How low (cost) can you go?

The past few days and weeks have filled the airline world with interesting news regarding Low Cost and Ultra Low Cost Carriers (ULCC): Icelandair has decided to take over its direct competitor WOW Air, American Airlines has reviewed its decision to exclude a full-size carry on from its Basic fares and Air Astana has joined the growing list of legacy carriers establishing a ULCC subsidiary. It feels like we have returned to the early 2000s when budget carriers in Europe and in North America were establishing the bases for the very important role they are playing today in the competitive landscape. The arrival of Norwegian on the transatlantic market, as well as the growth of the ULCC WOW Air with its hub-and-spoke business model connecting Europe and North America via Reykjavik, has shaken up a scenario that seemed to be settling towards a continuous hybridization of the main actors (Westjet going international and multi-class, easyJet tightening their grip on main airports in Europe where both Ryanair and Wizzair were also starting to dip their toes).

Spirit Airlines in the USA had established itself as the yardstick for ULCCs (at least in the more mature Western markets), especially after Ryanair started moving into some of the main slot-constrained hubs in Europe and went back-and-forth with its hand baggage policy while top management was embroiled in a multi-front battle with trade unions starting mushrooming in various countries. Enticed by the 20%+ margins and the healthy growth of Spirit and the other carriers following a similar model (Wizzair in Europe, Allegiant and to a certain extent Frontier in the USA), traditional carriers started to strip down their offering associated to the lowest fares to the bare minimum: checked bags for a fee, no changes possible, no seat selection and last boarding group.

But in this continuing-changing environment, how can we adapt the categorization of carriers so that it is possible to compare apples with apples, especially when it is necessary to explain the different products to non-frequent travelers who may think that, like in the ‘old days’, airlines all offer the same product. The NDC initiative that IATA is decisively pushing through should make product comparison a ubiquitous occurrence, no matter what channel passengers choose to buy their tickets (and even tickets could be a thing of the past when the next big IATA initiative, ONE Order, sees the light). But for the time being, confusion reigns: how many of us who are deemed to be “experts” in airline things have been asked by family, friends and acquaintances about one carrier or another, what their product is like, if you have to pay for food or drinks or bags or carry-ons?

In absence of a formal definition, I think anyone of us (we are experts after all, aren’t we?) can have a go at their own classification, as long as the criteria are clearly explained. I would divide all the airlines into four categories: traditional or Full-Service Carriers (FSC), hybrid low-cost, low-cost and ULCC.
Full-Service Carriers are those modeled on the legacy airlines of the pre-deregulation and open-skies era (1970s-80s) providing multiple classes of service, a full range of products and, generally speaking, a wide range of destinations. Then we could include in the “hybrid low-cost” category all those carriers who started out as textbook low-cost airlines following the Southwest Airlines model (one class of service, one aircraft type, minimal onboard service, free seating, point to point connections mainly connecting secondary airports, direct distribution only, heavy reliance on marketing and direct promotion to customers) but throughout time they have included in their offering some elements typical of FSC, be it premium seating assigned seating or indirect distribution, such as Westjet or JetBlue. Low-cost carriers are the most difficult to define at this point, since more or less all of the initial epigones of Southwest Airlines have now introduced some elements of hybridization. I would say that in order to be considered a “proper” low-cost carrier, a single class of service is essential, as well as a high percentage of tickets sold through direct channels. Finally, I would identify the watershed between low-cost airlines and ULCC with two product features that summarize the obsession on minimizing costs, true guiding light for all airlines in this category: the configuration of their aircraft geared towards the maximum number of seats possible (e.g. 150-156 on an A319, 180 on an A320 or 189 on a 737-800) and the carry-on allowance limited to a small personal item, with separate charges for passengers wishing to carry onboard a standard hand baggage (i.e. 22" x 14" x 9") or have access to overhead bins.

This latter feature seems to be a strong identifier to divide potential passengers according to their expectations and propensity to pay. The change in policy made by American Airlines after none of her direct competitors (especially Delta and United) followed their lead in eliminating the standard carryon form the onboard allowance attached to their Basic fares is very meaningful: customers wishing to travel on FSC are not willing to accept a fare that would not allow them to carry enough luggage to stay away a few days without having to pay extras. It seems therefore that ULCCs are tapping into a different market and the customer base for traditional carriers and LCC is immune (at least in theory) to the sirens of super-cheap fares advertised by ULCCs.

This should give some breathing room to all the incumbents nervous for some very low fares in the market: they snubbed the LCCs threat the first time around and they don’t want to repeat the same mistake. But the airline business does not allow to become complacent: now more than ever the customer is king, and it is fundamental to keep listening to them, even if you don’t like what they are saying.