Friday, 2 November 2012

The LCC Business Model

LCCs are defined by their ability to achieve drastically reduced unit operating costs. As a result, the average airfares they offer can be substantially lower than those of other carriers. In their pursuit of keeping costs low, LCCs typically have most, but not necessarily all, of the following operating and financial characteristics:

Operating Characteristic

Primarily point-to-point services. Limited number of stops or transfers, avoiding costs associated with passenger transfers

Use of secondary airports, which are often less congested than primary airports, leading to higher levels of dispatch reliability and lower costs of delays and rescheduling of flights

Fast aircraft turnaround time, to maximize aircraft utilization and employee efficiency

Flight lengths of 600km to 2,500km (under four hours), operating ranges that are particularly efficient for short-haul LCC

Single fleet types, which reduce maintenance and training costs

Young fleets, leading to reduced aircraft maintenance costs when compared to fleets of older aircraft.

Medium capacity, jet aircraft (approximately 100 to 180 seats)

Single-class service, with higher seat densities than most similarly sized economy class cabins, resulting in the spreading of costs across a greater number of available seats to be sold, lowering overall average costs per passenger

Limited complimentary offerings. Catering (food/beverages) and checked baggage may be available only on a paid basis.

Limited cargo services, as they can add time to aircraft turnaround times

Flexible, entrepreneurial corporate cultures that may not exist at larger, entrenched carriers, that can result in more efficient operations and lower employee costs

Financial Characteristics

Lower-than-average airport costs. Secondary airport charges in many countries are often lower than those of larger, primary or hub airports. In addition, minimal congestion at secondary airports optimizes aircraft turnaround times

Lower-than-average airfares. Average airfares are usually lower at LCCs than at full-service carriers, enabled by their lower costs structures. Low passenger airfares at LCCs are also partially offset by their higher-than-average aircraft occupancy levels. Some LCC tickets are fully non-refundable and non-rebookable if the passenger cannot travel as originally planned

Ancillary revenues. LCCs usually charge for drinks and meals and some have only limited free checked baggage allowances. Some LCCs add surcharges to their airfares for items that would normally be covered as a normal operating expense (such as ticketing and administration fees). LCCs are often aggressive in the sale of ancillary travel products

Lower-than-average salary and benefits costs. New and fast-growing LCCs will have a high share of new employees, while long-standing carriers will have a high share of senior employees and associated salaries and benefits. Additionally, LCCs have shown higher productivity rates and therefore lower employee cost structures overall.

Low cost ticket distribution methods. A reliance on internal reservations systems, electronic tickets, and the internet, instead of privately owned reservations systems, paper tickets and travel agents or city ticket offices, significantly lowers LCC ticket sales costs.

Source: Strategic Airport Planning Ltd (The S-A-P Group)

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