Aviation Festival: the evolution of the LCC business model continues

posted on 6th September 2018 by Justin Burns
Aviation Festival: the evolution of the LCC business model continues

The difference between a low-cost carrier (LCC) and full service carrier (FSC) is in today’s marketplace increasingly blurred but how far can the convergence between them stretch before all models look the same.

In an afternoon panel session at the Aviation Festival’s World Low Cost Airlines Congress today, the LCC and FSC debate was discussed by airline chiefs.

The likes of British Airways have adopted LCC strategies by cutting on-board food and drink offerings, while most FSCs are looking to drive costs down and offer less to passengers as they look to reduce fares or they simply set-up their own low-cost subsidiaries.

Canada is one of the last western markets to develop an LCC market but this is now finally gathering pace and one major new entrant is Swoop which has added numerous routes this year and will also start services to the US soon.

President Steven Greenway said Swoop “acts like a digital retailer that happen to run flights” and on passenger expectations of an LCC versus an FSC “it is not so much about making them pay, it is more about educating passengers on only paying for what they need”.

The airline is relatively new so is sure to face challenges ahead and Greenway is aware of this and said Canada’s airline market history is “tragic” as 25 airlines have gone bust, citing a mixture of reasons for the failure of start-ups.

He said it is operationally a difficult country to run an airline in, as it is spread over a sizeable land mass with a sparse population, while weather conditions also impact operations and the average flight time in Canada is 3.5 hours compared to two hours at a European LCC like Ryanair for example.

Swoop is in the early stages of development and as an LCC in Canada it has had to look away from the hubs like Toronto to run routes. “We cannot get slots at major airports as they are full and expensive so we use secondary airports and we operate from anywhere that has a terminal,” he said.

Different business models are being adapted by LCCs and the likes of easyJet and Ryanair are branching out and offering more services other than just flights.

WOW air chief executive officer (CEO), Skuli Mogensen feels WOW should not define itself just as an airline. “If we define ourselves too narrowly then I do not think we can make money selling higher economy fares. We have to find alternative and new ways to make money.”

Mogensen sees huge potential opportunities to grow ancillary revenues, something which is so important to the success of many LCCs. The likes of Spirit Airlines recently revealed 45 per cent of its revenues came from the ancillary segment.

WOW has no offices around the world but has grown at pace and has an average load factor of 90 per cent which is achieved purely by online campaigns and digital engagement such as social media platforms.

For Mogensen to succeed it is all about providing customers with great fares and value for money. “If you can deliver that value proposition then you can succeed,” he said.

WOW’s fast expansion has been aided he feels by Iceland’s unique geographic destination as the link between North America and Europe giving the airline great opportunities to develop a kind of LCC hub and spoke model.

Fellow panellist, JetBlue CEO Robin Hayes described his carrier as a “hybrid” airline and it has some costs of that FSCs have but drives a higher revenue than LCCs – so sits somewhere in the middle of the two models.

Hayes said LCCs grow profits by lower fares and stimulating demand, where as FSCs constrain demand and are reliant on premium fares, and have a much higher cost base than LCCs.

LCCs certainly look here to stay globally as demand for lower fares grows and due to new long-range aircraft like the Boeing 787 Dreamliner and Airbus A350 long-haul LCCs are also a major part of the future it seems. It will be interesting to see how both models evolve in the years ahead.

The Aviation Festival at the Business Design Centre in Islington, London goes on until tomorrow.