Air France corporate : Low-cost carriers

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Low-cost carriers

The low cost carrier: low costs – low fares – no frills

Started 35 years ago in the United States with Southwest Airlines, the low cost model developed in Europe in the 1990s, after the liberalization of air transport and the emergence of a Single European Sky in 1993.

Today two such carriers - Ryanair and easyJet – are in the lead: their share of the medium-haul market outstrips those of other European low cost airlines.

The development strategy of low cost carriers can be summed up by the following formula: low costs, low fares, no frills.

Low costs: all costs are very carefully examined and reduced to a minimum: single fleet type, improved flight crew productivity, simplified network serving secondary cities, and the outsourcing of many activities (maintenance, Catering, etc.).
Low fares: low costs enable the carrier to offer very low fares with a highly simplified pricing structure.
No frills: inflight service is virtually non-existent, so the number of flight attendants on board corresponds to the minimum regulatory requirement. The relationship between the airline and the customer is limited to the contract of carriage. Each service is billed to the customer.

There have been many bankruptcies around Ryanair and easyJet: more than 20 low cost carriers have disappeared, thus proving the limitations of this concept, especially in Europe, where the market structure is different from that in the USA:

profitable routes are already served,
charter airlines play a greater role in Europe,
competition with rail transport, favoured by the European Union, is very tough on short distances,
competition among low cost carriers is growing, with the risk of overcapacity.

How Air France copes with low cost carriers

Faced with competition from the low cost model, traditional European airlines have more advantages than their American counterparts.

Air France and KLM benefit from a network organized around two hubs which link medium-haul and long-haul traffic, while American hubs connect medium-haul to medium-haul flights. This system is very easy to exploit for low cost carriers.

Air France has also reworked its medium-haul product to compete with low cost carriers, reduce its operating costs and meet the changing needs of passengers.

The fare structure was entirely rethought: prices are far more attractive and more widely available. For example, 15,000 seats, the equivalent of 90 A320s are offered daily at the lowest fares on the domestic network.

In exchange for lower fares on the medium-haul network, segmented according to distance and customer types, the product was simplified and made more easily available. Densified cabins, simplified inflight service and greater deployment of e-services are the main features of the revamped medium-haul product.

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Air France’s exposure to competition from low cost carriers is limited

The turnover generated by Air France on operations that are comparable to those of low cost carriers, i.e. point-to-point short and medium-haul traffic, is limited to 31%.
The remaining passengers travelling on these flights are in fact connecting passengers. Furthermore, the substantial rail market share on the French domestic market (over 80% in 2004), has had a very dissuasive effect on low cost carriers: easyJet dropped its service to Marseille after two years, as it could not compete with SNCF’s promotional price of 19 euros.

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Low-cost carriers

The low cost carrier: low costs – low fares – no frills

How Air France copes with low cost carriers

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Air France’s exposure to competition from low cost carriers is limited

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