Competition between airlines and low-cost carriers is great for consumers.
- Low-cost carriers accounted for 28% of all passengers traffic in 2016. It's a percentage that's still growing.
- The rise of low-cost carriers has disrupted an industry traditionally dominated by major legacy carriers.
- These major airlines are now fighting back with low-cost options of their own.
- The availability of more low-cost flights is ultimately better for the consumer.
Over the past two decades, low-cost carriers have turned the airline industry upside down. In 2016, the purveyors of cheap, no-frills flying accounted for 28% of all passenger traffic around the world. That's up 10% since 2014.
Low-cost airlines have transformed the way people fly in the developed world. But for many in the developing world, these airlines made commercial air travel an actual reality.
The effect low-cost carriers have had on modern society is tremendous. But one group that has been caught off guard is the legacy airlines that once operated with impunity around the world. For a big legacy airline, an upstart low-cost carrier is a small nuisance. But once that small nuisance grows in size and market power, low-cost carriers can hold tremendous pricing power. In that, they drive down fares. Great for consumers, but a real pain the in the butt for legacy airlines.
In the US, when Southwest Airlines, the world's largest LCC, enters a market fares drop. It's happened so many times there's even a name for it, "The Southwest Effect."
But beyond individual markets, LCCs have shown the ability to massively disrupt an entire continent. A great example of this is the rise of AirAsia. Commercial air travel in Southeast Asia has traditionally been dominated by a collection of large, well-respected legacy airlines like Singapore, Thai Airways, and Malaysia Airlines.
In 2001, a music industry executive named Tony Fernandes along with several others took control of AirAsia for $0.25 and an agreement to assume the airline's $11 million in debt. Over the past 16 years, the two-plane operation has grown to a fleet of more than 200 aircraft. In 2016, AirAsia accounted for 49% of commercial air travel in Malaysia. The airline also holds a 22% market share in Thailand.
"People didn't take us seriously and that was good because Malaysia Airlines thought 'Oh it's another stupid idea that'll die soon,'" AirAsia Group CEO Tony Fernandes told Business Insider. "By the time they took us seriously we were too big and too popular."
AirAsia is but one example of how a low-cost carrier can shake up the airline business. In Europe, LCCs now account for more than 40% of the airline market on the back of carriers such as Ryanair, EasyJet, and Norwegian.
"My personal view is that for especially the first decade of their existence, network carriers like ourselves sort of underestimated, ignored — almost arrogantly ignored — the rise of low-cost carriers," KLM Royal Dutch Airlines CEO Pieter Elbers told us. "With that, we can see that their share in the European landscape has steadily increased and is now anywhere between 42% and 45% of all flights in Europe are with low-cost carriers, and a percentage which is significantly larger than in the US, where it's about a third."
In response, KLM has made drastic changes to the way it conducts business.
"With that, we have embarked on a program in KLM a few years ago whereby we sort of said, 'We're going to defend our European network, and we're going to make sure that we do the right thing for our customers on the European network,'" he said.
"So we have lowered our cost. We have increased our fleet utilization. We have changed our commercial offers on probably 60% of all our European destinations, which are about 80 destinations. We do have levels which are matching the low-cost carriers. So this combination of cost-cutting on the one-hand side, investing in our product and our service."
Legacy airlines flight back
It's not just KLM that's making changes to account for low-cost competition.
In Europe, legacy airlines are fighting back by operating low-cost carriers of their own. KLM has Transavia while sister company Air France launched Joon earlier this month. According to Air France-KLM, Joon will not only be used as a counterpunch to low-cost carriers, it will serve as a testbed for new ideas that could help make the entire company more competitive in terms of costs, efficiency, and customer service.
In 2012, IAG, the parent company of British Airways and Iberia, took full control of Spanish low-cost airline Vueling, which services destinations across Europe. Earlier this year, IAG launched Level, a low-cost long-haul carrier designed to take on Norwegian and WOW.
Lufthansa, on the other hand, has been developing its Eurowings and Germanwings low-cost subsidiaries for the past 15 years.
Legacy airlines are also fighting back in Southeast Asia against the rise of AirAsia and others like Lion Air. Singapore Airlines created Budget Aviation Holdings to own and operate regional low-cost carrier Tigerair and long-haul LCC Scoot. According to Singapore Airlines CEO Goh Choon Phong, separating the company's low-cost operation from the main airline, allows Scoot and Tigerair to create their own brand identities.
All of this is a boon for consumers. With iconic airlines like Singapore, Air France, and British Airways fighting for budget travelers, there are more options than ever for affordable flights. In fact, with LCCs in the market, even those who aren't shopping for ultra-cheap flights benefit from lower prices from greater competition.
US carriers take the basic economy route
In the US, American, Delta, and United are dealing with low-cost competition in a slightly different manner. America's big three tried and failed to launch their own LCCs. Delta's Song lasted only three years; from 2003 to 2006. While United's Ted managed to make it for five years before the financial crisis doomed the carrier in 2009.
Instead, America's legacy carriers have turned to basic economy fares to take on the likes of Spirit and Frontier.
So what does basic economy entail?
Basic economy is a discount fare class that exists within an airline's economy cabin. As a result, the in-flight service and experience will be the same for basic economy as it will be for someone who purchased a pricier main cabin economy ticket. This means passengers who go the basic economy route will sit in the same seats, enjoy the same in-flight perks and amenities as everyone else in coach.
But, there are restrictions placed upon the passengers prior to boarding the aircraft that separate basic economy from other fare classes. The most obvious restriction involves carry-on luggage. All three airlines allow basic economy passengers to bring on board one personal item/bag that will fit underneath the seat.
However, American and United prohibit any luggage that will require the use of an overhead bin. Delta's basic economy luggage policy is the same as its traditional main cabin which allows for a personal item as well as one complimentary carry-on bag.
Basic economy hasn't been as well received by consumers as dedicated LCCs with some referring to the fare as "sub cattle class." However, those unconcerned with the frivolities of main cabin air travel may still benefit from cheaper tickets.
As LCCs and legacy carriers dance their dance, consumers will continue to benefit from competition. With more than 7.5 billion people on Earth, there is still plenty of room for commercial aviation to grow. While markets in the US and Europe are fairly mature, there are still many areas of the world where air travel remains relatively underdeveloped and ripe for a well-run low-cost carrier to thrive.