Low Cost Carriers creating no-frills model of consumerism

11.8.2009   (Travel Weekly)

The proliferating low-cost carriers are signaling the rise of a "no-frills" model
where competition isn’t just restricted to fares but also for the discretionary
dollar of consumers, says an aviation expert


The proliferating low-cost carriers (LCCs) are signaling the rise of a "no-frills"
model where competition isn’t just restricted to fares but also for the discretionary
dollar of consumers, says an aviation expert.

"So when the fares get down to $50, it’s a question of whether I will have dinner
tonight or buy a new mobile phone or travel. It’s really getting down to that
consumer market," said Peter Harbison (right), managing director, Centre for Asia
Pacific Aviation.

"Yes, LCCs offer value for money against the other airlines but there are a whole
lot of other discretionary expenditure issues a low-cost carrier has to compete
with when it gets to those low prices."

Another discretionary factor would be time, as people may choose to travel more
frequently over the weekend or travel "last minute".

Harbison also noted that with the emergence of the low-cost model and with it
the migration to online booking, consumers are increasingly buying non-travel

He gave the example of Ryan Air which generates 20 percent of its revenue from
non-airline sales because its website is attractive to consumers and they have
the option to buy accommodation or car rental besides air fares.

This is indicative, he said that in the future intermediaries, which are expensive,
will be bypassed as consumers would do their own packaging and "do not need somebody
else to add that value".

But he said this is still in its infancy stage as, "even with Expedia and Travelocity
those systems still don’t work all that well".

"The travel industry has these signs on the horizon but they are more threats
than reality."

Harbison said the no-frills model being driven by LCCs stems from the commodisation
revolutions as even full-service carriers are matching the "no-frills" prices.

"Everything is relative, the first relativity is with the existing airline prices
in the market, the airline seat particularly on short-haul is becoming very much
a commodity," he said.

He pointed out that little difference exists between a seat on a major airline
for a two to three-hour sector compared to the low-cost airline.

"I think that we have got over the whole issue of safety and reliability. There
are always issues when you travel with airlines."

He cites the impact AirAsia has made on regional air travel.

"The fact that AirAsia is a highly reputable airline, is on time and better than
the other carriers, provides pretty much the same sort of seats, uses new aircraft,
all this type of factors do tend to make it a commodity."

Harbison added, "if it’s priced better than the competition, then the LCCs are
obviously value for money. They are producing pretty much the same product for
a lower price. They can make money as their costs are always lower."

The LCCs are a tiny speck in the horizon in terms of total capacity which is
interesting in terms of reaction or impact it has had on the incumbents in Asia/Pacific,
he said.

He predicts that the airline product will become a commodity.

"Linked to that, most of the major carriers will migrate to that type of activity
as quickly as they can because they see the cost issue is critical. They see that
the coming down of yields so they have to kill costs."

Harbison said one of the things that will emerge in Asia is the derivative of
the short-haul point-to-point in longer-haul low-cost operations.
They will be a hybrid of the short-haul ones, and the point is also recognising
that the whole yield issue is in transition.

Hence the transparency of pricing and of product is the real driver of new airline
entry. With this ongoing development, passengers will demand lower prices and
there will be a greater variety of airlines catering to different segments of
the market, he predicted.   Harbison also highlighted that LCCs are pushing fare
compression. This is evident on short-haul routes as it is difficult for airlines
to differentiate their product and consumers lose that ability to discriminate.

"The fares get depressed, you cannot push prices as high especially on short-haul

Fare compression is also taking over on long-haul routes as liberalisation makes
price control difficult.

He pointed out that progressively, excess capacity and new entrants challenge
yield management across the board. Hence this strikes at the heart of network
airlines’ basic philosophy of focusing on yields.