The Cost Equation: Cutting Costs And Strategies For Competing With Low Cost Carriers
Underlying cost is necessarily a key part of an airline’s revenue outcome. Maintaining cost discipline is a complex art. It is made more difficult by the fluctuations in uncontrollable input costs such as fuel, but every full service airline is continually seeking to reduce costs by 3 to 4% per annum.This continually raises the bar – or lowers it. The fact that fuel prices slumped over the past three years has in many cases reduced the intensity of management determination to cut every cost possible. The resulting 10-20% reductions in cost thanks to lower input costs tended to make marginal attempts appear futile, in turn making it harder to persuade employees to accept frugality. As fuel prices rise again, the need to regain cost discipline becomes imperative; but only so much can be achieved when starting from a high base.
Meanwhile low cost carriers have proliferated and intrude increasingly into areas where full service carriers previously dominated, both long and short haul.This has created the need for new initiatives which necessarily extend beyond mere cost saving in the legacy airline. Achieving adequate cost reductions to meet future market conditions simply are not possible from the current levels; to use the Irish idiom, if you want to get there, I wouldn’t start from here. On the basis of if you can’t beat ‘em join ‘em – or at least emulate them – new approaches are being adopted.
These include: establishing a formal alliance with one or more LCCs; creating a low cost subsidiary, or even more than one, thus forming a group of segment-sensitive operators; or combinations of all of these. Then again, there is also the option of acquiring an independent operator…
- What are the barriers to achieving significant cost reductions in legacy airlines?
- What are the preferred strategy options for preparing for a lower cost competitive environment in future
- How effective are LCC subsidiaries and what factors determine their success or failure?
- Managing an FSC-led “group” of multi-segment airlines is complex; for example, aside from the potential cannibalisation, managing brand perception in codesharing and partnerships can raise significant issues. What are the secrets for success?
Moderator: Skylight Aviation, Senior Advisor and former easyJet Group Strategy & Network Director, Cath Lynn
- AACO, Secretary General, Abdul Wahab Teffaha
- AAPA, Director General, Andrew Herdman
- Amedeo, CEO, Mark Lapidus
- Eurowings, CCO, Oliver Wagner
- IAG, CEO, Willie Walsh