Wednesday, February 25, 2009

Airlines: How Not To Compete

LCCs claim to compete with full-service airlines with a view to reducing cost for the consumer. This is akin to Proton claiming to compete with Rolls Royce in terms of cost.

1. While the claim is correct with respect to reducing costs, it does not result in reducing the price with respect to cost. While you may pay less, you may actually be getting less value for the money. You may have paid less in terms of money, but you may actually be putting your life at risk. Half the challenge in modern technology is to lengthen life, not shorten it. The LCC business model is a life-shortening one.

2. What is happening in the airlines business is not competition. Competition means that everybody faces the same key parameters (ground service, air service, customer service), where the only way to reduce cost and hence price is greater efficiency in running the business. Then the competition benefits the consumer. Otherwise, the consumer is being shortchanged and there is no outlet for the consumer to air grievances.

3. What is happening is market segmentisation. It would therefore appear that the LCCs are doing the Third Class coaches (and even that with differentiation). The full-service airlines are presumed to be doing the First Class and Second Class passengers. The air world is now neatly divided so that the different classes now don't even go to the same air terminals. They get terminated differently, according to their respective classes. (When the education system fails, you move the classes to real life.)

4. I have no objections to businessmen proposing ideas such as the LCCTs, but I object to politicians agreeing to them - unless of course the normal terminals are congested and more facilities need to be built. But to have built a futuristic airport and not using it is an abuse of resources.

I am in favour of compeition to lower prices for air travel. As there is competition in the full-service airline business, I think there also should be competition among the LCCs. To allow only one LCC is, of course, to promote monopoly.

I would love to see an LCC operating from the normal terminals and providing the full basic service but without frills (i.e. no steak for meal, give sandwich) - but be able to compete with the LCC operating from the LCCT. This would really be a challenge.

At the moment, the LCC business model may not necessarily be working well. Why? The LCCs are rooting for a specific market - the core of which may not be big enough for them to sustain long term - unless they go full service.

The market segment is being enlarged by the cheap thrill seekers - those small towners who have an aircraft taking off from their neighbourhood. This peripheral market will evaporate very quickly - within a year of operating. Evidence - the fewer number of flights per day, the more times flights get rescheduled, the more flights are delayed.

The only way the LCC business model can sustain is to trick new markets, by expansion into new geographical areas. This would not be dissimilar to what the Maddoff brilliance - so bright that we all go blind. But enjoy it while it lasts, so long as the planes are recently bought.

1 comment:

walla said...