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The group of airlines commonly called "low-cost carriers" continues to grow at a healthy clip in several regions around the world. Though their service and product offerings, limited distribution and traditional slant away from negotiating discounts for high-volume customers have kept them off the radar of many multinational companies, that is changing--rapidly, in some areas.
Low-cost carriers typically aim to price below incumbent carriers by maintaining simple--and therefore lower-cost--operations. They often use a single fleet type, focus on point-to-point flying (rather than busy hub-based networks) and offer few amenities. But today, some LCCs in Asia, Europe and the Americas are crafting corporate deals, participating in global distribution systems and offering products that stray from their no-frills roots. Those attributes, when combined with expanding networks, provide new air transport options for price-sensitive managed travel programs.
Even so, LCCs typically are not supplanting the more familiar airlines as primary corporate travel suppliers. Instead, they generally serve to fill gaps, give travelers additional options on certain city pairs and act as pricing foils to the bigger airlines. Yet, they appear to be taking advantage of opportunities to compete more effectively for intra-regional business.
Low-cost carrier growth will continue to be particularly dramatic in Asia. "Government moves to liberalize aviation access in Asia have been catalyzed by the emerging LCC sector, as they seek new routes to grow their businesses," according to the Centre for Asia Pacific Aviation. Noting that LCCs as a group plan to expand capacity by 250 percent and triple their combined fleet to 900 aircraft by 2012, CAPA expects "an unprecedented period of international route development in the region."
At the same time, more "budget carriers" are shifting away from the no-frills model toward a hybrid low fares-some service approach, according to a recent report from CWT Travel Management Institute. The reasons for that change, CWT wrote, include cultural aspects and the "sheer geographical size" of the region, both of which warrant inflight traveler comforts (premium seating and meals) and other business traveler conveniences (priority check in and airport lounges). For managed travel programs, some of these "new world" airlines also may participate in GDSs and strike corporate deals.
"According to Carlson Wagonlit Travel data, budget carriers already represent 20 percent of client air transactions in Asia Pacific," according to the CWT report.
In Australia, "Virgin Blue offers volume-based pricing, combined with a range of 'soft' benefits for companies," CWT wrote. The airline also is bringing low-fare competition on more routes, which has fueled the trend toward "best-buy" policies. According to CWT, such policies now account for "60 percent of companies' domestic transactions in Australia."
This week, Virgin Blue began eight daily flights between Canberra and Sydney, "specifically to cater to corporate and government high flyers," according to an airline announcement. It also opened an airport lounge in Canberra and is poised to introduce a "premium economy" product across its fleet.
In India, Kingfisher Airlines claims that 750 corporations have selected it as a "preferred" airline. Kingfisher offers "volume-driven discounts" and corporate account management. Combined with Air Deccan Group, in which Kingfisher has invested, the airline operates to 69 cities with 570 daily flights.
Corporate deals in India now are "commonplace," according to CWT. "Kingfisher has attracted nearly one-third of the business travel market only 18 months after adopting the new world model."
Elsewhere, Kuala Lumpur-based AirAsia markets a corporate travel program including "savings," data tracking and other services. Companies must spend at least RM120,000 (US$37,000) annually to qualify.
AirAsia offers extra-large seats--with a 52-inch pitch compared to the 32-inch pitch on standard economy seats--for "about twice the average economy fare." The airline also offers charter services from Kuala Lumpur "catered to a group of business travelers for the purpose of meeting, incentives, conventions and exhibitions."
The rise of these and other carriers may help the Asia Pacific air industry weather the next economic downturn. "A decade ago, in the Asian financial crisis, the outcome was simple: People stopped flying, and airlines lost money. This time around, things could be very different," said CAPA executive chairman Peter Harbison. "We are entering a tunnel--economically--and we don't know how long or how deep it will go. However, this is the first time that the Asia Pacific region will have faced these conditions with a full armory of low-cost/low-fare airline options."
In Europe, low-fare competition from LCCs has popularized spot-buy strategies among corporate travel programs. Those strategies stem from the nature of corporate discounting in the region.
"In the United States, the majority of airlines offer systemic discounts; whereas in Europe, most offer route deals only," explained Mitch Cwanger, air practice leader for American Express Advisory Services. "For many clients, a contracted airline is only considered preferred in those routes where there is a discount. Elsewhere, the playing field is level because the contracted airline offers no incentive."
"Spot buying always is preferred on domestic and regional routes," said Yves Galimidi, Ikea global travel purchaser, speaking in Munich at the October Association of Corporate Travel Executives conference. "That is a trend that came out with the emergence of LCCs."
"You start with spot buying, then we have global contracts, regional contracts and local contracts [with preferred airlines], and then the airlines say, 'Let's stop that and that route. It is not interesting for us,' " added Huub van Rumund, business travel purchaser for Oce Technologies. "Then I am back to spot buying again. Especially in Europe, you can live with spot buying and not contracting."
Of European low-cost carriers, easyJet is among the largest. The airline "is the most successful and has approximately 5 percent of the European business market on the routes they operate,'' said Mike Platt, HRG group industry affairs director. "They have been growing fast in the last year and, interestingly, their fares have gone up by 10 percent, as well; whereas the mainstream airlines have reduced their competing fares by 5 percent over the same period."
EasyJet's business-to-business portal includes access to all the carrier's fares and tracking of monthly data. Beyond its Web site, easyJet now participates in the Amadeus and Galileo GDSs. Bookings through those channels, however, incur an extra fee.
Meanwhile, easyJet last week completed its acquisition of GB Airways, a move that allows it to begin service from Manchester, U.K., and "carry more passengers from [London] Gatwick than any other airline."
Europe's other big low-cost carriers also continue rapid expansion. Ryanair--a carrier that has done nothing to specifically court business travelers--in January 2008 increased year-over-year passenger traffic 17 percent. In the 12 months to 31 January 2008, it carried nearly 50 million customers. Air Berlin, meanwhile, carried nearly 28 million passengers in 2007, up 11 percent from 2006.
Speaking generally about Europe's LCCs, HRG's Platt said, "I see these carriers continuing to pursue the business market but having to compromise their business model in the process."
To some degree, that has happened in the United States. Southwest Airlines by late last year had introduced a new fare category designed for business travelers, tripled its corporate sales force and started listing its fares and inventory in the Galileo and Worldspan GDSs. JetBlue Airways began offering refundable faresfor an extra $50 to $100 after testing the concept with corporate accounts and hinted at "an enhanced front-cabin product" now in development. AirTran Airways, which has come farthest among U.S. low-cost carriers in negotiating volume discounts, introduced optional advance seat assignments, allowing passengers to pay more for sitting in a roomier exit row, for example.
AirTran, JetBlue and Southwest together in 2007 accounted for more than 22 percent of the combined domestic U.S. traffic operated by the 10 largest carriers. They also are likely to grow more quickly in 2008 than the U.S. legacy airlines.
Whether in the United States, Europe or Asia, "corporate customers are more aware that LCCs are out there," said Brent Eisenach, CWT regional project manager for air solutions. "They have to balance that with legacy carriers in their portfolio" and weigh the risks of not meeting contractual commitments in competitive markets that would jeopardize discounts on international routes, where low-cost carriers do not operate.
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