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Are Low Cost Carriers the Future of Air Travel?

Are Low Cost Carriers the Future of Air Travel?

Low-cost carriers. We love ’em (Southwest). We hate ’em (Spirit).

Either way, they’re a fixture in today’s travel landscape. And their size and influence are ever-growing.

A report issued this week by travel-technology company Amadeus provides some perspective on the LCCs’ presence in the travel marketplace, including a regional breakdown.

Although it’s tempting to assume that North America boasts the heaviest LCC presence — Southwest is, after all, the model that most LCCs used as a template — both Europe and the South West Pacific regions are the current leaders in LCC activity.

In 2012, 38.0 percent of Europe’s air traffic was carried by LCCs. That’s for the region overall. In Spain, LCCs accounted for 57 percent of departing flyers. And in the U.K., the figure was 52 percent.

In North America, LCCs accounted for 30.2 percent of traffic in 2012, up slightly from 29.5 percent from 2011.

Elsewhere, LCCs’ 2012 traffic share was 24.9 percent in Latin America, 18.6 percent in Asia, 13.5 percent in the Middle East, and just 9.9 percent in Africa.

Except in Latin America, the LCCs’ traffic share in 2012 increased over 2011.

LCCs as Price Leaders

What’s so important about the LCC phenomenon? For one thing, industry boosters claim that their lower costs translate into lower fares, and that the LCCs therefore play a critical role in keeping the prices charged by legacy carriers in check. That alleged “pricing discipline” in turn has been used by the legacy carriers — most recently American and US Airways — to counter the argument that industry consolidation would lead to higher prices.

The claim is at least partly true. But as I’ve argued before, the legacy carriers have, through bankruptcies and mergers, significantly reduced their own costs.

At the same time, LCCs like Southwest and JetBlue have become much more legacy-like in their quest to make inroads into the more profitable market for business travelers.

So the gap between the LCCs and the legacy airlines, in terms of costs, services, and prices, has been narrowing. Which dilutes the argument that we can count on the LCCs to keep fares low even as fewer airlines compete for our business.

It’s not difficult to imagine the U.S. going the way of the U.K., with more than half of our air traffic being flown by LCCs. But by the time that happens, we’ll almost certainly be debating the definition of “LCC.”

Reader Reality Check

What part do LCCs play in your travels?

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  • Rupert Thompson

    I think LCC’s will always have a greater share on short haul flights. Long-haul is a different story

  • Thom

    Not necessarily… Air Asia X had been running service between KUL and LGW and STN (and just like shorthaul service, no catering or IFE on a 12 hour flight, along with 9 abreast economy seating on an A330.) They had to dump the service due to EU taxes, but word is they’re looking at starting flights to the US West Coast in the next few years.

  • Tyler

    Southwest is not a LCC anymore and never really was in the beginning. They happened to make a great hedge on fuel that gave them a huge price advantage for a couple of years. Compare that to today where Southwest is roughly the same price as the legacy carriers on most routes.

  • cowboyinbrla

    Really? Considering their aggressive fuel hedge strategy was a thing of the early 21st century (ca. 2000 forward), how is that tied to whether they “began” as a LCC – which occurred 30 years earlier?

    You seem to confuse “low-cost” with “low-fare”. “Low-cost” refers to keeping internal costs low to make it possible to be “low-fare” and still remain profitable. Fuel hedging – when it works for you – is an important tool in that regard. But it’s not the only one. Southwest, from the beginning, kept costs low by keeping turnaround times short (allowing planes to fly more hours per day generating revenue instead of sitting idle on the ground), keeping amenities extremely simple, flying into secondary airports where delays were less common and they could negotiate less expensive rent, and a myriad of other factors. They were among the earliest adopters of online ticket sales, which reduced sales costs. They resisted the siren song of the fare comparison sites (and thus avoided having to pay them fees to issue tickets) by keeping sales in-house.

    That’s what low-cost means.

    And as for fare comparisons, simply noting that Southwest and other carriers have comparable fares doesn’t mean that Southwest isn’t keeping prices lower. Did it occur to you that if Southwest (or another LCC) wasn’t flying those routes, the legacy carriers would feel free to jack the prices up through the roof?

    I recognize that Southwest’s fares aren’t as cheap (per mile, say) as they were 10 years ago. Low-cost doesn’t mean “forever cheap”. What Southwest does do and does well is offer rational, easy to understand fares with no change fees, for a decent quality product compared with its legacy competiton.

  • Tyler

    I do agree that they were a LCC in the beginning and up until recently, should be considered that. That was a mistake on my part. However, they hedged 80% of their fuel in 2005 and 60% in 2006. Up until late 2007/early 2008 they hedged large amounts of their fuel and reaped the profit off of it, enabling to keep their fares low. That advantage has diminished and their size has grown and as a result, their fares have become less competitive.

    I understand they are defined as a “low-cost carrier” and they were that for the majority of their life but I and many other people don’t consider them a low-cost carrier anymore, it’s a sort of hybrid that looks more and more like a legacy airline everyday

  • cowboyinbrla

    I still think you’re confusing “low cost” with “low fare”. Fuel hedging, no matter how dramatic, is *exactly* the kind of strategy a low-cost carrier would undertake, precisely because it *lowers* costs. The “cost” in the term “low cost carrier” doesn’t mean “low cost to the consumer”; it means “low cost for the airline” – contrasting with “legacy” carrier, as in a carrier with “legacy” costs.

    It’s true, of course, that the money saved via fuel hedging allowed the company to keep its FARES lower than they would otherwise have had to be while keeping the company profitable. But that, really, is no different than negotiating any other sort of price break on costs, whether it’s a discount on a bulk order of planes or a new contract with labor or whatever.

    And no, they’re not always the lowest fare by any means. But they’re almost always competitive when compared head-to-head (ie with comparable baggage loads on the legacy carrier), and as we’ve seen from changes we’ve seen as Southwest moves into a market (and the changes in reverse on the rare occasions they’ve pulled out of one), they act as the brake on even higher fares by the legacies.