14th Eurasian Air Transport Forum
1st November 2016, Moscow Dmitri Mirgorodsky | Partner, Concuros ……An LCC?
Or a short-haul business airline?2 EVOLUTION OF THE LCC MODEL
3 LCC principles have filtered LCCs injected through into fresh Full Service momentum Carriers Over 45 years of into air travel (FSCs) accumulated growth. • Core fare levels data on LCC • Average annual have sharply operations, market growth of declined in real models and 3.2% per year terms across all 1971 market impact increased to sectors of the market, both • First true 5.0% during the 1990s long haul and LCC starts short haul operating: Southwest in Texas
4 Source: CAPA 5 Pax (M), 2015 2000 1803.9 1800 1642.61 1,621 1600 1400 Europe 1200 North America 1000 800 La n America 488.14 600 Asia Pacific 400 271.73 148.59 200 Africa 0 Middle East Europe North La n Asia Africa Middle America America Pacific East
• Europe started well behind North America but is now the most LCC dominated region • China is the last significant new frontier Source: aci.org 6 ‘New Gen’ versus ‘Old Gen’ may seem simplistic: in a global context the successful players today are the first generation LCCs. But this categorization does have more relevance in a Russian context Through a taxonomy of LCCs we can identify what adaptations of the model work and which don’t We can predict the future direction of LCC evolution We can test the thesis: A “one size fits all” approach doesn’t work”; regulatory and geographical factors can apply significant constraints But we can still distill KSFs – Key Success Factors – from a multiplicity of LCC examples and these will have general application
7 If everyone is becoming an LCC, how to be different? Over time price stimulation effects are exhausted Airlines run out of new city pairs to serve/new bases to launch – Ryan now at 84 bases, connecting over 200 destinations in 33 countries The orthodox model needs a degree of adaptation to achieve differentiation
8 ORTHODOX ALLIANCE / HYBRID MODEL NETWORK LCC LONG HAUL MODEL FEEDER MODEL
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High seating density Single class configuration Short turnaround time at airports = high utilization Emphasis on ancillary revenues Low fares, simpler fare scheme, direct distribution Point-to-point traffic No Cargo Single aircraft type (family) Frequent use of secondary airports
11 Some of these features apply to all LCCs All of these features apply to the orthodox or ‘cookie cutter’ model But given ‘first mover advantage’ as new LCCs enter a mature LCC market, e.g. Europe or SE Asia, the only way to survive/succeed is to modify and adapt the model Ultimately and logically a low unit cost structure defines an LCC
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CASK Comparison (US cents) – Key Airlines in 2015
16 13.6 14
12 Others Low Cost Carriers
10 8.81 7.94 7.88 7.86 7.73 7.62 7.91 8 6.99 6.99
6 4.63 4.26 4.16 3.93 4
2
0 Lu hansa Cyprus Turkish Emirates Air Aeroflot Bri sh Aegean EasyJet Air Berlin Cobalt Y1 Pegasus Wizz Air Ryanair Airways Airlines France Airways Airlines Airlines
CASK (all costs including fuel) at 2015 levels (Source: CAPA and Cobalt Business Plan) 13 14
7.91
4.26 4.16 3.93
CASK (all costs including fuel) at 2015 levels (Source: CAPA ) Southwest in the US, Ryan in Europe, Air Asia Cost reduction is largely a function of size and scale This is clearly apparent in aircraft ownership costs, which can comprise 10%+ of total cost Significant scale benefits apply once a fleet exceeds 10 to 12 airframes. They only plateau off when fleet size is numbered in the hundreds If a ‘first mover’ maintains a rate of brisk expansion, and stays true to LCC principles, its unit cost structure can never be bettered or matched by a new entrant New entrants therefore need to differentiate in ways that the consumer values and avoid head to head competition on cost: one recent study showed that during the first decade of this century, 52% of LCC start ups failed; the average life of a start up was only 3.8 years!
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Viva Macau, 2004 Avianova, 2009 Long haul, low cost Orthodox short haul, low cost ‘Cookie cutter’
Vietjet Thailand, 2014 First cross-border offshoot of successful Cobalt (Cyprus) 2016 orthodox domestic LCC Network LCC based on the Larnaca hub
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TWO ‘LCC REVOLUTIONS’
17 Launched: 2009 Ceased: 2011
Launched: 2005 Ceased: 2011
Launched: 2014
18 Ekaterinburg Ekaterinburg Ekaterinburg Krasnodar Krasnodar Krasnodar Perm Perm Perm Rostov-on-don Rostov-on-don Rostov-on-don Saint-Petersburg Saint Petersburg Saint Petersburg
Sochi Sochi Sochi Chelyabinsk Astrakhan Astrakhan Kaliningrad Arkhangelsk Belgorod Murmansk Anapa Cheboksary Tyumen Kaliningrad Chelyabinsk Kurgan Kirov Naberezhnye Chelny Krasnoyarsk Samara Makhachkala Surgut Naberezhnye Chelny Stavropol Nazran (Magas) Simferopol Nalchik Tyumen Novosibirsk Ulyanovsk Samara Ufa Surgut Volgograd Tyumen Ufa Volgograd 19 INDICATORS Sky AO
Fleet size: 9 6 12
Passengers carried (last year of operations): 1,143 1,425 3,090
Domestic points served; 13 22 56
International points served: 0 1 2
CASK (US cents): 6.91 5.71 5.22*
RASK: 5.12 3.96 4.78*
Pax per aircraft (thousand): 123 238 258
Ranking in Russian market: 13th 10th 6th
Years of operation: 01.2007- 10.2011 08.2009-10.2011 09.2014 - date
* estimated 20 21
Passenger traffic (pax) Passenger load factor (%) Airline 2015 2016 % 2015 2016 +/- Aeroflot 17 275 037 19 033 237 110,2 79,9 81,6 1.7 S7 5 451 215 6 500 044 119,2 80,1 86,3 6.2 Rossiya 3 411 664 5 125 830 150,2 75,9 83,9 8 Utair 3 794 807 4 315 089 113,7 72,7 71,5 -1.2 Uralskie airline 3 666 288 4 271 261 116,5 77,3 78,5 1.2 1 820 982 2 881 649 158,2 81,5 87,1 5.6 Globus 1 626 733 2 327 485 143,1 79,6 84,6 5 Azur air 1 558 610 1 457 431 93,5 95,4 94,7 -0.7 Vim Avia 1 111 474 1 396 300 125,6 74,4 77,1 2.7 Nord Wind 1 929 168 1 130 168 58,6 92,0 90,7 -1.3
Passenger traffic, Jan-Aug 2016 (International and Domestic)
Source: favt.ru 21 22
16.11 16.12 15.01 15.03 From To Carrier KM Fare (Standard) Fare (Standard) Fare (Standard) Fare (Standard) Pobeda 1,529 2,549 2,549 3,059 Utair 2,385 1,790 1,790 1,790 Samara Uralskie 877 2,541 2,541 2,541 2,541 S7 2,850 2,850 2,850 2,850 rzd* 2,597 2,597 2,597 2,597
Pobeda 2,039 2,549 5,099 4,079 Surgut Utair 2137 2,985 2,985 4,985 2,985 rzd* 3,762 2,244 2,244 2,244 Moscow Pobeda 1,529 1,529 1,937 1,937 Uralskie 2,180 2,180 2,180 2,180 Rostov-Don Utair 959 2,185 2,185 1,990 1,990 S7 2,348 2,348 2,348 2,348 rzd* 1,975 1,975 1,975 1,975
Pobeda 2,039 3,059 2,549 3,569 S7 2,600 2,600 2,600 3,600 Astrahan 1271 Aeroflot 3,000 3,000 3,000 3,000 rzd* 1,904 1,904 1,904 1,904
1 way flight , ‘light’ tariffs Price without taxes and charges rzd* -by rail-2nd class sleeper 23
Sky Express: ‘first mover’, failed to establish LCC cost structure, business model diverted into charter operations Avianova: ‘cookie cutter’ approach imported by Indigo Partners (Wizz), rapid (over?) expansion, hampered by regulatory obstacles and shareholder conflict Pobeda: ‘home grown’ LCC with orthodox approach, absolutely ‘no frills’, occupied market space to protect Aeroflot’s flank, autonomy from parent – but little cannibalization. To some extent a network LCC
23 Can be argued that Sky and Avianova entered the market too early: the regulatory regime was tilted against them Customs policy favored two class configured aircraft imports over single class at that time ‘Consumer protection legislation’ on baggage/food and drink sales militated against a pure LCC model But Pobeda has been able to build on experience gathered by the first two ‘pioneers’ and has also benefited from (although still limited) regulatory change.
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Pobeda is well placed to dominate the market and prevent the entry of others It is gaining scale to the point where its unit cost structure will be ‘truly LCC’ and this – if properly managed – should deter new entrants Pobeda offers little on board: it will seek to grow its ancillary revenue streams to match global LCC standards The Russian air travel market as a whole is relatively unstimulated: great scope for Pobeda to grow and divert traffic from train to plane (not from its parent!) Any new entrant(s) will need to attempt product differentiation, eg a business lite product, new geographies (Siberia), free wifi, networking Developments in the CIS: Kazakhstan and Central Asia Pobeda has stepped into the international arena (eg. Cyprus) as foreign LCCs rein in expansion to Russia. Will foreign LCCs return? Can Pobeda compete?
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No longer any doubt that LCCs can stay the distance in all markets and that the model works globally ‘Core’ or Orthodox LCC’s have, for a quarter of a century, provided a sustainable aviation business model which richly rewards investors (in a sector where investors have historically lost money!) Convergence between FSCs and LCCs will continue to gain momentum in both directions The chief battle ground will be for differentiation: new entrants lead a precarious existence and if core LCCs maintain cost discipline, will find it very difficult to gain a foothold Differentiation in itself can provide a fragile way to survive and grow: it relies on accurately identifying true customer need. If fuel prices push up again or the global economy dips, many non core LCCs, which have developed a ‘differentiation’ model, may be caught out Ultimately the consumer values low fares (a function of low cost) more than anything else!
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