A CAPA REPORT

PREPARING FOR A
GATHERING STORM
CAPA 12-POINT SURVIVAL PLAN SPECIFICALLY FOR LCCs

2019 Latin America

AVIATION & LCCs SUMMIT
Topics in this report will be discussed at CAPA’s
2019 Latin America annual Latin America Aviation & LCCs Summit,
AVIATION & LCCs SUMMIT to be held in Curaçao on 16/17-September-2019.
Visit laas19.capaevents.com for more info

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 Preparing for a
Gathering Storm
A CAPA REPORT

A 12-POINT SURVIVAL PLAN SPECIFICALLY FOR LCCs

L ike any business, airline management is expected to manage the airline prudently through a
downturn to minimise the impact on profitability and shareholder returns.

Given the inevitability of a downturn in the industry – whether it’s this year or next – that
expectation becomes more telling.

Generally speaking, LCCs should be better placed in times of heightened price sensitivity, as
their lower cost base should give them an edge. But that alone is not enough.

CAPA offers here some key tactics that LCC management can deploy when things get tough.
Many of them are common sense, but in tough times the sense may not be so common.

Our thanks to CAPA Senior Advisor, John Thomas for his extensive input to preparing the report.

CAPA - Centre for Aviation Preparing for a Gathering Storm 1

A 12-POINT SURVIVAL PLAN SPECIFICALLY FOR LCCs

I. COMMERCIAL OPPORTUNITIES
1. Make the airline more attractive to business travellers
During a time of recession the first cost line for most businesses to be scrutinised is travel.
This should play well to LCCs as business travellers are encouraged to trade down from full
service carriers to LCCs. However the LCCs that will most benefit from this trend will be the
ones that position themselves to be more “business friendly” without necessarily changing
their core LCC business model e.g.:
i. Given most business travellers travel with carry on only – how does an LCC
accommodate this?
ii. Business travellers want a speedy seamless trip through the airport – and thus are
willing to pay for expedited check-in/security/boarding etc. How does the LCC
accommodate (and monetise) without changing their business model?
iii. Business travellers are time sensitive. What is the LCC’s philosophy on OTP as OTP
becomes a differentiator in the minds of the business traveller
iv. Business travellers are willing to pay for a better seat (e.g. emergency exits, forward
seats, aisle seats) – how can LCCs both accommodate and monetise?

2. Capture more of the passenger’s travel wallet

Air travel is not the only part of the travel budget that is scrutinised during a recession
– given the LCCs direct (lower cost) distribution model, how can it both add value to
customers but also capture more of their share of wallet by providing better deals on
accommodation, ground transportation etc - a strategy very successfully executed by
Allegiant in the leisure market that can be adopted in the business market.

3. Maximise ancillary revenues

LCCs have already conditioned their customers on optionality that comes from ancillary
revenues. As LCCs accommodate more business travellers within their existing business
models, ancillary revenues are the ideal means to provide business travellers, with some
of the product attributes they want (i.e. avoidance of “pain points”) and allow them to
differentiate from other LCCs. LCCs need to be creative and think outside the traditional
mindset of the airline industry e.g. easyJet’s “non traditional” Global Connect product.
LCCs should also look for other sources (and perhaps suppliers) to deliver new forms of
ancillary revenues e.g. neighbour free seating, enhanced food for sale options etc.

4. Wise asset allocation becomes even more critical

The traditional LCC model is to enter a market (with elastic demand curve) by dropping fares
and stimulating market demand. During a recession LCCs should pull back on their growth
ambitions and may also require paring back on developing routes until the market recovers
- so as to preserve cash during the recession. The same applies if an LCC operates within
a Group structure – how best to deploy Group resources to weather a downturn will differ
depending on the resilience of each group airline’s market position.

5. Work closely with airline partners

LCCs have not pursued airline partnership due to the costs typically associated with
traditional interline agreements. However in a recession, like any airline, LCCs need to
source as much incremental revenue as possible which can come through commercial
partnerships. This should and can be done in a low cost “lite” manner without changing the
core business model of the LCC (e.g. again, easyJet’s Global Connect product).

CAPA - Centre for Aviation Preparing for a Gathering Storm 2

A 12-POINT SURVIVAL PLAN SPECIFICALLY FOR LCCs

II. OPERATIONAL/FINANCIAL OPPORTUNITIES

6. Reduce capacity
While daily utilisation is a key value driver for most airlines, load factor trumps utilisation in
terms of value creation, especially in a recession. As such, load factor should be managed
by taking out capacity. This is extremely difficult with a young (i.e. high ownership cost) fleet
where a drop in utilisation will have a big impact on CASK. Conversely an old fleet can be used
as almost a “free” resource to take out capacity (e.g. Northwest Airlines was one of the best
placed US airlines after 9/11 as it had a fleet of very old, refurbished, DC9-10s that had minimal
ownership costs that could be taken out of the system temporarily). Likewise Allegiant’s model
originally relied on low capital cost airlines that could be operated with low utilisation.

7. Defer fleet order deliveries out as far out as possible

In order to achieve #6. Others will be trying to do the same, but the worst possible time to be
levering up the balance sheet with expensive new aircraft is during a recession (Note: it is a
good time to place orders, just not take deliveries).

8. Plan to re-set the business for the recovery

Use reduced flying activity to achieve such goals as clearing up outstanding crew leave
entitlement and use excess capacity to bring forward heavy maintenance etc.

9. Maintain investments that allow quick responses

When recovery comes, for example maintaining pilot recruiting and cadetship programs.

10. Eliminate unnecessary structural overheads

Analyse what functions have been added as the airline has grown, but that are not essential
to maintaining the low cost model and should be jettisoned. Additionally, in the case of group
airlines, make a hard assessment as to what can be centralised (for both cost and revenue
benefit) vs staying in the individual airlines.

11. Move as much as possible towards operating as a “virtual” airline

Assess what fixed costs can be turned into variable (or at least permit flexing the cost base in
downturn e.g. by staggering aircraft leases). This is an area where LCCs should excel as their
traditional core business model has typically been to outsource as much as possible from
the outset, so this does help mitigate the impact of the recession. But a downturn should
give impetus to an LCC to re-assess the balance between existing inhouse vs outsourced
resources.

12. As with FSCs, LCCs need to engage with labour during a recession
Maintain open communication to ensure that labour better understands the actions being
taken by management to weather the storm.

CAPA - Centre for Aviation Preparing for a Gathering Storm 3

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