Mid-air turbulence: Troubled times for LCC leadership

Low-cost airlines around the globe are waking up daily to a new reality, with many of the same troubles their legacy carrier competitors face.
So what happened? And what's being done about it? What does the future hold for these airlines and their leadership?
If we turn the clock back, even as little as five years ago, the picture for low-costs around the globe looked much rosier. Established players such as Ryanair, easyJet, Virgin Blue, Southwest and JetBlue could virtually do no wrong as they found growth markets, and their legacy competitors, to be easy pickings.
In developing markets - Eastern and Central Europe, India, Southeast Asia and elsewhere - budget carriers were in vogue. Attracting start-up capital to launch in a ­virgin, untapped market was relatively straightforward and many an airline executive took flight to such markets to experience the dream and capture the proverbial pot at the end of the rainbow.
Now, those same markets are in virtual disarray. Eastern Europe's largest budget carrier, SkyEurope, is on the ropes; none of the Indian low-cost airlines are making money, despite a giant market, and the Russian marketplace shows little promise of success anytime soon.
The forces that underlie the troubled times in the low-cost sector are numerous. Here we examine a few of the key issues and how the sleep-deprived leaders are handling them.
One of the issues facing certain budget sector players today is they find themselves in no man's land in terms of scale. They are large enough to require substantial new investments in critical infrastructure - such as information systems and corporate staff - to function smoothly, but insufficiently large to drive unit costs down to levels commensurate with healthy returns.
As former JetBlue senior vice-president sales & marketing, and now commercial advisor to AirAsiaX, Tim Claydon puts it: "The problem low-costs have nowadays is, in a word, growth. They geared their business plans for it, including major new aircraft deliveries, but now find themselves in the precarious position of not having attractive new markets to put those aircraft into.Yet they're of a size where they need new systems and processes to keep the business working properly and unfortunately those things cost money."
Jason Bitter, chief executive of embattled Central European budget carrier SkyEurope shares this concern:"Size and age are both issues for low-costs. Reverse economies of scale come into play. You gets some benefits of scale, but many of the problems as well. You lose the simplicity, and flexibility often goes out the door."
One silver lining, as Claydon sees it, is that the recent pause in growth budget players are experiencing "allows the airlines to slow down, consolidate and lay the foundation for the next phase of their development. That's a privilege few fast-growing companies get to enjoy, and one that low-costs would be wise to take advantage of."
22/04/09 Flightglobal.com

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Categories: Low Cost General Apr 2009