The Rise Of Low-Cost Carriers

WHO’S THE PLAYER?

Given the already challenging conditions, what is the response of HSCs when LCCs enter their incumbent markets, especially hub markets? A logical reaction would be to cut prices, grow capacity using larger aircrafts, increase flight frequencies to the same route, or change network operations through service changes. These, of course, will not increase the incumbent’s profits but only undermine the LCC.

Alliances also work, as they allow for economies of scale, cost sharing, wider networks and benefits to passengers, as well as compliance with the various operating and regulatory regimes of individual countries. In general, this puts incumbents in a better competitive situation by strengthening their hub operations and increasing the scale of their networks.

Similarly, code sharing enables incumbent airlines to create the image of operating direct flights, which in reality is served by their partners, and in turn helps attract more customers.

Is it a mere coincidence then that alliances and other forms of business agreements are becoming more commonplace in the aviation industry? In the Middle East alone, airlines are forging big global alliances, like Qatar Airways and Royal Jordanian becoming members of Oneworld Alliance, and Saudia recently joining SkyTeam. Etihad too has recently entered into minority equity partnerships with a number of partner airlines such as airberlin, Air Seychelles, Virgin Australia and Aer Lingus.

There is also more consolidation in the airline industry, with the merger of British Airways and Iberia, as well as Continental and United. However, to date, consolidation has been focussed on the mature markets of North America and Europe, where airlines face different challenges to those operating in the Middle East.

“Whilst I would never say intra Middle East consolidation is out of the question in the future, for now the principal Middle East players each have their own expansion strategies, primarily focused on organic growth,” says Toby Stokes, aviation sector leader – Europe, Middle East, India and Africa, Ernst & Young.

In contrast, according to industry experts, LCCs may engage in fare wars among each other, but not necessarily against full-service airlines. Similarly, no full service carrier has entered a market with the aim of taking on an LCC.

“Why would they?” asks Saj Ahmad, chief analyst at Strategic Aero Research. “It is a completely different market and one where margins are thinner. To date, the only GCC LCC that exited a market was RAK Airways before its relaunch – and even then that demise was not a result of any larger airline inflicting damage to them.”

So are industry experts and airline companies doubtful as to whether LCCs and HSCs are at loggerheads with each other?

“Yes,” says Neil Mills, CEO of SpiceJet. “We are too small for an incumbent like Emirates.”

An Emirates spokesperson shares a similar sentiment, “Emirates does not see LCCs as a threat; in fact, their operations in the overall market and specifically in Dubai is more likely to grow the air travel pie and attract more people to Dubai. This can only be good for Dubai and all airlines operating there. As a full service carrier, we are targetting a different travel segment.”

This may well be true. With one of the largest footprints in the GCC, Emirates is backed by a slew of flight frequencies and an undeterred focus on organic growth.

Additionally, much of Emirates traffic flows come from transit passengers on international flights, as opposed to the more regional-centric coverage provided by LCCs. Furthermore, Emirates has no major LCC competitor, other than its partner in flydubai, which also operates out of Dubai. The likes of Air Arabia are based in Sharjah, and foreign competitors like IndiGo, Jazeera Airways and others are, comparatively, very small players.

Furthermore, despite a fall in profits of 72 per cent to $409 million in 2011-12, Emirates is by far the most profitable Arab airline.

Even non-Arab airlines present in the Middle East do not view LCCs as competitors.

Sir Martin Broughton, chairman of British Airways says, “Low-cost carriers in the region really don’t affect us. From our perspective, we are only concerned with competing with LCCs within Europe.

“Every market has to learn to co-exist with LCCs. It’s a perfectly fair means of competition, which I think everyone – including the Gulf – has to get used to.”

The ultimate decision, he says, depends on the end-user, “The consumer has to decide whether for the short- haul they’re only interested in costs or also in services. In any of these markets you get what you pay for, and it is the consumer who should be willing to pay a little extra for a service like a lounge or efficient check-in or food.”