Low-cost carrier

Lion Air and AirAsia airplanes in Ngurah Rai Airport, Bali, two competing low-cost carriers in the Southeast Asian market

A low-cost carrier or low-cost airline (also known as no-frills, discount or budget carrier or airline, or LCC) is an airline that generally has lower fares and fewer comforts. To make up for revenue lost in decreased ticket prices, the airline may charge for extras like food, priority boarding, seat allocating, and baggage etc. Currently the world's largest low-cost carrier is Southwest Airlines, which operates in the United States and some surrounding areas.

The term originated within the airline industry referring to airlines with a lower operating cost structure than their competitors. While the term is often applied to any carrier with low ticket prices and limited services, regardless of their operating models, low-cost carriers should not be confused with regional airlines that operate short flights without service, or with full-service airlines offering some reduced fares.

In due course, some airlines have actively sought to market and advertise themselves as low-cost, budget, or discount airlines while maintaining products usually associated with traditional mainline carrier's services which often result in increased operational complexity. Among these products, which tend to increase complexity and reduce efficiency, are: preferred or assigned seating, catering other items rather than basic beverages, differentiated premium cabins, satellite or ground-based Wi-Fi internet, and in-flight audio and video entertainment. More recently, the term "ultra low-cost carrier" has been designated to differentiate some low-cost carriers, particularly in North America where traditional airlines increasingly offer a similar service model to low-cost carriers.

Business model

A Wizz Air Airbus A320 in Katowice International Airport.

A SunExpress Boeing 737-800 in Zurich Airport.

Low-cost carrier business model practices vary widely. Some practices are more common in certain regions, while others are generally universal. The common theme among all low-cost carriers is the reduction of cost and reduced overall fares compared to legacy carriers.

Traditional airlines have also reduced their cost using several of these practices.

Common practices

Aircraft

Most low-cost carriers operate aircraft configured with a single passenger class, and most operate just a single type of aircraft. These airlines tend to operate short-haul flights which complements the range of narrow-body (single aisle) planes, making a longer-range wide-body redundant (wide-body planes are also too capital-intensive investments for low cost carriers).

In the past, low-cost carriers tended to operate older aircraft purchased second-hand, such as the McDonnell Douglas DC-9 and older models of the Boeing 737. Since 2000, fleets generally consist of the newest aircraft, commonly the Airbus A320 and Boeing 737. Although buying new aircraft is usually more expensive than second-hand, new planes are cheaper to operate in the long run since they are extremely efficient in terms of fuel, training, maintenance and crew costs per passenger.

In 2013, ch-aviation published a study about the fleet strategy of low-cost carriers. They summarized that major LCCs that order aircraft in large numbers get huge discounts, and due to this they sell their aircraft just a few years after delivery at a very high price. That saves a lot in operative costs.

Aircraft often operate with a minimum set of optional equipment, further reducing costs of acquisition and maintenance, as well as keeping the weight of the aircraft lower and thus saving fuel. Ryanair seats do not recline and do not have rear pockets, to reduce cleaning and maintenance costs. Others have no window shades. Pilot conveniences, such as ACARS, may be excluded. Often, no in-flight entertainment systems are made available, though many US low-cost carriers do offer satellite television or radio in-flight. It is also becoming a popular approach to install LCD monitors onto the aircraft and broadcast advertisements on them, coupled with the traditional route – altitude – speed information. Most do not offer reserved seating, hoping to encourage passengers to board early and quickly, thus decreasing turnaround times. Some allow priority boarding for an extra fee instead of reserved seating, and some also allow only the emergency exit rows (which have longer leg room) to be reserved, again at an extra cost.

Bases

A Norwegian Air Shuttle Boeing 737-800 in Trondheim Airport

Like the major carriers, many low-cost carriers develop one or more bases to maximize destination coverage and defend their market. Many do not operate traditional hubs, but rather focus cities.

Simplicity

An Airbus A319 of Germanwings and an Airbus A320 of Air Berlin at Zurich Airport. Both carriers are among the largest budget airlines in Germany.

Airlines often offer a simpler fare scheme, such as charging one-way tickets half that of round-trips. Typically fares increase as the plane fills up, which rewards early reservations. In Europe (and early in Southwest's history) luggage is not transferred from one flight to another, even if both flights are with the same airline. This saves costs and is thought to encourage passengers to take direct flights. Tickets are not sold with transfers, so the airline won't need to take responsibility for a delay. Low-cost carriers often have a sparse schedule with one flight per day and route, so it would be hard to find an alternative for a missed connection. Modern US-based low-cost carriers generally transfer baggage for continuing flights, as well as transferring baggage to other airlines. Some airlines eschew the use of gates that include jetways, since these generally cost more to lease.

Often, the low-cost carriers fly to smaller, less congested secondary airports and/or fly to airports in off-peak hours to avoid air traffic delays and take advantage of lower landing fees. The airlines tend to offload, service and re-load the aircraft (turnaround) in shorter time periods, allowing maximum utilization of aircraft.

Non-flight revenue

Low-cost carriers generate ancillary revenue from a variety of activities, such as à la carte features and commission-based products. Some airlines may charge a fee for a pillow or blanket or for carry-on baggage. In Europe, it is common for each and every convenience and service to have an additional charge. AirAsia, for example, generates revenue by courier services and hotels as well as flights.

Allegiant Air is a large United States low-cost airline.

Limit personnel costs

Ryanair and easyJet airplanes in John Lennon Airport, Liverpool, two competing low-cost carriers in the European market

Low-cost carriers are intended to be low-cost, so in many cases employees work multiple roles. At some airlines flight attendants also work as gate agents or assume other roles (limiting personnel costs). Southwest Airlines is well known for using fuel hedging programs to reduce its overall fuel costs. Check-in at the gate of luggage requires fees, as it requires addition to the weight calculation and last-minute baggage handling.

Online check-in is becoming common, again in the interest of avoiding personnel costs.

Where permissible, some airlines have a disinclination to handle Special Service passengers, for instance by placing a higher age limit on unaccompanied minors than full-service carriers. Often these airlines offer no refunds or transfers to later flights in the event of missed flights; if the aircraft leaves on time without a passenger who arrived late from a connecting flight, the passenger will have to buy a wholly new ticket for the next flight.

Many years ago, when there were national monopolies in most countries, the crew could negotiate good pay rises and good pension benefits (something that cost money for the airlines only in the long term). Most passengers were business travelers who paid whatever the ticket price was. In recent years, new low-cost carriers could employ new staff with lower salaries, especially for cabin crew. The traditional airlines can't get rid of old salary deals with their staff and pension deals with their retired staff, and therefore have higher personnel costs. In some cases airlines have gone bankrupt (e.g. Alitalia, Sabena and Swissair), and new airlines were started, replacing them. In that case a more suitable staff profile can be recruited with new salary deals.

Traditional carriers follow the low-cost carriers by enabling web check-in and encouraging machine check-in at the airport, and generally reducing ground personnel cost. Many airlines are limited to whatever their hub airports decides. Ryanair is special by more or less having its own airports, when it can demand large cost reductions and good deals with the airport owners.

The number of crew members follow international conventions-one flight attendant per 50 passenger seats and two pilots are always needed. No carrier can save money on reducing the flight crew. The number of ground crew can be reduced.

Principles of operation

A Gol Transportes Aéreos Boeing 737-800 in Afonso Pena International Airport

At IATA, a LCC operation is defined as including the following characteristics, at least to some degree,

• Primarily point-to-point operations.
• Serving short-haul routes, often to/from regional or secondary airports.
• A strong focus on price sensitive traffic, mostly leisure passengers.
• Typically one service class only, with no (or limited) customer loyalty programmes.
• Limited passenger services, with additional charges for some services (e.g. on-board catering).
• Low average fares, with a strong focus on price competition.
• Different fares offered, related to aircraft load factors and/or length of time before departure.
• A very high proportion of bookings made through the Internet.
• High aircraft utilisation rates, with short turnaround times between operations.
• A fleet consisting of just one or two types of aircraft.
• Private-sector companies.
• A simple management and overhead structure with a lean strategic decision-making process.

While low-cost airlines all differ in their service offerings, by definition they feature some or most of the following principles:

• Standardized fleet (lower training, maintenance costs; purchasing aircraft in bulk)
• Remove non-essential features (non-reclining seats, no frequent flyer schemes)
• Use of secondary airports (lower landing fees, marketing support)
• Abandon airports which have too high costs
• Rapid turnaround (less time on the ground, more flights per day)
• Keep aircraft on the ground for very short time (less unprofitable standstill)
• Online ticket sales (avoid call centres or agents, charge extra for those)
• Online check-in (fewer check-in desks). Charge for desk check-in.
• Impose baggage charges (a manned bag drop desk is needed for bags, and of course people loading and unloading the aircraft. This also allows extra revenue for checked bags, hidden when e.g. a family discusses which airline to use). Some carriers charge extra for baggage on non-flexible tickets (mostly tourists) but include the baggage charge in the ticket price for flexible tickets (mostly business travelers, who often have no checked baggage).
• Jetways not needed (avoiding extra airport cost) (Stansted, the main Ryanair hub, has jetways, and they are needed for very large airports in order to avoid chaos on ground)
• Have staff do multiple jobs (cabin crew also check tickets at the gate, clean aircraft)
• Hedge fuel costs (buying fuel in advance when it is cheaper)
• Charge for all services (including on-board services, reserved seating, and extra baggage)
• Do not use reserved seating (which slows down the loading of the aircraft), or charge extra for reserved seating, or for early boarding.
• Fly point to point (passenger transfers to other flights are not accommodated, no compensation for missed connections)
• Carry very little extra fuel (reducing the weight of the aircraft)
• Have the plane outfitted with cost-cutting modifications as winglets
• Route planning before aircraft arrives at airport (saving time on the ground)
• Market and sell destination services such as hotels and rental cars and get royalty from that.

Innovative practices

A Nok Air Boeing 737-800 take-off in Phuket International Airport

Some airlines resort to very innovative practices. While many airlines these days are working with aircraft manufacturers, airlines such as AirAsia goes a step further, working with airports to develop specially designed low-cost terminals that require far less maintenance and overhead. The lower maintenance cost for the airport is passed on to the airline, and in turn to the customer. Other practices that might be included to reduce expenses are the use of UAVs for aircraft checkups, the use of tablet PCs instead of logs on paper (reduces airplane weight), and smartglasses for the pilot.

Differentiation

Ryanair and WizzAir airplanes at Glasgow Prestwick Airport, two competing low-cost carriers in the European market

Not every low-cost carrier implements all of the above points. For example, some try to differentiate themselves with allocated seating, while others operate more than one aircraft type, still others will have relatively high operating costs but lower fares. JetBlue for instance has in-flight entertainment (i.e. LiveTV) in every passenger seat. Other airlines are limited on what points they can implement based on local laws, such as Ryanair cannot remove window blinds from its aircraft as they are required to be fitted by the Irish Aviation Authority. As supply increases, this sort of differentiation by brand is one of the most important criteria for the future success of low-cost carriers, since price competition alone is not believed by many experts to be enough, given the number of carriers.

As the number of low-cost carriers has grown, these airlines have begun to compete with one another in addition to the traditional carriers. In the US, airlines have responded by introducing variations to the model. Frontier Airlines and JetBlue Airways advertise satellite television. Advertiser-supported Skybus Airlines launched from Columbus in 2007, but ceased operations in April 2008. In Europe, the emphasis has remained on reducing costs and no-frills service. In 2004, Ryanair announced proposals to eliminate reclining seats, window blinds, seat headrest covers, and seat pockets from its aircraft.

Sri Lanka's budget carrier Mihin Lanka and India's Air India Express offers a complimentary meal with beverages on most of its flights.

Ultra Low-Cost Carrier

A secondary term "ultra low-cost carrier" (ULCC) has been used to differentiate some low-cost airlines whose model deviates further from that of a standard low-cost carrier, with ultra low-cost carriers having minimal inclusions in the fare and a greater number of add-on fees. Spirit Airlines and Allegiant Air have been most commonly referred to as Ultra Low-Cost, with Frontier Airlines in 2015 announcing a new strategy to reposition themselves as ultra low-cost. Canada Jetlines specifically refers to itself as seeking to apply "Ultra-Low Cost Carrier operating principles".

Pricing policy

The pricing policy of the low-cost carriers is usually very dynamic, with discounts and tickets in promotion. Like other carriers, even if the advertised price may be very low, it often does not include charges and taxes. With some airlines, some flights are advertised as free (plus applicable taxes, fees and charges). Depending on the airline, perhaps as many (or as few) as ten percent of the seats on any flight are offered at the lowest price, and are the first to sell. The prices steadily rise thereafter to a point where they can be comparable or more expensive than a flight on a full-service carrier.

Most airlines charge additional taxes and fees on their tickets. Some low-cost airlines have been known to charge fees for the seemingly ridiculous, such as levying a credit card charge where credit card is the only payment method accepted. Many consumers and governments consider this to be fraudulent, but some still allow this and similar practices.

Traditional perceptions of the "low-cost carrier" as a stripped-down, no-frills airline have been changing as new entrants to the market adapt the business model in new ways. Spirit Airlines, Frontier and JetBlue offer assigned seating and premium cabins. JetBlue offers live in-flight television, and Southwest Airlines offers in-flight WiFi. Some airlines even have services not available on some legacy carriers, such as mood lighting, found in Virgin America.

Criticism

Some elements of the low-cost model have been subject to criticism by governments and regulators, and in the UK in particular the issue of "unbundling" of ancillary charges by both low-cost carriers and other airlines (showing airport fees, taxes as separate charges rather than as part of the advertised fare) to make the "headline fare" appear lower has resulted in enforcement action. Believing that this amounts to a misleading approach to pricing, the United Kingdom's Office of Fair Trading (OFT) in February 2007 gave all carriers and travel companies three months to include all fixed non-optional costs in their basic advertised prices. Although the full-service carriers had complied within the specified timescales, the low-cost carriers have been less successful in this respect, leading to the prospect of legal action by the OFT.

Many low-cost carriers show a zero cost for some flights. Most charge additional fees for airport check-in, baggage check-in, "handling charges", seat allocation, more legroom, priority boarding and credit card processing. These charges are non-refundable even in the case of cancellation by the airline. "Hidden" charging has been satirised by the vocal trio Fascinating Aïda in a song called "Cheap Flights", describing a fictional flight (the airline in question is strongly implied to be Ryanair) from London Stansted Airport to Tralee in Ireland, that was especially popular at the Edinburgh Festival Fringe in 2011.

Some destination cities lie relatively distant from the airports used by the low cost airlines, who do this in order to save costs such as airport landing fees. Examples of this are Hahn, Weeze and Girona airports that are advertised as the destinations Frankfurt, Düsseldorf and Barcelona, respectively, even though the airports are from 50 up to 90 kilometers away. This has drawn some criticism or scorn, mostly from competing airlines flying to the airports closer to the destinations.

History

While tour and package operators have been offering lower-priced, lower-frilled traveling for a large part of modern airline history, not until during the post–Vietnam War era did this business model really escalate and take off. Through various ticket consolidators, charter airlines, and innovators in lower-frills flying, such as Channel Airways and Court Line, the traveling public had been conditioned to want to travel to new and increasingly further away and exotic locations on vacation, rather than short-haul trips to nearby beach resorts.

The world’s first low-cost airline was Pacific Southwest Airlines, which started intrastate flights connecting Southern and Northern California on 6 May 1949. PSA's light-hearted atmosphere and efficient operations were a runaway success early on, and inspired a number of low-cost start-ups across the United States, beginning in the mid-60s. Herb Kelleher studied the success of PSA, and copied their culture closely when he established Southwest Airlines.

The first airline to offer cheaper transatlantic fares was Icelandic airline Loftleiðir in 1964, often referred to as "the Hippie Airline". Many young Americans travelled to Europe after graduation, to experience the "old-world culture", and they were more concerned with getting there cheaply than comfortably or even exactly on time. Loftleiðir were not famous for speed or punctuality, but flying with the company became a sort of rite of passage for those young "hippies", one of whom was Bill Clinton, later US President.

Advert for Loftleiðir Icelandic Airlines on Fifth Avenue, New York in 1973

The first airline offering no-frills transatlantic service was Freddie Laker's Laker Airways, which operated its famous "Skytrain" service between London and New York City during the late 1970s. The service was suspended after Laker's competitors, British Airways and Pan Am, were able to price Skytrain out of the market.

In the United States, airline carriers such as America West Airlines, which commenced operations after 1978, soon realized a cost of available seat mile (CASM) advantage in relation to the traditional and established, legacy airlines such as Trans World Airlines and American Airlines. Often this CASM advantage has been attributed solely to the lower labor costs of the newly hired and lower pay grade workers of new start-up carriers, such as ValuJet, Midway Airlines, and their like. However, these lower costs can also be attributed to the less complex aircraft fleets and route networks with which these new carriers began operations, in addition to their reduced labor costs.

To combat the new round of low-cost and start-up entrants into the very competitive and deregulated United States airline industry, the mainline major carriers and network legacy carriers strategically developed no-frills divisions within the main airlines brand and corporate structures. Among these were Continental Lite, Delta Express, MetroJet, Shuttle by United, Song, and Ted. These so-called "airlines within an airline", however, proved to be very short-lived, for the most part, and a financial burden, which were quickly disposed off when economic rationalization or competitive pressures subsided.

Taking a page from the mainline, major, or legacy carriers desire to reduce costs in all ways possible in regards regional route networks by outsourcing regional operations to the lowest expese airline bidder capable of operating regional aircraft; a new generation of low cost airlines (in name only) soon evolved in the US with varying levels of success. Among these variety of low cost and discount operators were noteworthy starts-ups that managed to get off the ground by using the larger aircraft services of established charter airlines. Among this group were the virtual airlines; Direct Air, PeoplExpress, Western, and those which never commenced service such as JetAmerica, to name a few. Though harkened as something new, this business model of hiring other mainline airlines and marketing it as a whole other airline business was actually pioneered by the ubiquitous Pan Am with its Pan Am Express operations operated by Air Atlanta and Emerald Air among others during the early years following Airline Deregulation, as established airlines fought to survive.

In Japan, low-cost airlines made a major inroads to the market in 2012 when Peach, Jetstar Japan and AirAsia Japan began operations, each with financial sponsorship by a domestic legacy airline and one or more foreign investors. By mid-2013, these new LCCs were operating at a unit cost of around 8 yen per seat-kilometer, compared to 10–11 yen per seat-kilometer for domestic legacy airlines. However, their unit cost was still much higher than the 3 yen per seat-kilometer for AirAsia in Malaysia, due to the higher cost of landing fees and personnel in Japan.

No-frills long-haul flights

It has been suggested that the Airbus A380, able to hold up to 853 passengers in an all-economy layout, would enable true low-cost long-haul service. While the per-seat costs of such an aircraft would be lower than the competition, there are fewer cost savings possible in a long-haul operation, and therefore a long-haul low-cost operator would find it harder to differentiate itself from a conventional airline. In particular, low-cost carriers typically fly their aircraft for more hours and flights each day, scheduling the first departure early in the morning and the last arrival late at night. However, long-haul aircraft scheduling is more determined by timezone constraints (e.g. leaving the US East Coast in the evening and arriving in Europe the following morning), and the longer flight times mean there is less scope to increase aircraft utilization by adding one or two more short flights each day. The business model comes with considerable fiscal risk, as seen in the many companies that have become bankrupt, such as Laker Airways and more recent airlines.

In 2004 the Irish company Aer Lingus lowered its prices to compete with companies such as Ryanair on shorthaul, however it maintains a full service on transatlantic flights. Late in 2004 the Canadian airline Zoom Airlines also started selling transatlantic flights between the UK and Canada for £89; and Oasis Hong Kong Airlines – for £199 from London to Hong Kong. In August 2006, Zoom announced that it was to establish a UK subsidiary, to offer low-cost long-haul flights to the United States and India, but the company suspended all its operations from 28 August 2008 due to financial problems related to high fuel prices.

Australia's Jetstar Airways has operated international flights since 2005, when it began services to Christchurch, New Zealand. In late 2006, more international services began. Departing from Sydney, Melbourne and Brisbane, it flies to popular tourist destinations within 10 hours of Australia such as Honolulu, Japan, Vietnam, Thailand and Malaysia. With the delivery of new aircraft, it hopes to fly to the continental US and Europe.

In April 2006, the industry magazine Airline Business analysed the potential for low-cost long-haul service and concluded that a number of Asian carriers, including AirAsia, were closest to making such a model work. On 2 November 2007, AirAsia X, a subsidiary of AirAsia and Virgin Group flew its inaugural flight from Kuala Lumpur, Malaysia, to Gold Coast, Australia. AirAsia X claims that it is the first true low-cost long-haul carrier since the end of Skytrain.

On 26 October 2006, Oasis Hong Kong Airlines started flying from Hong Kong to London-Gatwick. The lowest prices for flights between Hong Kong to London could be as low at £75 (approximately US$150) per leg (not including taxes and other charges) for economy class and £470 (approximately US$940) per leg for business class for the same route. From 28 June 2007, a second long-haul route to Vancouver, British Columbia was started. The company ceased operations on 9 April 2008, after over a billion Hong Kong dollars in losses.

In late 2007, Cebu Pacific, the Philippines' largest low-cost carrier, announced intentions to launch non-stop Pacific flights from the Philippines to the United States West Coast and other US cities by around mid-2009. The airline also intends to launch low-cost service to Middle East, where around a million Filipinos are based, and in Europe. Now, it plans to operate trans-pacific flights by the third quarter of 2013.

On 11 March 2009, AirAsia X started its first low-cost long-haul service into Europe – to London Stansted, England. The daily flights to Stansted are operated by two leased Airbus A340-300 aircraft. A one-way economy-class ticket often costs £150, and the premium-class one-way often costs £350. On 12 January 2012, AirAsia announced that it would be suspending services to London on 1 April 2012.

The third largest European low-cost airline, Norwegian Air Shuttle, started long-haul low-cost operations in May 2013. Norwegian initially operated flights to Bangkok and New York from Scandinavia using leased Airbus A340 aircraft, switching to new Boeing 787s in the second half of 2013 after Boeing resolved problems with the aircraft and resumed deliveries following extensive delays. It currently has direct routes from the United States (Los Angeles, Fort Lauderdale, New York, Oakland-San Francisco, and Orlando) into Scandinavia (Oslo, Stockholm, Copenhagen).

No-frills shortest-haul flight

On 9 September 2011, EasySky started operations in Honduras, using the low-cost model, serving the mainland City of La Ceiba and the island of Roatán in the Western Caribbean using a Boeing 737-200. Flight time is 8 minutes over a distance of 40 nautical miles.

Low-cost business-only carriers

A trend from the mid-2000s was the formation of new low-cost carriers exclusively targeting the long-haul business market. Aircraft are generally configured for a single class of service, initially on transatlantic routings. Similarly, Midwest Express (later Midwest Airlines) operated this model for its domestic US routes until it was absorbed into Frontier Airlines in 2010.

Probably best described as "fewer frills" rather than "no frills", the initial entrants in this market utilized second-hand, mid-sized, twin jets, such as Boeing 757 and Boeing 767, in an attempt to service the lucrative London-US Eastern Seaboard market:

• Eos Airlines, which ceased operating on 27 April 2008
• MAXjet, which has ceased its scheduled business flights, but is planning to restart as a luxury charter carrier
• Silverjet, which ceased operations on 30 May 2008.
• La Compagnie

See also

• Airlines
• Low cost carrier terminal
• List of low-cost airlines
• lowest air fare

References

• Gross, S./Schroeder, A. (Eds.): Handbook of Low Cost Airlines - Strategies, Business Processes and Market Environment, Berlin 2007
• "Low-cost airlines making their way to Japan". Japan News Review. 2007-12-18. Retrieved 2007-12-18.

External links

• Oleksandr Laneckij Trends of the European Aviation Market: Seven Themes from the CONNECT 2016 Conference
• Top 100 World Low-cost & Leisure Traffic Airlines by 2014 resultats