Low cost carriers [LCCs] carry inherently higher risks than full service airlines because to achieve those lower fares that have opened up the world to grandma and kids alike, the business model means operating off razor thin profit margins vulnerable to the slightest change in market conditions.
It means being flexible and nimble which, when confronted by a change in strategy as AirAsia was on this occasion, can result in The Phuket News’ screaming September 28 headline: ‘Bye bye Bali.”
The sudden switch from a route like Phuket-Bali to more lucrative Bangkok-Mainland China destinations, given the huge increase in Chinese tourism to Thailand, is not altogether surprising as all airlines frequently switch loss making routes, not just LCCs.
Full service airline adherents would argue that passengers would not have been left stranded, receiving an SMS message telling them they cannot fly directly back to Phuket from Bali, but via a more expensive route through Bangkok. Normally an airline would signal its intention to come off a route well in advance and plan for it to avoid PR mishaps.
And in many instances the full service carrier would be able to call upon code-sharing partners (such as those in the three airline alliances, Star Alliance, oneworld and SkyTeam) to place passengers on a partner airline or bi-lateral agreements with carriers plying the same, or similar routes, to help stranded passengers get home.
But LCCs like AirAsia, despite its size, generally, don’t have the same luxury because they do not fly through airport hubs, but point-to-point, making code-sharing difficult. AirAsia has, in fact, been guilty of cancelling other flights without warning. It stopped its long-haul AirAsiaX flights from Kuala Lumpur to London earlier this year, angering many passengers.
Here’s the thing about LCCs. Since Southwest Airlines in the United States pioneered the business model in 1971, LCCs have grown exponentially with the explosion in air travel in the last 50 years, overcoming skepticism – in Asia in particular – to have carved out around 25 per cent of the global aviation market.
Indeed, many of the full service carriers own LCCs to cover a low fare sector of the market. In the post 9/11 and SARs eras LCCs multiplied, even if good profits remained elusive.
Thai Airways is typical, although it has been slower than other full service airlines to adapt. It now has Nok Air and its new LCC, Thai Smile servicing smaller, short haul domestic and Asian regional routes to less popular destinations as Singapore Airlines, Qantas Airways, Japan Airlines and other heavyweights go after a segment of the market they need to cover off otherwise the void will be filled by competitor LCCs.
However, LCCs are also a very high risk business if the statistics are any indication. As of this year there were around 120 LCCs operating. Of these, 34 were in Southeast Asia (Thailand has seven: Nok Air, Thai Smile, Thai AirAsia, Orient Thai Airlines, Nok Mini, Solar Air and Happy Air-which is Phuket based), while the United States has the most LCCs, with nine.
But dig deeper for the more telling story about LCC carnage. There are currently 104 defunct LCCs , including six in Australia (Air Australia – which folded stranding passengers in Phuket; Compass Airlines, East-West Airlines, Impulse Airlines – rebranded by Qantas as Jetstar – Sungold Airlines and Virgin Blue, which actually became full service carrier Virgin Australia, which also dropped out of the Phuket-Australia route). The United States has 20 defunct LCCs.
Even by the appalling high casualty rate of airlines folding in the aviation business, that is an alarmingly high figure over such a short period of time. Why?
The underlying reason is the extremely slim margins LCCs must operate on. So a serious oil price spike, a 2008 type recession, or just stiffer competition, can easily put an LCC under. LCCs like AirAsia must be ruthlessly proactive about dropping loss-making routes for more potentially profitable ones.
The business model is simple: very low ticket prices, high utilisation of the fleet (quick turnaround on the ground) simple structures and processes and light workforces who multitask to save money (flight attendances cleaning out planes after landing; doing multiple check in processes).
All this means higher vulnerability to the slightest change.
So while AirAsia’s handling of the Phuket-Bali issue lacked finesse the simple fact is that this business model has served it well as it is now arguably the world’s most robust LCC with a stranglehold on the Asian market compared to its competitors. It continues to pick up awards and expand. In many ways the epitome of the modern LCC.
Pity about the PR.
Alastair Carthew is a Phuket-based journalist and public relations professional with extensive experience in the aviation industry. alastair@phuketpublicrelations.com