Towards the Transformation of “Low Costs”
Very interesting to follow Southwest Airlines’ earnings. It is the benchmark airline in the world of “low cost.” It was both the first to enter this field in 1971, with a huge expansion during the liberalization of the American skies in 1978, and it is also the largest in terms of turnover: $27.5 billion, even if the European Ryanair carries more passengers.
The fundamentals of the model are based on a few intangible principles: a single type of aircraft, faster turnarounds, densified aircraft capacity, no subcontracted distribution, very low call prices, a very stripped-down product with all services paid, all served by a young, enthusiastic, and sufficiently well-paid staff.
With this model, Southwest Airlines has been at the top of American domestic carriers with remarkable results. And then time did its work. Staff aged, became less efficient, and demanded and obtained benefits that were ultimately comparable to those of traditional carriers. The results paid the price. Not that the company lost money, but profits fell and, more seriously, the stock price began to decline with great regularity, which did not suit shareholders, especially investment funds. They demanded a change in management, and the latter adopted a very different strategy.
In fact, the new managers have evolved the pure “low cost” model toward a hybrid system. To begin with, distribution was extended to travel agents via GDSs; then the company entered into interline agreements, which had never been seen before. The product has improved and costs, as a result, have also increased. In total, the results were also badly affected, with a drop of 42%. And surprisingly, the stock price has soared more than 70% from its low, and the company is valued at 46 times expected earnings. Compared to Air France/KLM’s results, this would value the group at $16.3 billion instead of the current $3.63 billion, and let’s not even talk about Emirates Airlines, whose valuation on this basis would exceed $230 billion.
In other words, the stock market, which anticipates future results, has full confidence in the change in strategy of “low cost” carriers, whose product will gradually move closer to that of traditional airlines, which have gone the opposite way. Admittedly, after reaching the bottom just before Covid, the revenues of incumbent airlines are tending to rise. This was necessary because, even if their product was degraded, operational costs continued to increase, and customers no longer hesitated to leave for competitors who clearly displayed the simplest service.
It is therefore easy to imagine that the American example will be followed, albeit with some delay, by European and then Asian carriers. We are also starting to see the European leader Ryanair no longer hesitate to cancel services as soon as their profitability is no longer assured. EasyJet is taking the same path. This is how many small European airports will lose what kept them alive, as “low cost” operators have taken advantage of tax increases, decided somewhat lightly by government authorities, as a pretext to reduce their sails.
It is necessary to emphasize once again the lack of understanding in government policies which, in order to please a certain electoral clientele who will not be grateful to them, have consisted of taxing air transport in favor of railways, even going so far as to eliminate access to planes by administrative means, as we have seen in several European countries.
Meanwhile, orders for new aircraft, admittedly less polluting and more efficient, have multiplied. More than 16,000 aircraft are expected in the coming years, not counting new orders that continue to pour in.
Where are we going to put them if governments reduce access to major airports and if regional services can no longer be profitable because they are too heavily taxed? How will air transport, with its “low cost” components, be able to continue its beneficial role for the global economy and for bringing people closer together?
The next competition will no longer be in in-flight service, or even in fares, which we can expect will gradually be displayed more rationally than in the past, but will be played out in airports. The latter have become the main obstacle to air transport, which is poorly suited to the necessary fluidity of traffic, because if “low cost” carriers abandon small airports, there is no doubt they will strengthen their offer on the major platforms.
