FULL SERVICE CARRIER VS. LOW COST CARRIER – WHAT’S FUTURE-PROOF?

This September, on a flight from Frankfurt to Seattle, I had the chance to talk to three fellow travelers and ask them the reason for their travels. The first one, my seat neighbor, was a nurse from Germany who lived in the US and had been visiting relatives and was now returning home. The second one had visited an old friend from university. They had graduated two years ago and his friend now works at Amazon as a manager. The third one was a family who wanted to start a month-long trip through the US with their baby, just for the fun of it. It’s the year 2019.

Let's speculate a bit and think back to the past, say 1985. The same imaginary flight, Frankfurt to Seattle. Let's again ask three random passengers about their travel purpose. My idea: The first one might be a chief physician who will give a speech at a medical conference. The second is a middle-aged lady, who goes to the opening of a will which requires her to be present in person. The third is a gentleman in his sixties who wants to see San Francisco once in his life. He has been saving for five years to take this dream trip. For these three imaginary travelers, their trips would be either big events or, in the first case, it would be a business trip that would have been required for a very limited number of employees at that time.

It’s different today. Intercontinental flights, or at least flights within Europe or the US, are ordinary and common to us and this development is likely to continue. To what extent are airlines and airports affected by this change and what did they contribute to this development? It’s a fact that flying has become significantly cheaper in relation to the average household income. The Low Cost Carrier (LCC) airlines play a key role in this development. Southwest Airlines played a pioneer role with this radical new business model back in the early 1970s. Today it’s one of the top 10 most profitable airlines worldwide. Well-known LCCs such as easyJet, Ryanair or IndiGo approached the markets with a similar concept and are now established as well. Following their path, they increasingly take away market shares from their big competitor group, the Full Service Carriers. Today, there’s a strong competition of Full Service Carrier vs. Low Cost Carrier.

LOW COST CARRIERS ARE HERE TO STAY

It’s safe to say that the LCC’s business model has become established worldwide. Getting cheap fares from A to B with little luggage and service, but high reliability – that’s an idea that many travelers enjoy, especially when being on a budget. As they grow further, the decisive question is whether LCCs one day will replace the Full Service Carriers (FSCs) completely from the global market. From my personal point of view, they will not. But why? FSCs still provide services that LCCs cannot provide because their business model is simply not designed for it. It’s about their extreme cost-saving operation processes. One iron precept of aviation is that complexity drives costs. Therefore, all processes are kept as simple as possible. An important driver of complexity at FSCs are their hubs, which they utilize for connecting flights of their passengers – including their luggage. That’s why LCCs mostly only conduct flights from point to point without any connecting hubs.

NO FRILLS FROM POINT TO POINT

They do a lot more to avoid costs: no extra service, no free drinks or food and no frills at all. They also used to select cheaper airports and aim for a standardized fleet with only one aircraft type, which reduces staff and maintenance costs. These cost-avoiding factors and simplifications allow the LCCs to offer very low ticket prices while still being profitable.

As more and more LCCs merged in the last 20 years across the globe, they also made their way to the major airports and even started to operate more like the FSCs, nearing their business model. For example, LCCs like Eurowings, part of the Lufthansa Group, offer long-haul flights with business seats and all according amenities. On the other hand, through the cost pressure which seems to increase every year, the FSCs are being forced to reduce their services to be able to compete with LCCs on the market.

FULL SERVICE CARRIER VS. LOW COST CARRIER BUSINESS MODELS

The business models and passenger service concepts of FSCs and LCCs are nearing each other to the point where some selected airlines are becoming a sort of hybrid. Until not so many years ago, it was almost unthinkable for FSCs to be charging for on-board meals and drinks, checked luggage, seat selection, and so on. FSC’s basic economy fare, which strips out amenities like checked baggage and advance seat assignments, is now also a competitive tool against discounters. The question is, will the basic concept of FSCs and LCCs completely merge one day? A classical FSC with its more elaborate passenger services and processes, hubs, diverse fleet and complex networks has more personnel- and time-consuming daily business operations. Still, their services are needed and will remain a demand in the future. As long as there are connecting flights from hubs all around the world, long-haul flights, business seats and business lounges, there will be FSCs. However, they will have to keep up with the simple structures and the low costs of LCCs.

To achieve this, many large FSC groups will continue to establish their own LCC brands as part of their group – like the Lufthansa Group did with Eurowings or Transavia, a subsidiary of the KLM group. Another approach is to have a full-service operation, followed by a lower-cost division operating for the mainline. The FSCs see these additions as a reasonable extension of their portfolio for a good reason. The result of this shift is the emergence of the “hybrid” business model. This model combines the cost-saving methodologies of a pure LCC with the service, flexibility and route structure of a full-service carrier. This hybridization implies that airlines, especially FSCs, now target a broader customer spectrum with a widened competitive scope.

As a reaction, LCCs start to reshape their business model as well: they focus on areas like merchandising, multi-channel strategies and increasing partnerships. If this trend continues, airlines will have to calculate with even narrower margins, more competition and more air traffic. Increasing passenger numbers does not necessarily mean more profit – in the future, airlines will need to be even more efficient and creative to generate additional revenue streams.

Full Service Carrier vs. Low Cost Carrier – which type of airline do you prefer and why? Leave a comment and let us know!