Cost Cutting Blurs Line Between Legacy and Low-Fare Airlines

 - March 18, 2013, 2:25 PM
Carriers such as EasyJet have forced cost consciousness throughout the airline industry, particularly in short- and medium-haul markets, blurring the distinction between legacy and low-fare providers.

Both in terms of actual cost structures and customer perception, the line between low-cost carriers (LCCs) and so-called legacy airlines has blurred, according to a new report from accountancy group KPMG. The company’s 2013 Airline Disclosures Handbook, published on March 12, showed that the cost gap between LCCs and legacy operators dropped by more than 30 percent between 2006 and 2011, falling from 3.6 U.S. cents to 2.5 cents per available seat kilometer (ASK).

According to KPMG, most of the convergence occurred in 2008 and 2009 as legacy carriers had to cut costs in response to the financial crisis. “The lack of further convergence [in cost structures] after 2009 indicates that the ‘easy-wins’ in terms of restructuring had been taken [by the legacy carriers] and that the remaining gap is more structural in nature,” said the KPMG report. It also concluded that customers view the distinction between the two airline business models as “increasingly irrelevant” as traditional carriers’ short-haul operations now compete with the LCCs’ point-to-point services.

“The airline sector is in flux like never before and the old categories of ‘legacy’ versus ‘low cost’ are becoming increasingly blurred,” commented James Stamp, a partner with KPMG’s Global Aviation Team. “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. Price has become the key factor for customers when it comes to choosing a short-haul flight.”

The report details the main ways in which the legacy carriers have restructured to cut costs, such as shedding aircraft with high fuel-burn rates, staff layoffs and streamlining back-office functions.

In Stamp’s view, airlines now need to take a fresh look at their business models because they’ve cut their costs virtually as far as they can. “For legacy carriers, the key question will be how to compete on price with the LCCs while maintaining a differential, especially while feeding into their long-haul networks,” he said. “As far as the LCCs 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.”