largerestablishedairports. Solanding there will save theircost. Theyattemptstocontrol airportaccess andservice chargesbyfocusingon airportsthat offercompetitive costterms. Butagainstthissometimesthere isnoalternativeforthe high cost airports.Eg: There isno alternative for Chatrapati ShivajiAirportatMumbai.Fleetneedstolandat thiscongested&expensive airportonly,if apassengerneedstogoto Mumbai.  Point-to-PointFlying LCA prefertoprovide direct,non-stoproutes againsthub-and-spoke model.Throughthisthey saves theircost of providingservicesforconnectingpassengers,includingbaggage transferandtransit passenger’s assistancecostsetc.  Sellingof Ticketsonline A lotof moneycanbe savedbysellingticketsontheirownwebsiteinsteadof througha travel agent.So LCA encourage theircustomerstobookticketthroughtheirwebsitedirectly.  Stickingtoshort-overhaul distances Flyingforshort-overhauldistance i.elessthan2to 3 hoursenhancesthe maintenance strategyof the airlines.The capacityof a fleetremainmaintainforlong-time due toflyingovershortdistances.  ReducingTurnaroundTime Reducingairplane turnaroundtimesmeansmore efficientairplane utilization,particularlyforairlines that emphasize point-to-pointroutes. So,airlinesalwaystrytoturnaroundthe plane assoonas possible. The turnaroundtime for a short-haul flightisdefinedasthe time foran aircraftto complete full off- loading,loadingandwhere required,cateringandcabincleaningprocedures(InternationalAirTransport Association,1997). The average turnaroundtime of anyLCA is 30 minutes.  Fuel Efficiency LCA triesto use theirfuel inaveryefficientwaywhichinvolvesbuyingof fuel-efficientfleet,fillingfuels fromplaceswhere fuelsare cheap(if the cheaperfuelsplacesfallsamongtheirroutes),etc  OperatingAircraftforMaximumHoursPer Day Theyusuallyoptforoperatingtheiraircraftformaximumtime. Anaverage 15-17 hrs/ day make maximumutilizationof theiravailable resourceandhelpthemtoearnmore.  OtherCost Reductions Higherdensityseating,aswellasbyeliminatingall formsof free in-flightservicessuchascatering, entertainmentduringthe flight,magazines,etc ormake themchargeable whendemandedcanreduce theircost.
  4. 4. 4 All contents © 2016 Effectus Solutions Pvt Ltd (CrossProf.com). All rights reserved. However,notall LCA have appliedall the above listedaspectsof savings. ForExample,EasyJet-abritish airline,isamongthose LCA thatoperate frommajor hubs(Amsterdam, Madrid,Munich,ParisCDG, etc.). The main challenge tothese LCA isto make theirbusinessmore cost-efficientwiththe low ticketfare. So, some budgetairline companieshave revolutionized itsbusinessmodel.Itissaidthatyou can’t make moneyinthe airline business.Hightaxesonfuel,absence of cheapersecondaryairportsandcrowded metro-airportsmake profitsimpossible.SomeLCA thatmade profitshave provedthiswrong. Letshave a lookat the operationsof some well-knownbusinessesinthisLow CostAirlineindustry. 1. SouthwestAirlines SouthwestAirlinesCo.isa majorU.S. airline headquarteredinDallas,Texas. Theyare the world’s first successful no-frillscarrier.Theypioneeredwaysof reducingoperatingcoststhatare now usedall over the world. Theymostlyfocusonkeepingtheiroperationssimple. Theyserve mainlydomesticairroutes consisting93 destinationsin40 states.Theyevenoperate totheirneighboringcountrieslikeAruba, Jamaica,and The Bahamas. andfive near-international countries. Toreduce costs, Southwestfill its planeswithmore seats andmake sure each flightis packedandflew itsaircraftmore oftenthanfull- service airlines. Southwestairlineshave afrequentflyerprogramme called‘RapidRewards’.This givesbenefitsto frequenttravellersof Southwest byhelpingthemtoearn pointsintermsof ‘miles’fromtheireach travel,whichcanbe utilize toearnthema free ticket orto upgrade theirclass. Thisattract more travellerstotravel fromthe particularairline. The airlinesflyonlyBoeing737s family fleetwhichresultsinall mannerof cost-savingefficiencies. They onlyneedtotrain theirmechanicsonone type of airplane. They alsoonlyneedextraparts of inventory for that one type of airplane.If incase theyhave toswapa plane outat the lastminute formaintenance, the fleetistotallyinterchangeable—all the airline’son-boardcrewsandgroundcrewsare already familiarwithit. SouthwestAirlines followsthe free-seatingphilosophywhich letyousitwhere youlike,they don’t assignseatson the flights.Theyprovideon-boardseatingarrangement where they distribute the available boardingpositionon first-come,first-servebasis.Passengersevenhave the optionstoupgrade theirboardingpassavailable onthe check-incounter,whichwillbe chargedheavily.AnevenBritish airwayfollows the same strategyof open-seating. The “free-seating”philosophy contributestothe reductionof operatingcostsbecause itencouragespassengerstoboardthe plane earlierandthus additionallyreduce delays. Italsoprovesbeneficial when incase if aplane isswappedout,anda new one’sbroughtinwitha differentseatconfiguration,there’snoneedtoadjustthe entire seating arrangementandissue newboardingpasses. Most of the LCA charge to check bagsthese days.But, Southwesthas resistedthe trendandoptedfor “bags fly free”policyasa goodmarketingstrategy. The Southwest’sflightsare generallypoint-to-point. The plane lands,goesthroughturnaround,andoftenheadsrightbackwhere itcame from. Southwesttargetsthe domesticbusinesscommuter,notthe globetrottingjetsetter.The airline has limiteditself intentionally,tokeepitsoperationsrunningsmoothly. Buttoovercome thisphenomenon and to attract international flyers, Southwestairlineshave undergone several codeshare agreements withotherairlines. Codeshare agreementisanaviationbusinessarrangement where twoormore flightsshare the same flights. There the carrieroperatingagivenflightallowsone ormore othercarriers
  5. 5. 5 All contents © 2016 Effectus Solutions Pvt Ltd (CrossProf.com). All rights reserved. to marketthisflightandissue ticketsforitas if theywere operatingthe flightthemselves. Throughthis agreementtwoormore airlines offertheirpassengersone-booking&one-ticket,andplace itscodeson a "codeshare"partnerairline'sflights In a departure fromitstraditional "goitalone"strategy,Southwestenteredintoitsfirstdomestic codesharingarrangementwith ATAAirlines,whichenabledSouthwestAirlinestoserve ATA marketsin Hawaii, Washington,D.C. andNewYorkCity.Theyalsosigneditssecondinternational codeshare agreementonNovember10, 2008, with Mexicanlow-costcarrierVolaris.The agreementallowed Southwesttosell ticketsonVolarisflights.AfteracquiringAirTranAirways in2011, Southwestbegana codeshare agreementwithAirTranonFebruary14, 2013. The agreementendedafterAirTranbecame fullyintegratedintoSouthwestonDecember28, 2014. Alongwithmaintaininglowfare,southwestairlinedoprovide non-alcoholicbeveragesandsome snacks as a complementary.However, theycharge foralcoholicdrinksandothersnacks. Theyprovide wi-fi and televisionfacilitiesonaprescribedrates. Accordingto V.P.of groundoperations of Southwestairline-ChrisWahlenmaier,they canturnaround planesinabout25 minuteswhichisindustryleading. A simplernetworkalsomeansfewer luggage gettinglostinthe shuffle. The simplestoperationsof Southwesthave proventhemawinner. Theseall factors contribute totheirloweroperatingcost,andso they inreturn are able to provide low faresto the passengers. Recently,SouthwestAirlinesquotedthattheyearnedarecord profitof $1.1 billionin 2014, the firsttime the Dallas-basedcarrierhasgone overthe $1 billionmark. 2. AirAsia Airlines OthernoteworthybusinessinLCA industryisMalaysianAirline Company,AirAsia.AirAsiareceived ‘World’sBest LowCostAirlines 2014’ award fromworldairline Skytrax .The airlines whichhasbeen successful inmostof the marketsit operatesin,followsthe businessmodel of offeringheavydiscount on advance bookings. Nootherlow-costcarrierhasas many destinationsinAsiaasthey do.Not onlythe numberof destinations,butthe frequencyof flights. Theyare servinga100 destinationsin22 countries. Apart fromdomestic,the airlinetravels inThailand,Indonesia, HongKong, Philippines,India, UAE, Australia,Brunei,China,Korea,Sri lanka, Bangladesh, japanandmanymore. Theyalsoearn a highshare of itsrevenue fromancillaryservices. Againstthe otherlow-costairlines AirAsiafollows hub-and-spoke model,havingKualaLampurastheirmainhub. Like Southwest,theytoo include frequentflyerprogramcalled‘BigLoyaltyProgramme’. AirAsiawhenwaslaunchedinIndia,gottheirfleet- AirbusA320deliveredattheirplace inChennai.They savedtheirstaff efficiencybynotsendingtheirofficersandcrew members outof the system toflying factoryat Toulouse,France.InIndiatoincrease theirrevenue they soughtpermissionfromForeign InvestmentPromotionBoard(FIPB) for renting and leasing of aircraft. The permissionalso includes air transportcarriers (of freight) and cargo handling.Byrenting,leasingandbycarryingair freightthey optimizedtheirrevenue tothe maximumwiththe use of theiravailable resources. AirAsiadoesn’thave acodeshare agreementwithanyairlines,asthey believe the relationshipbetween passengersandairline will be hamperdue tochange of brandin the journey. The otherstrategyabout whytheysell inexpensive ticketsisamainmethod inwhichtheytry to geta lotof usage out of the same
  6. 6. 6 All contents © 2016 Effectus Solutions Pvt Ltd (CrossProf.com). All rights reserved. cost of operatinga single airplane. Forexample,theyfly17hrsa daywhichis far more thantheir competitor. Empty Seats Options AirAsialaunchedEmpty SeatsOption,whichmeansthatforRMB100 (US$16), you can occupythe full row of three seatsif there are no otherpassengers. If the airline endsupsellingall the seats,they give moneyback to passengers.If the seatsare leftunoccupied,company getanextraRMB 100. By doing this, they estimate thatthey canearn upto US$1 millionin2012. Theyalsoadoptedthe unique model where they burnlessfuelperpassengerthanotherairlines. They burn twolitersof fuel forone passenger100 kilometers.Fortraditional airlines,it'sfourliters. 3. IndiGoAirlines The nextbigexample isof IndianbasedAirlines,IndiGo. InAugust2009, while the otherairlineswere bleedingfrommile-highdebtsanddecliningnumberof passengers,IndiGowasmakingmoney. The airline won‘CentralAsia & India’sBestLow Cost Airlines 2014’ awardfrom worldairline Skytrax. They are point-to-pointoperatorconnectingmultipledestinationsinAsia-Pacificandthe Middle East. The airlinesalso servesselectedinternationaldestinations,namely Dubai,Muscat,Kathmandu,Singapore and Bangkok. They spendvery low on marketing and advertising.IndiGohassix-yearsale andlease backagreements for mostof itsplanes.The leasertakesthe planesbackafterthe lease andthe airline caninductabrand newone inits place.Takingtheirfleetonlease savestheirhuge amountof moneyforthe future maintenance andrepair. Theyoperate AirbusA320family fleetwhichconsistsof highdensityseating. Theyhave single aircraftwitha verysimple fare structure. The airline hasbeenable toplanits operationstothe lastdetail overthe pastfour years.Daysbefore anaircraft isdeliveredtheyare well- plannedaboutwhere tooperate itandusuallyhave begunsellingtickets. IndiGowasamong the firstairlinestohave the aircrafttaxi to the terminal withone engine,shutting downthe secondengine tosave fuel. Anotherexampleisof pilotsflyingathigherspeeds(andburning more fuel) toreachMumbai quickly,onlytospendthe nexthalf-hourcirclingthe airport.Thiswas curtailedandfuel burnreduced. AirbuscustomersinIndia,includingAirIndiaandKingfisher,sendtheir pilots,crewandengineerstoToulouse tothe plant.ButIndiGopreferstohave the planesdeliveredin Delhi.Thiscomesata marginallyhigher cost;the advantage isthat twosetsof pilotsandcrew are not out of the systemforthe 10-15 days. On the network, IndiGo is sticking to routeswith an averagestagelength of 1 hour,30 minutes. Ithas dailyflightsonall itsroutes,andisthe largestoperatoron a thirdof these routes.Italignsflighttimings to match connectionsfromMumbai andDelhi.Ithas noloyaltyprograms,yethalf of those flyingare repeatcustomers. The IndiGoevenhave luxuriouslounge facilities tocaterto theirpremium customerswhoallow themto escape fromthe crowd and work& relax inpeace and quietness.Servicesinclude hotbuffet meals/snacks&non-alcoholicbeverages,internetworkstations,wi-fi andavarietyof newspapersand magazineswhichischargeable.IndiGoalsooffersticketlesstravel;thatmeansyoudon’t needtocarry a ticketwhile boarding,youjustneedtocarry the confirmationpage printoutandyourcredit/debitcard fromwhichyou have bookedyourticket.
  7. 7. 7 All contents © 2016 Effectus Solutions Pvt Ltd (CrossProf.com). All rights reserved. Challenges Highfuel cost, governmenttaxes,airportchargesaddstothe big challengesforthe low costairlines. These budgetairlines are inflirtysituationswhentheyleftwithnooptionsapartfromtryingtocompete withthese highcosts.The whole workingof low costcarrieris dependentontheiroperations;soif they lack a small gapbetweenthem,theirwhole operationsgoesininefficientway. Theyare alsofacinga verytoughcompetitionfromfastrailwaytransport,whichare providesthe same kindof service asair- transport. In conclusionwe cansay that, these lowairlinesprovedthatitispossible togrow andkeepyourmargins high. LCCs are beingaffectedbyagreatercompetitive pressure,whichrequires themtofollow a differentstrategyotherthana simple cost-leadershipstrategy. Todifferentiatethemselvesfromother LCCs, some low-costoperatorsare adoptingdifferentbusinessmodelsthatinclude,forinstance,shifting to primaryairports,startinghubbingactivities,providingmealsandotherin-flightservices,andentering alliances.
  8. 8. 8 All contents © 2016 Effectus Solutions Pvt Ltd (CrossProf.com). All rights reserved. airline,lowcost,carrier,hub andspoke,model,pointtopoint,airport,airasia,southwest,IndiGO,Ryan, in-flight,entertainment,luxury,economy,business,firstclass,cost,revenue,profit, lounge,empty seats,free seating,openseating,loyalty,bigflyerprogramme,rapidreward Ref: http://www.economist.com/blogs/economist-explains/2013/10/economist-explains-13 http://www.ijtte.com/uploads/2013-03-25/5d57e65e-a0a9-482fIJTTE_Vol%203%281%29_7.pdf http://www.slate.com/articles/business/operations/2012/06/southwest_airlines_profitability_how_the _company_uses_operations_theory_to_fuel_its_success_.html http://www.slate.com/articles/business/operations/2012/06/southwest_airlines_profitability_how_the _company_uses_operations_theory_to_fuel_its_success_.html http://aviationblog.dallasnews.com/2015/01/southwest-airlines-tops-1-billion-in-annual-profits-for- first-time.html/ http://www.dnaindia.com/india/report-leading-low-cost-carrier-airasia-to-start-operations-from- mumbai-2021664 http://www.thehindubusinessline.com/news/air-asia-indias-first-airbus-a320-arrives-in- chennai/article5818119.ece http://archive.indianexpress.com/news/air-asia-tata-group-jv-seeks-permission-for-aircraft- leasing/1082462/1 http://www.forbes.com/2010/11/03/forbes-india-how-rahul-bhatia-found-indigo-gold.html Morandi,V.,et al.,Codesharingagreementsbylow-costcarriers:Anexplorativeanalysis,Journalof Air Transport Management(2014), http://dx.doi.org/10.1016/j.jairtraman.2014.10.004 http://swamedia.com/releases/southwest-airlines-and-airtran-airways-begin-connecting-networks http://www.swamedia.com/releases/e89b5d36-734b-55cc-c781-936d4b4663a0?search=ata+airlines http://www.blogsouthwest.com/news/swa-to-offer-online-link-to-volaris-service-on-southwestcom/ https://www.southwest.com/html/travel-experience/boarding-your-flight/ http://www.britishairways.com/en-gb/information/seating/choosing-your-seat https://www.southwest.com/wifi/?int=GFOOTER-PRODUCTS-WIFI http://travel.cnn.com/shanghai/life/airasia-x-says-codeshare-strategy-so-last-century-117891 https://content.goindigo.in/Corporate/conditions-of-carriage#inner-10-2 http://www.aviation.unsw.edu.au/downloads/papersWu/1_JATM_2000.pdf

Air travel remains a large and growing industry. It facilitates economic growth, world trade, international investment and tourism and is therefore central to the globalization taking place in many other industries. The airline industry exists in an intensely competitive market.

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