Are we ‘over’ low cost carriers, and if so, what happens next?

The poor traffic figures filed this week for Jetstar ,which is owned by Qantas, and Tigerair Australia, which is controlled by Virgin Australia with its 60 percent equity, suggest that both have built franchises for which not enough customers are turning up.

This poses some problems for Qantas and Virgin.

People are attracted to low fares, but the competition between the full service brands have delivered lower fares on their flights, and neither of the low cost carriers  have enough usable, un-tricky fares sufficiently cheaper than their more frequent and less uncomfortable parents to bring in enough punters to satisfy their business plans.

Or to be blunt, not enough Australians are small enough to tolerate their seating plans for more than a short flight, and the savings mean nothing compared to the costs of getting to and from the airports by any means where the car parking over a few days can become the most infuriating cost component of the trip, especially if the vehicle ends up parked a long walk away from the terminal anyhow.

The lessons of low cost airlines around the world contains a number of absolute truths, starting with the need to fly the aircraft for as long as possible each day and preferably around the clock, and full or nearly full, not 69 per cent full, which is impossibly low for the model to survive.

It is also essential to find ways to trick or punish the traveller with difficult to fulfill conditions for checking in, booking and changing flights, and boarding with little hand luggage never mind checked bags.

Low cost passengers have to be sold drinks and snack at high margins. If it was legal, LCC’s would probably like to sell pain killers and tranquillizers as well.

However there is a further lesson that both Australian carriers have ignored, which is that LCCs owned by full fare carriers don’t work.  The fundamental claim made by Qantas that Jetstar wouldn’t be allowed to cannibalize its parent wasn’t honored for long, and both Virgin and its bigger competitor schedule their budget brands at times where they often compete with and bleed revenue away from their own operations, even though they are supposed to be competing with each other.

Strategies that involve deliberate self harm in order to harm a competitor are something you would expect from a consultancy full of juvenile MBAs, rather than a world wise fully grown airline.

In Europe and the US stand alone successful low cost carriers like Ryanair, easyJet, Southwest, Westjet, Spirit and JetBlue don’t have that problem.  Some of them have to compete with rail, but mainly, they compete with the ‘legacy’ carriers by avoiding an over emphasis on connecting hubs and offering a combination of time and fare savings that makes anyone who has flown Lufthansa internally know how inappropriate that excellent carrier is if the task is just to quickly get from one secondary city in Germany to another if blasting along the autobahns doesn’t appeal.

It could be argued that the fundamentals for a successful low cost carrier like Spirit simply don’t exist in the wide open low density air routes of Australia, notwithstanding the astonishing concentration of traffic between Sydney and Melbourne.

Qantas and Virgin Australia cannot afford their low cost carriers to fly as empty as they are, a problem compounded for Qantas by the state of Jetstar international as disclosed in the monthly activity reports,  where its competitor isn’t exposed to the risks of participating with its own long haul LCC.

If we turn to the May traffic filings and year-to-date to the end of May the relative exposure of the Qantas group and Virgin Australia to their own low cost activities can be best assessed by looking at ASKs or available seat kilometres.

ASKs represent the total commercial risk, in that this metric measures all seats flown whether occupied or not, since they all cost fuel, labor, finance charges, maintenance costs, navigation fees and so forth.

If the ASKs flown by all full scheduled domestic operations in the Qantas group, and by Virgin plus Tigerair, are then divided by the ASKS only attributable to their respective domestic low fare brands  28.7 percent of Qantas group  domestic ASKs were flown in May by Jetstar.

On the same basis Virgin Australia’s owners are only exposed to 11.5 per cent of their total domestic lift in May being flown (empty or otherwise) by Tigerair.  The figure would obviously fall further if diluted to the level of Virgin’s 60 percent ownership of Tigerair domestic.

If the sums are done on a May year-to-date basis Jetstar domestic accounted for 32% of the Qantas domestic lift in Australia. The comparable figure for Virgin’s Tigerair exposure is 9.98 percent, however in that period it assumed control of the failing LCC enterprise and was relieved of the operational limits imposed on it by CASA after the original Tiger tried to ignore the safety authority’s requirements.

How might the two major domestic brands escape from their low fare predicaments?

Qantas Group CEO Alan Joyce has said that a sale of all or part of Jetstar is on the table as is the disposal of its frequent flyer program. But Mr Joyce says lots of things,  not all of which have come to fruition, and none of which so far have prevented the company losing customers and shareholder value during his tenure which began in November 2008.

This angry photo comment appears on JQ's Facebook, but it doesn't look like an A320

For Virgin Australia’s Singapore Airlines shareholder the sale of 60% of Tigerair Australia at a time when it owned only 32% of the Singapore based Tiger Airways Holdings company was an important part of its own commercial strategic settings, and there is a commitment entered into between Virgin and Tiger Airways Holdings, in which Singapore Airlines is now a more committed part owner, to achieve ambitious growth and profit goals for the Australian LCC.

So short of a joint decision to quarantine Tigerair as a limited operation, or even dump it like Tigerair Singapore dumped its ventures in the Philippines and Indonesia,  Tigerair will remain a challenge of magnitude for Virgin Australia.

But it can’t go on as it is today anymore than Jetstar can.

For Qantas the added dimension of the disappointments of its trans border Asia and Japan operations make its issues with the low cost model somewhat worse than they are for Virgin Australia.

Cut free, and run like non full service airline owned stand alone operations, there are differing low fare models that might thrive in this country.

However that wouldn’t be of comfort to Qantas or Virgin Australia either, since part of such success would undoubtedly be at their cost.

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