Low cost carriers target business travellers

30 Nov 2015 by Clement Huang
If the story of long-haul travel in the last two decades has been the rise of the Middle Eastern carriers – Emirates, Qatar Airways and Etihad Airways – the headlines for short-haul have been made by low-cost carriers (LCCs). These budget-friendly airlines have changed the landscape of short-haul markets around the world; they now account for one-third of Southeast Asia’s total fleet and control 60 per cent of seat capacity for flights in the region, according to a February 2015 report by the Centre for Aviation (CAPA). Yet for all their rapid growth, LCCs have been slower to pick up business travellers. In part this is testament to the excellence of the full-service carriers in the region, with the Asian market home to six out of the seven five-star Skytrax-rated carriers. It’s also due to the understanding of “low-cost carriers”, which is ambiguous in some ways. For most, it means a carrier that keeps costs down with a no-frills approach and lower standards of service. Yet quality-wise, the difference between LCCs and full-service carriers (FSCs) is getting smaller by the day. In response to growing competition, FSCs have worked hard to reduce their operational costs and pass this on to passengers through lower fares. Some have experimented with “unbundling” some of the frills they used to include in the price of the ticket – for example, many American carriers have begun charging passengers who opt for an inflight meal on domestic flights. Others have begun to develop their own LCC, or hybrid offerings: Thai Airways launched Thai Smile in response to growing competition from a plethora of LCCs such as Nok Air, Thai Air Asia and Thai Lion Air, that collectively snapped up 35 per cent of passengers in Bangkok last year – up seven per cent from the same time in 2013 according to data by Airports of Thailand. Conversely, LCCs have begun incorporating some of the extra perks more traditionally associated with full-service carriers, from adding long haul travel to their operations to improving their product offering; Air Asia X now offers lie-flat seats in business class, while Scoot, owned by Singapore Airlines (SIA), delivers a near full-service offering that’s significantly cheaper than flying with SIA. TARGETING UP-AND-COMING CITIES While some LCCs such as Air Asia X, Jetstar Airways and Scoot have started to operate flights exceeding six hours, the vast majority of low-cost travel still hovers around two hours. But this “limit” on range, has become a strength for LCCs in a way, as they have instead turned to diversifying their regional networks by targeting second tier and third tier destinations. This has worked particularly well in Asia, where many such cities are developing aggressively but are not yet served by FSCs due to capacity/operational issues. According to Andrew Cowen, chief executive of HK Express: “As the economic growth and development in the second and third tier cities accelerate, the demand for travelling on business also rises. With limited routes flying to and from second and third tier cities, this [is] a great opportunity for HK Express [and other LCCs] to connect people in these regions with the rest of Asia at an affordable price.” There are also operational advantages of flying short, direct routes, as highlighted by Cowen: “In general, the point-to-point model minimises travel time and eliminates the intermediate stop at the connecting hub. There is also no interdependency of flights and hubs – a delayed flight or a closed airport will not significantly affect other flight schedules,” he says. In Europe, LCCs picked up a bad reputation by flying to out-of-the-way airports located hours from the city advertised, with poor transport links for passengers getting to and from the airport. This was always less of a problem in Asia, where many airports have dedicated LCC bases, including Kuala Lumpur International Airport 2 and Don Mueang International Airport, currently the world’s busiest low-cost carrier airport based on passenger traffic, with more than 14 million passengers travelling with LCCs through the airport during the first half of 2015. THE MYTH ABOUT RED-EYE SLOTS  One of the ways LCCs keep costs down is to secure cheaper departure and arrival times. However it would be wrong to make the generalisation that because they can’t compete with full service carriers in acquiring the best slots, they are “relegated” to operating red-eye flights. LCCs do operate their fair share of flights in the wee hours of the morning, but these make up a small proportion of their total schedules, and are more common on major routes that are too profitable to neglect. Moreover, being left with red-eye time slots is not necessarily a bad thing: “As we wish to expand our route network, getting enough slots at the congested Hong Kong International Airport is certainly a challenge for us,” admits Cowen. “[However,] HK Express provides more flexible travel time (e.g. red-eye flights) at an affordable price for travellers who don’t need to travel at peak times, such as executives travelling on a last minute request, or business travellers who have a very packed schedule in the day time and can only travel on red-eye flights.” More often than not, LCCs work around the constraints of slot allocation by flying to secondary airports. Combining this with quick turnaround and lack of multi-segment services, helps to ensure flight schedules remain fairly straightforward. UTILISING FUEL-EFFICIENT AIRCRAFT A common misconception about LCCs is that they usually operate old aircraft. While there is some truth in this – Scoot previously used secondhand B777-200ERs acquired from SIA – many Asian LCCs now offer relatively young fleets of fuel-efficient aircraft such as the A320neo and B787 Dreamliner. A report conducted by planespotters.net in early 2014 showed that Jetstar Airways and its Asian offshoot Jetstar Asia offered a fleet that was 5.1 and 3.4 years in age respectively compared to Cathay Pacific (nine years) and Dragonair (11.9 years). Purchasing newer aircraft is in fact a key strategy in maintaining the bottom line for LCCs: “The A320neo aircraft [that we currently have on order] features quieter engines, larger overhead baggage storage compartments and a more energy-efficient engine, which results in average fuel savings of 20 per cent per flight,” says Cowen. “Of course, greater energy efficiency translates to lower operational costs — savings that will be passed onto HK Express’ [passengers], allowing the airline to offer even more of its signature ultra-low fares.” MIXED SAFETY STANDARDS Related to the age of aircraft, are safety concerns. The fact is, the safety records of LCCs vary widely, as do regulatory standards in Asia. Prior to the flight 8501 crash last year, Air Asia and its subsidiaries boasted a spotless safety record. On the flip side, Indonesia’s Lion Air has suffered from eight major incidents since 2002. Speaking to the International Business Times earlier this year, Max Leitschuh, a transportation analyst for iJET International, described the safety record of LCCs in Asia as a mixed bag, with Singapore being excellent, Malaysia mediocre and Indonesia problematic. HK Express’ chief executive Cowen says safety, quality services and punctuality are the three things that are never compromised on, and that lower fares are possible through the elimination of non-value added processes. “HK Express is IATA Operational Safety Audit (IOSA)-credited and has [the highest] seven star safety ranking by the independent airlineratings.com. To achieve this ranking, airlines must adhere to strict standards and practices, and must pass a stringent test by IOSA,” he says. OFFERING COMFORT ONBOARD LCCs have a reputation for packing in more passengers on flights than FSCs, and there is truth to this. Scoot used to configure its B777-200ER aircraft with a 10-across seating arrangement in economy, whereas parent carrier SIA offers a more comfortable nine-across configuration on the same aircraft. The tighter seat arrangement on Scoot meant that the LCC was able to squeeze 370 seats in economy, 41 of which were designated as ScootinSilence with an extended pitch. The economy class cabin on SIA, meanwhile, offers 245 seats. However, the shift towards operating more efficient aircraft has enabled LCCs such as Jetstar Airways to configure their B787-8 with a nine-across layout, placing it competitively alongside British Airways and United Airlines. Additionally, short flight times and point-to-point travel, means LCCs have been able to do away with things like crew rest areas, creating more space for seats, as Steven Greenway, Scoot’s head of commercial explains: “We need less storage space and smaller galleys, which means we can fit more seats into our cabins and drive higher crew efficiency.” Aside from space, LCCs have improved their product offering across the board. Jetstar Airways offers personal IFE seatback screens in economy class on the B787 Dreamliner, Scoot offers wifi connectivity on all flights (for an additional fee, like many FSC’s), while Jin Air offers complimentary water to all passengers. BUSINESS CLASS, LCC-STYLE The use of new widebody aircraft such as the A330 for Air Asia X and B787 for Scoot has enabled carriers to introduce high-quality premium seat products that further blur the line between low cost and full service offerings. Take Scoot for instance – its leather ScootBiz seats offer at least 38 inches of legroom, exceeding some of the industry’s best premium economy offerings by FSCs, including Singapore Airlines and Cathay Pacific. With 30kg of checked baggage, priority check-in and boarding, inflight entertainment via streaming and meal service among ScootBiz’s other services, it has proved an attractive proposition to SMEs that may not possess the financial muscle to fly their employees business class. COMPETITIVE PRICING Pricing is still the most important consideration for LCCs. A mid-week return premium economy fare on SIA for a flight between Singapore and Hong Kong in mid-January costs S$993.70 (US$697.73). In comparison, a return fare for travel on the same days in ScootBiz costs S$473.58 (US$332.52). “Scoot considers the needs of business travellers, but we offer a very different proposition from FSCs,” says Greenway. “As a long-haul LCC, we recognise that guests may need more amenities and comfort when they fly on longer flights. As such, we have structured our products and services offerings accordingly to accommodate these needs on an optional, payable basis, i.e. ScootBiz, PlusPerks, Max Your Space, ScooTV, inflight wifi and so on.” By unbundling such enhancements, Greenway believes that this provides greater flexibility to passengers. Those that simply wish to travel at the lowest costs can do so, while those looking for something more can mix and match add-on benefits at an extra cost. Business travellers can opt for the airline’s ScootinStyle package, which affords access to the SATS Premier Lounge in Singapore Changi Airport along with priority check-in and boarding. These perks are available to all passengers that pick up the  package, including those in economy and may prove particularly attractive to long-haul passengers. “When it launches next May, our flights to Jeddah [transferred to them by SIA], will be our longest yet, clocking in at roughly nine hours long,” notes Greenway. “Therefore, we have stepped up efforts for a seamless transition. For guests booked on connecting flights to Jeddah via Silk Air for example, Scoot will continue to offer guests the same connection privileges as existing SIA services. This includes through check-in of baggage, additional 5kg baggage allowance for their holy water, halal meals on board the aircraft, inflight announcements in English and Bahasa and a special transit voucher of S$40 (US$28.5) to be used at Singapore Changi Airport.” A DISTINCT LACK OF LOYALTY One of the major weaknesses of LCCs from a business traveller point of view is the lack of loyalty programmes. Most LCCs don’t offer things like lounge access, priority upgrades or waitlisting, as they add cost to the operation. This makes loyalty programmes somewhat redundant – as there are no perks to make them worthwhile. There are a few exceptions: Jetstar Asia offers Club Jetstar, which givesmembers access to special fares and discounts. Meanwhile Tigerair and Scoot have used their position as subsidiaries of SIA to offer Krisflyer miles to customers, but the accrual rates are poor and require a small cost to be levied. Tigerair, for instance offers a maximum earn rate of 100 miles for one-way flights from Singapore to destinations such as Bengaluru, Guangzhou and Hong Kong. This compares to the standard economy earn rates on SIA of 1,971, 1,631 and 1,594 miles to those three destinations, respectively. To put this into perspective, Krisflyer members travelling on Tigerair earn roughly 5 per cent of the miles they would receive when flying with SIA or Silk Air. But on the whole, loyalty programmes for LCCs are still a rarity in the industry. COMPETITIVE MARKET Full service carriers are aware of the threat of LCCs, and have reacted by cutting the cost of their own operations, and lowering ticket prices. According to the 2013 Airline Disclosures Handbook report by accountancy group KPMG, the cost gap between economy class fares on LCCs and legacy rivals was reduced by around 30 per cent between 2006 and 2011. Further complicating matters is the emergence of the hybrid airline concept, which combines elements of the low-cost and full-service business model. Malindo Air, a Malaysian joint venture between NADI and Lion Air, offers full-service benefits such as inflight entertainment, meals and checked baggage, at low-cost prices. The cost gap between LCCs and FSCs is unlikely to ever be fully eliminated due to inherent differences. However, as LCCs continue to entice business travellers with more add-ons, and full service carriers cut costs and “unbundle” the frills, the likely winner will be the traveller. There has never been more choice than now.
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