Low-Cost Carriers in Emerging Countries

Ethan.

Chapter 1

Introduction: Now Everyone Can Fly

Abstract

In 2018, more than 130 low-cost carriers (LCCs) accounted for nearly a third of airline seats around the world. This chapter defines LCC and sketches some measures of their importance. With a couple of notable exceptions, budget airlines in emerging markets (defined here as Latin America, sub-Saharan Africa, the Middle East and North Africa, Eastern and Central Europe, and Asia-Pacific outside of Japan, Australia, and New Zealand) have received relatively little scholarly attention, but their rapidly growing significance warrants careful scrutiny. LCCs have made it possible for hundreds of millions of people to fly for the first time and for others to fly more often. The resulting shift in travel away from buses and trains and other modes has enormous social, economic, and environmental implications, which are introduced in this chapter and explored more fully in later parts of the book.

Keywords

Aeromobility; Air Manas; AirAsia; Emerging markets; Low-cost carrier; T’way Airlines

At about 7:00 p.m. local time on Friday, April 6, 2012, the Singapore Airlines (SIA) flight SQ 748 from Hong Kong landed at Singapore's Changi Airport, completing the company's last passenger flight with the iconic Boeing 747. On board were airline executives, aircraft enthusiasts, media representatives, and others invited to commemorate the end of the airline's 40-year relationship with the jumbo jet (SIA, 2012). Many of the 350 people on board were ensconced in the luxurious business and first class cabins. But even those in economy class enjoyed SIA's legendary high level of service. When the flight reached cruising altitude, the crew served champagne to everyone on board to toast the queen of the skies. The acclamation was well warranted, for the 747 had been instrumental in the rise of SIA to its stature as one of the industry's elite carriers, and the airline had once operated as many as 51,747 s on a network encircling the globe. Yet by the early 21st century, the big jet's four fuel-thirsty engines made it inefficient in comparison with two-engine wide-body jets like the Boeing 777, so the SIA and other airlines gradually withdrew a once celebrated plane from service.

That same April evening at Changi, at about the same time that flight SQ 748 touched down, other flights were coming and going. Among them was the departure of AirAsia flight 716 to Kuala Lumpur. The AK 716 was operated by an Airbus A320, one of the more than 5000 operated by airlines around the world at that time with thousands more on order. The jet was packed with 180 economy class seats and there was no champagne or for that matter any alcohol on board. There was no fanfare at its departure and none at its arrival. Yet if AK 716 went unremarked, it was not exactly unremarkable. For the 1-hour flight was one small example of a global phenomenon that has transformed the airline industry and—to some degree—the communities it ties together.

AirAsia is a low-cost carrier (LCC), an airline whose operations are structured in almost every way to minimize cost, fostering lower fares in turn. The earliest LCCs were Pacific Southwest Airlines in California in the 1960s and Southwest Airlines in Texas in the early 1970s (Bowen, 2010, chap. 7), but in the decades since, budget airlines have spread to markets around the world. This book is about LCCs in emerging markets—defined broadly here to include Latin America, sub-Saharan Africa, North Africa, the Middle East, South and Central Asia, Southeast Asia, and East Asia (excluding Japan). In 2018, there were more than 130 operating LCCs globally, including those identified by the International Civil Aviation Organization in 2017 (ICAO, 2017), a handful of other airlines recognized elsewhere as LCCs but missing from the ICAO tabulation¹ plus a handful that launched by mid-2018. Of these, 85 were based in developing markets, including Malaysia-based AirAsia and its subsidiaries Thai AirAsia, Indonesia AirAsia, Philippines AirAsia, AirAsia Japan, AirAsia India, AirAsia X, and Thai AirAsia X.

The stories of Southwest Airlines (Muse, 2003), the world's largest LCC, and easyJet (Anderson, 2014) and Ryanair (Creaton, 2004), the two largest in Europe, have been told in numerous places, but budget airlines in developing countries comprise too new a phenomenon to have attracted much attention. A couple of books have been written about budget airlines globally, but these volumes are now increasingly dated in a so dynamic an industry and emerging markets comprise only a part of the focus. The Low Cost Carrier Worldwide (Gross & Lück, 2016) and the Handbook of Low Cost Airlines: Strategies, Business Processes, and Market Environments (Gross & Schöder, 2007) provide wonderful insights into the LCC business but give relatively little attention to the broader impacts of budget airlines. The same is true of a World Bank publication, Ready for Takeoff? The Potential for Low-Cost Carriers in Developing Countries (Schlumberger & Weisskopf, 2014). True to the priorities of the World Bank, the latter book focuses on the policy of environment for LCCs. This is an important concern and one that is addressed in the present book too, but it is only one piece in a bigger puzzle.

The new airlines of Africa, Asia, and Latin America are taking wing in a sky generally not yet crowded with well-established airlines. And on the ground, road and rail transportation systems are in many instances slow, congested, and dangerous. As incomes grow in emerging economies, LCCs are well positioned to capture much of the resulting demand for intercity transportation. The implications at the local, national, regional, and global scales are enormous. Most fundamentally, many more people will join the ranks of the world's flyers, with far-reaching positive and negative impacts.

Consider this: on December 23, 2003—exactly 100 years after the Wright Brothers’ first flight—an estimated 540,000 people were airborne on commercial flights somewhere in the world (Bowen, 2010, chap. 1), but approximately 54% of them were on flights that were both originated and terminated in a developed country (i.e., Western Europe, North America, Japan, Australia, and New Zealand) (Author's analysis of OAG, 2003). By April 6, 2012, when SIA's last 747 passenger flight touched down, the airborne population had jumped to 880,000 and the developed country share had tumbled to 37% (Estimate based on OAG, 2012 and methodology described in Bowen, 2010, chap. 1). The LCCs, including the LCCs in emerging markets, have propelled these trends, which are expected to continue toward the middle of the 21st century. Indeed by 2018, the airborne population at any one moment was approximately 1.4 million, but only about 34% were on flights that originated and terminated in a developed market (estimate based on OAG, 2018 and methodology² described in Bowen, 2010, chap. 1), and that proportion, for the first time, was smaller than the share of who were on flights that began and ended in an emerging market (Fig. 1.1). Incredibly, in 2018 one out of every 12 people who were airborne at any time was on an LCC flying to and from a city in the developing world.

Fig. 1.1 Distribution of airline capacity (available seat-kilometers) by market, 2003–18. The early 21st-century growth of developing economies and contemporary ascent of low-cost carriers have been associated with a remarkable shift in airline capacity toward emerging markets. (Data from OAG (2003). OAG MAX. March [CD-ROM—OAG Worldwide]; OAG (2013). Customized datafile containing detailed worldwide schedules for all airlines for March 2013; OAG (2018). Customized datafile containing detailed worldwide schedules for all airlines for April 2018.)

The slogan of AirAsia, boldly declared on all of its jets, is Now everyone can fly (Fig. 1.2). That is a hyperbolic marketing claim, of course, but there is no doubt that AirAsia directly and indirectly through its influence on its competitors has helped to make aviation more affordable. Its success in this regard adds an ironic element to that evening in Singapore in 2012, for among the many nicknames of the Boeing 747 was the Everyman airplane (Gandt, 1995, p. 70). When it debuted in 1970, the jumbo's sheer size was expected to reduce airfares opening up air transportation to the masses. And the 747 did democratize air transportation in the developed countries at least. Yet by the time of the 747’s twilight, a more substantial democratization of aviation was underway via LCCs like AirAsia. Rather than a new kind of plane, it has taken a new kind of airline to the open skies.

Fig. 1.2 AirAsia A320. An AirAsia Indonesia jet takes off from Ngurah Rai International Airport on the island of Bali, November 28, 2012. (Courtesy: AirTeamImages by permission.)

1.1 LCC: Defining Low-Cost Carriers

In mid-2018, easyJet operated a fleet of 179 aircraft comprising mainly relatively new Airbus A319s and A320s across a network linking 135 cities in more than 30 countries (OAG, 2018; Planespotters, 2018). The most important place in its network was London, the dominant world city in the global economy. The airline ranked among the largest carriers in the world by revenue, and its founder, Sir Stelios Haji-Ioannou, was one of the most celebrated entrepreneurs in the airline industry. Half a continent away, Air Manas operated two Boeing 737 s (one 10 years old, one 20) from its hub in Bishkek, Kyrgyzstan and flew as many flights in a week as easyJet flew in an hour. The network of Air Manas comprised just six cities with about two-thirds of its capacity on just one route linking Bishkek and Osh, Kyrgyzstan's two main cities. The easyJet has risen to prominence by taking on the many state owned flag carriers of Europe. Air Manas is majorly owned by the Kyrgyz government, formed as an initiative to assist in the country's transition to a more open economy. The easyJet's name and its bright orange and white planes speak to the informal and relaxed character of low-cost aviation. Air Manas is named after a 1000 year old epic poem in Kyrgyzstan that is central to Kyrgyz identity (Reichl, 2016); and the airline's livery is one of the most unexciting in the industry—just the company name and website on a plane's white fuselage and unadorned yellow tail. Yet, despite their many differences, both the airlines were included among the list of LCCs recognized by ICAO (ICAO, 2017).

What is an LCC? As noted above, it is an airline that operates in a way that minimizes costs to the benefit of passengers. For example, a detailed study (Smyth & Pearce, 2006) undertaken for the International Air Transport Association (IATA) found that in 2004, easyJet's cost per available seat-kilometer (ASK) was €0.0577 or less than half the comparable figure (€0.1285) for the intra-Europe networks of the region's three main legacy or full service network carriers (FSNCs) (British Airways, Air France, and Lufthansa). The gap between the legacy carriers and Ryanair was even greater. And the gap between AirAsia and a rival Asian legacy carrier (not named in the report) was larger still. Indeed, AirAsia had the lowest costs of any airline analyzed for the IATA study at just USD 0.019 per ASK. What about Air Manas? Its costs have not been publicly reported, but for reasons described in detail below there is little doubt that its costs are lower than the bankrupt national airline, Kyrgyzstan Airlines, which it has partly replaced.

How do LCCs do it? In 1971, an early advertisement for Southwest Airlines asked, How do we love you? Let us count the ways (Lauer, 2010). In that spirit, let us count the myriad advantages of LCCs:

(1)Lower labor costs

Budget airlines tend to have lower labor costs than their rivals due to the lower wages (in part because the more rapid growth of LCCs means more of their employees have little seniority compared to legacy carriers) and higher labor productivity. The LCCs offer fewer in-flight services and make greater use of automation on the ground. These and other strategies translate into lower labor costs per available tonne-kilometer. In a study of 19 European airlines using 2012 data, labor costs were lowest (EUR 0.0259 per ATK) for Wizzair, an LCC, and highest for FSNC SAS Group (EUR 0.3033 per ATK) (CAPA Centre for Aviation, 2013).

(2)Lower aircraft and fuel costs

The LCCs typically operate a single or very few aircraft types, which reduces the costs of training, maintenance, and spare parts. They favor new aircraft with high fuel efficiency. Further, LCCs utilize their aircraft each day, reducing the portion of the aircraft's cost that must be borne by each passenger. As for AirAsia, at the time of the IATA study its average aircraft utilization was over 12 hours per day. To maximize aircraft utilization such airlines typically have very short turnaround times between arrivals and departures; easyJet's standard has been as low as 25 minutes at some airports (The Economist, 2011).

One way the LCCs optimize turnaround times and fleet utilization is by de-emphasizing air cargo, which requires added infrastructure and added time on the ground. Of the world's 25 largest airline enterprises by passengers in 2017, six (Southwest Airlines, Ryanair, easyJet, IndiGo, jetBlue Airways, and AirAsia Berhad) were LCCs. Of the 25 largest airlines by freight tonne-kilometers, none was an LCC (Air Transport World, 2018).

Rapid turnarounds are further facilitated by an emphasis on point-to-point scheduling rather than hubbing so that airplanes do not have to wait for other planes to arrive during connection banks. That does not mean that LCCs lack focus cities. Consider the example of T’way, a South Korean LCC (Fig. 1.3). Incheon International Airport near Seoul is clearly the airline's most important node, with about 60% of its routes originating or terminating there. That proportion is only slightly lower than the comparable figures for Asiana and Korean Air, Korea's two main FSNCs. However, an airline like Asiana must schedule operations at its hub to ensure adequate traffic feed to fill its long-haul operations, especially by wide-body aircraft such as the Airbus A380. So, for instance, arrivals at Incheon are timed to help fill Asiana's daily A380 (485 seats) flights to Los Angeles and New York (among other destinations). The T’way's all-737 fleet can be scheduled simply to optimize aircraft utilization.

Fig. 1.3 T’way Airlines network. Although most of its flights depart from or arrive at Incheon International Airport, low-cost carrier T’way has numerous flights that bypass its base altogether, including many departing from Daegu, Jeju, and Osaka. The t in the airline's name refers to today, tomorrow, and together. (Data from airline website.)

(3)Lower infrastructure costs

Wherever feasible, the LCCs operate from secondary airports with lower landing costs. The love in that Southwest Airlines’ advertisement referenced above was a play on Love Field, the Dallas airport that was an important early base for Southwest because it offered a less expensive gateway to the Metroplex than the much larger (and at that time brand new) Dallas-Ft. Worth International Airport. In the years since, many LCCs have similarly emphasized secondary airports. For instance, AirAsia flies to Don Mueang International Airport in Bangkok rather than the newer, larger, and more expensive Suvarnabhumi Airport. The T’way operates some flights from Gimpo, the older of the two airports serving Seoul, and from Shongshan, a smaller gateway to the Taipei metro area.

(4)Lower product, distribution, and overhead costs

Also known as no-frills airlines, the LCCs offer fewer amenities than their full-service rivals, lowering the cost of delivering their products. For instance, in Asia, where in-flight catering has been an important dimension of airline competition (SIA has won many catering awards), the LCCs took the lead in offering no free food on board. For instance, AirAsia offered its Café in the Clouds a la carte menu in place of conventional complementary in-flight snacks (Thomas, 2003). The LCCs tend to have minimal frequent flyer programs or none at all and are stingy in offering free in-flight entertainment (except perhaps for jocular cabin crew; LCCs tend to put a stronger emphasis on having fun on board).

Similarly, distribution costs have been lowered. LCCs were the early adopters of ticket sales via the Internet. Indeed, many budget carriers emblazon all of their jets with their Internet addresses. Legacy carriers have moved into cyberspace too, but LCCs were typically earlier in prioritizing online sales (Hanke, 2016). For instance, AirAsia recorded 45% of its bookings online by 2003 at a time when only 18% of Malaysians were Internet users (Thomas, 2003).

(5)Higher seating density

Perhaps most simply, the LCCs lower the per passenger cost by squeezing more people on board. easyJet and AirAsia both operated the A320, for instance, with 180 economy class seats in 2018. By contrast, British Airways operated the same plane in a mixed class configuration with 144 seats.

These elements of the LCC strategy go back to Southwest Airlines and have spread around the world over the past few decades. Indeed, as described in detail in the next two chapters, one of the driving forces behind the spread of the LCC phenomenon to developing markets has been the demonstration effect provided by Southwest, easyJet, Ryanair, and other successful no-frills airlines in established markets.

Yet it is important to recognize early in this book that not all airlines recognized as LCCs embrace the full model. Every flight in the little network of Air Manas, for instance, begins or ends in Bishkek (its de facto hub) and none of the airports it served was secondary (most of its destinations, like Tajikistan's capital, only have one commercial airport), but it is still an LCC. It operates economy-only high density (e.g., 189 seats in its Boeing 737–800) aircraft configurations, provides only a la carte in-flight services (USD 5 for a Coke and a chicken club sandwich in mid-2018), and piggy-backs on the Internet sales platform of Pegasus Airlines, a Turkish LCC that owns just under half the shares in Air Manas. So the airline is not a carbon copy of Southwest Airlines but the key elements are there. Perhaps most importantly, Air Manas and other LCCs share a common animating spirit. The website of Air Manas proclaimed the airline's two guiding mottoes:

We haven’t start aviation in Kyrgyzstan, but we will change it.³

Flying is the right of everyone (every citizen).

The first motto is unique to Kyrgyzstan and has to do with the fact that Kyrgystan's airlines have been on a European Union blacklist for years due to the country's poor safety record and the determination of Air Manas to change that situation. The second motto, however, expresses a democratizing ambition repeated from budget airline to budget airline. The slogan of Air Manas roll off the tongue as easily as Now everyone can fly, but the central idea is the same.

Ultimately, even Southwest Airlines is not a perfect adherent of the Southwest Airlines model. In a 2005 study, Southwest scored just 62% on a measure of how well it conformed to the standard operating practices of LCCs. Its deviations included its frequent flyer plan and its acceptance of air cargo (Alamdari & Fagan, 2005). Since then it has strayed even further, at least compared to its origin, in expanding into the international arena. For decades, Southwest Airlines expanded methodically across the United States, but rejected international flights because the greater complexity of foreign operations conflicted with its standard operating procedure. But having saturated much of the domestic market, by 2018 Southwest had spread its wings to Mexico and several Caribbean destinations.

Like other LCCs, Southwest Airlines has also stretched into longer haul markets. Traditionally, budget airlines have eschewed flights over 4 hours or so because their cost advantage versus full-service carriers is not as great as in short-haul sectors. One study (Francis, Dennis, Ison, & Humphreys, 2007) found that a typical European LCC operating on a 6-hour sector would have a 20% cost advantage versus a full-service network like Virgin Atlantic but would enjoy a 50% cost advantage on a short-haul route. On long haul routes, quick turnarounds do not matter as much (since aircraft utilization is high anyway), in-flight amenities are more important, frequent flyer miles matter more, comfortable seating is more highly prized, multiple service classes make more sense, and more complex fleets may be required—all factors inimical to the LCC advantage. And yet, LCCs have moved into long haul markets as short-haul opportunities are exhausted.

Meanwhile, many FSNCs exposed for decades to the brunt of LCC competition have themselves evolved toward trimmer operations—most obviously by cutting back on free baggage allowances and in-flight catering. The result is that in more mature markets the cost differential has narrowed. An analysis of US legacy carriers versus LCCs found the gap in cents per available seat-mile had fallen from a 32% differential in the second quarter of 2007 to 18% in the second quarter of 2014, though there was quite a bit of variation in both groups from year to year (Hazel, Stalnaker, Taylor, & Usman, 2014).

The network expansion of LCCs and cost reduction of FSNCs have blurred the distinction between these two ideal types. Yet the competition that has forced this convergence has hardly begun across much of the developing world, and therefore the two types remain further apart and the classification of LCC retains its validity. For instance, the cost gap between Malaysia Airlines’ short-haul operations and those of AirAsia was reported as 42% in 2014 (Grant, 2014).

Across the vast reaches of the developing world no-frills airlines have not even left the terminal. Their growth potential is vast and apart from some important exceptions (e.g., Schlumberger & Weisskopf, 2014), largely unexamined.

1.2 Planes in the Periphery: The Universe of LCCs

The same ICAO report that identified about 125 operating LCCs in 2017 (ICAO, 2017), listed an additional 130 LCCs that had gone out of business or had merged with an adversary or has been acquired by the time the tally was made. The LCC phenomenon depended on the airline deregulation, making it easier for new competitors to enter the fray but also to fail, so carriers have come and gone with increasing rapidity. The number of LCCs to exit the industry is especially large in the North America (where exits outnumbered operating firms 37 to 11) and Western Europe (49 to 17). In the developing countries, which are the focus of this book, there has been less time for the depredations of a freer market to thin the ranks of LCCs, but there have been numerous exits nevertheless. The 1time Airline in South Africa (ceased operations in 2012), One-Two-GO in Thailand (2007), and Webjet in Brazil (acquired by rival LCC Gol in 2011 and shut down in 2012) were among about three dozen such exits recorded by 2017 (ICAO, 2017).

The dynamism of the low-cost component of the airline industry means that pinning down the LCC phenomenon is impossible. Some of what is written now, in 2018, will no longer be true in a year or so. In particular, the number, distribution, and relative sizes of LCCs will surely change. Nevertheless, taking a census of no-frills airlines can yield important insights about the development of the low-cost airline sector to date and provide a benchmark for future analyses.

With that proviso and optimistic note in mind then, Table 1.1 provides the distribution of LCC capacity in 2018. The table provides information on the seat capacity of schedule airlines worldwide using data from the OAG,⁴ a digital compilation of airlines schedules for almost every carrier, including the great majority of LCCs. The regionalization in the table is somewhat arbitrary of course. Singapore is far richer than some countries in Western Europe, for instance, but the continued rapid economic growth in Singapore and its connections to the rest of Southeast Asia make it appropriate to classify the city-state among the emerging