Tue, Nov 12, 2013
Network Carriers Nearly Cut Unit Costs To Low-Cost Carrier Level
This year, for the first time ever, U.S. low-cost airline unit revenue on domestic routes exceeded that of network carriers. That's according to Oliver Wyman’s annual Airline Economic Analysis report, released Friday at the Raymond James Global Transportation Conference. The report highlights this and other shifts taking place in the global airline market.
The analysis indicates that while low cost carriers fly shorter routes, inherently generating higher unit revenue, this unprecedented spike in domestic revenue per available seat mile among U.S. low-cost carriers is still evidence of a major change. “With both network and low-cost carriers focused on generating higher revenue, the result may be higher profitability in the short term,” said Oliver Wyman Partner Bob Hazel. “However, this environment could also facilitate the emergence of a new group of lower fare airlines.”
The report also shows Asia strengthening its position as the world’s largest airline market, surpassing Europe and the U.S. Just a few years ago, the U.S. was still No. 1, Europe second, and Asia third. The shift in the airline market shows why manufacturers are focusing on Asia.
It indicates a narrowed cost gap between U.S. network airlines and low cost airlines during the past five years from 34 percent to less than 4 percent. Even so, ultra-low-cost airlines modeled after Europe’s Ryanair operate at costs that are a step below even traditional low-cost carriers and are a growing challenge to both network and low-cost carriers, as well as increasing pressure from ultra-low-cost carriers. Some ultra-low-cost airlines unbundle their products to the maximum extent and charge low base fares and high ancillary fees. Added together, these low fares and high fees can equal the higher fares and lower ancillary fees at traditional airlines.
(Chart provided by Oliver Wyman Company)
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