The Low Cost Carrier – Part Two – September 11, 2009

The Low Cost Carrier, LCC, and the basic points of what make it work for now —this is the topic for today. I recently read in the WSJ that an analysis of all of the LCCs quarterly/yearly earnings show they are losing money and the slugfest between Southwest and US Airways is troubling for them; however, if there were no issues for them to write about they would be in trouble. As always, I would like all aviators to connect with their roots and one of the ways they can do that is by using the “Third Dimension Blog” as a resource.

Quote of the Week

“It was a cherished experience. I feel I got the chance to see the inner workings of the grand order of things. In the overall scheme of things, it proves that men can do about anything they want to if they work hard enough at it, and I knew that I could do it . . . and that leads, of course, to a strong suspicion that everybody else can do it if they want to.”—Scott Carpenter recalling his 1962 Mercury 7 space flight

The Low Cost Carrier

There is a lot to be said about the business models being used by the low-cost carriers (LCCs), as I said last week, and this week we will discuss the first three of the seven points or elements listed below.

Traditionally there are seven elements that define a LCC. These elements are:

1. Low labor cost per flight hour
2. Low ticket distribution costs
3. No frill service
4. Common fleet type
5. Point-to-point route structure
6. Secondary airport service
7. Above-average fleet utilization

Of course, the missing element that makes all of this work is that there is no CAB to micromanage the affairs of the airline. So let’s take a look at each one of these separately by asking a question—What if?

Labor costs are always one of the biggest operating costs a company has to deal with, especially when associated payroll taxes, health care and retirement benefits are factored in. However, when we consider that the mandatory retirement age of 60 was moved up to 65 in 2007 and the additional burden that a company like Southwest now has because of this. Does this begin to put them at a disadvantage?

If Southwest’s route structure was challenged by a Southwest lookalike that was well-capitalized with a much lower labor cost and ready for a long fight, would they survive as the dominant carrier? It is rumored at the time of this writing, that Southwest is considering a buyout of AirTran. If this actually takes place, history suggests that they will probably not merge or integrate the people but instead would simply eliminate the duplication of service and increase the utilization of their fleet thereby reducing their hourly operating cost. Not a pleasant thought for the people of AirTran, but Southwest is concerned about their company and want to be ready for the time when that Southwest lookalike appears.

Ticket distribution costs are now almost the same for all carriers. Initially, the legacy carriers had to resolve the travel agent problem and the massive infrastructure cost surrounding the call centers which each airline had. When that was done, the Internet provided a delivery system that is now utilized by all of the carriers and the cost for everyone is almost the same.

However, the next level of ticket distribution and cost savings that could very well be employed by the LCCs is almost ready and it is my personal belief that Walmart is involved. If this were the case, do you think if Walmart can sell tickets they could also figure out how to start and run an airline that will compete with Southwest?

No-frill service is no-frill service, but what happens when the LCCs begin to offer a few tidbits here and there to give themselves an advantage? In the free market system carriers would have to begin to match the offers of others to keep up and then perhaps offer one better. If the ticket prices are to stay low who will pay for this? Will it be the airline or the employees?

Next week we will continue our series on the “Low Cost Carriers” and look at the remaining four points and elements of the business model. So, until then, take some time to look back, connect with your past and remember as an aviator you are a “Gatekeeper of the Third Dimension.”

Protect your profession, your future and the future of your fellow aviators.

Robert Novell

September 11, 2009