A race to the bottom, low-cost carriers and the “Gotcha” economy

FILE IRELAND RYANAIR EARNINGSThe rapid emergence of the so-called “Low Cost Carrier” (LCC) airline worldwide has transformed the industry on all continents (Southwest Airlines, JetBlue, Ryanair, easyJet, WizzAir, Air Asia). To indulge in some jargon, the LCCs represent a strategic discontinuity in the history of the industry. By moving from an asset heavy “hub and spoke” model – you move passengers from outposts to your hub airports and then move them to another outpost – to a “point-to-point” model (no lengthy layovers, no through ticketing), the LCCs have forced the traditional carriers into responding to this in a range of ways.

  • Developing their own LCC (Germanwings, Delta’s “Song” and so on) – with varied success
  • Engaging in price wars on routes with direct competition between LCCs and the traditional players
  • Finding ways to increase turnover through incremental revenue strategies (e.g. paying to check in luggage, buying food on the plane)
  • Reconfiguring economy class cabins with less seat pitch and less legroom
  • Reducing frequent flyer benefits and raising elite qualification thresholds for frequent flyers

And what do we notice about all of these tactics? They are reactive! The traditional carriers have allowed the LCCs to dictate the direction of the industry without finding out ways to positively counter the cost externalization tactics of the LCCs (I’ll write more about this in a future blog post).

What we have is a race to the bottom in the mass market segment – ever restrictive ticketing conditions; customers forced to pay for anything extra; the slow and inexorable  reduction in in-flight catering.  Recently, Ryanair CEO, Michael O’Leary lambasted “stupid” consumers who end up paying additional fees when they don’t read the small print when they purchase tickets.

http://redtape.nbcnews.com/_news/2012/09/07/13710824-the-truth-comes-out-ceo-says-stupid-consumers-deserve-hefty-fees?lite

This has been dubbed the “Gotcha” economy – that successful companies go out of their way to create conditions in the fine print that lead to consumers paying extra fees and penalties. Think about credit card companies that charge you penalties for late payments (they set the deadline at midday and so if you pay after that you are “late”).

The airline industry and the LCC segment in particular have embraced this approach with open arms – anything they can do to generate additional revenues is welcome. But should the travelling public tolerate this? Especially since many of the LCCs fly out of secondary airports whose terminals have been built with hefty subsidies of public money paid for by the travelling public in their role as taxpayers. So while you may think you are getting a cheap ticket and even if you avoid their fine print traps, you are still paying LCCs through your taxes.

So here is my advice for the travelling public

  • Avoid airlines (like RyanAir) that egregiously externalize the cost of airline services through “Gotcha” conditions and public subsidy. Do some research on them and decide for yourself.
  • If your flight is a short one – less than 2 hours – instead of paying the traditional airlines $200 more for a cheese sandwich and a “free luggage allowance”, eat a great meal at home or your favorite restaurant in town and fly LCC (notwithstanding my ‘ethical’ objections above).
  • Use travel forums online (tripadvisor.com, airlinequality.com) to publicise and highlight the worst excesses of LCC and traditional carriers’ race to the bottom.

The more information (objective and subjective) out there for the travelling public, the better for all concerned. Michael O’Leary at Ryanair may be honest, but he should be ashamed of himself. Based on his public persona, he probably doesn’t give a damn.

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One thought on “A race to the bottom, low-cost carriers and the “Gotcha” economy

  1. Yusaf
    As you suggested, I am leaving a comment on Lcc in cargo flights.
    You and prof Obloj both pointed out, that Lufthansa’s most profitable branch are cargo flights.
    I wonder, why there is no famous LCCC (low cost cargo carrier)? By analogy to traditional vs lcc passenger airlines, one can assume that traditional airlines may be as ineffective in cargo as they were before LCC era in passenger flights.
    Of course there may be a few reasons for that. For example my knowledge of this market is narrow and I am simply not aware of significant LCCC. Or, traditional lines are really effective and defend their positions in the market, which not so “sexy” in terms of ATL marketing. They may also benefit from some institutional or regulatory support. Or simply, major freight carrier companies like UPS or FedEx own their own fleets. But then, what is Lufthansa doing there? Serving Deutsche Post? I think, that this might be an interesting case for the students.
    Cheers
    Pawel Kasprzak from WIEMBA

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