The development of the low cost airlines company
In the 1990s, the aviation sector witnessed the emergence of new actors: low cost companies (LCCs) whose prices defied those offered by the traditional airlines in specific market segments. What are the prospects for the evolution of the LCCs and what are the strategies of adaptation for the traditional companies? How will the LCCs face the trend of the rise in energy prices and focus on carbon emissions in the short and medium term?
The "low cost" model and the differences in the mode of development
In this section, we examine the mode of operation of a contemporary "low cost" company. The first two chapters highlight the similarities of these companies: the search for the lowest cost possible, use airport means to zero in on the most effective and well adapted pricing strategy. We then show the differences that appear among these companies.
Flight costs: What immediately catches the attention of the commercial passenger availing of the services of these low cost carriers is the lack of certain services which are taken for granted in case of traditional airlines. Amenities or services such as meals and newspapers have to paid for. By downsizing the staff, the productivity of each member of the staff is higher than that of his counterpart in the traditional airlines.
While personnel costs account for 25-30% of the budget of a traditional company, the share is reduced to 10% in case of reputed low cost airline EasyJet. These companies encourage employees to be ever more profitable by linking a portion of their salaries to their performance.
These cost cutting policies are not without its fair share of scandals and operational hiccups. In September 2004, a Swedish trade union organized demonstrations in four airports across the country to protest working conditions imposed on the pilots and stewardesses of the low cost airlines. They would work more, sometimes beyond the national regulations, and earn much less than in traditional companies.
Fixed costs: The fleet of the low cost airlines features only a couple of airline models. This has several benefits: relatively less maintenance costs and much less complicated and simpler process of staff training. Ryanair's fleet comprises 202 B737s while EasyJet has 30 B737s and 107 A319s.
Companies also utilize the technique known as "leasing" ? a company leasing an aircraft to another company.
European Air Charter provides Ryanair aircraft during peak periods. They can thus increase their flexibility in terms of flight capacity without affecting their operating costs.
The low-cost companies rely on outsourcing to reduce their operating costs.
At the airport in London-Lutton, six different companies are connected to the Easy-Jet in view of the baggage check, organizing schedules, etc. Outsourcing, although this solution may seem risky, still allows more flexibility and lets the company escape too high initial investment costs. Depreciation costs of equipment are higher in low-cost airlines because their fleets are often younger.
Tags: Low cost Airlines v/s traditional airlines, Minimizing operational costs by outsourcing, development of the low cost airlines company