The cost equation: cutting costs and strategies at the legacy airlines to compete 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.

But to achieve any of these, some major questions need to be answered:

  • 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?

This will be one of the topic areas discussed at the forthcoming CAPA- Centre for Aviation Airline Leader Summit – A CEO Gathering 2018 that takes place in Dublin, Republic of Ireland on 17-May-2018 and 18-May-2018.

Understanding aviation markets is CAPA’s great strength and passion and this year’s agenda includes a variety of topics sure to generate interest.  The Cost Equation: cutting costs and strategies for competing with low cost carriers  will be the final panel session of the Dublin forum ahead of its early afternoon conclusion on 18-May-2018.

It’s hardly a secret that the airline industry is facing myriad challenges, notably in the marketing and distribution areas, as companies with personalised data, and the analytics and artificial intelligence to go with it, become greater threats to the stability of the traditional airline model.

This high-level aviation event, hosted at Powerscourt Hotel Resort & Spa in County Wicklow, to the south of Dublin, in the Republic of Ireland, for a sixth time, is a forum for debate and discussion of strategic issues facing the aviation industry and it is attracting delegate interest from across the globe.

The main summit subject is “Airlines making money: a vision of the future”, with an underlying theme of disruption and change and it will bring together global leaders to discuss key strategic issues and challenges facing the industry as new technologies come online and tougher regulations create downward pressure on traditional revenue streams. The forum will also explore adapting business models, smart innovations and how the industry can embrace collaborative partnerships to adapt and flourish in the digital age.

FIND OUT MORE… visit the CAPA Airline Leader Summit homepage to find out more about this not-to-be-missed opportunity to discuss relevant issues impacting the aviation sector and learn meaningful insights from your industry peers.