A service is an economic activity that creates value and provides benefit for customer at specific...

LOW COST CARRIERS

Chapter-1

A service is an economic activity that creates value and provides benefit for

customer at specific times and places by bringing about a desired change in, or

on behalf of, the recipient of service

Service

1. Intangible------- Cant see, feel. smell

2. Inseparability-- Produced and consumed simultaneously

3. Perish ability-- Dies

4. Variability------ Change

5. Ownership---- Right to use only

Characteristics

Complex and tricky thing as selling intangible idea or product

Complex and tricky thing as selling intangeble idea or product

QUALITY

Is the study of processes involved when individual or group select, puerchase ,

use or dispose of product, services, ideas or experiences to satisfy needs and

desires

Consumer behavior

Is the study of processes involved when individual or group select, puerchase ,

use or dispose of product, services, ideas or experiences to satisfy needs and

desires

• Invention of wheel--- mesopotamia

• Locomotive

• 1903

• No-frills is a term used to describe any service or product for which the non-

essential features have been removed to keep the price low• No-frills businesses operate on the principle that by removing luxurious

additions, customers may be offered lower prices

• The term originated within the airline industry referring to airlines with a lower

operating cost structure than their competitors

• While the term is often applied to any carrier with low ticket prices and

limited services, regardless of their operating models, low-cost carriers should

not be confused with regional airlines that operate short flights without service,

or with full-service airlines offering some reduced fares

• A low-cost carrier or low-cost airline (also known as a non frills, discount or

budget carrier or airline) is an airline that generally has lower fares.

• Something offered to customers for no additional charge may be designated

as a "frill" - for example, free drinks or food.

Definition

What is No-frill

• No-frill airlines are airlines that offer low fares but eliminate all non-essential

services, such as complimentary drinks, snacks, inflight entertainment

systems, business-class seating, flying from remote airports, using one single

type of aircraft, A/C interiors is fitted with minimum comforts, carry

advertising inside to increase revenue, charge passengers an additional fee

for carrying luggage, using the airport checkin desk, using wheelchairs or

toilet

What are No-frill Airlines?

• Some LCCs operate A/C configured with a single passenger class, and most

operate just a single type of aircraft

• In the past, low-cost carriers tended to operate older aircraft, such as the

McDonnell Douglas DC-9 and older models of the Boeing 737

• Since 2000, fleets generally consist of smaller, newer, more fuel efficient

aircraft, commonly the Airbus A320 or Boeing 737 families, reducing training and

servicing costs

Common Practices

http://en.wikipedia.org/wiki/McDonnell_Douglas_DC-9

http://en.wikipedia.org/wiki/Boeing_737

http://en.wikipedia.org/wiki/Airbus_A320_family

http://en.wikipedia.org/wiki/Boeing_737

Common Practices

• Single passenger class

• Single type of aircraft

• Minimum set of optional equipment on the aircraft

• Simple fare scheme, such as charging one-way tickets

• Flying to secondary airports

• Flying early in the morning or late in the evening

• Fast turnaround times

• Unreserved seating

• Point-to-point service

• Ancillary revenue

• Direct sales of tickets

• Low wages

• Employees working in multiple roles

• Aggressive fuel hedging

• Charges for online check-in and priority boarding.

• No free meals and drinks

• No refunds or transfers to later flights

• Using a mobile stairway

• Fly their aircraft for more hours

• Not every low-cost carrier implements all of the mentioned points

• Some try to differentiate themselves with allocated seating

• In-flight entertainment (LiveTV) in every passenger seat

• Discounts and tickets in promotion

• reducing costs and no-frills service

• reclining seats

• premium cabin

• assigned seating

• mood lighting

LOW COST CARRIERSDifferentiation

• When talking about LCC, some quarters will react with cynical and sometimes preposterous views• We've been asked before if a passenger must stand in a flight due to lack of seats or there will be chickens in the flight• Such misconceptions are not surprising, given the fact that scheduled, low-fare flights are a relatively new phenomenon in the world• We list down some of the most common misconceptions with regards to the LCC:

Working of the Low Cost Carrier (LCC)C0mmon Misconceptions on LCC?

i. Are the aircraft safe? Absolutely! The number one priority for LCCs is safety, and that’s a trait that we never compromise. LCCs complies with the highest international standards and procedures.

ii. Are they flying old planes?We are rejuvenating our fleet with brand new Airbus A320 aircraft. Going forward, we will have the youngest fleet of any airline in Asia.

iii. Do they have well trained and qualified personnel? Yes. Our cabin crew is among the best trained and best paid.

iv. What service can one expect? A service that will get you from point A to B, safely, comfortably and on time.

Working of the Low Cost Carrier (LCC)

v. Do they Fly on time?LCC’s time performance is now above industry average. And it is continuously improving as we induct more brand new Airbus A320 aircraft into our fleet.

vi. Do I have to stay through weekends to get the best fares?No such nonsense. Our tickets are point to point and fare is based on demand for a particular flight. There are no ridiculous restrictions to get the cheapest fare; you just have to be faster before anyone else snaps it up first.

vii. Do LCC really offer the cheapest fare at all times?Yes. Our business model stipulates that our fare must be at least 20% cheaper than a competing FSC at all times. Anything less, in our view, will steer passengers to our competitors.


Yield Management

v. Do they Fly on time?LCC’s time performance is now above industry average. And it is continuously improving as we induct more brand new Airbus A320 aircraft into our fleet.

vi. Do I have to stay through weekends to get the best fares?No such nonsense. Our tickets are point to point and fare is based on demand for a particular flight. There are no ridiculous restrictions to get the cheapest fare; you just have to be faster before anyone else snaps it up first.

vii. Do LCC really offer the cheapest fare at all times?Yes. Our business model stipulates that our fare must be at least 20% cheaper than a competing FSC at all times. Anything less, in our view, will steer passengers to our competitors.


1. High aircraft utilization• Aircraft is kept flying as much as possible, the first flight starts as early in the morning commercially possible and the final flight typically ends at midnight• A fast turnaround is critical to ensure time spent of the ground is minimal – an airline makes money when the aircraft is flying, not when the aircraft is parked• Air Asia’s turnaround time is 25 minutes; compare that against 1 hour for a FSC• On average, AirAsia’s utilization per aircraft is 12 block hours per day, a FSC might do about 8 block hours per day


Components of LCC Business modal?

2. No frills• Underlying business for a LCC is to get a person from point A to point B• Everything else is considered to be luxury item or “frill”, of which can be acquired for a small fee• Among many of the frills that AirAsia has do away are;

• No free food & beverages. Why give away something that you don’t appreciate? Passengers are most welcome to purchase food & drinks at an affordable price from the cabin crew

• Free seating. There is no assigned seating. Passengers receive a generic boarding pass and they will have to take any of the available seats



2. No frills• Ticketless airlines.

Less hassle for the customer, who doesn't have to worry about collecting tickets before traveling, and cost-effective for the airlines (paper, printing, distributing).

• No refund. Airlines waste a lot of money when passengers do not show up for a flight due to refunds and rescheduling. Whether a passenger shows up or not, the cost of flight to the airline is the same. LCC are unforgiving to no show passengers and do not offer refunds for missed flights

• No loyalty programme. We believe our customers are loyal to our low fares, so who needs frequent flyer miles programme then



3. Streamline OperationsMaking the process as simple as possible is the key of a successful LCC. • Single type of aircraft.

Pilots, flight attendants, mechanics and operations personnel are specialized in a single type of aircraft, which means, among others, that there is no need for costly re-training of staff, for maintaining a stock with parts for different types of aircraft, for knowledge and skills in order to operate and maintain different types of aircraft with their own characteristics, or for new work requirements.

• Single class seating. There is only one class seating, i.e first class, and passengers are free to sit where they choose. Should you want to have the privilege to choose your seats, you can by purchasing Xpress boarding.

• Standard Operating Procedures. SOPs are important to ensure same level of competence among all the staff. This way we can ensure the homogeneity of service throughout the company.

Working of the Low Cost Carrier (LCC)Components of LCC Business modal?

4. Basic Amenities• Secondary airports.

• Low cost carriers mostly fly to and from airports that are not necessarily the busiest, for example, London - Stanstead rather than London – Heathrow

• These are often referred to as secondary airports. Operating from so called secondary airports is cheaper than from the bigger major airports and they are also a lot less congested and “turnaround times” for aircraft are a lot shorter

• For instance, to minimize fees AirAsia fly into Clark Airbase which is 70km away from Manila as appose to flying into Manila Ninoy Aquino airport.

• Business Lounges.• Forget about it.


• Emergence of Low Cost Carrier (LCC) industry has created new challenges for A/Ps to consider splitting up their services and offer a different product to different A/L since LCCs have different needs to have quick turnaround times, raise productivity, and cut down costs• Their focus is on point-to-point services and avoid passenger/baggage handling systms

LCC Needs and Requirements of Airport TerminalsService/facility LCC needs and requirementsOverall terminal design Simple, functional with low construction/operating costsCheck-in Fewer desks than full service airlines Airline lounges Not neededSecurity Efficient processes so boarding may not delay aircraft Transfer facilities Not neededAirbridges Preference for steps for quicker boarding and deplaneAirfield buses Preference for passengers to walk to/from A/C to save costsOffice accommodation Simple and functional

6. LCC requirement of Airport Terminals

• For small regional A/Ps, the arrival of LCCs has been useful to fill up underutilized existing infrastructure while A/Ls have benefitted from uncongested facilities which help them achieve fast turnarounds• Such a strategy may have problems if demand grows to such a level that new facilities are needed and the A/P revenues are not sufficient to fund further investment

• Examples of regional A/Ps include Liverpool and Prestwick in the UK, which have decided to focus purely on serving the LCC market and have developed the simplified facilities these A/Ls require• Other examples include Finland, where Finavia, the governing body of the Finnish A/Ps, introduced a ‘low cost concept’ at the small A/P

• Outside Europe, this practice is generally not so common • Avalon near Melbourne in Australia is a rare example of an A/P that has been developed for the ops of the LCC Jetstar

Examples

1. Use of secondary Airports

• In some cases, old unused military A/Ps have been developed primarily to serve the LCC sector• This has been the case of London Manston A/P and Robin Hood Doncaster airport in the UK

2. Use of Unused Military Bases

Frankfurt–Hahn (former US airbase) is another

example where passenger

terminal was a converted

officers’ club

Ryanair began services from the A/P in 1999 and then in

2002 it set up a base there and give services to 27 destinations

A/P is served by three other LCCs, namely

Blue Air, Iceland Express, and Wizz Air

Passenger numbers have gone from 90

000 in 1999 to over 4 million in 2007

During this time the A/P authorities have invested €17 million

to give the A/P a capacity of 5 million

passengers

This is equivalent to an investment cost

per passenger of €3.50 compared to €18.25 at Hamburg, €32.40 at Cologne–Bonn, and €60.00 at

Munich

Example

2. Use of Unused Military BasesLow

Cast

Carrier

(LCC)

Industry

Frankfurt–Hahn (former US airbase) is another example where passenger terminal

was a converted officers’ club

Rental space has increased from 180

square metres in 2002 to 3300 in

2005, whilst parking spaces have risen from

3433 to 9736

This means that non-aeronautical

revenue now accounts for 35% of

all revenues

A/P does not charge a landing fee to airlines with fast turnarounds to minimize the fixed cost per turnaround and the passenger

charge varies between € 5.35 for less than 100 000

passengers and €2.48 for 2 to 3 million

passengers

Beyond 3 million passengers, further discounts is offered

for a turnaround time of 25 minutes

Example

• When an A/P serves both full service and LCCs, it is a difficult task to meet the different and conflicting needs of these two types of A/Ls

2. Use of Unused Military Bases

One option which is growing in popularity is to develop a specialized low cost facility or terminal with simple design & lower service standards than in

conventional terminals

Certain costs associated with the R/W, nav equipment, fire/rescue, and security, will be same for all

• For example, Amsterdam A/P built which has a simple design with no airbridges and functions within a 20-minute turnaround time• Marseilles had a separate low cost terminal that was converted from an old cargo facility • Budapest has also developed an LCC terminal to accommodate Wizz Air and Sky Europe who have bases there, and in 2004 Warsaw A/P opened its Etiuda terminal, which originally had been an arrivals hall but more recently was used as a supermarket, furniture shop, and storage space• At all these A/Ps, the passenger charge is lower for the low cost facility except at Amsterdam where there is a differential landing charge depending on whether an airbridge is used or not

Table-4.2 Examples of LCC Facilities and TerminalsAirport Date of Type of Passenger Gross area A/P charges Airline users

opening terminal capacity policyMarseille 2006 Refurbished l3.5 7532 Cheaper EasyJet, Flybe, MyairAmsterdam 2005 Piers off terminal 4 6150 Cheaper No airbridges Budapest 2005 Refurbished N/A 7990 Cheaper Wizz Air, Sky Europe,

Table gives details of some presently existing low cost terminals and facilitiesSome of these are refurbished existing facilities and some are dedicated new terminals

LCC facilities & Terminals in EUROPE

• There are two LCC facilities in South East Asia (Singapore A/P, Kuala Lumpur A/P) opened in 2006• At both the A/Ps, the passenger charges for the low cost terminal are lower and the rental charges at Singapore are half of those charged in the main terminal•

LCC facilities & terminals in South East AsiaTable-4.2 Examples of LCC Facilities and Terminals

Airport Date of Type of Passenger Gross area A/P charges Airline usersopening terminal capacity policy

K’Lumpur 2006 New terminal 10 35290 Cheaper Air Asia,Pacifi c Air, Singapore 2006 New terminal 2.7 25000 Cheaper Tiger Airways

• There is Plan for providing similar facilities in Bangkok, the Philippines, Indonesia, Dubai, and Delhi• In Mexico, at Monterrey A/P, Terminal C is an LCC terminal• Southwest in the US has low cost facilities at Baltimore–Washington, and at JFK A/P in New York

5. Point to point network• Point to point network.

• LCC shuns the hub-and-spoke system and embraces the simple point-to-point network

• Almost all AirAsia flights are short-haul (3 hour flight or less)• No arrangements have been made with other airline companies on

connecting flights, on possibilities of flight transfers, nor on having the luggage labeled and passed through from one flight to another


6. Lean Distribution System• Distribution costs are something that FSC most often ignore. Very often, FSC relies on travel agents and from their posh sales office• Furthermore, FSC always blows the budget by complicating their distribution channels by integrating their systems with multiple Global Distribution Systems• LCC will keep their distribution channel as simple as possible and will cover the whole spectrum of the clientele profile• For example, AirAsia can cater to the most sophisticated European traveler via internet and credit card sales. And at the same time, AirAsia has an established system to sell our tickets to the most remote and technology deprived locations, such as in Myanmar. (a) Internet Sales. The bulk of sales (65%) are done via the airline’s website, whereby the fares are paid using a credit card. This is the most cost effective distribution channel


6. Lean Distribution System (b) Sales office. AirAsia only has a few sales offices. We only establish a call centre if we are confident the sales derived from the centre will be worth it. Furthermore, we are not fixated with having our sales office in the posh side of town.

(c) Travel agents. LCC avoids reliance for sales via travel agent as much as possible. This means that the airlines do not pay any commission to a travel agent, which would otherwise have been reflected in the fares. Also, as they do not use travel agents, they do not use, nor participate in the world wide reservation systems and thus save costs, which again are reflected in their pricing.

(d) Call centres. Ticket sales can be done via telephonically; this is a simple and cost effective method


• Full service airlines argue that LCC terminals are discriminatory against carriers that

operate in the main terminals and all A/Ls should have access to the new terminals

• They also argue that A/Ps should be focusing on the reduction of costs for all it’s A/L

customers and there should not be differential pricing

DIFFERENTIATION

OF SERVICE

LEVELS

Full Service Airline’s Concerns

• These A/Ls have made a number of legal challenges• For example, at Geneva A/P where easyJet is a major A/L, there were plans to convert an old terminal into a low cost terminal but Air France-KLM objected and claimed that the lower passenger charge would give the LCCs a competitive advantage but Swiss Federal Court rejected this but Geneva has abandoned its low cost terminal development project• At Marseilles A/P, Air France-KLM claimed that the differential charges between the main terminal and the low cost terminal were unreasonable. This resulted in Marseilles A/P discontinuing its separate charges in the main terminal and adopting a single €3.54 fee which is nearer to the €1.22 fee of the low cost terminal• At Amsterdam, Air France-KLM has also opposed the differential pricing, particularly as there is only a separate pier and not a separate terminal

• For A/Ps, LCC terminals are an effective and cost-efficient way of coping with

increasing demand, if the current terminal capacity is already well utilized

• However if there is still capacity in the main terminal, the more favourable option must

be to get A/Ls to use this terminal• Worst case scenario is when a significant traffic shifts from the old terminal to the new

terminal, leaving the original terminal underutilized at a time when overall costs have

increased• There is also a more general issue related to non-aeronautical revenues as most of the

low cost terminals have commercial facilities but revenue from them is lower than what

would have been generated in the main terminal

DIFFERENTIATION

OF SERVICE

LEVELS

Airport’s Concerns

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