When you consider the most disruptive changes to have affected specific industries in the last 40 years it’s hard to think of many that have had more impact than the low cost business model has in the airline industry. Low cost airlines have proliferated and thrived since Southwest Airlines first pioneered the model from its incorporation back in 1967. The same airline is a great example of the impact the model has had on the industry as Southwest is now the largest airline in the domestic US market serving over 100 million customers each year.
The essence of the low cost business model is to get customers from A to B, on time and for the lowest possible cost. Naturally, low cost airlines have had the ability to structure their businesses with the benefit of hindsight and one result has been their reluctance to adopt the hub and spoke network model, instead preferring to operate short-haul point-to-point routes. This approach keeps cost and complexity low, which are key to the competitive power of LCCs.
Low cost players also pioneered the introduction of ancillary services such as extra legroom or priority boarding, which can be purchased optionally by their customers. Research by IdeaWorks shows that for some LCCs these ancillary products represent as much as a third of all revenue and certainly 100% of all profit margins in many cases. Some traditional airlines have responded by lowering base fares and also offering ancillary services as a means to compete. As LCCs have grown and consumers have enjoyed the benefits of low cost air travel, their success has been founded on leisure travel – often creating new demand from segments of the population that could not previously afford to fly.
Today though we are witnessing perhaps the most interesting period of change in the low cost business model yet. In many geographic markets, but especially in Europe and North America, where LCCs were first to develop, we can see a maturing of the low cost leisure market. Effectively, LCCs are now serving this new demand and have wrestled market share from full service carriers on short-haul routes. The question now is, how do LCCs continue to grow? And what is the next phase of business model innovation?
A distinct opportunity now presents itself – the business travel market. Business travel is a largely untapped market, for LCCs which they have traditionally ignored. Many saw business travel as the preserve of the full service airlines, which offer a more comprehensive product, flexibility and participate in the GDS which is the preferred booking method for travel management firms that organise the vast bulk of business travel. Today though some LCCs are evolving with their sights set firmly on this market.
For those that can succeed the prize is huge. Global business travel will be worth an estimated $1 trillion this year according to the Business Travel Coalition and business travel bookings offer significantly higher yield than leisure. As Carolyn McCall, easyJet’s CEO described recently, business travellers tend to book later (and therefore at higher fares) and they are far more likely to take additional ancillary services like the flexibility to change tickets or priority boarding. In short, serving business travellers offers the chance for greater profitability.
Those LCCs seeking to woo business travellers have taken a variety of measures such as amending their product, for example easyJet has just introduced its ‘Inclusive Fare’. The new Inclusive Fare includes one piece of hold luggage up to 20kg, seat selection for £3 and all other fees and charges within a single bundle, at lower cost than booking the ancillaries separately online. easyJet is only making these new fares available to its travel agency partners through the GDS in a clear signal that the higher yield and reach provided by travel agency distribution is of great value to them.
LCCs are also taking measures such as hiring in-market sales teams to strike agreements with travel agencies and tailoring their message to resonate with business travellers. It’s certainly a time of great change and at Amadeus we look forward to helping our LCC and hybrid customers to access the benefits of travel agency distribution.
This is the first of a series exploring how Amadeus is driving the next phase of growth for low cost and hybrid carriers. See new posts as they are published on the LCC page.