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Budget Vs Premium Airlines.

  1. Operational benchmarks that unmask the financial performances.

    The strong financial performance of an air carrier requires not only a solid brand proposition, but sound operational strategies, that evolve in a continuous dynamic environment. Although the list could be exhaustive, operating characteristics include high operating margin routes, strong network on routes serviced, value for money and low overhead cost.

    Low-Cost Carriers (LCCs), are immensely successful on short haul trips and account only for 6% of the traffic on long haul trips. LCCs like Air Asia, Southwest and Ryan Air have cemented their operational viability by offering low-cost alternatives to premium carriers.

    The quick turnaround time and functionality on the shorter routes are few of the USPs of LCCs. This, in turn, lowers the servicing and refuelling time and allow the LCCs a minimal overhead cost and reduced operating and lease expenses. Additionally, LCCs enjoy a low maintenance and training costs. This is a direct result of employing a young and homogeneous fleet from operating bases located in smaller/cheaper airport towns. These bases and hangar facilities allow a greater degree of flexibility without the impending penalties levied by the bigger airports. Further, the LCCs benefit from low fuel cost and improved mileage as compared to their counterparts in the premium airline segment.

    For example, a highly favourite LCC aircraft such as the Airbus A320 consumes c. 274 gallons per hour and at an average capacity consumes c. 1.5 gallons per seat, per hour vis-a-vis a legacy preferred aircraft such as the A330, which consumes c. 582 gallons per hour and at an average capacity consumes c. 2.4 gallons per seat per hour, or approximately 60% higher than the LCCs.

    The fuel consumption goes down further if the comparison is based on smaller capacity aircraft like Ebraer or Sukhoi Jet. Moreover, selling and distribution costs are relatively low for an LCC as they generally tend to offer tickets via online platforms. Thus removing the expenses associated with commissions to sales agents and third party vendors. Furthermore, LCCs have now started forming code-share partnerships, which apart from providing access to non-serviced routes also double up as a major marketing tool.

    To compete with LCC's, legacy carriers (Aeroflot, Air Canada and Delta Airlines) applied few customized strategies, and reduced operating costs and increased their revenues, through the following:

     

    In addition, premium carriers have over the last decade formed global or regional alliances (Star Alliance, One world, SkyTeam) which has helped them boost capacity utilization, increase RASM (Revenue Per Available Seat Mile) and PRSM (Passenger Revenue Per Seat Mile), as well as reduce costs attributed to higher purchasing power resulting in strong profits.

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    In conclusion, it can be stated that although long haul flights are here to stay, their cost reduction strategies would result in cost savings being transferred to the customer or they would aim to streamline their business in order to reduce overheads and cut direct operating costs. LCCs on the other hand, generally serve the customer in accordance with what is paid for the services. Case in point, while the legacy carriers will survive, it is the LCC's that have a chance at thriving.

      • Aeroflot and Delta Airlines between the year 2000 to 2010 routed a majority of their connecting/transiting flights via their company operated hubs/facilities, to reduce operating and leasing costs.
      • Cathay Pacific operated cargo services, offsetting the negative impact caused by a downturn in the passenger market, which helped contribute c. 24% towards the company's revenue in 2015.
      • Premium carriers like Virgin Atlantic, Lufthansa, Singapore Airlines and American Airlines started offering 'Premium Economy'. This strategic move enabled the airlines to tap into a market that was previously travelling via coaches' despite being financially adept to pay a little extra for more comfort.
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