Low-Cost Air Travel
Enters the Next Stage
Low-cost carriers have reshuffled the cards
in short- and medium-haul service. How can
established airlines maintain their advantage
in long-distance routes?
Low-Cost Air Travel Enters the Next Stage
1
When Herb Kelleher launched Southwest Airlines in 1971 with three Boeing 737s serving a handful
of Texas cities, few bet on his success—and even fewer foresaw the creation of a model that
would be repeated worldwide. Forty-five years later, low-cost carriers (LCCs) have democratized
air travel and are now the industry’s highest-profit airlines.
While LCCs challenge short- and medium-haul routes’ business model by carefully managing
costs, increasing ancillary revenues, and choosing routes based on what’s attractive to fliers
and not where hubs are located, legacy carriers are still trying to figure out the best path
forward—imitate LCCs or hang on to their models?
Now, as LCCs explore expanding into long-haul service, the threat of a new battlefield in air
travel is more of a realistic possibility than legacy carriers may think. However, we believe there
is a profitable path forward for legacy carriers in this environment. This paper looks at the
landscape and how legacy airlines can proceed.
The LCC Era
Low-cost carriers have grown steadily since Southwest’s beginnings, and they now account for
25 percent of all global flights. LCCs have made their biggest impact on short- and mediumhaul flights globally, with European LCCs’ share of 41 percent higher than Asia Pacific and
North America (see figure 1).
Within Europe, LCCs’ share of traffic varies significantly by airport, due to local regulations, slot
availability, and development priorities. Some markets—Spain, the United Kingdom, Portugal,
and Italy, to name a few—have been swept away by the LCC trend (see figure 2 on page 2). And
in places such as France, Germany, and Benelux where legacy carriers still lead by a healthy
amount, LCCs are expected to continue to gain in the coming years.
The growth is driven by LCCs’ evolution from no-frills service to option-based offers that are
now targeting more frequent passengers and even the small-business segment. And they’re
now increasingly flying from main airports—even Ryanair, a mainstay in secondary airports,
which now has plans for routes from major airports, including Paris Charles de Gaulle.
Figure 1
Low-cost carriers’ share of short- and medium-haul air traffic is growing
LCCs’ % of seats offered, short- and medium-haul flights (intra-zone)
45%
Europe
40%
35%
30%
North America
25%
Asia Pacific
20%
15%
10%
5%
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Sources: OAG; A.T. Kearney analysis
Low-Cost Air Travel Enters the Next Stage
1
Figure 2
In some countries, LCCs have captured close to half of short- and medium-haul seats offered
% of seats offered, short- and medium-haul flights
Legacy carriers
52%
58%
76%
75%
24%
25%
Germany
France
57%
UK
68%
75%
48%
42%
Low-cost carriers
43%
Spain
Italy
32%
25%
Benelux
53%
47%
Switzerland
Portugal
Note: The column width represents the numbers of seats offered in each country. The figures are for a typical summer 2016 schedule.
Sources: OAG; A.T. Kearney analysis
A close look reveals that mainstream LCCs have 30 percent lower costs, much of that happening
behind the scenes in how they are structured (see figure 3).1 LCCs have far more efficient value
chains than legacy carriers, accounting for half of the cost difference; the other half is lower
service levels (see sidebar: Three Categories of Inefficiency on page 3).
Figure 3
On short- and medium-haul routes, low-cost carriers have
30 percent lower costs than legacy carriers
Estimate
Indexed costs, short- and medium-haul flights
(Average legacy carrier=100)
–30%
100
–5
–3
• No free
catering
• Lower
compensation
• Higher
productivity
• Higher seat
density
Average
legacy
carrier
Crew
Catering
–9
–3
• Limited
passenger
support
• Higher seat
density
• Higher
rotation
• Newer fleet
• Higher seat
density
Ground
handling
–4
• More direct
sales
• More online
purchases
• Lower CRM
costs
Fleet and
Marketing
maintenance and sales
–2
–3
–1
70
• Newer fleet
• Higher seat
density
• Higher seat
density
• Simpler
organization,
processes,
and systems
IT, support,
and
overhead
Fuel
Air traffic
control and
navigation
Average
low-cost
carrier
Note: CRM is customer relationship management. Costs are per available seat kilometer, considering higher seat density and intraday aircraft rotation,
but same airports.
Sources: Airlines’ annual reports; A.T. Kearney analysis
Mainstream LCCs include EasyJet, Vueling, and Norwegian, which in most cases have similar departure and arrival airports as legacy
carriers. It does not include Ryanair, which for the most part flies to and from secondary airports. Ryanair has an added advantage of
lower fees, or in some cases subsidies, to fly out of those airports.
1
Low-Cost Air Travel Enters the Next Stage
2
Three Categories of Inefficiency
Why are legacy carriers’ costs
so much higher than LCCs?
Customers only see about half
of this cost gap in service downgrades, such as less leg space,
limited food and beverage
services, limited airport support,
and add-on fees for some services.
For the most part, the major
impact is behind the scenes,
where LCCs have much more
operational efficiency than
legacy carriers.
Three categories of inefficiency
stand out as where legacy
carriers can gain some ground
back from LCCs (see figure):
Crews and ground operations.
Crew costs are much lower for
LCCs because of the combination
of both lower compensation for
cockpit and cabin workers and
higher productivity levels thanks
to smaller cabin crew
composition.
Fleets and fuel consumption.
LCCs’ aircraft cost a bit less
than their legacy competitors
thanks to greater intraday
rotation (10 to 12 hours compared
to the typical seven to nine)
and better amortized maintenance, repair, and operations
calendars. Their younger fleets
are also more fuel efficient, and
in recent years, some have
gotten better one-off deals from
aircraft original equipment
manufacturers during some
opportunistic times.
Sales and support functions.
A much higher share of LCCs’
sales occur directly (particularly
online)—between 50 and 80
percent, compared to 20 to 30
percent for legacy carriers—
which means lower commissions. And LCCs’ remaining
support and overhead costs are
designed to be lean, with simpler
service and networks and less
burden from decades-old IT
systems and processes. The
plunging cost of jet fuel has
widened the gap between legacy
carriers and LCCs, as lower fuel
costs release pressure on the
overall cost structure and allow
low-cost players to differentiate.
Figure
Why legacy carriers’ costs are so much higher than LCCs
on the short- and medium-haul flights
Estimate
Indexed costs, short- and medium-haul flights
(Average legacy carrier=100)
–30%
100
–15
–15
85
Crews and ground operations
• LCCs’ crews have higher productivity and
receive lower compensation.
Fleet and fuel consumption
• Higher aircraft rotation results in lower fleet
and maintenance costs.
• Fuel burn is optimized through newer fleets.
Sales and support functions
• Optimized direct sales channel mix with
strong share of online sales.
• Simplified back-office processes and
systems.
Average short- and
medium-haul
legacy carrier
Operational
efficiency
70
Seat configuration
• Higher seat density reduces aircraft
operations cost per seat.
Product offering
• Services (such as catering, newspapers, and
extra bag) are not included in ticket prices.
• Passenger support on the ground and
in airports is reduced (online check-in;
no lounge).
• Cabin crew composition is smaller, matching
legal constraints only.
Target short- and
medium-haul
legacy carrier
Lower service
levels
Average short- and
medium-haul
low-cost carrier
Note: Costs are per available seat kilometer, considering higher seat density and intraday aircraft rotation, but the same airport.
Sources: Airlines’ annual reports; A.T. Kearney analysis
Low-Cost Air Travel Enters the Next Stage
3
Long-Haul Routes Are the Next Battlefield
Long haul is the next frontier for LCCs. In Europe, Norwegian Air Shuttle already offers low-cost
long-haul service to multiple destinations in the United States and a few in Asia. The impact on
legacy carriers has been limited so far, because LCCs are not yet flying out of the most popular
business and tourism destinations.
Low-cost carriers now account for
25 percent of all global flights.
However, the long-term threat is real. LCCs’ advantages in shorter flights also apply for
long-haul service, even if the impact is lower (see figure 4). And the cost difference for LCCs
versus legacy carriers is as much as 20 percent (see figure 5 on page 5). For customers, the
absolute savings could prove much more attractive.
While the immediate threat is still small, over the long term it will grow as LCCs enter major
intercontinental routes from Europe to cities like New York, Singapore, and Shanghai.
Figure 4
Many of the low-cost carriers’ success factors in short- and medium-haul flights
would apply in long-haul flights
Fully
applicable
Fleet
Younger fleet
Online direct
sales increase
Product
design
Low service
included in price
Operational
efficiency
Factors
• Long-haul flight length requires higher comfort for
passengers than in shorter flights, but aircraft density
can still be optimized (for example, less kitchen spaces,
or smaller space between rows)
• The channel mix for LCCs will remain the same
• Long-haul flights require more catering service for
passengers, but much of it could be remain optional
Low passenger
support at airports
• Limited desk support could remain, and most
operations could remain self-service, with additional
support available for a fee
Point-to-point
liaison only
• Offering the most attractive destinations in long-haul
would limit the need for base feeding
• Still possible to offer both legs without transfer service
(DIY connection)
Higher fleet
rotation
Higher staff
productivity
Lower staff
compensation
1
Not
applicable
Higher seat
density
Marketing
and sales
Partially
applicable
• It is not possible to increase fleet rotation on regular
scheduled services1
• There could be an advantage in the number of days
“ON” per year (with less magnitude than in shorter
routes due to safety regulations)
• There would be no advantage in daily hours, due to
flight structures
• There would be an advantage in annual compensation
and cost of accommodation
There is a very slim possibility for some the low costs to be transposable, if LCC airlines flew at “unfriendly” times and proposed different flight slots
to optimize rotation. However, this would be quite complex to achieve.
Source: A.T. Kearney analysis
Low-Cost Air Travel Enters the Next Stage
4
Figure 5
Low-cost carriers could have a 20 percent cost advantage
over legacy carriers on long-haul routes
Estimate
Indexed costs, long-haul routes
(Average legacy carrier=100)
–20%
100
–7
93
Crews and ground operations
• LCCs’ crews would have higher productivity
and receive lower compensation.
Fleet and fuel consumption
• Fuel burn would be optimized through
newer fleets.
Sales and support functions
• Optimized direct sales channel mix with
strong share of online sales
• Simplified back-office processes
and systems
Average long-haul
legacy carrier
Operational
efficiency
–13
80
Seat configuration
• Higher seat density reduces aircraft
operations costs per seat.
Product offering
• Services (such as catering, newspapers,
extra bag, and in-flight entertainment)
are not included in ticket prices.
• Passenger support on the ground and
in airports is reduced (online check-in;
no lounge).
• Cabin crew composition is smaller,
matching legal constraints only.
Target long-haul
legacy carrier
Lower service
levels
Average long-haul
low-cost carrier
Note: Costs are per available seat kilometer, considering higher seat density and intraday aircraft rotation, but the same airport.
Sources: Airlines’ annual reports; A.T. Kearney analysis
Four Ways Europe’s Legacy Carriers Win the Long Haul
With busy long-haul routes an essential part of legacy carriers’ profit and network attractiveness,
competition from LCCs is a clear hazard.
So how can legacy carriers keep their advantage in long-haul service? With these four moves:
Enrich and emphasize product differentiation and the customer experience. The temptation
is to try to beat LCCs at their own game, but in fact, legacy carriers can gain a competitive edge
by standing their ground. Investing in what makes them stand out—including service, coverage,
and customer experience—offers greater opportunity for success than trying to keep pace with
LCCs. Legacy carriers can use the same unbundling methods—not to lower service levels but
to increase their differentiation by offering innovative services that customers will value.
Service is where legacy carriers can truly shine. The customer is still king, and taking care of,
understanding, and surprising him or her with favored services or innovations is one way to build
the legacy brand value, keep customers happy, and outshine LCCs. Airlines’ massive troves of
data from frequent flyer and credit card programs can help them better customize services.
Challenge long-haul economics with cost and revenue analyses. When seeking the most
profitable routes and seat classes, floor space usage and costs by cabin are particularly important
to understand. If necessary, legacy airlines can reconfigure cabins to adapt them for various
routes. In the end, analytics can redefine route economics and help legacy airlines move closer
to optimal cost levels than simpler analyses based on available seat kilometer (ASK) analyses.
Low-Cost Air Travel Enters the Next Stage
5
For example, while premium classes are long thought of as subsidizing lower seat classes
on long-haul flights, the benefits are often overstated, considering that those sections have
fewer seats and cost more to serve (see sidebar: Premium Classes Are Not a Prerequisite in
Long-Haul Economics).
Transform the operating model. As we noted above, at least half of LCCs’ advantage comes
from operational efficiency. Three steps are important for legacy airlines to close this gap:
• Enhance and deploy lean processes across the value chain. Use advanced benchmarking
approaches to identify and size competitive gaps versus peers and engage transformation
programs in relevant domains.
• Empower procurement organizations. Improve practices, tools, and organization from
procurement to payment. Implement innovative sourcing approaches to change the rules of
the game and capture untapped potential (for example, collaborative optimization in ground
handling or catering, which could deliver savings of up to 15 percent).
• Create new deals with employees. Change must start at the base. The transformation
described above will benefit from strong support from operational teams, both in timing
and magnitude of closing the competitive gap.
Develop dedicated low-cost units. The long-haul battle may actually be won in the short
and medium haul, as traffic bundling in hubs remains a crucial differentiator for long-haul
economics. Instead of downgrading core legacy operations to match LCCs’ value proposition—
which will only hurt brand image—legacy airlines creating dedicated low-cost arms alongside
their main operations is preferable, as some large European airlines are already doing with
Vueling, Transavia, and Eurowings. The key is that the model be built from the start as a LCC,
rather than a transformed version of a legacy carrier. These new LCCs must also have the
freedom to use favorable flight networks, even if they compete with main airline service.
Premium Classes Are Not a Prerequisite in Long-Haul Economics
The conventional wisdom is that
first class and business class
subsidize economy classes in
long haul, and it’s not entirely
false—premium passengers bring
in much more revenue (two to 10
times greater, depending on
class), are typically more frequent
fliers (increasing average revenue
per user), and, with most costs
fixed, bring higher revenue per
seat, meaning higher profits.
But in reality, the benefits are
lower than many realize.
Even though revenues on a perpassenger basis are usually
higher, revenues related to
airplane floor space are often
similar for premium seating—
and sometimes even lower.
Business class occupies two to
three times more space per flier
than standard classes; when
looking at load factors by class,
business class usually reaches
only 50 to 75 percent, compared
to 85 to 90 percent for economy.
And it simply costs more to serve
premium classes. On-the-ground
amenities like lounges, special
desks, and special assistance are
expensive to maintain. On board,
catering costs are between three
and five times more expensive,
and there is typically one cabin
crew member per four to 12 seats,
compared to 1 per 30 or 40
in economy.
Ultimately, comparing premium
class revenues and costs with
economy classes on an applesto-apples basis, the results are
surprising for some legacy
airlines, raising questions about
their strategies for different
classes and the aircraft space
devoted to premium classes.
Hence, the premium classes are
not essential in long-haul flight
economics, even if for some
airlines with outstanding yield
management capabilities, it can
boost route profitability.
Low-Cost Air Travel Enters the Next Stage
6
Flying into the Future
As the industry’s highest-profit airlines, LCCs are forcing legacy carriers to reexamine their
traditional business models. With the battle shifting from short- and medium-haul routes to
the longer routes, the legacy carriers can still succeed by revamping how they operate and
standing out from the crowd with an outstanding customer experience.
Authors
Hugo Azerad, principal, Paris
[email protected]
Eugenio Prieto Ibanez, global head of
Transportation, Travel, and Infrastructure
Practice, Madrid
[email protected]
Key contributors and local contacts
Marco Andreassi, partner, Rome
[email protected]
Pablo Escutia, partner, Madrid
[email protected]
Christian Hassel, partner, Copenhagen
Mark Page, partner, London
[email protected]
Pedro Rezende, partner, Lisbon
[email protected]
Rene Steinhaus, principal, Berlin
[email protected]
Robert Tasiaux, partner, Brussels
[email protected]
Salvatore Zarate, partner, Middle East
[email protected]
Low-Cost Air Travel Enters the Next Stage
7
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