In aviation, few things have been more discussed than low-cost carriers (LCCs), and talk nowadays is mainly about LCCs hybridising from their present strategic and market positions.
Christos Shephard, Head of Business Development and Start-Up Airlines at Mango Aviation, told me: “In mature markets, where operational costs are much higher and air ticket taxes are often considerably higher, deviating from the original LCC model is the only way in which LCCs can survive financially, at least in the long term.”
While LCCs traditionally avoided competing directly with each other, they have increasingly sought to differentiate themselves from other LCCs and network airlines particularly in response to new market entry.
After all, only one LCC can possess the lowest costs in each market, with increasingly pursuing a hybrid position achieved through the addition of, or changes to, product and/or operational attributes. This, and more, can be seen in the provided diagram, which represents the theoretical continuum in a simplified way.
While I am more naturally drawn towards the ‘pure’, think about the appeal. A hybridising airline may price sufficiently close to the fare leader yet with a perceived higher-quality product and so offer greater overall value than both LCCs and network airlines.
Of course, it entirely depends on the willingness to pay of targeted segments.
Clearly, there is a finite pool of potential customers for every airline. The addition or modification of attributes enables a change in a service-price offer and so the ability to target new segments which would not be feasible without the change. This may also enable a first-mover advantage. However, the airline’s core customers – the source of most of its profits (if any) and the source of its authority – may be marginalised.
Local market conditions
Local market conditions, particularly in developing countries, may also cause attribute changes by necessity, so increasing complication. For example, using travel agencies to circumvent technological and low credit card usage; under-utilising aircraft from inadequate airport infrastructure, mainly in certain developing countries; adjusting an ancillary revenue strategy when considerable market resistance occurs; and in response to imposed regulations.
Cost of access
Widening the market, for whatever reason, has clearly been a key driver of deviation from the pure LCC model.
But this is completely unimportant without the generation of sufficiently higher revenue to offset the increased “cost of access”. Seeking increased operating revenue – and higher margins so long as the costs do not rise commensurately – is fundamental for hybridising – otherwise, why bother?
Hybridising also concerns spreading revenue sources and risk through diversifying the traffic mixture. This may then act as a means of stabilising revenue generation.
Increasing revenue is achievable through adding more capacity (often a sizeable capital commitment), extracting more from the existing customer base, or appealing to brand-new segments, with most LCCs deciding to offer value-added components to higher-yielding business travellers.
Win, win, win?
Many LCCs – OK, so that’s generally a silly term nowadays – including Southwest, WestJet, AirAsia, easyJet, and now even Ryanair, have sought business travellers by utilising GDS. For easyJet and Ryanair, the cost of using them is offset by marginally higher prices, so benefiting from increased revenues and a larger overall market yet without the associated costs.
This is surely win, win, win.
As LCCs increasingly hybridise by offering greater benefits and higher added value to try to achieve greater yields, so they increasingly need higher yields. The reinforcement of this relationship is therefore continual.
Ultimately, hybridising is completely predictable and effectively represents entrepreneurialism and natural evolution. Even Ryanair is doing it – because it’s inevitable.
And once they start to hybridise their strategic position changes, and it’ll be hard to stop or go backwards to simpler, more cost-effective times.
What further changes we will see in the remainder of 2014? At what point does it all become excessive? As LCCs increasingly hybridise, what further responses will we see from network airlines? And, excitingly, what opportunities are presented for newer, nimbler, and more pure operators?