The “Long Haul Low Cost Carrier” model and its functions

The “Long Haul Low Cost Carrier” model and its functions

PREFACE: This paper was written back in 2007 and formed part of a year long study Academic on the concept of the “Long Haul Low Cost Carrier” – obviously a lot has changed in the last 6 years, however it is still interesting to see what these carriers (most have failed) have become and whether the analysis and predictions are still relevant and applicable today. A revised paper is being written based on current carriers.

© 2007, © 2013 – AIRLINE HUB BUZZ – author.

1 Introduction
Traditionally the LCC model has largely been confined to short-haul flights of less than five hours duration (Doganis, 2001 and Calder, 2003). It important to address, if the intrinsic characteristics associated with LCC can be transferred or adapted to long haul operations. Is it case of simply transferring the characteristics directly to the long haul operation or it there are requirement for these characteristics to be adapted accordingly. Furthermore, it may be the case that certain characteristics may not be conducive to long haul operations and as such may be exclusive only to short haul. As such these characteristics are not able to be transferred to the long haul model (Francis, Dennis, Ison and Humphreys, 2007).

This paper looks at the product and operating features that constitute the LCC model however they are now analysed from the attributes of the “Long Haul Low Cost Carrier” LHLCC. Given that the main driver of the LCC is being able to offer the availability of discounted fares, these features are critical in facilitating the achievement of cost competitiveness and cost efficiencies. Costs are associated with these characteristics achieving an optimum level of how they are offered and presented in the long haul perspective.

1.1 Defining ‘long haul’
There are conflicting definitions of what is considered ‘long haul’. Morrell (2005) considers trans-continental/coast-to-coast flights in North America as long haul. From this perspective and for the purposes of this research, using the North American domestic airline industry as an example would not be suitable since there the divide between what constitutes a legacy and LCC is growing narrower. This is particularly evident in the on board product on US domestic flights between legacy and LCC where service wise there is not much differentiation between the two types of carriers.

In the context of this research and of the carriers evaluated the definition of ‘long haul’ are international/intercontinental flights ranging in distance of between around 2000 nautical miles to just over 5500 nautical miles. The average flight distance is around the 4000 nautical miles. Table 4.1 provides the distances and the flying times of selected city pairs of the LHLCC.

Table 1.1 – Flying times and distance of selected city pairs operated by LHLCC

CITY PAIR CARRIER DISTANCE FLYING TIME
Singapore-Darwin Tiger 2076 4h 25m
Sydney – Denpasar (Bali) Jetstar 2860 6h 00m
London  -New York Silver/MAX 3458 7h 40m
Kuala Lumpur  – Gold Coast AirAsia-X 4014 8h 00m
Sydney  –Osaka Jetstar 4843 10h 00m
Melbourne  –Honolulu Jetstar 5514 10h 30m

(source: Galileo GDS)

 

2 LHLCC Product Features
On a general level, the LHLCCs have taken on a number of the attributes of the legacy carriers, particularly with aspects of the on board product and some ancillary ground services. None of the LHLCC can be regarded as functioning on a ‘pure’ LCC model. Virtually all the LHLCCs offer a premium seat of some sort and not just single class product like traditional LCCs. There is consistency with the concept of purchasing food, drinks and entertainment among most of the LHCCs.

2.1 Fares and Pricing
Virtually all LCCs have adopted a very simple pricing model. All fares are one-way, directional and ‘point to point’. The LHLCCs have also adopted this structure as per the original LCC model. Traditional fares which carried restrictions such as advance purchase and minimum stay requirements are eliminated with LCCs. At the same time successful LCCs still apply the yield management strategy in order to maximise their revenue, however there are key differences to it application than that of the legacy. This strategy has been one of the key factors contingent on the viability and prosperity of the LCC.
In Australia, legacy carriers such as QANTAS and British Airways has applied this concept of simplification and elimination of minimum stay requirements across their entire product of fares internationally and domestically and now all fares are one way module based (Travel Weekly, 2005). There are advantages to the consumer since there is great scope of pricing due to the combinability of fare types; more importantly fare simplification greatly facilitates the possibility of offering these fare types on online reservation tools, which as evidenced in the LHLCC profiles is still significant method distribution.
2.2 Network
The LHLCC closely mirror the short haul model with respect to offering ‘point to point’ city pairs and by passing a ‘hub and spoke’ operation. However the concept of offering high frequency services may not be achievable given the flight sector length (refer to Table 4.1) and the requirement to have a large number of aircraft in order to be in position to offer high frequency services. A large fleet would of wide body aircraft would add considerably to the cost if the city pair cannot give a suitable return to such a service (Doganis, 2004). Furthermore the small fleet size of some of the carriers may pose problems if such a fleet is just adequate to service the network assuming all schedules are operating normally and there are no reserve aircraft. These limitations were clearly manifested by Jetstar’s technical issues with their A330 aircraft which became unserviceable in Honolulu and Hawai’i early earlier in 2007 (Rochfort, 2007). The ramifications of such delays were felt system wide for Jetstar resulting in flight cancellations to other services. These are obviously costly and can damage an airline’s reputation for reliability and on time performance. A carrier like Jetstar which is wholly owned by a legacy carrier is better buffeted by such upheavals since it may rely on the resources of the parent.

AirAsia-X intends initially relying only on one A330 aircraft to service its first city pair of Kuala Lumpur to the Gold Coast. Jetstar raised concerns that such an operation would pose a risk to the carrier being able to effectively service the route (Creedy, 2007). Creedy quotes the AirAsia-X CEO Asran Osman-Rani –”If you think about it, even if I had five planes I wouldn’t have a spare just sitting on the ground.” .While it is important to have a high aircraft utilisation to service the network, failure to not have spare aircraft or other suitable contingency plans may prove detrimental to the carrier in the long term.

2.3 Distribution
The LHLCCs have adopted a mix of using traditional methods such as an agent and GDS and also their own online sales portals. AirAsia-X would be the carrier most closely aligned with the short haul LCC model since it deals exclusively with its online sales portal and does not participate via any intermediary platforms such as GDS and travel agents. The carriers which have a focus on business/corporate destinations and clients such as Oasis, MAXJet and SilverJet have a strong presence in traditional distribution systems. Carriers that whose main market is business/corporate need a strong relationship with specialised intermediaries referred to as TMCs (Travel Management Companies) which manage the travel requirements of corporate travellers (Labbozzetta, 2006).

2.4 In-flight product
To varying degrees the LHLCC have attempted to adhere to the LCC philosophy of only paying for what you use (Calder, 2004). Notable exceptions are the low cost Business Class only carriers of MAXJet and Silverjet which are using a differentiation strategy of providing full service at low cost over legacy carriers such as British Airways and American Airlines which operate on the same city pairs as these LHLCC. It is in this aspect that the challenge lies for the LHLCC which competes ‘head on’ with the legacy on the same city pairs. The LHLCC will need to offer some form of differentiation, be it with the price or product, in order to gain some form of competitive advantage over the legacy carrier.
They type of destination and market as well as the type of traveller has direct implications on what strategies the LHLCCs need to adopt in terms of distribution. Even for leisure destinations, LHLCCs may need to form closer ties with travel wholesalers in order to have sustainable operation if their markets and destinations are predominantly leisure or holiday based. Labbozzetta (2006) identified that legacy carriers which have a significant amount of traffic to leisure destinations rely on wholesalers for the distribution of their product. Jetstar has created their own Jetstar Holidays brand to facilitate the selling of their products as well as a strong representation in the parent company’s QANTAS Holidays division (Qantasholidays.com and Jetstar.com, 2007).

Japan may prove a challenge for Jetstar. Apart from Tokyo, all of the QANTAS Group’s Japan services are largely served through the Jetstar brand (Qantas.com corporate, 2007). The booking of airline tickets in Japan still has a strong reliance on the traditional travel agent and CRS (Kiyohiko, Nishimura, Ramseyer, 2002). The code-sharing the Jetstar has in place with Japan Airlines should to some degree alleviate the pressure of intermediary reliance its Japan flights are marketed and sold by a legacy carrier therefore making use of traditional distribution methods.

3 LHLCC Operating Features
3.1 Fleet
All the LHLCCs profiled operate on simplified single family of aircraft. This does not necessarily equate to the cost efficiencies achieved by the short haul LCCs due to differences in aircraft utilisation. A significant factor to airlines being successful is their ability to maintain high utilisation of their aircraft (Doganis, 2004). High aircraft utilisation rates for LCCs is possible through a combination of flying to less congested airports and through the exclusive scheduling of ‘point to point’ traffic (Williams and Mason, 2004). While a number of the LHLCC meet these criteria, this may not be possible or feasible with the LHLCC given the greater distances and also the actual scheduling and timings of flights may impact on achieving high utilisation levels. Morrell (2005) on the other hand argues that legacy carriers achieve high aircraft utilisation through the ‘hub and spoke’ network model. Morrell further elaborates that carriers operating widebody aircraft such as the Airbus 330 (operated by Jetstar and AirAsia-X) and Boeing 777 may find it challenging to fill such aircraft without the use of ‘hub and spoke’ and intercontinental city pairs are only sustainable with ‘hub and spoke’ feeding. This challenge may be greatly diminished for a carrier like Jetstar which can take advantage of the parent’s mainline network and traffic feed since its flights are marketed by QANTAS under code share thus Jetstar gets feeding traffic from QANTAS mainline.

3.2 Airports
The LHLCCs profiled make use of both primary and secondary airports; therefore they are not strictly adhering to the LCC model. It should be noted that major airports, such as Kuala Lumpur’s KLIA at Sepang and Singapore’s Changi airport have both created dedicated low cost terminals for LCCs (KLIA.com and Singaporechangi.com, 2007). These two Asian airports allow the LCCs to maintain their lower operating costs and at the same time make use of primary airports.

.3.3 Sector Length
The LCC model is based on one which is primarily made of frequent short sectors. In most instances the LCC will achieve a cost competitive advantage over legacy carriers operating on short sectors, since the legacy carriers have high fixed costs (Morrell, 2005). The average sector length of the LHCCs evaluated in this paper is around 4000 nm as opposed to the average length of the typical LCC which is around 400 nm (Almadari, 2004). Also it may not be possible due to forces market forces or limitations of the fleet for the LHLCC to offer high frequency service on its network, therefore the competitive advantage and cost efficiencies inherent with the LCC model achieved through frequent short sectors may be significantly reduced on long haul.

3.4 Staff
LCCs achieve cost advantages by taking advantage of non-unionised low cost labour (Calder, 2004). The LHLCCs have adopted the same concept. A main reason for QANTAS creating its low cost division Jetstar was to adopt lower pay structures than those of its mainline counterpart (Knight, 2006). QANTAS was unable to make changes to pay structure and conditions with its mainline staff, something it was able to achieve through the creation of Jetstar. The LHLCCs evaluated in this paper are all relatively new and conditions and pay would have been structured modelled on the LCC. These carriers would not have inherited any high cost pay structures that come with legacy carriers.

4.4 Main considerations for LHLCCs
The LCC model has proven highly successful, in terms of profitability and cost advantages, as attested by the Southwest Airlines which has been used as the basis of the LCC model (Doganis, 2001 and Calder, 2001). Alamdari and Fagan (2004) analyse that there has been a trend to move away from the pure LCC model and create hybrid models. They argue that most efficient form of cost leadership and cost competitiveness and through it profitability is achieved through strong adherence to the LCC. Any deviation from the pure LCC model will dilute the potential for maximum profitability. The authors evaluate these factors from the short-haul LCCs where there is a greater chance of adhering to the core functions of the LCC model. As evidenced and discussed in the analysis in this chapter, the long haul concept may pose limitations to adherence to the LCC model characteristics.

PROLOGIS Consultants (2007) suggest that as a consequence of environmental forces such as increased competition, technology and changes to distribution, there is a tendency to move away from strict adherence to the LCC model. They suggest that both legacy and LCCs are adopting a hybrid structure with characteristics of both the LCC and legacy. The main factor that has emerged from is the in many instances the LCC model in its pure form has been far from static in its structure and is in fact quite dynamic and thus needs to be adapted. This dynamic function can be attributed to environmental and operational drivers which have necessitated the in this contact need for the LHLCC carriers to adapt and evolve their business model in order to be a viable option. These carriers which can be considered as redefining themselves using hybrid models, yet still retaining many of the characteristics of the LCC.
Virgin Blue would be considered as one carrier which has evolved since it first started operations in 2000. Notwithstanding Virgin Blue’s move away from the pure LCC and more closely aligning its model to that of a network carrier, it still retains characteristics of the LCC model, particular in its cost structure and product distribution, which still allow it to retain some of the cost efficiencies of the LCC. In trying to derive a definition for Virgin Blue, the term ‘New World Carrier’ (NWC) has been used. Meier (2006) defines the NWC as ‘a forward driven airline with a different approach and strict focus on a low cost base’. There is the consideration the current LCC model is lacking a degree of relevance commensurate with market and economic condition. Virgin Blue’s CEO Brett Godfrey has stated the carrier is now mulling the creation of an ‘ultra low cost carrier’ (ULCC) to combat the entrance of Tiger Airways (Ionides, 2007).

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