A changing low-cost landscape – new markets, new strategies, new customers

Recently, we analysed our unique passenger demand datato identify emerging trends in air traffic around the world, including changing LCC passenger demand. We noticed that, although budget airline traffic represents just 19% of total air travel in Asia (compared with 38% in Europe and over 30% in North America), this seemingly modest level of LCC penetration belies the pace that LCCs are gathering in this region: LCCs’ share of air traffic in Asia grew by 2 percentage points, from 16.5% to 18.5%, between 2011 and 2012, more than in any other region worldwide.

At first glance, the regions that have traditionally been home to pioneering LCCs – Europe and North America – appear to enjoy continued dominance of global LCC capacity. At a city level, London’s LCC seat capacity remains by far the largest of any city in the world, with nearly 15 million available LCC seats - roughly 1.5 times the number of available seats at the next-largest LCC city, Sao Paulo.

A closer look, however, reveals that this landscape is rapidly changing, and that the trends identified in our passenger demand analysis earlier this year are mirrored by trends in LCC capacity over the first six months of 2013. We previously noted that LCC passenger traffic was growing faster in Asia than any other region of the world; now, it’s clear that LCCs are adding capacity in this region at a similarly swift rate.

We compared LCC capacity on departing flights in the first half of 2013 to that of the same period in 2012, and found that Asia increased the number of LCC seats by 28.7%, significantly outpacing the global picture: LCC seats grew by 6.8% worldwide across the same period. LCC capacity in the Middle East also grew at a remarkably fast rate of 17.7%. This is in stark contrast to Europe and North America, where capacity continues to grow, but at a much more modest rate: just 0.8% in Europe, and 1.5% in North America.

Considered alongside our passenger demand analysis, the trends in LCC capacity data seem to show a maturing LCC market in the sector’s traditional home grounds of Europe and North America – and a dynamic market for LCCs in Asia and the Middle East.

It’s evident that low-cost airlines are adding capacity in Asia as passenger demand increases – but to really steal a march on their competitors in new markets, LCCs need to gain reach, scale and recognition of their brand, as quickly as possible. One way to achieve this is by distributing LCC content through travel agents, who can serve as ambassadors for the airline and help extend reach even in markets where the airline brand may not be widely recognised present – this can be a cost-effective alternative to enormous and costly marketing and advertising campaigns in unfamiliar markets. In Europe, Volotea, a new entrant to the market in 2012, adopted this strategy from day one of the airline’s operations: bookings from the indirect channel now account for 20% of Volotea’s revenues.

In regions like Europe and North America, where it seems that theLCC marketis reaching maturity, low-cost carriers may need to think of new ways to ensure continued growth and profitability. One strategy is to look to new customer segments: not only the leisure travellers that have fuelled much LCC growth, but also to higher-value business travellers. This may require low-cost airlines to diversify their business models and take new approaches to distribution. A number of LCCs are already adopting this strategy: for example, Amadeus recently announced its partnership with easyJet, which saw the airline become the first light ticketing airline in Amadeus, allowing travel agents around the world to book easyJet fares with the same booking flow used for traditional carriers. EasyJet has also recently launched ‘Inclusive Fares’ for corporate passengers, which include services important to corporate bookers, such as a bag and seat selection, with the seat fare.

It seems clear that we are entering a new phase of innovation in the LCC business model, and that we can expect to see a wide variety of strategies tested and adopted over the next few years – from new products to attract specific customer segments, to long-haul LCC flights, via many different products, services and routes. It is an exciting time to partner with LCCs, as they make pioneering steps in new directions – both geographic and strategic.