Low Cost Airlines The Operations Strategies
Since the late 1970, the United State introduced an airline deregulation to the aviation industry. The airline deregulation of US had led other countries including European countries to adopt the same strategy. The deregulation strategy allows commercial airlines to price their service, choose their route and destination freely. Moreover, the act had provided a golden opportunity for airlines to reduce cost as they are allowed to cut down unnecessary services such as passenger lounges and onboard free meals. Thus, low cost carrier (budget airlines), with respect to the demand for cheap air delivery service, were invented.
According to a recent research, the market share of low cost airlines based in Europe shows an increasing trend towards other airlines in the last decade (ELFAA, 2011). It is a reflection of the operation success of low cost airlines. The aviation industry is now facing a new challenge from these low cost airlines while the battles between low cost airlines and full service airlines are deemed more severe. This result raised our interest in discussing the operation strategies of low cost airlines in this following report.
This report is separated into four parts looking at different aspects. To begin with the discussion, analysis of low cost airline characteristics is necessary. Following this would be evaluating the performance objectives and operations strategy of low cost airlines. After that, we would distinguish the differences of the budget airline and full service airlines. Finally, the focal point would set to see how full service airlines changed in response to the threat from low cost airlines.
The Characteristics of low cost airlines
The low cost flight providers aim to reduce cost as low as possible in order to attract as many travellers. The discussion would focus on the characteristics of budget airlines in the following section.
It is worth emphasizing that the customer chooses to take low cost flight because they demand straightforward flight delivery. As a result, budget airlines should just generate a simple flight experience for their customers. This result leads budget airlines input mainly their customers as their transformed resources. While the resources used for transforming output would be aircrafts and cabin crew. This basic service procedure could be easily drawn in a transformation model.
For the purpose of distinguishing the service characteristic between low cost airlines and full service airlines, the concept of the product-service continuum could help to explain. As a full service airline generally tends to provide a comfortable and luxurious flight experience, their customers are served during their flight with fine wine, meals or magazines as their choice. Thus, their total services may include some extent of tangible benefits to the customers. By contrast, low cost airlines do not bundle their services into a package. Usually these airlines do not include meals and extra services on board. This explained why the ticket price could be significantly cheaper. Where Low cost airlines aimed just to deliver customers to their destination which is deemed predominantly pure service, their service offers extremely few tangible benefits to the customers.
Different Operational Characteristics, 4 Vs
O’connell (2005) and Williams (2001) have distinguished some characteristic differences between two kinds of airlines. As low cost airlines provide just a single class, where customers do not have alternative choices; full service airlines could provide economic seats and business seats to fulfill different customer needs. Moreover, the travel network of budget airlines, which based on the point-to-point basis, mostly used the smaller secondary airports in order to reduce the cost. However, in order to increase the variety of destination, full service airlines adopted hub and spoke network, which drop down customers in a center airport and send them to another place, allowing customers to travel to a different destination easily.
Move on to the volume characteristic of low cost airlines, they output more amount of services than those full service airlines. Low cost airlines have a significantly low turnaround time in the airport, unlike the full service airline; they spend much time on air. As a result, the aircraft usages are particularly intensive for budget airlines while the full service airlines are deemed average intensive only.
As regards visibility, it should be high because customers have to be involved into the service. However, full service airline provide more ways for customers to contact them. Thus, it has slightly more visibility than low cost airline. On the other hand, the variation of demand of low cost airlines could be more fluctuating. As low cost airlines focus mainly on backpack travelers, the demand tend to vary depends on the travelling seasons. However, full service airlines target their customers not only travelers but also businessman. The demand could be slightly less fluctuating.
Performance objectives and Operations strategy
In the economic recession, consumers reduce their spending, the emergence of low cost airlines make the aviation market competition more intense, forcing the big boss considering it as potential rivals. Generally on the international market, low cost airlines are playing a crucial role in the total airlines demand of travelers. As well as the traditional airlines, low cost ones also have some specific performance objectives.
As the majority of consumer sentiment, low cost airlines synonymous with old aircrafts, poor quality services. Even ‘low-cost’ word has caused a psychological sense of caution to the user. However, if consumers get to know or have ever used low cost airlines, low cost airlines have their own advantages. Although the fare is much cheaper, the quality of low cost flights is still regarded, highly competitive and satisfy customers. Order tickets online, which is fast and convenient, is another advantage, although an online booking will be more complicated for airlines because business process and increase investment in security. Moreover, ‘only pay for what you need’ is another favorite feature for passengers. Customers have to pay for food and drinks on the cheap flights. However, on some long flights, airlines still offer blankets, entertainment services for free. Finally, deals are offered frequently: Cheap Airlines launched regular promotional packages, discount tickets extremely low, especially in the low season.
However, there is always trading off, especially with low cost carriers’ dependability and flexibility. Firstly, cheap airline often chooses small airport, away from the center in order to save costs. So customers will have to spend the extra costs incurred as buses, taxis. The current trend is to build a regional airport for cheap airline within the current airport, with basic amenities. Next minus point of these airlines are delayed flights. This is due to the aircraft capacity utilization is used fully as much as possible. It should be able to fly away repeatedly on the same route. Thus, late trips can often occur. Besides, weight of luggage is strictly limited, and to exceed the limit, travelers have to pay an extremely expensive cost. Finally, there is no ticket refund, or the amount returned is unusually low. Also, do not expect the airline will provide accommodations for customers in case of flight cancellation.
To consider low cost carriers’ operation strategies, their marketing mix should be concerned. Firstly, true to its name, the greatest benefit of this service is able to move at a lower cost than traditional airlines. This is also the reason for the cheap airlines become abundantly “attractive”. The operations strategy of these carriers is the aim at minimizing cost. Reduced costs split evenly by many ways. Often, the space on the plane of low cost carriers is using as efficiently as possible. The seats are closely folded, slightly smaller and narrower seat to maximize passenger capacity. In addition, the low cost airlines use only one type of aircraft; thus they only need a team of aircraft maintenance to repair and test if there are technical problems. Through this, the support costly hiring maintenance operation is also lessened. Fuel, one of the largest operating costs of airlines, is also concerned. If airlines do not think that fuel prices will drop in the future, they can sign a contract to buy at the current price of a period. If the actual fuel price increase, they will benefit; otherwise they will have to pay higher fuel prices.
Secondly, the distribution network of the low cost airlines is remarkably fast, friendly and flexible that customers can sign up to buy tickets using the web check-in, kiosk check-in or calling center service. All transactions are made online over the internet to reduce the cost of hiring the ticket seller or airline agency. When customers book tickets through network, they will get a code and airlines do not need to print the ticket and send it to customers, thus further reduce the cost of printing and mailing. Especially, by rarely using agents or intermediaries travel companies to sell tickets, high costs of distribution are reduced. The next operational strategy should be mentioned is low cost airlines, positioned as ‘cheap’, offer many shocking and exciting promotions last only a short time which encourage customers to become ‘ Cheap ticket hunters’. This promote customers, who feel excited and happy hunting fare, to register online more and then create better social marketing strategy. Many forms of promotion are used. Reserve auction where the winner is the lowest and unique bidder could be an example.
Differences between LCCs and FSCs
To compare comprehensively between LCCs and FSCs, it is necessary to consider their SWOT analysis which show advantages and disadvantages of each kind.
LOW COST CARRIERS
Travel demand is growing
The monopoly of the traditional aviation may lead to poor services quality with a high price.
High requirements of customers (low price but the quality still need to be good)
It is not attracted to the business and upper classes.
Easy ticket registration
Branding and widespread low cost airlines to the customers to strengthen their confidence.
Improve the services quality
Delayed and Combined flights
Poor flying route
Invest to buy more aircrafts.
Extended flight route and time.
Increased segment for upper class.
FULL SERVICE CARRIERS
Travel demand is growing
As people’s life quality is improving, comfortable full services airlines are considered more.
Harsh competition from Low cost Airlines.
High requirements of customers
Fast and convenient
Copious flying route
High confidence from customers
More attrarctive to upper class
Invest on recruitment to ensure quality of airlines staff and marketing campaign to widespeard brands.
Improve services’ quality.
Aircrafts may be used for a long time.
Invest to buy more aircrafts with shorter life cycle.
More promotions and lower price.
With these differences in operation objectives and strategies, it can be explained why there are differences between low cost and traditional airlines. Besides the two above SWOT analysis, it can be briefly pointed out some pros and cons of low cost airlines in comparison to the traditional one. While the low price, fast and convenient online ticket booking, appropriate promotional campaign are some of the advantages, there are still concerns about the restrictions on baggage allowance, or limited compensation in case of canceled flights or delayed trips. Also, no seating arrangements could be another minus point.
Changes of FSCs in response to LCC’s threats
Nowadays, there are a competition between the full service airlines and low cost airlines. The appearance of low cost carrier has made a significant impact on full service airlines that provide higher quality for travelers. The phenomenon of low cost carriers has been affected on leisure travelers that usually have the demand for a short holiday and less require about the high quality services (Alderighi et al, 2012).
It is noted that the reason why the low cost carriers can offer the cheap price because they reduce management cost such as “the training staff, employment cost and landing fees and direct ticketless selling” (Gillen & Morrison, 2003). However, to compete with low price airline, full service carriers can give the different travelers the specific services. For example, full service carrier can offer services such as “business cabin, economic cabin, refundable and non refundable, VIP lounge and no- lounge access” (Alderighi et al, 2012). These services can satisfy the separate demand of each traveler. People often want to book consecutive tickets although they are not sure about traveling to somewhere. In that case, choosing the full services airline that can refund for them is a wise decision. Therefore, travelers have more choices by using full services airline than low cost carriers.
This maybe become the advantages for full services carriers that they can charge the different prices for separate airline market segmentations. As a result, although the low cost carriers can offer the low price, it would probably be that they still difficult to attract customers by the drawback in services like non refundable air tickets. For example, business travelers can be charged a higher price than leisure travelers when they use full service carriers because they are provided the better serving quality (Gillen & Morrison, 2003). These services can give the extra profits for full service airlines. Hence, it is vital that full services carriers can offer the low price for leisure customers. Thus, it could be predicted that full service carriers can be even more developed in spite of the growth of the budget airlines. In addition, this represents the effective operation management of full services carrier by launching the high quality services. In other word, the full service carriers use the “traditional yield management” to control the operation that have six principles such as “market segmentation product differentiation, price setting, fences, availability of control and distribution” (Alderighi et al, 2012).
These factors help full service carriers to manage and innovate the operation management to against the phenomenon of low cost service carriers. In addition, full service airlines can create the advertising to introduce the range of their services for travelers (Barbot, 2008). Airlines’ reputation can attract travelers and help them to make the decision easier. While with less famous and available information, low cost carrier is difficult to attract passengers by their loyalty and the belief for full safe services (Barbot, 2008). Another change of full service carriers has adjusted probably decreased the entrance to the hub by providing a large number of “the small airport and having feeder carriers, generally affiliated” (Gillen & Morrison, 2003). This might result in helping the travelers to feel convenient to move from different cities and countries when they travel the first time to this place. Consequently, full service airlines can deter a large number of rival like low cost carriers.
In conclusion, the low cost airlines use their operation strategies to offer the cheap fare for travelers. To maintain in low air ticket price, they reduce a large number of services. For instance, the low cost carriers use the internet like the main source to sell the air ticket instead of using brokers. This might decrease the expenditure of each air ticket for brokers. In addition, by having the low ticket prices, some services are that travelers probably pay extra money if they wish to use like wines and meals. Thus, the spending on services of low cost airline might slightly increase by charging marginal services that are not included in air tickets.
Although the low cost airlines provide the high volume and variation, it offers extremely low in variety and medium visibility services for travelers to attract more customers. Hence, one of the special circumstances like a businessman who needs more variety and quality services in air travelling, low cost carriers would probably be difficult to convince these clients to use their services. The reason is that cheap ticket airlines usually provide the standard services with low cost that does not serve the higher quality services. However, as each kind of airline has different market segments, appropriate performance objectives and operation strategies are needed to encourage customers buying their tickets. In addition to reducing brokers as mentioning above, they also decrease the administrative costs, space on an airplane and less flexibility on airplane tickets.
To be more specific, low cost carriers might not offer the refundable tickets and allow less weight of luggage that each traveler can bring on airplanes. In contrast, the full service airlines give more service choices that are suitable with different demands of travelers. They usually give the proposal of refundable tickets, more kilograms of luggage weights. In addition, the full services airlines use traditional yield management to increase efficiency into operation to give the reasonable price with the same services with low cost carriers. However, there is no doubt that the full service airlines make appropriate the marketing strategies show the travelers to aware about the airline brand names and available services to compare between different airline companies. Hence, the full service airlines still attract customers although the there are developing of many low cost airlines.