The Rise Of Low-Cost Carriers

THE WAY FORWARD

What will then determine what type of airlines thrive and which survive?

If you analyse the two segments, HSCs are saddled with inefficient costs structures, huge pension debt obligations and are woefully slow to enact changes to market shifts. LCCs, on the other hand, have the ability to chop and change their operations quickly because they do not rely on a single market. For example, BA derives about 70 per cent of its revenue solely from the North American market.

No LCC would expose itself to one segment with that sort of volume.

LCCs also tend to have flexible staff contracts, a homogenous fleet to keep costs down, and may also outsource a lot of their non-flight related businesses, like catering, servicing and operations.

“For LCCs, the policy of ‘bums on seats’ is more important than yields that full service airlines need to survive on. That’s why the likes of Ryanair flies more passengers than BA and will continue to do so,” says Ahmad.

Stokes is also bullish on LCC growth, “The Middle Eastern LCC segment is relatively new and still has significant growth opportunities. With the Arab
world population larger than the US, and with other forms of public transport relatively scarce, the principal method of travel will continue to be by air, and a portion of that population would be attracted to low cost air travel.”

Stokes adds that as the low cost market develops further there will inevitably be new entrants to the market.

“The European short-haul market, which is relatively mature and advanced as compared to the Middle East market, has over 60 LCCs. So there is great
opportunity for growth in this region.”

Only six LCCs currently operate in the Middle East. The real change in the aviation sector, as Sir Broughton also points out, will come by way of consumer choice. The fact that passengers no longer have to pay a premium and can opt for low fares to get to where they’re going with minimal fuss could provide impetus to LCC growth. Incumbents and full service airlines have slowly woken up to the reality that if they are to survive, they need to address their high cost base in order to be more agile and receptive to market changes.

Social media and technology will also be a vital tool, as travellers view these as enhancing their airport experience.

Many want to control their entire airport journey through the use of mobile phones to navigate through key touch points (63 per cent), use frequent flyer cards as permanent boarding passes (59 per cent), benefit from permanent electronic bag tags (57 per cent), and automation of the
full range of airport processes including baggage drop (48 per cent), according to a study done by Amadeus.

Similarly, consumers also want their improvement ideas to be heard (69 per cent), receive important information (66 per cent), provide real-time feedback (53 per cent) and be rewarded as frequent travellers/ shoppers (51 per cent).

Traditional and low-cost airlines have successfully co-existed in the Middle East for a number of years. As seen in the growing number of passengers to Dubai International Airport – more than 18.8 million during the first four months of this year, a 13.9 per cent surge compared to the same period in 2011 – there is enough capacity for HSCs and LCCs to continue to work in harmony.

Yet, a word of caution. As was the case with Ryanair and its hugely successful entry into the European market at the expense of the region’s traditional carriers, incumbent airlines would be wise to recognise the threat developing from their low-cost rivals.