Competitive Strategies Of Low Cost Airlines Management Essay

1580 words (6 pages) Essay in Management

5/12/16 Management Reference this

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INTRODUCTION

In the beginning of this century, aviation industry was searching for a new concept of flying. The concept knocked the minds of the airlines people to go for the Low Cost Carriers (LCC) LCCs open a totally new product: no frills, no food, no drinks, less spacious seats, no travel agencies bookings, but for a very low price. This “low-cost revolution” has then forced the traditional network full-services carriers to respond this phenomenon progressively. Therefore, the competition between LCCs and full-services airlines has become a significant issue of interest regarding the airlines industry.

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The emergence and growth of no frills, low-cost airlines have radically altered the scenario of competition in the industry. Those major LCCs have innovative operation methods to lower the cost base and provide lower average fares. In terms of strategic positioning, in order to provide low-fares the LCC business model focuses on its distinct low cost strategy. However, not all LCCs carriers are likely to make profit, only certain market-leading operators are able to produce a consistent level returns above their cost of capital.

ORIGIN OF LCCs

The first low cost airline was used in the year 1949 at UNITED STATES. The successful company which became a benchmark in this industry was ‘Pacific Southwest Airlines’. Today, Southwest Airlines operates more than 3,100 daily flights across 62 cities in United States, and registers around 80 million passengers per year. A small Texas airline named when it began, now Southwest has grown to become one of the largest airlines in the United States.

KEY FEATURES OF LCC MODEL

Simple Product: Catering was done on demand for extra payment; planes with tight seating (but bigger capacity) and only single type of class; no seat assignment; as well as no frequent flyers’ programmes.

Positioning. Non-business passengers like Leisure travellers, traffic and price-conscious business class passengers; short-haul point-to-point traffic with very high frequencies; aggressive marketing; secondary airports; and competition with almost all transport carriers.

Low Operating Costs. Low wages; low fees to the airport; low maintenance cost, cockpit training and standby crews for homogeneous fleet; high resource for productivity: shortest ground waits and turn around timings due to simple boarding processes, no air freight, no hub services, little cleaning times; and high degree of online sales.

CHALLENGES FOR LCCs

Doganis had identified four major problems of low cost carriers.

Over Capacity

Decline in yield or average fare

Controlling Costs

How low cost carriers should develop their business model.

PORTER’s COMPETITIVE STRATEGY MODEL

Porter has described three general types of strategies that are commonly used by businesses. These three strategies are defined with two dimensions.

Strategic Scope

Strategic scope refers to the demand side dimension and analyses the size and composition of the target segment.

Strategic Strength

Strategic strength is the supply side dimension, which sees the core competency and the overall strength of the firm.

Low cost airlines must do three things in order to survive in the market for a long term and to make their ends meet in the short term.

Cost Leadership Strategy

LCCs must ensure that their cost per passenger-km should be half that of the legacy airlines in order to survive in the market.

Differentiation Strategy

LCCs must focus on differentiation of the product. They have to prove the value for the money which a customer spends.

Market share and Market Segmentation Strategy.

The dominance of market share at their area service and the focus on their area of expertise is a must for LCCs.

THE “LCC” PHENOMENON IN INDIA

In India, the model was introduced in 2003 by Air Deccan. However, the same descriptive label has masked the differences in ways the model has worked in India vs. U.S. and Europe. First, in terms of market share, LCCs accounted for almost 30% of the domestic passengers carried in 2006. As of November 2006, it rose to 35%. This rate of market penetration of LCCs is remarkable given that the market share was zero in August 2003. Low cost carrier operations account for 44% of all flights within India compared to 22% in the U.K. and 19% in the U.S.

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The second significant difference was about the relationship between low cost and low fare. In U.S. and Europe, the LCCs offering low fares are also truly low cost operations. In India, the airlines that offer low fares are in reality not low cost operations. They are LCCs in name only. Among the LCCs in India, Spice Jet has the lowest unit cost at 6.2 cents per Available Seat Kilometres (ASK), which is comparable with Southwest, Easy Jet, and Jet Blue. But this is more than twice that of the best performer, Air Asia with unit cost of slightly over 3 cents per ASK. For another Indian carrier Jet Lite, it is 7.2 cents per ASK. Jet Lite is the reincarnation of Air Sahara after it was acquired by Jet Airways in April 2007.

There were operating losses for Air Deccan in 2004-05 and 2005-06. Moreover, while the operating revenue per Revenue per Kilometre (RPK) went up by 9.4 percent, the operating expenses went up by 30.65 percent. These flies in the face of what LCCs outside India like Ryanair have done when they were in a similar stage of their growth. Ryanair ruthlessly focused on lowering costs while finding ways to enhance revenues by selling food and drinks during flight to captive passengers and selling services such as insurance, hotel reservations, and rental cars on its website.

In the real scenario of LCCs, they will provide only point to point service avoiding connecting flights. Whereas Air Deccan has deviated from the LCC model, it actually connects all metros as well as metros with tier 2 and tier 3 cities. Analysts in the industry had pointed out that this had actually increased the cost of Air Deccan.

IMPACT OF LCCs IN INDIA

The so-called LCCs in India have expanded the market for air travel in India through their low fares but without being profitable. They have made air travel accessible to the middle class. Some travellers who were using trains and buses have switched to travelling by LCCs because of the low fares. Spice Jet for instance, has targeted passengers who are travelling by air-conditioned classes in Indian Railways. They have also made pricing more competitive.

The LCCs had set off a price war with the incumbent full service carriers (FSCs) Indian, Jet Airways, and Air Sahara. The FSCs started discounting fares by as much as 60%-70% in some routes to match the prices of LCCs. This in turn has hurt their revenues, margins, and market shares. For instance, Jet Airways, which controlled about 50% of the domestic market in 2003, saw its share (including that of its acquisition Jet Lite) drop to about one-third by 2007. Lower fares also meant more frequent travel. Low cost air travel has created both depth and width of demand which has percolated to non-metro towns and Tier-II cities as well.

AIR DECCAN AND KINGFISHER AIRLINES.

India’s first low-cost carrier, Air Deccan, which started the low fare boom in India, reported a $43 million loss for the fourth quarter ending June 2007. To keep afloat, Air Deccan sold 26% of stake in May 2007 at $136 million to the man who is famous for the liquor brand, Vijay Mallya’s then two-year-old Kingfisher Airlines, which itself was losing about $250,000 a day! This stake was later increased to 46%. The business models of these two airlines seem to be as diametrically opposite as the personalities of Mr. Gopinath (founder of Air Deccan) and Mr. Mallya-all the more likely why these two will not be merged and will continue to be run as separate entities. By this strategic move, both the airlines plan to improve performance and save money by sharing facilities and staff.

NACIL, Jet Airways, and Kingfisher, are the market leaders of the airline industry in India, controlling over 80% of the market. Most likely, there will be 2-3 carriers operating in domestic FSC space, 5-6 carriers in the domestic LCC space and NACIL, Jet Airways, Jet Lite-and soon to be joined in 2009 by Kingfisher-in the international space.

CONCLUSION

The low-cost airlines had revolutionized and had injected a dose of democracy into the travel world – but can it last long? The price of a return flight ticket can be cheaper even than a train. It seems too good to be true in the past, but the cracks are showing in the budget aviation world really. Low-cost airlines have succeeded in taking over a great share of the market. India as a developing country has lots of vision towards the low cost carriers. Its emergence and development can only be done with certain new strategies which they ought to adopt to emerge as real LCCs of the country.

With targeted markets and networks, low-cost carriers nearly have turnaround times, increase aircraft utilisation, reduce congestion, and significantly improve their productivity; and still are in compliance with safety regulations. Moreover, low-cost carriers get ready to take off more quickly; enabling them as competitive airlines to schedule more flights and provide more attractive schedules for passengers.

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