Detailed Analysis of Economics of Foreign Low Cost Carriers v/s Indian Airlines

Detailed Analysis of Economics of Foreign Low Cost Carriers v/s Indian Airlines: A Competitive Strategy Perspective

Overview of Competitive Strategies Of LCC (Low Cost Carriers)
A low-cost carrier (also known as a no-frills, discount or budget carrier or airline or cheap flight) with its lower fares and fewer quality products and comforts, is a developing business in the aviation industry and presents huge market opportunities due to varying competitive strategies. Although all Low Cost Carriers have the same operating structure, they possess their own distinct competitive strategy, which in most cases, is the main contributor to their business. To make up for the revenue loss through decreased ticket prices, the airline may adopt additional competitive strategies by charging for extras like food, priority boarding, seat allocating, and baggage etc. The term originated within the competitive aviation industry referring to airlines with a lower operating finance and cost structure than the competition. While the term is often applied to any carrier with low ticket prices and limited services, regardless of their operating methods, low-cost carriers should not be confused with regional airlines that operate short flights without any service, or with full-service airlines offering some reduced fares. In due course, some airlines have actively sought to adopt competitive strategies to gain advantage by marketing and advertising themselves as low-cost, budget, or discount airlines, while maintaining products usually associated with traditional mainline carrier’s services, which often result in increased operational complexity and reduced efficiency. Among these products, which are a part of their competitive strategies are: preferred or assigned seating, catering other items rather than basic beverages, differentiated premium cabins, satellite or ground based wifi internet, and in-flight audio video entertainment.

Business Model of Low Cost Carrier

Low-cost carrier businesses’ competitive strategies vary widely. However, the common theme among all the low-cost carriers is the reduction of cost and reduced overall fares compared to legacy carriers.

Some Common Competitive Strategies are as follows:

1. Aircraft: A business analysis of the Aviation Industry has shown that most low-cost carriers’ competitive strategies revolve around operating aircraft configured with a single passenger class, and most operate just a single type of aircraft. Since 2000, fleets generally consist of new, more fuel efficient aircraft, commonly the Airbus A320 or Boeing 737 families. These are extremely efficient aircraft in terms of fuel, training, maintenance and crew costs per passenger. In 2013, ch-aviation published a study about creating competitive strategy of low-cost carriers. They summarized that the major competitive strategies involve ordering aircrafts in large numbers, in turn getting huge discounts and because of which, they are able to sell their aircraft just a few years after delivery at a very high price. This helps in saving a lot in operative costs. The other competitive strategies are based on the fact that these aircrafts often operate with a minimum set of optional equipment, further reducing the costs of acquisition and maintenance, as well as keeping the weight of the aircraft lower and thus saving on fuel. For example, Ryan air seats do not recline and do not have rear pockets, to reduce cleaning and maintenance costs. Some other competitive strategies could be having no window shades, or pilot conveniences being excluded, such as ACARS and auto-throttle. Often, some of their competitive strategies are excluding in-flight entertainment systems, though many US low-cost carriers do offer satellite television or radio in-flight. It is also among the most sought after competitive strategies to install LCD monitors onto the aircraft and broadcast commercials on them, coupled with the traditional route – altitude – speed information. Reserved seating and priority boarding form a critical component of their competitive strategies. Most do not offer reserved seating, hoping to encourage passengers to board early and quickly, thus decreasing turnaround times. Some allow priority boarding for an extra fee, in lieu of reserved seating, and some also allow only the emergency exit rows to be reserved, again at an extra cost. The emergency exit seats have more leg space. In this way, low cost carriers save costs in aircrafts and increase revenue.
2. Bases: Like the major carriers, these businesses’ competitive strategies involve developing one or more bases in order to maximize the destination coverage and defend their marketshare. Most do not operate traditional hubs, but rather only the focus cities.
3. Simplicity: Among the most frequently used competitive strategies is offering a simpler fare scheme, such as charging one-way tickets at half rates than that of round-trips. Typically, fares increase as the plane fills up, which rewards early reservations. In Europe (and early in Southwest’s history) luggage is not transferred from one flight to another, even if both flights are with the same airline. This saves costs and is thought to encourage passengers to take direct flights. Modern US-based low-cost carriers generally transfer baggage for continuing flights, as well as transferring baggage to other airlines. Gate fees and landing fees forms another important element of their competitive strategies. Some airlines eschew the use of gates that include jet ways, since these generally cost more to lease. Often, the low cost carriers fly to smaller, less congested secondary airports and/or fly to airports in off-peak hours to avoid air traffic delays and taking advantage of lower landing fees. Turnaround is one of the most important competitive strategies of these airlines. These airlines tend to off-load, service and re-load the aircraft (turnaround) in shorter time periods, allowing maximum utilization of aircraft.
4. Non-Flight Revenue: Along with their other competitive strategies, low cost carriers also generate ancillary revenue (non-flight revenue) from a variety of activities, such as à la carte features and commission-based products. The competitive strategies of some airlines involve charging a fee for trivial items like a pillow or blanket or for carry-on baggage. In Europe, it is common for each and every convenience and service to have an additional charge. Air Asia for example, generates revenue by courier services and hotels as well as flights.
5. Limit Personnel Costs: In Low-cost carriers, one of the most critical competitive strategies is that employees work multiple roles. At some airlines, flight attendants also clean the aircraft or work as gate agents (limiting personnel costs). Southwest Airlines’ competitive strategies include using fuel hedging programs to reduce its overall fuel costs. Another of the competitive strategies could include checking-in at the gate of luggage, which requires additional fees as it requires addition to the weight calculation and last minute baggage handling. Online check-in is one of the most common competitive strategies, again in the interest of avoiding personnel costs. Where permissible, some airlines have a disinclination to handle Special Service passengers, for instance by placing a higher age limit on unaccompanied minors than full service carriers. Another of their competitive strategies include offering no refunds or transfers to later flights in the event of missed flights; if the aircraft leaves on time without a passenger who arrived late, the passenger will have to buy a wholly new ticket for the next flight.

To summarize the competitive strategies, the low cost carriers have the following top notch strategies:

1. Standardized Fleet (lower training, maintenance costs; purchasing aircraft in bulk)
2. Remove Non-Essential Features (non-reclining seats, no pilot auto throttle, no frequent flyer schemes)
3. Use of Secondary Airports (lower landing fees, marketing support)
4. Rapid Turnaround (less time on the ground, more flights per day)
5. Online Ticket Sales (no call centres or agents)
6. Online Check-In (fewer check-in desks)
7. Impose Baggage Charges (fewer bags mean faster loading of aircraft and allow for extra revenue for checked bags)
8. Do Not Use Jet-Ways (avoiding extra airport charges)
9. Have Staff Do Multiple Jobs (cabin crew also check tickets at the gate, clean aircraft)
10. Hedge Fuel Costs (buying fuel in advance when it is cheaper)
11. Charge For All Services (including on-board services, reserved seating, and extra baggage)
12. Do Not Use Reserved Seating (which slows down the loading of the aircraft)
13. Charge For Checked Bags (which slows down loading of the aircraft)
14. Charge For Last Minute Baggage Check-In (which slows down loading of the aircraft)
15. Fly Point-to-Point (passenger transfers to other flights are not accommodated)
16. Keep Aircraft On The Ground For Very Short Time (lower airport charges)
17. Carry Very Little Extra Fuel (reducing the weight of the aircraft)
18. Route Planning Before Aircraft Arrives At Airport (saving time on the ground)

Many Low-Cost Carriers Show A Zero Cost For Some Flights. Most charge additional fees for airport check-in, baggage check-in, ‘handling charges’, seat allocation, more legroom, priority boarding and credit card processing. These charges are non-refundable even in the case of cancellation by the airline.

PORTER’S FIVE FORCES MODEL

1. Threat of New Entrants: Low
   Owing to high industry regulations in India and exorbitantly high fuel costs, which forms the major component of the costs structure, new entrants might have to deal with high operating costs (even though the competitive strategies of low cost carriers include carrying fewer services and hence, accounting for fewer operating costs). Additionally, the components and raw material parts are not easily available and hence, expensive for new entrants, because most of the suppliers are already tied up with the existing players. For a low cost carrier, where fares are low, in order to overcome the high costs, the payback period is high.
2. Threat of Substitute Products or Services: Medium
   The substitute products or services for the low cost carriers would consist of premium airlines, regional airlines, other airlines, and jets. In some cases, helicopters and trains could also be seen of as substitute products. Since most airlines have similar services, so costs play a major role in their decision making. Hence, the substitutes, though exist, but are not very high in consideration, owing to the low fares of low cost carriers. Additionally, the buyer switching costs are high and the perceived level of product differentiation is low, which justifies the claim above.
3. Bargaining Power of Customers: Medium
   The industry products have a differential advantage in terms of time saving and lower costs as compared to premium and luxury airlines. Additionally, the buyer’s switching costs are high, as also is the firm’s switching costs. Their bargaining leverage is also balanced.
4. Bargaining Power of Suppliers: High
   The impact of inputs on cost or differentiation is very high, since each component is very critical to the manufacturing process. The supplier switching costs is not very high, but the degree of differentiation of inputs is very high and the presence of substitute inputs is also low.
5. Intensity of Competitive Rivalry: High
   Though the level of advertising expense is low, sustainable competitive advantage could be attained through innovation. A high number of success factors persist in this industry and huge opportunities to engage customers are available, which keep the competition intensity high.

BUSINESS MODEL OF SOUTHWEST AIRLINES

Having understood the low cost carrier industry of the aviation sector and their possible competitive strategies, let us now study in detail a low cost carrier in USA and its effective and first-rate competitive strategy, before comparing them to Indian LCCs.

Southwest Airlines was started as an intra-state operator in Texas in the year 1967. It established itself on the budget airline philosophy, thereby surviving a severe price war. It became the 7th largest carrier in the country by April, 1993. It expanded to become a national carrier, serving all major cities. It is also the 12 time winner of the coveted Triple Crown award. The main competitive strategies of this airline could be summarized as short haul, high frequency and low cost.

Southwest Model’s Competitive Strategies and Strategic Management Methods:

1. Use of Non-Conventional Models For Low-Cost: Most promotions were done internally.
2. Leadership Is Fun: Celebrations formed a part of their frequent competitive strategies and was common to the Southwest family. Having fun together (the whole network of all stakeholders: management, employees, customers) was said to be among the key competitive strategies of Southwest. Leadership capabilities of its CEO, Herb Kelleher was known to have played a key role in incorporating the celebrations and the fun quotient.
3. Treating Employees As Part of The Southwest family: Recognition of each individual formed the basis of the Southwest’s competitive strategies.
4. Recruitment Method (Hire only those who form the fit): Identify attitudes rather than skills. The management knew that skills could be taught to anyone and everyone, but the attitude of a person takes time to change. Hence, their competitive strategies included hiring individuals with an attitude common to Southwest, because attitude was the key competitive advantage of Southwest. Rigorous interviews were conducted to make sure they hire the right candidate. Peer hiring was another important element of their competitive strategies. The compensation of employees varied with position and profile, and was at par with the industry standards. Pension was also doled out to them through the Southwest’s profit sharing plan. 10% of the company stock was held by the employees.   It is said that Southwest’s core competencies lay in their employees and their overall development and growth.
5. Involving The Employees In The Management Process of The Airline: Most promotions were done internally through the employees. The whole firm was centred on team building and cross-training was strongly encouraged.

Southwest’s Competitive Strategies:

1. Strategy Marketing: The Southwest Airlines’ competitive strategies in Marketing could be covered under the Marketing Mix, i.e. the 4 P’s.
   • Product: Its product is travel, and therefore, its competitors include not only other airlines, but also any other mode of transportation. In order to understand its product offering, let us first understand its target group of customers and its positioning with respect to its direct competitors, on the basis of its target customer need.Its target group of customers include:
     • Cost and Value Conscious Customers, Mostly Male
     • Small Business Executives
     • Customers Traveling Short Distances
     • Customers With Frequent Schedules
     The target customers could then be summarized as the cost and value conscious male and small business executives who travel short distances and are on frequent travel schedules.
     Its positioning, as respect to other low cost carriers, was FUN and LOVE. All their communications and competitive strategies revolved around LOVE. One ad was titled “How do we love you?” depicting the flight schedule, while yet another was titled “We’re spreading love” depicting the rapid growth of the airline. Some of their competitive strategies depicting love are illustrated below. The whole airline was based on a Love theme, with its love potions of on-board drinks and love machines for ticket writing. They also had a Weird Colour Scheme for seating to add to the element of fun. Its differentiation was that it can get the passengers to their destinations when they want to get there, on time, at the lowest possible fares- while having fun. Moreover, as compared to other low cost carriers, their average cost of serving meals per passenger was just 20 cents, as compared to the industry average of $5.
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     1. • The Product Offering Of The Southwest Airlines Is:
          • Frequent, Conveniently Timed Flights,
          • Point-to-point Route System Rather Than The Hub-and-spoke Model, And
          • Direct, Non-stop Flights.
        • Pricing: Pricing formed an important part of their competitive strategies. Its pricing strategy was charging the lowest possible fare and competing with all forms of transport, including automobiles. When the market gets busier and more people start flying, it increases the number of flights keeping the prices same, rather than increasing the fares.
        • Distribution and e-Business Strategy: Southwest Airlines does not rely on travel agents. They have their own travel booking services, which is also a part of their Direct Marketing campaign. It does not interline or offer joint fares with other airlines. It is said that Southwest’s internet ticketing (e-Business) saves costs up to $50 million a year, which is roughly 1% of total revenue. These competitive strategies in distribution has aided Southwest in saving enormous costs and hence, been the backbone of their success.
        • Promotion: The most important of their competitive strategies has been illustrated in their promotion strategies. It launched its Frequent Flyer Awards, which was awarded based on the number of trips taken. This was one of the competitive strategies in which Southwest showed its philosophy that every customer is equally important as the other and making ALL passengers feel special.Southwest’s competitive strategies in promotion could be summed up as doing three things in their advertising:
          • Intrigue
          • Entertain
          • Persuade
          They also followed the Television Sports Advertising, which was aimed at reaching the corporate set of customers via sports and other venues through its association with Sports Television programming. In 2000, Southwest renewed its multi-year sponsorship agreement with the National Football League (NFL).
          They aimed at “Free Publicity” through its Public Relations. They were 12 times crowned the Triple Crown Award. They used this occasion for their public relations campaign, wherein they named a plane “Triple Crown One” and painted names of 24000 employees on them.
          Their core business, they proclaimed was, Customer Service and providing airline transportation was just a means to the end. Southwest’s philosophy was “Service for smiles and profits”. Their internal marketing campaign revolved around encouraging the employees to treat customer service as the most important aspect of their job. As their CEO, Herb Kelleher puts it,
          “We want people who do things well, with laughter and grace.”
     2. Supply Chain Strategy: Their key competitive strategies in supply chain are as follows:
        • Did all of its ticketing themselves and not made seats available through computerized systems, thus ensuring that travel agents contact the airlines directly to book their seats.
        • Did not operate hub and spoke route system and the passengers flew non-stop origin to destination as the airlines did not promote connecting services.
        • Flew into uncongested airports of small cities and less congested ones of large cities in order to save on taxi time, fewer gate holds and in-air waiting time.
        • Did not transfer baggage directly to other airlines, as it doesn’t coordinate its services with other airlines.
        • Only drinks and snacks, often peanuts were served on-board.
        • 84% unionized labour force, but its labour relations were excellent, because they did not share the ground handling crew until unavoidable.
        • Only flew Boeing 737-Fleet of 150 at an average of 1500 trips per day.
        • The average age of Southwest Airlines was 7 years, which was the lowest in the industry.
        • Lower turnaround time, 2 out of 3 planes were turned around in 15 minutes, as compared to the industry average of 55 minutes.
     3. Cost Cutting: As a popular saying goes, “Airlines do not have revenue problems, they have cost problems”, hence SWA’s most important of its competitive strategies includes taking care of its costs very prudently as shown below:
        • Cost Cutting In Fuel: Pilots offer new ideas to save more fuel.
        • Fuel Costs: Buying fuel at best prices. They sometimes carry inventory as well, if possible.
        • Gate Costs And Landing Fees: Through its successful business strategy of operating in uncongested airports of small cities and less congested airports of larger ones, it saves on gate costs and landing fees as they are way below the industry average for these airports.
        • Number Of Departures: They focus on maximizing productivity of people and machinery with at least 20 departures a day.
        • Low Cost Service: It offers great service at lower costs. SWA cost per passenger is way below the industry average (7.3 cents in 1993)
     4. Growth Strategy: They followed conservative competitive strategies in growth with expansion in the current route structure being the first priority. 85% expansion of SWA was internal. External expansion was only opportunity driven. After the collapse of Midwest Airlines in 1991, Southwest moved to Midway Airport in Chicago and anchored there. They do not do a lot of market research. They only choose a market, negotiate for gates and look for controlled growth. They are focused on growth with consistency. When they enter a new city, they want to ensure forming successful business, which is consistent throughout the system.
     To summarize the competitive strategies and understand the process of creating memorable business, let us conduct SWOT analysis of Southwest Airlines:
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   • COMPARISON OF COMPETITIVE STRATEGIES WITH INDIAN LCC’S (INDIGO AIRLINES, FOR EXAMPLE)

     COMPETITIVE STRATEGIES IN	INDIGO AIRLINES	SOUTHWEST AIRLINES
     Marketing	Product: The theme revolved around low cost and on-time flight schedules, which was common across most low cost carriers across the globe. Price: The best price among all competitor airlines Distribution: Its own website and through travel agents Promotion: Fare discounts to registered users, advertising and publicity.	1. Product: The main theme was FUN and LOVE, which gave the passengers a sense of loyalty and family-like feeling with the airline.2. Price: The best among all competitors, including automobiles and ground transportation. 3. Distribution: Its own distribution services 4. Promotion: Sports Television Promotion, Advertising, Public Relations, Internal Marketing
     Supply chain management	Professional Airline Management Team No frills Lower turnaround time Lesser staffing Standardized fleet Self ticketing Point-to-point connectivity Flying into less congested airports No baggage transfer policy No frills Only Boeing 737 flights Lower turnaround time 84% unionized labour force, but still excellent labour relations Lesser staffing Standardized fleet
     Cost Cutting	Tighter ships No frills or hot meal service Ability to strike savvy deals Fuel Costs and Savings in Fuel (Fuel Cost Hedging) Lower gate costs and landing fees Low cost service
     Growth Strategy	Extensive Market Research Growth with consistency Gradual growth with expansion taking place gradually External expansion Conservative growth with expansion in the current route structure being the priority Opportunity driven external growth Growth with consistency No market research

RECOMMENDATIONS FOR COMPETITIVE STRATEGIES OF INDIAN LCC’S

COMPETITIVE STRATEGIES IN	RECOMMENDATIONS
Marketing	More unique positioning of low cost carriers, like SWA did Develop plans for Experiential Marketing, Social Marketing, Sports Marketing and Public Relations should form the core promotion activities, with very little sales promotion Lowest prices
Supply chain management	Point-to-point connectivity No baggage transfer policy Flying into less congested airports Good labour relations Avoid using jet ways Remove unnecessary facilities Forward and backward integration
Cost Cutting	Savings in fuel Lower gate costs and landing fees, in lieu of point 3 of Supply Chain Management
Growth Strategy	Opportunity driven external expansion Focus on internal expansion and current route

By Tarun Gupta