A strategy that focuses on further penetrating primary airports will help ULCCs reach their growth potential in 2020 and beyond, writes international consultant René Armas Maes.
Simply put, the success of a low-cost business model depends on its ability to control costs, maximize productivity and deliver low fares while at the same time make a profit.
It is to no one’s surprise that the ULCC business model has changed dramatically over recent years. Among the changes currently impacting ULCC’s is the need for a core presence at primary airports. After all, the end goal for every ULCC airline might be to have a presence at just about every primary airport, at least for mature markets in a number of regions of the world.
Secondary airports typically do not have slot requirements or any other operating restrictions. On the contrary, primary airports have higher airport charges and greater competition including slot limitations which can increase airlines’ operating expenses while limiting the number of allowed take offs and landings. Certainly, they represent an operational challenge for short-to-medium range ULCCs.
However, there are many cases where ULCCs have successfully penetrated primary airports. Today, besides passengers’ needs (and demands) for a great deal on price, choice of departure time, and high number of frequencies, passengers also want to fly from airports which work best for them.
Most of the time, that means a primary airport.
Targeting primary airports for ULCCs have also become a significant growth opportunity for these airlines.
But what should the focus be when targeting network carrier primary airport fortresses? In order to be successful at a primary airport, ULCCs management need to concentrate their energies on a solid strategy and plan, which includes among others:
1. Financial strength and timing. Well-established ULCCs with solid P&L and traffic volume growth at secondary airports might have the necessary cash strength to battle network carriers upcoming fare war at their hubs. Therefore, ULCCs entering a primary airport can expect fierce competition and having a strong P&L and cash on hand will provide the financial strength to navigate turbulence. In addition, the timing to plan an attack is also important. For example, a network carrier’s financial turmoil and/or fragmented competitive environment. One key example is Alitalia at Rome–Fiumicino International Airport.
2. Network strategy. Key to identify a number of potential primary airports target markets. Focus on single to double digit passenger volume growth markets. Moreover, identify those markets where competition is weak and/or when competition is fragmented. A solid plan will focus not only in ramping-up quickly operations to high customer demand destination but also up-gauging aircraft strategy as demand growth to further reduce CASKs (or CASMs).
In addition, a ULCC route network should be regularly reviewed in order to exploit further demand opportunities. For example, as a number of new routes might be identified, it is key to reevaluate and discontinue where appropriate those routes that either did not meet expected profits or simple became secondary options to a more attractive and identified new route. Furthermore, closely evaluating any deceased/suspended slots at slot-constrained primary airports will prove to be a good growth opportunity to consider.
3. Cost control and leanest structure focus. Tight cost control means to achieve the lowest cos-per-seat-mile possible, as that’s perhaps what matters the most to be able to offer ultra low-cost fares. As a perishable good, an airline’s revenue potential is gone with every single take-off; selling that seat at the highest revenue/cost spread is what matters. Therefore, not only revenues need to be maximized but costs need to be minimized. As the airline with the lowest CASKs might end benefiting the most, it is key to contain and reduce cost as a matter of life or death.
Concerning the management team, think in terms of a core team versus setting up a plan for a more cost-efficiently structure one where services are provided by third parties (for example, ticketing, passenger and aircraft handling, among others). By evaluating the impact of each on the bottom line, important headcount and labor cost savings can be achieved.
4. Build a strategic attack plan. One where the airline is able to become at least initially the third or, better yet, the second player in terms of market share at the targeted primary airport, with the intention to become number one in the next three to seven years. Profitable expansion and not over-capacity is a key metric to concentrate on as market share for the sake of it might end up destroying investor value.
5. Negotiating favorable long-term multi-year contracts. When negotiating competitive rates with third parties, look closely at fixed pricing terms using multi-year contract opportunities. Besides negotiating favorable terms that includes slots, landing fees, etc. with the airport, systematically meeting and exceeding a high volume of passenger traffic growth and seat capacity commitments will put you in the driver seat to when it comes to crafting favorable contracts.
6. Use of technology to reduce costs and increase revenues. From web/app check-in and implementing a commercially robust and friendly web/app to not only maximize top line revenues but also to collect key customer data to micro-segment the market to personalize offerings. In addition, look for alternatives to reduce waiting times and airport handling costs including implementing a self-baggage check-in and drop off technology. Furthermore, look for preventive measures using technology and data collection to proactively reduce costs in for example aircraft maintenance and operational disruption areas to name a few.
7. Revenue optimization and upselling strategies. Closely manage the airline inventory and – especially – late passenger yield bookings based on a comprehensive analysis of the airline bookings as well as your competitor pricing behavior. Focus on managing the airline seat inventory including per route, market, seasonality, frequencies, target segment, scheduling, aircraft type and others in order to optimize pricing from when seat inventory buckets are open up to that percentage of late to very close to departure bookings. The challenge here is how to manage these properly while being able to meet your mandate or being able to offer great fares and value to customers. Indeed, this is a key ULCC challenge at slot-constrained primary airports especially when network airlines continue de-bundling of economy fares (for example basic economy fare product). Even today, at least one carrier is thinking to go beyond this airline trend and is considering unbundling business class fares as well. These two strategies were conceived with a single thought in mind - to fight back ULCCs.
In addition, focus on boosting revenues per passenger using a comprehensive ancillary revenue strategy and other revenue growth opportunities (co-branded credit card, loyalty programs, etc.). Furthermore, matching your product offering with a personalized third-party service (such as hotel accommodation targeting specifically leisure traffic) are known to bring margins from a low 30 percent to up 100 percent plus. Indeed, those high profitable commercial opportunities must be pursued to improve profitability and margins.
8. Business segment investment. A solid and continued investment in this segment will drive higher revenues but also higher distribution costs (for example selling seats via a travel agent on GDS). If ULCC have penetrated or are planning to penetrate a primary airport, capturing higher yield business traffic will be key to optimize revenues. Therefore, it is important to set-up a dedicated business travel team to actively engaged corporate accounts.
9. Target operational efficiencies and measure key metrics. Find ways to reduce higher primary airport costs including operating less expensive gate locations (if possible) including outdoor passenger boarding stairs which are most cost effective than jet bridges. In addition, negotiate credits toward landing fees for any new post-launch marketed route(s). Likewise, it is important to rethink the entire passenger processing procedure and onboard operation in order to grab any cost saving associated with them.
10. Communicate, demonstrate it in every way possible, hire and reward your team for it. Constantly and relentlessly, continue embedding a culture where cost reduction, productivity gains, teamwork, commitment, accountability, and winning customers’ loyalty are the airline’s key hard and soft specs.
In order to be successful, a primary airport attack plan should focus on the end goal of becoming the market share leader, while offering the most powerful network of large demand destinations with a solid offer of frequencies to/from the airline’s network. For example, at Oakland International airport, Southwest Airlines has a seat capacity share of almost 80 percent, while its nearest challenger is at 5 percent.
Ultimately and by being number one at a slot-constrained primary airport, it will mean that a ULCC has positioned its brand to be the strongest one, with the best value delivered (and perceived by customers) that will translate into the first-choice airline. That, in turn, will enable the airline to be able to deliver strong profitable growth and returns to its investors.
But let’s also remember that even without financial instability, today, network carriers are confronted with a fierce competitive reality and that is one where unit costs keep rising due to fuel price hikes, among others.
If a network carrier is unable to further reduce its operating costs (e.g., labor, fuel, parts/maintenance costs, among others) and/or generate additional revenues, then its operating profits are likely to continue falling. Therefore, the best strategy for a ULCC at a primary airport is to continue reducing expenditures, delivering on their low fare mandate and continue attacking higher unit cost network airlines and peers.
While cost containment is mandatory for all airlines, one question always arises, especially for ULCC carriers in terms of their network decision making. The greatest gain will come not only for network decisions driven solely by CASKs, but by the desire to secure long-term and sustainable cost efficiencies across the whole transportation network (e.g., airports, handling, third-party suppliers, etc.). Those will translate to a larger profitable positioning in the future and should drive long term growth, as well as further cost benefits that will guarantee a sustainable competitive advantage for ULCCs.
As we start 2020, and look beyond this year, it is expected that ULCCs will continue building leading positions at primary airports and taking market share from network carriers. It will be very interesting to watch how each business model reacts in the future in terms of M&A, labor and asset productivity improvements, further gains on cost savings and revenue optimization initiatives as well as customer-focused strategy improvements in order to be able to continue driving profitable growth and returns.
At least for now and based on competition encountered, a number of network carriers might be able to balance out losses encountered in their short to medium haul operations (due to ULCC expansion among others) with their international networks. But, could it be a case where low-cost carriers become a feeder to network carrier international destinations? At least, it seems a possibility as ULCC can simply put have lower CASKs than network rivals do. This conversation has already started in Europe and it will be discussed in a follow-up article. Stay tuned.
About our guest author, René Armas Maes:
René is an International Consultant and manages several global consulting projects with a key focus on revenue optimization, cost reduction, business restructuring, strategic planning, risk mitigation, and process streamlining. René Armas has taught several management courses on behalf of IATA and Airport Council International. He is a regular contributor to many air transport publications including in the US, Canada, Europe, and Latin America. You can reach René through his LinkedIn page.