All carriers must take a fresh look at their business models if they want to stay competitive: report reveals impact restructuring has had on cost base of legacy carriers and remaining cost gap between 'low cost' and 'legacy' carriers structural.
Research by KPMG into airline unit costs reveals that the difference between the cost base of low cost carriers (LCCs) and legacy airlines has narrowed dramatically over the last six years.
From a customer perspective, the distinction between the two business models for short haul flying is increasingly irrelevant as traditional flag carriers' short haul operations now compete head to head with the LCC's point to point services.
KPMG's 2013 Airline Disclosures Handbook*, which reviews the financial reports of the world's top 25 airlines and six of the largest low cost airlines, shows that the cost gap between legacy and low cost carriers has narrowed from 3.6 to 2.5 US cents per Available Seat Kilometer (ASK) between 2006 and 2011, a reduction of over 30 percent (see chart below).
The majority of this convergence happened in 2008 and 2009, mainly due to aggressive streamlining by legacy carriers in response to the financial crisis.
The lack of further convergence after 2009 indicates that the "easy-wins" in terms of restructuring had been taken, the report says, and that the remaining cost gap is more structural in nature.
James Stamp, Partner at KPMG's Global Aviation Team comments: "The airline sector is in flux like never before and the old categories of ‘legacy' vs. ‘'low cost' are becoming increasingly blurred. The concept of customer loyalty to a brand is becoming obsolete as the service now being offered by low cost and legacy carriers is more or less the same. Price has become the key factor for customers when it comes to choosing a short haul flight."
The research reveals in detail the areas in which legacy carriers restructured their operations since the financial crisis began and the impact these measures have had on the cost base of airlines (see chart below).
The graph shows how reducing fuel costs, mainly through the removal of fuel inefficient aircrafts, redundancy programmes and the streamlining of back-office operations helped legacy carriers to cut the cost gap with their low cost counterparts.
James Stamp comments: "The interesting questions is what will airlines do next to stay competitive? We think there is not much they can do anymore to reduce the cost gap any further, which means all airlines have to take a fresh look at their business models. For legacy carriers the key question will be how to compete on price with the LCCs while maintaining a differential especially while feeding into their long haul network. As far as the LCCs are concerned, some of them will be ruthlessly following the ‘Ryanair' model which means carrying passengers from A to B at the lowest price. Others will try to compete with the Premium aspects of legacy carriers. All airlines will have to look at new ways of cooperating with each other."
View the full report* KPMG 2013 Airline disclosures handbook. The analysis takes a cost per ASK approach to compare the cost bases of both legacy airlines and low cost carriers. Its looks at the financial data of the top 25 legacy carriers by revenue and six low cost carriers, distributed globally. Six years of financial data (from FY2006 to FY2011 inclusive) were compiled and converted to USD at the average exchange rate across the survey period for the relevant airline. These were then converted to cost per ASK measures and the weighted average cost per ASK for each of the cost measures discussed for each of the legacy and low cost carriers were compared. The reporting periods in which the airlines are grouped, are based on yearend dates between 1 April and 31 March of the following year e.g. 2011 cost performance year relates to airlines with balance dates between 1 April 2011 and 31 March 2012.
