Low Cost Structures: a Winning Model
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Barcelona Treball Summary of sector trends: Air transport November 2012 Low cost structures: a winning model The investment in the airline industry is highly This fact has also affected business class, the risky, but the high rate of return is one of the main market of the big and traditional basic reasons for this industry to be very companies such as Iberia or Lufthansa. interesting to investors. After the 2001 terrorist attacks in the United The low cost The airline industry is characterized by a States, the industry suffered a heavy blow and high degree of volatility and there were a large number of bankruptcies model aims, not unpredictability (fuel prices, market and merges. To fix this situation, companies only at reducing fluctuations ...), forcing airlines to adopt flexible boosted flexible business strategies to enable strategies that allow them to respond efficiently them to quickly adapt to an uncertain costs but also at to changes in its operating environment. Low environment. Thus, during 2002 and 2003, the changing the cost airlines are expert in these strategies. airlines companies reduced costs and staff (especially at managerial level) and eliminated way of A low cost airline is an airline offering low rates additional facilities provided on board, and providing the to the detriment of other services, but trying to gradually adopted a model close to that of the keep the quality of the services provided. The low cost. service while two clearest examples of successful low cost making profits. airlines in Europe are Easyjet and Ryanair, who The current economic climate benefits were born in 1991 and 1985, respectively. The the definitive consolidation of this The main Spanish most successful low cost airline is model, because consumers have become reason of low Vueling, which started operating in 2004. more price-sensitive. This fact has affected companies like Spanair, that has ceased its cost airlines’ The low cost model was first introduced in activity, or others, such as Air Nostrum and Air success is lean Europe in 1997, following the deregulation of the Europa, which are preparing restructuring airline market that allowed for free competition plans. However, other companies continue manufacturing between European airlines on all routes of the growing and getting good results: the case of practices, which European Union. From this moment the position Ryanair, which closed 2011 as the airline of the major airlines began to be weaker. Until having carried more passengers to Spain, reduce by 66% then, there were high barriers to the entry of new more than 17 million people, over Iberia which the time the competitors due to the need of large capital carried 5 million less. investments to cope with the high activity costs. airplane is on But low cost airlines began to enter the It must be said that low cost companies are the ground. market and steal market share to the specialized in short trips, and long-term trips traditional airlines, and also helped are managed by the traditional major airlines. change habits linked to the concept of This is because consumers value comfortable seats more than the price as a key factor in travelling: it is possible to travel further and 1 intercontinental travel or long-term trips . more often, because there are low prices. 1 Journal of the Spanish Association of Aeronautical engineers. February 2012. Cofinancen: Impact on the sector The low cost model is not only a business In recent times there have been other that sells airline tickets, it furthermore initiatives. In April 2012, Volotea began transforms this sale into an instrument to operating, a project of Vueling founders get other incomes. These revenues come based on a model that offers low cost Ryanair has more from selling services such as baggage short and medium European routes2. than 1,100 routes check in, boarding priority and seat and 44 bases, and assignment; commercializing advertising According to Oswaldo Lorenzo, teacher spaces on aircrafts; or having a higher of Deusto Business School, with the has become the occupancy rate in the economy class to the low cost model everyone wins. most profitable detriment of the business class. Workers, as management in the low airline in the cost model takes into account the Furthermore, the development of the employees’ motivation, flexibility and world. Internet and the online selling systems has identification with corporate image and had a strong impact on the sector because culture. Companies, which offer a people who plan their travels and contract profitable business model to its services through the net may compare The European investors. Customers, as the prices prices and buy them easily. In fact, e - Low Fares Airline commerce (electronic commerce) and e- become cheaper. And society, as ticketing (electronic ticket) have also been there is a sustainable business able of Association, key factors in this retrenchment policy, generating new jobs. composed by nine because they have helped low cost airlines eliminate middlemen and sell only online. The creation of new low cost airlines low cost airlines, The self-service kiosks for check-in have subsidiaries of big companies includes, estimates a staff also permitted costs reduction. in parallel, investments in projects of 29,330 people. aimed at improving their Airlines, also usually operate in secondary efficiency and reducing the check airports, a factor that has placed them in a in time, mainly, by investing in favorable position to negotiate airport new technologies. For example, Air charges and the price for the use of airport France technology development project facilities for each flight (airport slot) and the at Charles de Gaulle airport, or the Iberia’s staff is use of runways and other airport facilities Iberia Agora project at Barajas airport. around 29,500 (slot flight operations). Airlines have also people, a figure cut aircrafts maintenance costs, as they This technological development is have fewer aircraft models (usually the based on the update of the flight that is over 750 in Airbus A320 or Boeing 737), which program, the review of the crew Vueling. simplifies maintenance and breakdowns. transfer, and the reduction of the aircraft run time, in conjunction with air traffic Sector competitiveness imposed by control personnel. All those elements the low cost model has forced major improve user’s perception on incidents airlines to generate synergies and management and connections. Those merge with other companies to investments may provide new opportunities to generate According to the avoid losses. It is the case, for example, business and employment in of the merge of Lufhtansa and Air France- European Low KLM, or Iberia and British Airways. other sectors such as Fares Airline telecommunications or logistics. Association, in In the case of Iberia, low cost pressure inspired the creation of Click-air that ended, 2011 the number in 2006, merged with Vueling. In October of passengers of 2001, Iberia created a new subsidiary low cost airline, Iberia Express, which began low cost airlines operating covering short flights in March grew by 9.5% over 2012. This way, Iberia can focus its activity the previous year. on long flights between Europe and Latin America. 2 Journal of the Spanish Association of Cofinancen: Aeronautical Engineers. February 2012. Impact on professional profiles The impact of low cost airlines in air Low cost airlines outsourcing of some The emergence of transport profiles has affected particularly: management incidents services has also created new jobs, for example, low cost airlines has . Adapting jobs, mainly developed telemarketers in call centers, or mobile required adapting by professionals specialized in application developers that allow for booking the traditional marketing strategies and market flights and services through this device. research. The strong competition profiles working in between low cost companies has Furthermore, the strong price competition has airlines to this new generated the need to design new outcrop companies that supply services to marketing and corporate strategies to compare prices online. They have created business model. So facilitate knowledge from other airlines jobs, mainly in the field of computer and the professionals and increase revenues. communications, for example, web designers, have had to acquire . Adapting to the change in the programmer analysts, and databases manager. the following model of those professionals traditionally working in the competences: Moreover, the restructuring of non-traditional industry: fleet technicians, adapting to change, low cost companies forced them invest in new pilots, flight attendants, technologies to make information, billing and resilience, learning dispatchers, etc. These time ashore services more efficient. These ability and professionals have had to adapt their investments may provide new employment personal and technical skills to the new opportunities for technical profiles teamwork. They demands. For example, pilots need to specialized in efficient data have had to put into drive more efficiently to spend less fuel; flight attendants need to provide management programming (computer or practice values such the costumer service with the same software engineers), or specialists in as responsibility and quality although the ratio of process optimization. passengers has increased; and initiative. professionals working in check in More information about the industry is desks must know