Characteristics Of Low Cost Airlines Operations Management Essay
Low cost airlines are having a rapid development. In 2012, Luton-based budget airline Easy Jet reported it carried 1.79m passengers in September, increasing 18.6 from a year earlier. Airports operator TBI reported growth of 29% in the number of passengers using low-cost services from its four European airports.
It is worthy analysing the operations of leading low-cost airlines nowadays. This report will analyse the operations characteristics and strategies of low cost airlines, with the intention of fully understanding their business practices along with how they compete and interact with Full service carrier airlines. When analyzing the characteristics of Low cost airlines operations we can take Ryanair or Easy Jet as examples as since they are industry leaders they exemplify many of the attributes which Low cost airlines work towards.
2.1 The characteristics of low cost airlines ’operations
When analyzing the characteristics of low cost airline operations, we have to look initially at different low cost airlines and compare them but also look at non- low cost airline companies and compare with them as well. If we take Ryanair as an example, we will notice that they were able to make obscure and unknown airports into visible, the key word here being visible. They were able to expand their rote of network, thus they were able to establish more and new bases to create more possible and wanting connection flights at very cheap costs, giving the customer a pleasant price. Ryanair has achieved a dominant market share in all the routes they operate on. Easy Jet has been focusing more on major airports, which may be the biggest threat to other major airline companies.
The product-service continuum
When analysing the product-service continuum, which shows the focus of company towards its operations strategies, where there will be either more of a service or product perspective, towards the customers. These airlines tend to provide more of a service rather than a product itself The service here being obviously cheap transportation in the best quality and efficient manner. This can be seen as a major service. ’Products of Easy Jet include sandwiches, toasted sandwiches, chocolate, snacks, hot drinks, soft drinks and alcoholic drinks. EasyJet also sells gifts such as fragrances, cosmetics, gadgets and EasyJet-branded items on board, as well as tickets for airport transfer services or train tickets. The easyJet magazine called "The Traveller" is published monthly and as other airline magazines, is free to go’’. (Source: http://en.wikipedia.org/wiki/EasyJet). Passengers may purchase items on board from the "EasyJet Bistro" buy on board programme. As shown by the graph below, the LCCs produce major service accompanied by minor goods and services. Minor service can be seen as ‘EasyJet Hotels and EasyJet Holidays which is an accommodation and travelling booking service.
b) The transformation model
The transformation model, a process that looks at the complexity of an organization where its goal would be to minimize and gain a better understanding of the business itself, would have to be all the processes around the plane, the main service, luggage, inspection and finally the transportation.
The inputs for this process include two main categories.
+ Transformed resources: customer
+ Transforming resource: staff and facilities.
Staff includes pilots, attendants, technicians, managers, workers, etc. Moreover, the process also requires many facilities likes airport, planes, trucks and machines for the flight.
All the needed resources are put in the transformation process and load it on the plane to ready for the flight. Food and another supplies are provide during the flight for the passenger. After the plane take off, the all of the baggage will be delivered to the destination airport and ready to be collected.
The output would be the provision of the service, of transporting the customer to another location, assuring that the customer reaches his or her destination.
c) The 4V´s
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When comparing cheap to expensive airlines, we must always analyse the four V´s to be able to make a more accurate conclusion about each type of airline.
In terms of volume we could say that low cost airlines have a high level, because they have their own specific characteristics, their everyday procedures and obviously lower unit costs. Other regular airlines would probably have a lower volume, since there will be fewer flights but more expensive, their unit cost will be higher. EasyJet airlines operate on over 600 routes across 30 countries with their fleet of over 200 aircraft.
When talking about British airways, we can immediately notice that there’s some flexibility in the procedure, such as check in, it’s a complex project but the company will make sure to meet the customers wants and needs, on the other hand the unit cost will be high, giving them a high variety dimension. Easy jet on the other side has a low variety, because their unit cost is low, not flexible, less complex and due to the low costs, customer’s needs are not always met.
This analyses would be very similar for both types of airlines, variation on demand will be increasing on holidays, such as Christmas or summer holidays, which will lead to demand spikes to both types of airlines.
This aspect of the analyses would be low, even though, the customer experiences the flight and all the services provided by the airline, he or she has little contact with the people providing the service, due to a distance between the customer and the process there is an inevitable lag in communications, on the other side, the customer experiences the actual process, by checking in, or interacting with the flight assistant, consuming at the airport and so on.
Low cost airlines’ performance objectives and operations strategy.
EasyJet is Europe’s second largest low cost carrier in Europe, with the fleet of over 200 aircraft and so provide a good example of the sort of performance objectives low cost airlines will likely be working towards and the sorts of operations strategies they are likely to use to achieve them.
Slack (2010) determined that in order to satisfy customer requirements, there are five basic performance objectives that a company like EasyJet must meet for the operations, these being; Cost, Quality, Speed, Dependability and Flexibity. It is not likely that EasyJet can operate simultaneously focus upon five performance objectives and so they need to choose the objectives that they will give priority to; the ones they have elected to focus on are cost, flexibility and dependability.
Keeping a low Cost is the main order winner for EasyJet. An order winning factor is an operational factor that will directly and significantly contribute to winning business and providing advantage over competitors. They are regarded by customers as key reasons for purchasing the products and services from EasyJet. Since EasyJet is a low cost carrier, customers primary reason for choosing EasyJet is because they are cheaper than the alternative which is from a full traditional service carrier airline. Therefore, reducing cost is one of Easy Jet’s primary internal strategies.
From EasyJet 2012 annual report, fuel cost is equal to a half of total other costs. In 2012, the fuel cost raised to over £1 billion. Fuel is the most expensive and important cost, therefore reduce the fuel bill is an objective of a low cost carrier such as EasyJet
This table from EasyJet’s 2012 annual report it is evident that fuel cost is equal to a half of total other costs. In 2012, the fuel cost raised by 25%,, from £917 million to £1149 million. Fuel is the most expensive and important cost, therefore reducing the fuel bill by maximising their operations will be a key means of meeting their objective of being a low cost carrier. A good example of how EasyJet is working to achieve this is the four zonal dryers designed to reduce weight of airplanes which is currently going on a 12 month trial. They are being used on four A320, aiming to cut weight created by moisture by up to 250kg each flight, so they can save more fuel. The zonal dryer technology will potentially save 4.5 million kg of fuel and also increase the speed of aircraft.
Much like most Low cost airline carriers Easy Jet prefers to use secondary airports in major cities as their destinations. It is because secondary airports charge lower administrative fees than primary airport, more willing to co-finance the promotion of new routes and normally offer faster turnarounds as there are fewer air movements. However, they miss a number of important airports to stay. For Instance, London Heathrow, the biggest airport in the UK has no flights operated by EasyJet, instead they use a smaller London airport, Luton. It is cheaper but causes problems for people who live in London as it is not easy to get to Luton. It is more flexible to travel to Gatwick or Heathrow since they are main airports in London so there are more public travelling services. As a result, they lose some customers.
Secondly EasyJet Choose to focus upon service Flexibility as a performance Objective and key part of their operation strategy. EasyJet currently is operating on 600 routes across 30 countries and they intend to expand this number in the future. Also Easy Jet concentrates on volume flexibility. From winter 2012, EasyJet announced to have new routes to Tel Aviv, Tallinn, Turin, Amsterdam, Geneva, Venice, Isle of Man and Copenhagen. EasyJet has also been awarded the rights to operate between London Gatwick to Moscow Domodedovo by the CAA (Civil Aviation Authority) from Spring 2013. They expect to have about 230 million passengers in the first year. EasyJet will bring a lower price for the flights between London and Moscow in compare to other fares from other carriers, about £1000 for an economy ticket. From summer 2013, EasyJet will begin flying to popular Greek resort of Myxnos and the historic Sardynan resort of Ollia. The new route will operate two times per week, with the fares starting from £31 (http://www.easyjet.com/en/book/moscow-route). Therefore, passengers will have a wider range of choices to respond to the growing demand for flights. Also, in high demanded time such as holidays, EasyJet increases the number of flights to fulfil its passenger’s demand.
This being they try to distinguish their business from the competition by being the more dependable company when it comes to the service they offer. This takes the forms of trying to minimise delays and waiting times for customers. Getting customers to their destinations on time is a key factor. Their objective is to arrive at the designation within 15 minutes of scheduled time. A system named ACARS in the aircraft records the time of arrival and then sends them to the control centre. Therefore, EasyJet can measure exactly the time the passengers arrive at the destinations.
In the 3rd quarter of 2012, they improved their on-time performance from 77.2% to 88.2%, increasing customer satisfaction and the brand image.
Quality is qualifying factors. “Qualifying factors may not be important competitive determinants of success but are important in other ways. They are those aspects of competitiveness where the operation’s performance has to be above a particular level just to be considered by the customer.” (Slack, 2010, Operations Management). For Easy Jet and other LCC’s, the quality must be flights with good meals, cleanliness or in-flight customer service, also the efficient booking, luggage handling, reliability and punctuality.
Speed is also qualifying factor. Speed is a matter of turnaround time of aircrafts, reservations, luggage handling for most airlines. Each airline would try their best to fasten the time; however, this also depends on others. For example, the faster the passengers run through the terminal gate, the sooner the flight can take off. It reduces the turn round time of the aircraft and can save the airline utilisations as well as money. Because Easy Jet and other LCC’s charge for the holding luggage, around £9 each luggage, the number of holding luggage decreases. The weight of aircraft decreases, increasing the speed.
2.3 Differences between the operations of low cost carriers (LCCs) and traditional full service carriers (FSCs).
Full service carrier airlines, or FSC’s key features of operations differ from those of Low cost carrier airlines, LCC’s in several key ways. First and foremost is their decision to operate a hub and spoke network structure that allows a wide range of origins and destinations covering destinations that are domestic, European and worldwide. There are also various commercial and legal advantages to using a hub and spoke network, such as the increased number or origins and destinations available. As this occurs the load factors will do the same which explains why FSC’s, unlike LCC’s, are able to include the largest aircraft such as the Boeing 747 in their fleets. The key downside to the hub and spoke network is due to the complexity of planning connecting flights and the tight time frames needed to meet these can result in delays.
In comparison when looking at LCC’s operations, one can note that the focus is upon cost reduction with the aim of implementing a price leadership strategy onto their market. The table below shows the various cost cutting strategies used by LCC’s and which unit cost category they fall into (costs per passenger kilometre).
LCC’s will often look to reduce unit costs by implementing high density seating configurations and operating a “no thrills” service where all kinds of free inflight services are eliminated. Unlike LCC’s they will often FNC’s often choose to operate different aircraft types which means that they are not able to minimize costs in the same way as LCC’s. To allow for this they instead focus on providing a wide range of pre-flight and on-board services, including different classes and connecting flights. This is a sharp differentiation to LCC’s and their limited cost, no thrills service.
LCC’s will usually operate pricing policies which are very dynamic, offering substantial discounts for customers who book a long time in advance. LCC’s unlike FSC’s will often choose to earn ancillary revenues by selling other products and services both on the aircraft and through their websites. These could take many forms from additional fees for checked in luggage to additional cost for paying via credit card. These are not however universal to all LCC’s. Most LCC’s will also choose to eliminate programs like frequent flyer miles or loyalty programs, however this is not universal for example German Wings, a German Low cost carrier airline, is one of the first few LCC’s to have introduced the option to pay a registration fee which covers the administrative costs of running a frequent flyer program. This allows their customers to receive the benefits of such a programme whilst passing on some of the cost from German Wings to their customers.
FSC’s will also operate a different marketing and strategic view from LCC’s, this is due to the fact that the Hub and Spoke system adopted by them allows for the bundling and reallocation of outgoing airline passengers at the hub airports at which they operate. This allows them to serve significantly more origins and destinations than most LCC’s. In addition FSC’s tend to gain market power on their respective hub airport allowing them to strangle competition by offering premium rates not available from other airlines flying from their “hub”. This means that fares for passengers originating or transferring through the carriers hub are cheaper than those taking similar routes which do not include the carriers hub. In Europe this has proved a key capacity constraint at the largest airports which has hampered the ability of any new carriers to enter the market.
2.4 Changes that full carriers have made in response to the threat from low cost carriers.
It cannot be denied that LCC’s have permanently altered the dynamics of the short-haul market in aviation, their approach to both strategic and operational issues is focussed upon simplicity and this has now become their guiding principle. As a result of this LCC’s achieve substantially lower operating costs than traditional FSC’s, these savings can then be passed onto the consumer in the form of substantially cheaper fares. When Analysing the changes that full service carriers have made in response to the threat from low cost carriers it is worth noting that, in order to fully address the threat presented by LCC’s, FCC’s have adopted a number of various strategies. For the purpose of this it is beneficial to focus upon changes made by one particular company as a result of the threat; British Airways are a company who as a direct result of LCC’s has been forced to dramatically reform its business model and who now find themselves in a position where, in order to compete in the short- haul flight market, they must benchmark their costs against LCC’s to determine the extent of change required.
British Airways did not have an established short haul program; instead they were operating a collection of independent businesses with their own separate sales and management divisions. These were unable to compete with the new wave of LCC’s cutting chunks from their market share. British Airways elected to cannibalize these to cut costs and streamline its business model. This resulted in the formation of British Airways CitiExpress, and with other subsidiary airlines such as CityFlyer being absorbed into British Airways short-haul operation out of Gatwick. British Airways was also forced to re-evaluate its short haul capacity, and so reduced its short haul fleet from 234 aircraft in 2001 to 179 by 2005.
In order to further maximise their capacity utilization British Airways also established a twin hub network out of Heathrow and Gatwick. Heathrow would focus its operations upon retaining a traditional two hub service while Gatwick would be restructured in order to focus upon point to point flights that can be flown with a higher frequency and will less turnaround time.
However by January 2006 British Airways short-haul airline BA CitiExpress was still losing money and so in an effort to make it more distinctive it was rebranded BA Connect and a series of dramatic strategy changes were enacted upon all flights. These included restructuring of its selling classes, cutting down from over 70 ‘selling classes’ to 25. Furthermore by installing single cabins and installing an open seating arrangement they were able to increase their capacity utilization. They also adopted a more ‘No thrills’ approach, with the introduction of a pay-on-board meal and beverage service across all non-London City Routes. This change was justified by the reduction of one way fares by up to 40%.
British Airways have also looked to enact changes in the distribution of their service. This has taken the form of an 11.3% reduction in distribution and selling costs between the years of 1994 to 2004. In 2003 alone this represented a reduction in costs of £212 Million. This dramatic change has been achieved by several methods which are representative of the moves made by many FSC’s in reaction the threat from LCC’s. To start with they took the steps to increase online booking and have now managed to reach a point where 60% of all booking of their short-haul custom is made on www.BA.com and one third of all their passengers since 2006 have booked online.
In order to further differentiate them-selves from the competition they face, FSC’s must now instead focus upon different operating strategies. Instead of cutting costs across the board FSC’s are electing to focus upon customer relations, value adding services and the need to innovate when looking to generate new streams of revenue. This is in stark contrast to the LCC’s they are competing against.
LCC’s provide the mixture of product and service, but mainly service. Obviously, the major service is transporting passengers which are their main transformed resources to different places with cheaper price than FSC’s, accompanying transforming resources such as flight crew or airplanes etc. Generally, LCC’s provide high volume but low variety and variability. The variation is quite low, fluctuated by seasons and holidays.
LCC, like Easy Jet has five basic performance objectives: Cost, Quality, Speed, Dependability and Flexibility. It is difficult to operate all five objectives simultaneously, so they give priority to their order winning factors which are cost, flexibility and dependability, whereas keeping a low cost is the main strategy.
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