According to ICAO data in the source, the share of low-cost airlines in the world air transport market was 19% in 2005 and rose to 30% in 2014. So how did this growth affect passengers, airports and traditional airlines? In this lesson we examine the human resources and customer profile of low-cost airlines, their comparison with traditional airlines, the effects of the business model on the market, on Türkiye and on airports, the responses of traditional airlines and the new trends in the business model; and we complete the Airline Management 101 series.

Period note: The market shares, growth data on Türkiye and comparison values in this lesson belong to the period in which the source was published; current values should be followed in the official publications of ICAO and the Directorate General of Civil Aviation.

What will you learn in this episode?

• To explain the human resources and customer profile of low-cost airlines
• To compare low-cost and traditional airlines in terms of product, distribution, service, operations, network and customers
• To explain the effect of differences in seat density and aircraft utilization on productivity with a numerical example
• To explain the effects of the low-cost business model on the world market, on Türkiye and on airports
• To explain the responses of traditional airlines and the difficulties faced by affiliated airline ventures
• To explain the new trends in the business model and the concept of the hybrid airline

Summary of this episode

1. Human resources profile

Why does it matter? Staff costs are one of the important items of airline costs; for this reason low-cost airlines (LCC) try to raise labour productivity.

Definition (labour productivity): It is the available seat kilometres (ASK) or revenue passenger kilometres (RPK) produced per employee.

How is it raised? Working hours are planned as productively as possible without going beyond legal limits; a homogeneous fleet gives flexibility to crew planning; outsourcing is used in ground handling and maintenance. Some airlines motivate their employees through profit sharing.

The role of employees: The source stresses that employees who fit the strategy and are committed to their work are an important force behind successes such as a short turnaround time, and that keeping employees in the company relies on a positive workplace culture and trust.

The limit (safety): Focusing on cost does not mean unsafe working conditions; cost should not be the priority in areas such as recruitment, training and health monitoring.

2. Customer profile

Definition (airline customer): It is the person who decides which airline to fly with and buys the ticket.

Comparison (customer and passenger): The passenger is the person who travels; the customer and the passenger may not always be the same person.

The LCC customer: The most distinctive feature is a preference for low prices. These airlines are usually preferred by people travelling for leisure, tourism and sports, and by students going home; some of these customers choose air travel by comparing it with road, rail and sea. In this way flying has stopped being an expensive way to travel and has become something much wider groups can try.

Comparison (two customers): LCC customers are usually not time-sensitive and their comfort expectations are limited; the customers of traditional airlines, on the other hand, are mostly business travellers who are time-sensitive and prefer comfort over price.

A common rule: Whatever the business model, all airlines must meet safety standards; compromising on safety to cut costs is out of the question.

3. Comparing the two business models

Definition (traditional airline; FSC): It is an airline that follows the differentiation strategy and serves with a multi-class cabin, a varied fleet and a hub-and-spoke network.

Definition (differentiation strategy): It is Porter's competitive strategy aiming for a company to charge higher prices by offering products seen as different from and better than its rivals'. LCCs, on the other hand, follow the cost leadership strategy.

Comparison (dimension by dimension):

• Product and price: The LCC offers a simplified product at a low price; the traditional airline offers a complex product structure at a high price.
• Distribution: The LCC focuses on the internet and direct sales; the traditional airline also uses travel agencies and global distribution channels in addition to these.
• Extra services: In the LCC they are charged separately; in the traditional airline they are included in the ticket price.
• Cabin: Single and dense in the LCC; multi-class and spacious in the traditional airline.
• Operations: The LCC works with a short turnaround time, high aircraft and labour productivity, a homogeneous fleet and secondary airports; the traditional airline works with a longer turnaround time, a varied fleet and primary airports.
• Network: The LCC prefers a point-to-point network; the traditional airline prefers a connecting hub-and-spoke network.
• Non-flight activities: The LCC mostly uses outsourcing; the traditional airline spreads into areas such as maintenance, ground handling and catering.

Definition (primary airport): It is a large airport located in a big city, used as a hub by traditional airlines, that faces capacity constraints.

Cause and effect (fleet difference): The difference in fleet comes from the difference in network. Traditional airlines carrying passengers to distant points through a hub-and-spoke network need a varied fleet of narrow-body and wide-body aircraft, and even cargo aircraft; wide-body aircraft are usually not found in the fleets of LCCs flying short distances.

4. The productivity gap in numbers

Calculation example (seat density): The same type of narrow-body aircraft can be used with 150 seats in a spacious three-class layout and with 180 seats in a dense all-economy layout. If both fly full on a 1,000-kilometre route, the first produces 150,000 RPK and the second 180,000 RPK; in other words, the same aircraft produces 20% more output.

Aircraft utilization: According to the world average data in the source, daily aircraft utilization was about 11.1 hours at LCCs and about 9.1 hours at traditional airlines.

On-time departure: According to the same data, on-time departure performance was 79.2% at LCCs and 77.6% at traditional airlines.

5. Effects on the world market

Market share: The market share of LCCs worldwide rose from 19% in 2005 to 30% in 2014.

Europe: The most marked growth took place in Europe. In the same period the seat share of LCCs in the European market rose from 22% to 41%, while the share of traditional airlines fell from 78% to 59%.

2017: According to the source, in 2017 LCCs carried about 30% of passengers worldwide, and the growth in LCC passenger numbers (11.4%) was about one and a half times total growth (7.2%).

6. Effects on Türkiye

Cause and effect: Significant growth was seen after the liberalization of domestic flights in 2003.

The numbers: The number of aircraft, 162 in 2003, reached 422 in 2014, and seat capacity rose by 253%. In 2003 two airlines flew to 60 international destinations, while in 2017 six airlines flew to 296 destinations.

7. Effects on airports

What does it depend on? The size of the effect depends on the airport's location, size, capacity and how it positions itself.

How airports respond: Airports that have rivals may lower their charges to attract LCCs; some hub airports have opened low-cost terminals for LCCs.

Definition (low-cost carrier terminal): It is an airport terminal designed for low cost to serve low-cost airlines. These terminals can be designed without equipment such as jet bridges or baggage belts.

An extra contribution: This development has also helped bring idle airports into use, especially in Asia-Pacific.

8. Responses of traditional airlines

Operational responses:

• reducing the workforce, raising aircraft productivity and seat density, shortening turnaround time,
• lowering distribution costs by increasing internet sales, using outsourcing in ground handling and catering,
• deepening product differentiation by focusing on long-haul routes and connecting passengers,
• investing in customer relations and brand strength.

Strategic responses: Mergers and acquisitions, joining cooperation groups, and setting up or buying an affiliated LCC.

Definition (affiliated airline): It is a low-cost airline or sub-brand set up, bought or created within its own structure by a traditional airline.

9. Difficulties of affiliated airline ventures

Research finding: Research shows that a significant share of affiliated LCC ventures were closed or transferred within a few years.

Possible reasons:

• not being able to bring unit cost down to the level the business model requires,
• not being able to raise labour and aircraft productivity enough,
• the new structure causing confusion with the main brand among employees and customers,
• fleet and network needs not being managed under the same roof.

Definition (stuck in the middle): It is the situation in which a company fully achieves neither cost leadership nor differentiation. As Porter warned, these ventures can get stuck between the two strategies.

Success factors (Asia-Pacific): On the other hand, successful examples have also been seen in Asia-Pacific thanks to factors such as liberalization, rising income levels, a growing middle class, low-cost terminals and incentive policies.

10. New trends and hybrid airlines

Diversification: Growing competition has diversified the business model. The source describes three approaches:

• the simplest and strictest cost-focused model (purist),
• a somewhat more flexible middle way,
• a model moving closer to the traditional one with a varied fleet and network, connecting flights and separate business and economy classes, which also reaches business travellers who want to fly at a low price.

Definition (long-haul low-cost airline): It is an airline applying the low-cost business model on long-haul routes. Passengers' expectation of comfort and catering on a long journey makes this model difficult.

Blurring boundaries: LCCs now codeshare with one another and with traditional airlines, become the subject of mergers and acquisitions, carry connecting passengers and also use primary airports.

Definition (hybrid airline): It is an airline using the features of both the low-cost and traditional business models.

In short

The LCC and the traditional airline are the two aviation counterparts of the cost leadership and differentiation strategies, and they differ in everything from their products to their fleets, from their networks to their customers. LCCs have rapidly increased their market share, grown air transport in many markets including Türkiye, and led traditional airlines to new strategies. Today the boundaries between the two models are not as sharp as before; hybrid structures are becoming widespread.

Key concepts

• Traditional airline (FSC): An airline that follows the differentiation strategy and serves with a multi-class cabin, a varied fleet and a hub-and-spoke network.
• Differentiation strategy: Porter's competitive strategy aiming for a company to charge higher prices by offering products seen as different from and better than its rivals'.
• Labor productivity: ASK or RPK produced per employee.
• Airline customer: The person who decides which airline to fly with and buys the ticket; may not be the same person as the passenger.
• Primary airport: A large airport located in a big city, used as a hub by traditional airlines, that faces capacity constraints.
• Low-cost carrier terminal: An airport terminal designed for low cost to serve low-cost airlines.
• Affiliated airline: A low-cost airline or sub-brand set up, bought or created within its own structure by a traditional airline.
• Stuck in the middle: The situation in which a company fully achieves neither cost leadership nor differentiation.
• Long-haul low-cost airline: An airline applying the low-cost business model on long-haul routes.
• Hybrid airline: An airline using the features of both the low-cost and traditional business models.

At the end of the series

We have reached the end of the Airline Management 101 series. Over sixteen lessons we have completed together the eight core units of airline management, from the basic concepts of transport and the airline product to the classification of airlines, from economic regulations to cost structure and productivity indicators, from network design to fleet and schedule planning, and from airline cooperation to the low-cost business model. While preparing for exams, you can review the summary and key concepts of each lesson again and see the topics as a whole by following how the units connect to one another (for example, the relationship between cost structure and the low-cost business model, or between network structures and cooperation).

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Sources used:
Demirci, A. E. (2016). Düşük maliyetli havayolu işletmeleri. E. Gerede ve A. E. Demirci (Ed.), Havayolu Yönetimi (8. Ünite) içinde. Eskişehir: Anadolu Üniversitesi Yayınları.

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