New MasterCard Report On Low Cost Carriers Out

MasterCard International today announced a new landmark report that examines the impact of low cost carriers (LCCs) on the airlines industry in Asia/Pacific. The report explains how LCCs may generate more traffic volumes and induce a faster growth in revenue paying passengers by enticing lower income travelers to travel in and around the region. It also discusses how, under a scenario of “open skies” in Asia/Pacific, the LCCs may erode the traditional position of full service carriers and result in the need for new competitive strategies, as well as potential consolidation, mergers or downsizing of some of the existing full service players. Dr Yuwa Hedrick-Wong, economic advisor, Asia/Pacific, MasterCard, said: “The growth potential of the airlines industry in Asia/Pacific is the highest in the world, with or without the LCCs. The operational environment that will unfold in the coming years will also likely to be different from that of Europe or the US. A unique situation is therefore evolving in Asia/Pacific – LCCs will have to operate in a less than optimal environment, against a background of having the highest growth in the world.” Advantages of LCCs The business model of LCCs gives them enormous advantages over full service carriers enabling them to maintain fares that entice lower income travelers to fly. The point-to-point system of the LCCs, for example, gives them a huge cost advantage over full service carriers’ hub-and-spoke model. It eliminates the need for a ground transfer system and a virtual computer reservations system to provide connections. LCCs also opt to have greater use of the internet and restricted distribution channels such as their own sales outlets, or one or two selected distributors. This sales channel and the single class model effectively reduce the need for complicated inventory management. Perhaps the real advantage that LCCs have is their focus on short range operations. In Asia, this means flights of less than three hours. This allows them to rely on a single aisle common aircraft fleet. While common airframes ensure that cockpits are the same and flight deck crew can effectively operate on any sector. The fleet also has the added advantage of having common engineers which ensure less spare part holdings of different types. Significantly, LCCs have often opted to outsource engine and airframe services so that internal cost burdens are further reduced. The results of a simplified fleet structure, point-to-point operations, outsourcing of the technical functions and, because of the newness of the phenomenon, staff members who are younger. All these culminate to lower staffing costs. The Impact of Budget Carriers The fundamental core of LCCs operations is to maintain a low cost base on which is grafted high load factors achieved through low prices. In doing so, they have changed the operation structure of the airline business by using three variable, pricing, load factor and operating cost, instead of the traditional two factors, pricing and load factor that full service carriers have traditionally engaged in. LCCs focus on achieving high load factors and lower prices to achieve good yields. At the same time, they keep operating costs down to achieve profitability. Full service carriers found this difficult to copy because of their inflexible structural costs: different fleet configurations, hub-and-spoke networks, computer reservation systems, and an older workforce. LCCs operate most successfully in the common ‘open skies’ environment in Europe and the US. In Asia/Pacific, however, there is no common open skies arrangement. The present emergence of LCCs in the region is occurring within and limited by the context of point-to-point operations permitted