Barcelona – Low cost airlines are looking further afield to grow their business as fears grow that unbundling of fares may have reached a limit, delegates at the World Low Cost Airline Congress 2009 in Barcelona heard. Although airlines, having achieved a 15% contribution of ancillary revenues, can go as high as 25% but risk regulatory action if it approached 50%, airline CEOs said.

European carriers such as Ryanair, Flybe and easyJet have led the way in unbundling fares and services that passengers were accustomed to getting for free but airline executives are now cautioning that there are limits to how much further they can go. Their caution, which comes at a time when more and more legacy carriers are following their lead on adding new fees on baggage, seat selection and on-board catering, is based on the prospect of government regulation and consumer acceptance.

Daniel Skjeldam, chief commercial officer for Norwegian Air Shuttle, predicted if airlines do so much unbundling that customers cannot fly for the fare the airline advertises, the European Union will regulate what the airlines are doing, predicted. Agreeing, Mike Rutter, chief commercial officer for UK-based Flybe – the airline which first introduced a charge for baggage, said he's worried about regulation, too, and urged the low-cost carrier industry to consider the prospect when unbundling.

"I would ask the industry to heed this call for self-control,” he said. “We have reached a stage where ancillary revenue is about 15%. We believe we can go to about 22-25% but if we go anywhere near the 50% level that will bring regulatory action. We don’t want to destroy the Golden Goose."

But fear of regulation isn't the only reason for the cautionary statements. Julian Carr, the commercial director for bmibaby, echoed the regulatory concern, but said the airlines also are getting close to the limits of consumer acceptance. "There is a limit to how far you can go before you tee off customers too much," Carr said.

Similar sentiments were expressed by Ben Druce, director of revenue and pricing for Canada-based WestJet and easyJet founder Stelios Haji-Ioannou. Alex Cruz, Chief Executive Officer of Spanish low-cost carrier Vueling, said while airlines cannot get revenue above 15% to 20% from what he termed "punitive" ancillaries, he claimed the amount carriers can get from "value-added" ancillary options is "unlimited.”

“We must continue to evolve and look for new ways to generate revenue,” he told delegates. “We have teams looking at new lines of revenue which generate revenue at no cost to us. Airlines must think differently and ask what people want and what are they prepared to pay for. Services must add value to their flight.”

Vueling offers a range of products and services including a frequent flyer program, additional legroom seats and a “toolbar” on their website which offers passengers additional services such as hotel, car hire and news and features. Free to the airline and passenger the revenue is generated through advertising.

Long-Haul LCC’s
Connectivity is the key to making the low cost, long haul business work AirAsiaX chief executive Azran Osman Rani claimed at the World Low Cost Airlines Congress in Barcelona. He claimed short-haul carriers that did not address connectivity with long-haul passengers did so at their peril.

The airline, which flies Airbus A340 and A330 aircraft on nine long-haul routes from Kuala Lumpur to points in Australia, China and London, is enjoying low costs and high load factors. But, noting the high proportion of traffic on the Kuala Lumpur-London Stansted route that make their own connections out of the north London airport, Osman Rani said: "Connectivity is very important in our model. A third of our passengers on the London route don't end their journey in Stansted and ignoring that can make the difference between a route working and not working. You have got to keep your eyes on the what the legacy carriers are doing. They will evolve the model and they will go after the customer passenger base of the low-cost carriers. It is going to be very difficult if you don't have access to 30% of the volume someone else has access to."

Osman Rani argued there is no need for a sophisticated booking engine to achieve this connectivity, noting passengers are easily now able to buy different segments together and that some price sensitive customers would rather save money on the fare by having to get off at Stansted and check in again on another flight. "We are still seeing that connectivity without taking onboard all the complexity," he said.

The Malaysian low-cost, long-haul operator will continue its expansion later this year by adding flights to Abu Dhabi and Chengdu in China and Osman Rani believes there is an opportunity for a low-cost, long-haul model.

"People seem fixated that you can't have a big utilisation or seat density difference,” he told delegates. “Of course you can. You just have to think differently. The key is, how are the legacy airlines operating today and is there a different way of doing it. I think you just have to look at things from a fresh perspective and find where the value opportunities are."

Daniel Skjeldam agreed long-haul can work but only in selected markets and with the right aircraft. “We started flying from Scandinavia to Dubai in the Middle East last year and it is going well,” he said. “Two flights from Oslo and Stockholm were operated and we have expanded that to three flights a week from each city and added a weekly flight from Copenhagen. This not only makes it much easier to schedule crews. We have been surprised at the take-up. It was initially envisaged as a leisure route but many business travellers are using the service. We have the Boeing 737-800s on the route and this is an efficient way of operating. The same aircraft can operate short-sector flights, say between Bergen and Oslo, where the flight time is just 25 minutes, and then go straight onto Dubai with the same configuration and the same product.”

Connectivity is offered on these flights from the domestic network in the same online transaction he added.
But Skjeldam admitted their options for further long-haul destinations are limited by the range of the aircraft. “It does not have the capability, at present, to fly across the Atlantic,” he noted.