Business models of LCCs and traditional carriers have converged, but remain distinctive

According to a KPMG studythe flight cost gap between LCCs and traditional carriers narrowed from 3.6 to 2.5 US cents per Available Seat Kilometre (ASK) between 2006 and 2012.

But structural factors will continue to set the LCCs and traditional carriers apart and they will continue to compete along the familiar lines of their comparative advantages – price versus service.

Matching LCCs

Traditional airlines have demonstrated their ability to cut costs, but those interviewed for our report Shaping the Future of Travel, generally agreed that they will not be able to go as far as to fully match the LCC cost base. LCC’s frequent flights along profitable routes, point to point routing and fleet productivity (e.g. using only a few types of aircraft, having most of the aircraft in the air, most of the time) will inevitably set it apart from traditional carriers on price.

The traditional carriers’ strengths are tied up in their network connectivity, service provision and brand recognition, which place a limit on how far streamlining costs can go. Traditional carriers are constrained by the complexity of operating intercontinental networks and the average flight length of their routes. They also carry hefty legacy costs, for example senior staff salaries and pension liabilities, and face greater maintenance costs due to the diversity of their fleets, which are necessary to operate varied route-networks.

While there is likely to be continued convergence of the traditional and LCC models, it is equally the case that there are limits as to how far this process can go.

Have a look at our report Shaping the Future of Travelby Oxford Economics for more about the trends impacting the travel industry.