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Excitement over New Low Cost Carrier
Posted: Sunday, October 24, 2010
By Derren Joseph
October 24, 2010
I think it was back in 2007 when I was working at Caribbean Airlines that I first heard about plans for a new Jamaica based Low Cost Carrier (LCC). The rumor was that it was born from the experience of Digicel Executives who were island hopping during the 2007 Cricket World Cup. They saw inefficiencies with the existing players and decided to turn this into a business opportunity. A December 7th 2007 article in the Jamaica Gleaner however, dismissed talk that Digicel was an investor but rather a sales partner.
In mid 2008 we then read that they were denied permission by the Jamaican government and shifted their base of operations to Barbados. They were due to launch in 2009 but now we hear December 2010. Most travelers here in the Caribbean are familiar with the no-frills, point to point, short haul, cheap fare, model that Ryanair epitomizes. We are excited by the headline grabbing announcements about US$9.99 fares (excluding 'taxes' which is a controversial topic on its own) made by the REDjet (formerly Airone Caribbean) CEO. A style that reminds us of the headline grabbing PR strategy successfully used by Ryanair CEO (Michael O'Leary) to keep his airline in the news. The question that many are asking however, is will it actually work here?
The LCC model works because it is able to keep costs low and pass these savings onto travelers in the form of lower fares. Most obviously, they use lower-cost secondary airports, but they also aggressively manage the three (3) main line items in an airline's income statement – fleet costs (which include fuel), personnel costs and distribution costs. Let us briefly consider each in turn.
Firstly, REDjet will be using MD80s or more specifically, two MD82s which were previously used by American Airlines (AA). This type of aircraft is not exactly new and dates back to the late 1970s or early 1980s. While they may be refurbished, I really cannot see this type of equipment offering them a cost advantage on LIAT and Caribbean Airlines (CAL). In the words of one blogger "Historically, when I flew on the MD80 with Bwee, these planes had a lot of mechanical problems including loss of engine power and pressurization failure..." Furthermore, MD82s are not really known for their fuel efficiency and they will be up against CAL who at the moment, enjoys a fuel subsidy and has just received approval for a fleet upgrade.
Secondly, in terms of staff, REDjet will be based in Barbados which is not exactly known for its low labour costs. But if it achieves cost savings from better utilization of cabin crew (especially pilots), it may have an advantage.
Thirdly, we have distribution costs. European based LCCs in particular, achieved incredible savings through bypassing the traditional but expensive GDS' (Global Distribution Systems or CRS' is the system used by your travel agent to access airline tickets for you) and attracting customers to their own airline website to buy tickets (and bypassing travel agents altogether). The problem with our region is that while internet penetration may be good, credit card penetration is low. This means that an offline intermediary would still be needed to allow customers to pay for the ticket – perhaps at Digicel shops/partners. The real quantum leap however, is if they allow customers to pay for tickets using their Digicel phones.
The critical advantages I see REDjet having are its demonstrated marketing savvy, being well capitalised, and its ability to leverage its rumored Digicel relationship to revolutionize airline ticketing. CAL – should you be speaking to Bmobile just about now? It may be useful however, to step back and look at the bigger picture. The introduction of LCCs in Europe did one thing that few people foresaw and that is, it led to an overall increase in the number of people flying. Suddenly one did not have to stay in one's city/country for holiday weekends; it was cheap and easy to hop a plane to another country for a weekend break.
So rather than view LCCs like REDjet as competition to LIAT/CAL, it could stimulate an increase in the overall market. It is noteworthy that they will launch in four key regional markets/destinations – Kingston, Barbados, Trinidad and Guyana. I will continue with this subject next week but ultimately, it is my hope that this new airline will help bring us beautiful people of the Caribbean – that much closer together. My name is Derren Joseph and I love my country. As always, I end by saying that despite our challenges, we are so blessed to live in this beautiful land. Let us continue to have the audacity of hope in the future of our beloved country.
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