STRATEGIC ANALYSIS OF
THE BEST LOW-COST CARRIER AIRLINES IN THE WORLD
ASSIGNMENT FOR MICROECONOMICS FACULTY OF ECONOMICS AND BUSINESS NATIONAL UNIVERSITY OF MALAYSIA
BY: IWAN BUDHIARTA P-46048
MALAYSIA – 2009
A low-cost carrier (also known as a no-frills or discount carrier) is an airline that offers low fares but eliminates all “non-essential” services. The typical low-cost carrier business model is based on: – – –
a single passenger class a single type of airplane (reducing training and servicing costs) a simple fare scheme (typically fares increase as the plane fills up, which rewards early reservations) free seating (which encourages passengers to board early) direct, point to point flights with no transfers flying to cheaper, less congested secondary airports short flights and fast turnaround times (allowing maximum utilization of planes) "Free" in-flight catering and other "complimentary" services are eliminated, and replaced by optional paid-for in-flight food and drink.
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Simple Product A typical low cost airline product is extremely basic. It focuses on getting passengers from point A to B, cutting out all the “extras”. This means there are no meals, drinks or snacks served free on board. In certain airlines, these may be purchased on request. The aircraft have Narrow seating to permit greater capacity. Low cost airlines offer all-economy flights, with 2
no additional space requirements for wider business class seating. This means more passengers can be accommodated on each sector. There are no facilities for seat allocations as this “free-seating” makes passengers board the flights early to get themselves a decent seat. The pricing structures of low cost airlines allow for no additional schemes or sales promotion activities, including frequent-flyer programmes.
Positioning The low cost airlines the world over are known to target Non-business passengers, leisure traffic and the price-conscious business passenger segment. The low cost model works best on short-haul point-to-point traffic with high frequencies. These airlines have aggressive marketing strategies and compete with all transportation carriers, including the road and railway networks. Most Western low cost airlines fly to secondary airports which are cheaper to land into. However, this is not yet an option available in India.
Low Operating Costs Low cost airlines have a very lean organization structure and operating costs are kept to the bare minimum with low wages (as crew/staff requirements are low and generally freshers are preferred), low airport fees, low costs for maintenance and cockpit training (as these are typically outsourced). There is no requirement for standby crews due to a homogeneous aircraft fleet. Low cost carriers aim at achieving high resource productivity. This is generally achieved due to short ground waits (as turnaround times are kept minimal due to simpleboarding processes, no air freight, no hub services and short cleaning times). Selling costs are also minimized as high percentage (if not 100%) of ticket sales is generated online, eliminating the margins that would otherwise need to be passed on as commissions to travel agents.
Dato’ Sri Tony Fernandes: We fly to where others dare not fly or have given up. “Being an unproven model, the low-cost, long-haul business is rather risky. But it is a feasible business with tremendous growth opportunities, hence it qualifies for us to put our money on it,” Fernandes explains. Fernandes and a group of individual investors, including Datuk Kamaruddin Meranun and Datuk Seri Kalimullah Hassan, collectively hold a 48% stake in AirAsia X. The other prominent shareholders in AirAsia X include British billionaire Richard Branson’s Virgin Group, with a 16% stake; Japanese conglomerate ORIX Corp with 10%; and Bahrainbased Manara Infrastructure Fund with 10%. AirAsia holds the remaining 16% stake.
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