When will low cost fares begin?
Posted: Sunday, May 8, 2011
By Derren Joseph
May 08, 2011
The answer to this question is—last month. Even though REDjet only starts flying this week, as flights went on sale last month, Caribbean Airlines almost immediately cut their fares on some routes. Already customers are benefiting from healthy competition. This sounds like a good thing to me as a customer. Some have expressed to me however, some concern over the (hidden) extras that low cost carriers (LCC) charge. Would these hidden extras lead to average fares that are higher than the legacy carriers?
Last month, a report prepared by flight analysts RDC Aviation compared 5,000 airfares from 20 different airlines at 192 airports. In short, this study revealed that LCCs offer consumers fares that are on average 33 per cent lower than full service carriers. This is despite the fact that LCCs can add up to 44 per cent in ‘added extras' to their standard fares. So while average fares will be considerably more than the $9.99 lead-in prices that REDjet advertises, we should expect that the average fares may still be lower than what full service carriers like Caribbean Airlines (CAL) offer.
A veteran airline professional explained to me that one major advantage that LCCs in North America and Europe enjoy is access to secondary airports which give them lower airport-related costs. REDjet will not have lower airport related costs plus they will have higher fuel costs than CAL. This should concern them. But they do have some advantages to exploit. Firstly, REDjet will pay no commission to travel agents which choose to sell their service, which will lead to much lower distribution costs. Secondly, REDjet's MD-80s may not have a fuel subsidy but their engines are separately leased. This means they benefit from an arrangement where they pay a per hour charge for their use over X number of hours— and then simply exchange them. This may lead to lower maintenance costs.
I admire the entrepreneurial spirit behind Redjet and more importantly, I am among the many who have experienced first-hand, poor customer service with LIAT as recently as two weeks ago. At the same time, since BWIA became CAL, it is hard to ignore their strong on-time performance, incredibly low lost-baggage rate (by industry standards), excellent safety record and (in my opinion) decent customer service levels. Now together with all this, they are armed with a fuel hedge/subsidy. Can Redjet realistically survive a head-to-head battle with CAL? Personally, there are observers including myself, who do not think that CAL should trash its profit margin by cutting fares too aggressively. Rather, I do believe that CAL offers a premium travel experience, and should continue to emphasise this as they seek to differentiate themselves from the competition.
This week, we will see the first commercial flights from a carrier determined to be the Caribbean's first, genuine, LCC. The success of REDjet's business model is premised on CAL and Liat actually responding by cutting their fares and trying to play by their LCC rules. CAL should be careful in taking this bait. A lesson could perhaps be learnt from Aer Lingus. The Irish national carrier was a state supported legacy carrier with no real history of profitability, when Ryanair relaunched against them as a LCC. Aer Lingus successfully repositioned itself as a more customer-friendly, full service alternative.
In addition, Aer Lingus restructured and got their act together and have since enjoyed some financial success. This is despite continued LCC attacks. As of April 18th, REDjet had just under 16 000 fans on their Facebook page whereas CAL had just under 7 000. As of May 2nd, REDjet had just under 18 000 and CAL had just over 7 000. 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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