Study On Low Cost Airlines And Carriers Management Essay

Low-cost carrier, is so-called no-frills airline or budget airline is an airline that adopts the low cost strategies in all respects of business, such as the opening of airlines, choice of secondary airport, ways of selling tickets, and on-board service. For instance, single type of airplane, simple fare scheme, direct sales of tickets, unreserved seating, without many traditional passenger services, use secondary airport, short flights, fast turnaround times, simplified routes with point-to-point transit, low labor cost with multiple roles and etc. Such a strategy will cut down the price to a lower level and then the cost they have saved will benefit the passenger, and it will help to achieve the win-win aspect. Low-cost carrier had changed the traditional idea of air travel, is a high level of consumption, into a speedy and economic air travel. The concept originated in the United States, follow by Europe and subsequently to Asia.

The Implementation of the above plans of action cannot be executed by the other low cost airlines. Every airline tries to be unique in itself with methods of difference varying from allotted seats to operation of more than one type of aircraft. Being even after implementing the best of the strategies the operation costs of the airlines is significantly high while in contrast the airline offering cheap fares to attract passengers does not favour the airline industry a lot. These are the typical scenarios any low cost airline carrier is facing all over the globe and with increasing competitors the situation is jus taking a downhill slope.

Most, thriving low-cost carriers strive to offer a modicum of supplementary benefits ranging from flying the passengers on the stipulated time and offering the guests with extra luggage space and/or more legroom. The classic example of offering a great value low fare in its business class section can be demonstrated by AirTran, whereas live in-flight television can be found in Frontier and JetBlue airlines. The advantageous position of US Airways can be credited to its widespread route network together with its array of international destinations.

The trend of the low-cost carrier airlines was actually initiated by Pacific south west on May the Sixth, 1949 in the United States of America. With actual operation of its fleet of airlines beginning in 1971, South west airlines continued to add profits in its accounts books from 1973 onwards. With The Airline Deregulation Act of 1978, it was hardly a matter of time that the model saw itself being implemented in various parts of the world.In the country of Ireland it was RyanAir which really extracted the full capabilities of the model and started making huge profits since its inception in 1991 followed by easyJet which setup its counters in 1995.The development of the ‘Low-cost’ airlines was just about to explode in Asia and the Oceania with major airline giants such as AirAsia from Malaysia and Virgin blue from the Australia making the most of the new models in their respective routes. The low-cost carrier model is appropriate internationally, while deregulated markets are most apt for its swift reach. In 2006, fresh low-cost carriers were announced in Saudi Arabia, Mexico and also in the sub-continent of India.

Customers consider the price of the ticket they are paying as one of the most important factors when selecting an airline and, this is the one area where the conventional ‘full service’ airways are not able to compete with the low-cost carrier airlines. To be fair on the conventional airlines part, the huge structure cost of their operations hamper them from competing with the low cost airlines on a price point of view. From 2001 to 2003, when the aviation business was shattered by terrorism, war and SARS, the bulk majority of conventional airlines faced heavy losses while low-cost carriers usually held on to the profit

Majority of the carriers decided to initiate their own no-frills airlines, as the case of KLM’s Buzz, British Airways’ Go, Air India’s Air India-Express and United’s Ted, but have found it difficult to avoid cannibalizing their core business. Exceptions to this have been bmi’s bmibaby, germanwings which is controlled 49% by Lufthansa and Qantas’s Jetstar all of which successfully operate alongside their full-service counterparts.

For holiday purposes, budget airlines also contend with seat-only charter airplanes. However, the unavailability of chartered planes (mainly depending upon the length of stay) marks them as one of the least favourites with the tourists.

As the competition among the budget carriers has increased in the last couple of years, the level of competitive stiffness among the various carriers have also increased. They not only have to compete among themselves but also have to compete with the other traditional carriers. The American Airline industry, to cope with such conditions, has implemented variations to the model being used in practice. For example, while Frontier Airlines and JetBlue Airways advertises satellite television. In Europe, the emphasis has remained on reducing costs and no-frills service .In 2004, Ryanair announced proposals to eliminate reclining seats, window blinds, seat headrest covers, and seat pockets from its aircraft. (Sydney Morning Herald 17 February 2004).

The domestic deregulation of the airline industry prompted a number of upcoming airlines to break into the aviation sector ,but the period which followed it was one which lead to a majority of them being seized or acquired. It was this time where the large full-fledged domestic airlines ruled and displayed domination in the airline sector. But it was not until southwest Airlines entered and revamped the whole scenario of the sector. Following this was a period when the merging and consolidations of the airlines started on a huge scale, which led to the creation of a geographically broad hub and spoke network of systems. Even the entry of the new airlines failed to deteriorate the consolidation processes. This finally gave way to a period where no new airlines was ready to initiate their firm and this in turn made the critics of the airline industry to wonder that the three major network carriers were having such a huge stronghold that the domestic competition looked to be threatened. Then there were Southwest airlines which was the only airline which stood any chance in challenging the large networked carriers.

By the end of 1992 Southwest was still the only low cost carrier, but it had expanded to the point that its markets share reached 21 percent of domestic passenger traffic, compared with 13.7 percent four years earlier. Southwest’s very low operating costs and success wherever it operated left no doubt about its ability to continue to be competitive.

As it turns out, in addition to its own direct competitive effects, Southwest had another important impact. It provided a blueprint for successfully competing with large network carriers. The linchpin to this success is low costs. While a number of new entrant carriers today have different business concepts, many of the more successful have one thing in common that allows them to compete effectively. This common dominator is very low operating costs. Since early 1993 numerous other low cost carriers began service. These carriers are expanding rapidly in number and in size.

By 1994, Southwest and several low cost new entrant carriers competed in markets that accounted for 31.5 percent of domestic traffic. Only nine months later, the year ended September 30, 1995, passengers traveling in markets with low cost service accounted for 38.6 percent of total traffic. This accelerating growth rate shows no signs of slowing down.

SWOT Analysis

S.no

Potential resource strengths and competitive capabilities

Potential resource weaknesses and competitive deficiencies

1

Corporate Culture – LUV and FUN

Highest employee compensation levels in the industry

2

Low Cost Operation

Lean Staff Operation

3

Efficient Utilization of Assets

Customer service being secondary option

4

Maximize Human Resource

Highly Unioned Employee

5

Single Aircraft Type – Boeing 737s

Risk of Single Aircraft Supplier

6

Distribution Efficiencies

Tickets Oversold

7

Simple Fare Structure

Not able to get the consumer for a round trip thereby losing the second trip to a competitor

8

know-how or competencies

9

High capacity usage

Sno

Potential market opportunities

Potential market threats

1

Airline’s fuel hedges

Fuel costs

2

Point-to-point operations

Natural disaster such as Hurricanes

3

Drop in competitive capacity

Legacy carriers consolidation (merger)

4

Rapid capacity grow

Alternative Transportation

5

Strong brand and loyal customer

Stealing traffic from other LCC (JetBlue, AirTran)

6

Terrorism

7

demand for Boeing narrow bodies in Asia and Europe is strong, making it difficult to secure delivery positions before 2010

8

Industrial R&D

The amplified annual costs associated with Airline security measures.

9

Prolonged internet adverts

Potential resource strengths and competitive capabilities

Corporate Culture – Love and Fun

People like to work in an enjoyable environment. If the work environment is very seriously and strictly business, they might burn out. Southwest promote love and fun at work. For further promoting love and fun corporate culture, Southwest stock listed on the New York Stock Exchange as “LUV” (Southwest 1997).

At Southwest Airlines, Customers and Employees are their top priority. Herb Kelleher of Southwest Airlines says, “Our paychecks say ‘from our customers’ because we want our people to remember that it’s not some addition in an office that produces the check; it’s our customers.” (Southwest 2006)

Southwest spirit to customers was the key, as one Southwest manager put it, “Our fares can be matched; our airplanes and routes can be copied. But we pride ourselves on our customer service.” (Sunoo 1995)

Southwest has initiated “The Nuts about Southwest” blog with the goal to give readers the opportunity to look inside Southwest Airlines and to interact with Southwest. The bloggers from cross-section of the company build a personal love and fun relationship with readers. (http://www.blogsouthwest.com)

Low Cost Operation

No extra on-board service

In order to archive low cost and fast turnaround time, on-board catering, entertainment, reserved seat, more stewards and air hostess, and other complimentary services are eliminated, and replaced by optional paid-for on-board food, drink, and entertainment. Moreover, they will sell duty-exempt goods in the flight to increase income also.

Single Passenger Class

Because of low cost strategies, Southwest will not set business class, but single economy class to have more travelers. Besides, they narrow the seat space to contain more seating use fully the airplane cabin.

Efficient Utilization of Assets

Quick Turnaround time

Short flights and fast turnaround times to allow maximum utilization of planes. This is to make sure the aircraft utilized constantly, which in turn maximizes revenues.

Secondary airports

Southwest Airlines is using less congested secondary airports or the corners of major airports to avoid air traffic delays and taking advantage of lower landing and parking fees. Passengers are sent to their destinations by shuttle buses.

Unreserved seating

Time is money. Southwest Airlines will not offer service for travelers to reserve the seat because it will reduce the boarding time to check the numbers and the time that ground crews have to deal with the boarding procedure. There is no seat allocation, you just sit where you like. Moreover, they use plastic and recyclable boarding pass to save the cost. All the purpose is to simplify the procedure to turnaround fast, so there rarely to see lots of customers wait in line in front of the counters of Southwest.

It is also in order to turn a plane as soon as possible. It can save about 20 minutes than the mainstream airlines because the longer the waiting time at a gate, the more it costs an airline. More daily operations at a gate, fewer gates are needed and infrastructure costs are reduced. The airport agencies will try to cooperate with them to provide good service.

Maximize Human Resource

The employees are working in multiple roles in order to limit personnel costs. Every scheduled flight only has three flight attendants after the airplane lands, two of the flight attendants have to clean the cabin and one work as gate agents to check or collect the flight tickets for the passengers of next flight. The aircraft commanders have to clean the cabin if that is necessary. Thus they don’t hire cleaners and extra workers. Flight attendants also sell meals, drinks, and duty-exempt goods after the aircraft is taking off. Besides that, as the Southwest Airlines only three persons to take care of the flight tickets but the average of the mainstream airlines are 50 to 60 persons.

Moreover, Southwest Airlines pays pilots and flight attendants per trip, shifting what could be a fixed cost to a variable one, he says. JetBlue has taken this a step further by employing reservations agents who work from home. They are busy during peak times and receive extra compensation. In downtime periods, they are off duty and not paid. “This allows two things: you are not paying people when they are not needed and two, it allows people flexibility and choice.”

Southwest Airlines make policy choices that give people incentives to reduce cost at every opportunity.

Single Aircraft Type

To keep costs of equipment down, Southwest Airlines is using a single type of airplane, Boeing 737. Instead of different types of airplanes thus employees, spares, equipment could be replaced each other to reduce staff training costs tremendously. This minimizes the cost of maintaining different aircrafts, and brings economies of scale when buying parts for airplane repair in large number.

The reason of Boeing 737 is preferred due to its low operating cost and fuel consumption. Southwest can save the cost of consuming energy of changing flight and can take the mass customers to many different destinations within 3 hours. These aircrafts are smaller than usual, thus it can lands and takes off in the secondary airports, does not need to land and take off in the primary airports because the airport landing fees at major centers remain very high.

“Southwest Airlines operates some 360 aircraft,” said Williams. “It handles its own line maintenance and outsources its heavy maintenance, yet it still has lower maintenance costs than any of Europe’s airlines.”

Distribution Efficiencies

In order to decrease distribution costs, Southwest Airlines has their ways to save the costs, avoiding fees and commissions paid to travel agents and corporate booking systems, or other “middle men”.

Direct channels

Southwest Airlines emphasize on direct sales of tickets to customers bypassing travel agents without a wholesaler or a ticket agent, especially over the Internet. This saved Southwest Airlines 5% to 10% of each fare, a savings no other airline enjoyed. People can purchase the ticket by calling or going to the airline, or going on the exclusive website and paying the fare by credit card.

No Payable Computer Reservation System

There is a usual way to book the seat by mainstream airlines computer reservation systems (CRS), but its cost is high which paid a fee for each reservation, Southwest Airlines is keeping off the channel.

Own Booking Request Reservation System

Southwest Airlines being the first airline customer of the Sabre Basic Booking Request reservation system, which allowed travel agents to accommodate the reservation needs of our Customers directly.

DING! Discounts Directly To Customer Desktop

Since the 1990s, Southwest has been running a television ad campaign based on the phrase “Wanna get away?” The commercials present comical, embarrassing situations in which people find themselves wanting to “get away”. Most ads are accompanied by the sound clip “[ding] You are now free to move about the country”. The PA “ding” has become synonymous with Southwest Airlines, and inspired the name of an online ticket offer program, “DING!”. “DING!” brings deeper discounts directly to customer desktop of their choice and get live updates from the cities.

Ticket-less

Travelers will not depend on the CRS, but a confirmable code from Southwest Airlines. Southwest Airlines own reservation system that used no tickets. Ed Stewart, a Southwest spokesperson, compared the new system to those used by car rental agencies. “You show up at the ticket counter and you have a confirmation number, and we give you a boarding pass and off you go,” he said (The New York Times 1994). The operating way is to benefit both the travelers and Southwest Airlines because of the less paper work and the fast boarding time.

Simple Fare Structure

Southwest Airlines prefers to adopt simple fare structure, emphasize point-to-point transit, and adjust the fare with needs. The price structure of Southwest Airlines is lower than mainstream airlines. It is entirely different to the mainstream airlines with offering the flexible and high fare tickets. Only supply-and-demand principle dominates the price and this makes the price attractive to frequent flyers. Besides that, it also can change the price anytime to adapt to the needs of off-season and high season. Cheaper tickets by booking early where there may only be a handful of seats available on each flight at the advertised bargain fare; the earlier you book the larger the saving. The best price strategy there is in terms of marketing and cash management.

Know-How or Competencies

There will always be other air carriers that try to replicate Southwest Airlines unique business strategy. But the truth is, Southwest Airlines “invented” competition in the airline industry, therefore, we know how to handle competition from other carriers. Unlike other carriers, the Employees of Southwest Airlines know how to have FUN while turning a profit – it truly is the Employees of Southwest Airlines who set us apart from the rest. (Southwest Media, 2006)

Potential resource weaknesses and competitive deficiencies

Inconvenience Booking

The promotional fare must be booked online because agents are hard to find. Not all customers know how to access internet.

No Business Class

For greater capacity, Southwest Airlines provides only economy cabin seat and narrow seating.

No Services for Special Needs

No services are provided for passengers who need connecting flights or wheelchairs.

Simplified Service

In order to be low cost and turning planes fast, no meals, drinks and snacks for free, no seat reservation and free seating. Therefore, only flies to destinations within four hours.

Poor Quality Perception

Southwest Airlines use price as a market position. Customers may artificially relate low priced tickets with poor quality flight equipment and search for more expensive tickets that are associated with better and safer airline equipment.

Small Legroom

The smaller the airplane is; the smaller legroom is. Boeing 737 have smaller legroom even compare with other low-cost carrier commonly use Airbus A320 aircraft.

High labour cost

The labour cost of Southwest Airlines is usually lower than the mainstream airlines, maybe only about forty percent of them (Anon, 1997). Due to many reasons as the staffs are younger, there are no additional costs on senior staff or those retired staff.

Potential market opportunities

As the budget airlines put together a structure of service on demand they imagine and invent the better strategy. Moving a consignment from A to B is the rock bottom easiest structure within motor freight trucking.

International gateways is lacking of affordable secondary airport and the focus of the new airports on their role. The demand is there. Thus, the budget airlines choose the short haul, “point-to-point” service between midsize cities and secondary airports as its primary market focus to decrease the costs. The point to point service means if you are making a journey that involves a change of plane, you will have to check your luggage in for each leg of journey. In addition, with some airlines, if your firs leg is late you will not be transferred onto another plane if you miss the second. So it is wise if the passengers would check with each airline their policy on missed connections. It can insure against missing low cost connections with airlines.

Fuel Hedging

Southwest Airlines locked in lower jet-fuel prices with its strategy of buying advance jet-fuel contracts. Southwest is 85% hedged at prices capped at $26 per barrel of oil for 2005, 65% at $32 per barrel for 2006, more than 45% at $31 per barrel for 2007 and more than 25% at $35 per barrel for 2008. To hedge so extensively, an airline needs ready cash to invest, and Southwest’s biggest competitors are hanging onto cash to ride out their continuing losses. Continental is an extreme example; it has no hedges in place at all. “It’s very expensive to hedge right now,” says CFO Jeff Misner. “I sure wish I had some coverage out there,” he adds, but given the cost, hedging doesn’t make “economic sense” for Continental. CEO Larry Kellner notes, however, that the company had no 2004 hedges at this time a year ago and still wound up with a $70 million hedging gain for the year.

Availability of Secondary Airports

There are few secondary airports in major centers.

Airport Extract Low-Cost Carrier

In addition to creating lower cost facilities specifically for low-cost airlines, airports will begin to unbundled their services and the resulting charges so that airlines can select and pay only for those services that are required. This unbundled treatment of airport services can reduce costs to airlines, identify unwanted airport services that can eliminated, and reward airlines for more efficient use of airport facilities.

Low Airline Fare

Non-business passengers, leisure traffic price-conscious business passengers, are in consideration of low airline fare. The raise of low-cost carrier all offer low wages and pay less airport fees. For instance, the wages of low-cost carrier flight attends are lower then the mainstream airlines’ about 60%, it could save lots of costs.

Alternative Income

Although Southwest Airlines do not provide meals, drinks and snacks, it is actually another way to earn money. There are advertisements of various products in side the cabin and outside the fuselage which is in order to get the advertisement expenses to increase the income; the flight attends even can have commission for selling food and drinks on the airplanes. This profit will encourage the flight attends’ willing of selling products.

Low Fare Service Competitiveness

After the 911 terrorism, the costs of the security and insurance of the mainstream airlines are rising sharply. This situation provides an opportunity of development for the low-cost carrier. The latest investigation showed that there are 60% Asian travelers, which include workers, students, teachers and many businessmen, are willing to take the low-cost carrier airlines to their destinations. Today, one of every seven domestic passengers is flying because of the increased competitiveness resulting from low fare service.

Positive Impact

The low fare stimulated demand has very positive implications for the airline’s industry labor force, and promotes substantial economic growth to the benefit of consumers, local communities, travel related industries, and the aerospace industry.

Potential market threats

Needs For Higher Services

Southwest Airlines use price as a market position. Customers may artificially relate low priced tickets with poor quality flight equipment. Thus, in order to have passengers’ confidences, Southwest could be forced to shed its minimalist cost structure by providing higher services such as tickets and baggage transfer.

On the other hand, price is not the key to everything. People, some not focusing on price-sensitive clients, still have emotions, which can be stronger than price motivation because the pricing is not the key to medium- to long-term success.

Shortage of Available Airplanes

Southwest may facing an unexpected problem; a shortage of available airplanes. And the shortage is also pushing up leasing costs at a time when airlines are already hurt by record high fuel prices. Lease rates have increased between 10% and 15% since the start of the 2004. Other low-cost carrier have selected Airbus. Over the last six months, the situation has gone from one of oversupply for these 100 to 150 seat aircraft to one where there are very few available for lease. Current rentals for new A320 aircraft range between US$250,000 and US$350,000 a month depending on the length o the lease.

AeroStrategy’s Stewart, is the perceived risk of buying everything from a single supplier. This article was published in the September 2003 issue of Overhaul & Maintenance.

Fuel Cost

The fear of an oil hike remains. Southwest Airlines has been aggressively hedged against rising oil prices over the past couple of years, locking in fuel prices well under $40 per barrel. That spared Southwest Airlines the squeeze from higher energy prices that hit other carriers. Unfortunately, those hedges are ending, so Southwest faces higher energy costs even though crude prices have fallen. (Robert Walberg, Street Patrol, Jan 2007)

Unpredictable Factors

What if the unpredictable factors, like 911, the war in Iraq and the SARS strike happen again? During the sensitive time, the travellers usually choose to stay in their own countries to insure their security. Can Southwest pass the difficulty with low incomes?

Task 2

On the basis of the critical factors identified in Task 1.

a) Draw conclusions concerning the company’s overall situation.

Company Situation Analysis

Strategy Grid Model

Strategy Options Method

2002~2005 Revenue vs ASK/M

Group Mapping

b) Suggest actions for improving the company’s strategy.

STOM SOG

Konsortium

Task 3

Human Resource practices of Southwest Airlines that collectively show the company’s focus on its employees.

Employees Come First, Customers Come Second

Most company principle always customer come first but Southwest operative principle was that employees come first and customers come second. This reflected management’s belief that delivering superior service required employees passionate about their job and knew the company concern their well-being and committed to provide job security. Southwest’s thesis was “Keep employees happy, then they will keep customers happy (Thompson et al. 2004). Important of employees has been reflected in Southwest 2004 Annual Report. Southwest has changed personnel department’s name to People Department in 1989 and the department head with title of vice president of people. This happens similar with Starbucks. Starbucks recognizes competitors can replicate products, but they cannot replicate people. Therefore, Starbucks seeks to connect first with employees and second with customers. There is no better spokesperson for a company, product, and brand than someone who is happy with their job and respected by their employer and peers. A happy employee will in turn, make customers happy. (Moore 2006)

Hire Attitude, Train Skill

Love and Fun is about attitude but difficult to change someone’s attitude, so hire for attitude and train for skill (Freiberg K and Freiberg J 1996). According to Sunoo (1995), Southwest Chairman Herb Kelleher says the company looks first at individuals’ sense of humor in assessing their potential fit with its corporate culture. The airline’s reputation as a fun workplace allows it to recruit and grow without using recruiters or employment agencies. Beside that, Southwest looked for people that reading people’s emotions and responding in a genuinely caring, empathetic manner. Southwest is interested in people who truly enjoyed meeting with people, motivated to help other people and enjoyed their job (Thompson et al. 2004).

University for People

The curriculum involved everyone included new recruits, employees, and leadership regardless new or experienced. The leadership courses focus on coaching and encouraging rather than supervision or enforcing rules and regulations. All employees received customer care training including pilot. Southwest emphasized on people development by offering many courses including corporate culture. Employees’ orientation programs called “The Southwest Shuffle” featured many of Southwest employees rapping about the fun they had on their jobs and other exercises that corporate culture has informally communicated. (Thompson et al. 2004)

Career Advancement

Employees are encouraged to apply for supervisory positions. Most of the supervisory positions, 80% ~ 90% were filled by internally (Thompson et al. 2004). Internal people will be appreciate and understand the needs under them and enjoy the respect of their peers and higher managers. Targeted Selection process will apply that similar to screen new recruits in order to improve the chances of matching the right people to the right jobs. This provides an opportunity for the employees grow together with Southwest and career path to enjoy and feel great to be at Southwest. All newly promoted leaders have an opportunity to develop leadership and communication skills as well as operation in every department over a six-month period to ensure that they could perform their job. Department heads, peers and subordinates provided 360-degree feedbacks. People Department analyzes the feedback and decides specific assignment for each candidate (Sunoo 1995).

Highest Employee Compensation Levels In The Industry

Southwest’s pay scales were at levels close to the industry average and its benefit packages were good relative to other airlines. According to a 1997-98 survey, Southwest’s pilots earned, on average, about 10 percent above the industry average.

Southwest introduced the first profit-sharing plan in the airline industry for senior employees in 1973. Most Southwest employees had the plan in 1999. By 2001, Southwest further develop the plan into 12 different stock option programs for various employee groups, a 401(k) employee savings plan that included company-matching contributions, and a profit-sharing plan that covered virtually all employees and consisted of a money purchase defined contribution plan and an employee stock purchase plan. About eight to twelve percent of base pay represented in recent years. With payroll deduction, employees participating in stock purchases at prices equal t