The concept behind low cost carriers is solid. But like everything in the airline business, things are evolving
Just when we thought we had the cast of characters finally figured out, up pops speculation we’re on the verge of ‘Merger Mania, the Sequel.’ This time the actors look to be a couple of the industry’s so-called ultra-low cost carriers, or ULCCs. How things shake out over the next few months may go a long way in determining just how ULCCs treat their customers.
In January Robert L. Fornaro took over from Ben Baldanza as president and CEO of Spirit Airlines. Baldanza was to Spirit as legendary Michael O’Leary is to Irish-based Ryanair – brash, smart and (on occasion) in your face. Ryanair has mellowed of late in terms of customer service – and it seems Spirit may too.
Spirit’s infamous 29-inch seat pitch may not change says respected airline consultant Robert W. Mann, Jr., president of Port Washington, NY-based R.W. Mann & Company, “but the idea that the customer can be ignored,” almost assuredly will soften with Fornaro at the helm, Mann believes.
Ryanair began to change when it set out to “capture some of the same customers [as] the so-called network full-service carriers,” says Mann. That includes business travelers.
Fornaro knows all about business travelers. A mediator and moderate sort of guy who helped engineer the highly-successful Southwest/AirTran merger a few years back, he could well be instrumental in integrating Spirit with another ULCC, Frontier Airlines. That’s where yet another industry veteran comes into the picture. Bill Franke is chief of Indigo Partners, which owns Frontier. He used to be board chairman at Spirit.
Thus aligned – Fornaro at Spirit and Franke at Frontier’s parent company – “I think [it’s inevitable]” a merger’s going to happen. Here’s what Mann says argues strongly for such a move:
Franke and Frontier president Barry Biffle are working hard to change the pervasive perception of their airline as “an unadulterated ultra-low cost carrier with no holds-barred.’
Frontier has some 60-plus A320 family aircraft of various flavors. Spirit has about 80 of the same. That eases an integration of the two operationally. It also bodes well for US Department of Justice approval of any proposed merger. Mann says a 140-aircraft fleet, coupled with a “more comprehensive network” could make for the sort of competition-enhancing “disciplinary factor that DOJ has really been looking for.”
As of this writing in mid-January, nothing’s been formally announced, but signs are everywhere that a merger could happen.
If it does, then what? Will the minor skyquake triggered by a Frontier/Spirit union induce low-fare/high-frills JetBlue and Virgin America tie the knot? Mann notes that both airlines fly A320-family jets. “JetBlue is big north-to-south, to Florida and beyond—[as well as] on certain transcon markets,” while Virgin America “is really struggling to find a survivable niche,” Mann says.
ULCC InfluenceWhether Spirit merges with Frontier or not, Dallas/Fort Worth-based American Airlines is already responding to Spirit on its own. In late October American Airlines president Scott Kirby told analysts his airline would start offering “no frills” airfares in 2016, the better to compete against Spirit – especially at AA’s Dallas/Fort Worth International Airport megahub. “In Dallas, Spirit at DFW is our number two competitor – they are larger than either Delta or United.”
“Scott Kirby kind of came out with guns blazing,” says Bob Mann, “and said we’re not going to take it anymore.” Mann says the increased competition will be point-to-point. “You’re going to have a brutal price war.”
Such is the hot topic in US aviation circles just now. Abroad, low cost carriers continue to shape markets. It wasn’t always so, of course. “At the beginning of the 1980’s, the first low cost carriers (LCC) were initially ridiculed as an ‘exotic’ business case phenomenon,” writes Marc Israel in an Oct. 28, 2015, piece of market research for European-based aviation analysts AirlinePROFILER. “No one from the established airlines believed that it can be a sustainable and successful business model, or even constitute a serious threat or serious alternative to their business mode.”
How times have changed. Israel’s research shows LCCs worldwide possessing roughly 23 percent average market share per airline departures as of 2013. That number corresponds nicely with Canadean Ltd.’s just released report The Global Low-Cost Airline Market to 2019, which put the worldwide market share “at almost 25 percent.”
Not only are LCCs gaining ground on full-service airlines in terms of market share, according to Israel’s research, they’re also incrementally more punctual: Nearly four in five (79.2 percent) of LCCs departed on time as compared to 77.6 percent of full-service carriers. Although Marc Israel doesn’t indicate as much, the approximate 2 percent on-time lead could have something to do with the fact that LCC’s often operate out of ‘alternate airports’ where the traffic isn’t as intense.
A survey of 1,400 business travelers evaluating 62 LCCs and full-service carriers conducted for AirlinePROFILER found the satisfaction gap between the two types “is getting smaller.”
Measured GrowthEven as the likelihood of LCC mergers dominates water cooler talk, the day-in, day-out business of route expansion and contraction goes on. Cases-in-point: the two dominant LCCs in the United States, Southwest and JetBlue. The former is poised – pending foreign government approval – to launch nonstop Los Angeles International–Liberia/Guanacaste service April 12. Last year, Southwest opened its new International Terminal at Houston Hobby Airport, lofting a slew of new Caribbean and Latin flights from the close-in Bayou City field.
Southwest has come a long way since it’s debut in the early 1970s, when it flew just to Dallas, Houston and San Antonio. It now fields some 3,900 daily departures. DOT data show Southwest is the country’s largest carrier in terms of originating domestic passengers boarded.
Another success story is low-fare/high-frills JetBlue. The JD Power award winner for highest customer satisfaction just added Albany to its route network, making the New York capital its 93rd destination. JetBlue now connects ALB nonstop with Fort Lauderdale-Hollywood International as well Orlando International Airports.
Starting May 5, JetBlue is set to begin flying nonstop from Fort Lauderdale to Aguadilla, Puerto Rico.
Prosaic stuff, but nonetheless the stuff of steady, solid airlines’ everyday doings. Southwest and JetBlue’s measured growth is purposeful. LCCs which grow too fast jeopardize their own (not to mention their customers’) business interests. Consider for a moment: Israel says, “From 2004 till today, 52 percent of the newly founded LCC airlines have ceased operations.”
Changing ChannelsPart of the business model in keeping fares low at some LCCs entails eschewing traditional GDS channels in favor of in-house solutions. Now that’s begun to change, at least at mighty Ryanair. The airline’s return to the global distribution channel after a decade’s absence is significant in that it underscores it’s going after business travelers. “You can’t sell low fares [economically] through those types of channels,” says Bob Mann, “but you can certainly sell business-purposed fares there.” Travelport was the first GDS to have Ryanair fares back in the fold. Amadeus and Sabre followed suit.
Mann contends the move is largely about business travelers. Michael O’Leary is no longer “aggressively dismissive of customer issues” – not to mention travel agents. “I think [Ryanair] has carefully and quietly been more accommodating.”
If Ryannair’s move is significant, so too is Star Alliance’s “Connecting Partner” initiative, a move that aims to allow LCC’s to connect to Star’s network of carriers. First up is Mango, South African Airways’ low cost offspring.
“With this innovative concept, we are breaking new ground. We see a definite trend of convergence between the ‘traditional full service’ and ‘low-cost’ business models in the airline industry,” says Star Alliance CEO Mark Schwab. At the same time, we’re hearing our customers telling us that they need further access to markets where we do not yet provide ideal coverage. In many cases network carriers are not in a position to fill this gap and, hence, working with future Connecting Partners will allow us to provide an extended network to our travelers.”
Among other conveniences, fliers traveling on an itinerary entailing a connection between a Star member and a Connecting Partner will have “through check-in.” “It’s the first time Star has used this extension alliance,” says Mann. “I think they’ve agreed that this is now a strategy for them. After you run out of all the ‘full service’ candidates, you ought to be looking for high-quality, easy-to-accommodate low-cost carriers.”
It will be instructive to see if Star’s initiative sets off a series of such moves throughout the industry.
Flying Over a Wall of WorryDespite a perception that low cost equals lower safety standards, Marc Israel rates overall safety among the group as “high.” The numbers speak for themselves: In the 20 years spanning 2003 to 2013 his data show 818 serious incidents among full service carriers and 112 among LCCs. As for actual accident ‘hull losses’ (where the aircraft is basically written off) between 2003 and 2013 FSCs racked up 160; LCCs just 14. Of course much of the disparity has to do with the sheer number of flights and the relative size of the fleets. But in general the safety records of LCCs overall measure up.
Still, safety in some quarters of the globe isn’t stellar – even though the aircraft flown by the LCCs are relatively new and crew training apparently meets all official standards. Mann contends there are “a number of carriers in a number of countries where safety-level oversight isn’t not what it needs to be.” The aviation consultant further says IATA (International Air Transport Association) recognizes this. “They’ve sent some of their international aviation oversight staff into Asia to look at it. I think the situation needs to be improved.”
Though worries persist about the unevenness of European economies, the number of passengers carried by European LCCs has been soaring. According to the European Low Fares Airline Association (ELFAA) 37 percent more passengers flew on Euro-LCCs between July 2014 and June 2015. ELFAA member airlines flew more than 306 million folks during that period. At the same time the seating squeeze that besets US airlines in general – LCC or FSC – is manifest on the Continent and the British Isles as well. “Average [seat] occupancy rose by 2.3 percentage points to 86.4 percent,” says the association.
“In contrast to other sectors of the airline industry, ELFAA has recorded positive growth each year since its formation in 2004,” asserted John Hanlon ELFAA secretary general in October 2015. “Our low fares, combined with reliable, quality service will enable millions more European citizens to travel affordably by air.” This, he contends, improves connectivity, in turn “making a real contribution to Europe’s economic development.”
As for Latin America, Bob Mann says even such high-quality LCCs as Azul are being affected by the region’s financial problems. “The economy is kind of at full stall,” he says. “It’s just punishing those carriers,” be they low cost or full service. He’s concerned high-profile events such as the 2016 Summer Olympics in Rio de Janeiro, “will show all the world how bad things are,” in the economies of commodity price-dependent nations such a Argentina and Brazil.
Still, the evidence is solid: while individual LCCs may come and go, the low-fare concept is here to stay. Maintains analyst Marc Israel: “LCCs will continue to increase their market share.” And as that happens, they “increase pressure on the FSCs” such that “services and price competition increase.”