Legacy carriers closing cost gap on low-cost airlines

The cost gap to the consumer between low cost airlines and traditional carriers is closing, according to a new report.

KPMG’s 2013 Airline Disclosures Handbook looked at the cost of available seat kilometres, a measure of a flight’s carrying capacity calculated by multiplying the number of seats on an aircraft by the distance travelled.

Analysts reviewed the financial reports of the world’s top 25 airlines and six of the largest low cost airlines and noted that the cost gap had narrowed from 3.6 US cents to 2.5 US cents between 2006 and 2011, a reduction of around 30 per cent.

The majority of this convergence happened in 2008 and 2009, mainly due to aggressive streamlining by legacy carriers in response to the financial crisis. The lack of further convergence after 2009 indicates that the easy wins in terms of restructuring had been taken, the report says, and that the remaining cost gap is more structural in nature, explained James Stamp, partner at KPMG’s global aviation team.

“The airline sector is in flux like never before and the old categories of legacy [and] low cost are becoming increasingly blurred. The concept of customer loyalty to a brand is becoming obsolete as the service now being offered by low cost and legacy carriers is more or less the same,” he said.

“Price has become the key factor for customers when it comes to choosing a short haul flight.”

The restructuring of the established carriers included measures like reducing fuel costs, mainly through the removal of fuel inefficient aircraft, redundancy programmes and the streamlining of back-office operations.

“The interesting question is what will airlines do next to stay competitive,” Mr. Stamp continued.

“We think there is not much they can do anymore to reduce the cost gap any further, which means all airlines have to take a fresh look at their business models. For legacy carriers the key question will be how to compete on price with the low cost carriers while maintaining a differential especially while feeding into their long haul network.

“As far as the low cost carriers are concerned, some of them will be ruthlessly following the Ryanair model which means carrying passengers from A to B at the lowest price. Others will try to compete with the premium aspects of legacy carriers. All airlines will have to look at new ways of cooperating with each other.”

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