New airline model identified as growth sector

Value-focused carriers have emerged as a new airline model, merging the benefits of both traditional and no-frills carriers, according to Sabre Airline Solutions. 

The company’s consulting business president Nejib Ben-Kheder described VFCs as being identified by their focused route networks, simple fare structures, relatively cheap sales and distribution arrangements, limited array of partnerships and streamlined ground operations.

The new business model is gaining ground as no-frills carriers and traditional airlines around the world converge to become VFCs. Ben-Kheder pointed to dozens of examples of airlines in the Middle East, Europe, the Americas and the Asia-Pacific regions as examples of this transformation.

“It’s important to note that ‘value-focused’ does not mean ‘no-frills’,” he said.  “VFCs such as Flybe in the UK, JetBlue in the US and Kingfisher in India do offer complete services and could never be described accurately as ‘no-frills’, but neither would they fit the profile of your typical traditional carrier such as British Airways, Qantas or Singapore Airlines.”

Sabre Airline Solutions says VFCs ultimately will gain a significant share of the market for leisure and cost-conscious business travel. It estimates that these carriers currently handle 12% of this traffic around the world, compared to 6% in 2001.

Ben-Kheder identified the Middle East is ripe for expansion by VFCs.

He said: “Globally, the airline industry is recovering well. Scheduled airlines’ operating revenues crossed the $400 billion mark in 2005. Yields are also improving, and reached 11.1 US cents per revenue passenger kilometre (RPK) last year, compared with just over 10.3 cents per RPK in 2002. Within this healthy picture, the Middle East’s own share of worldwide airline revenues is growing, too.  This stood at 4.5% last year, compared to 3.7% in 2002 and 2003.”

Total revenues of airlines based in the region have been growing at double-digit rates for the past few years, Ben-Kheder said. This has been fuelled particularly by Dubai, with its importance as a financial sector, burgeoning tourism industry and demand for labour from around the world to assist with infrastructural growth.

Traditional network carriers in the Middle East are investing hugely in growth opportunities, he added. Some carriers in the region have projected compound annual growth rates of 16% between now and 2015. 

“The traditional carriers in the region are responding well to the changing market forces,” Ben-Kheder said. “They are maintaining differentiation and value over the basic no-frills business model, but increasingly looking forward to multi-lateral alliances such as Arabesk to increase the breadth and depth of their networks – thereby reinforcing their network strengths and delivering a broader service to the community than no-frills carriers can afford.

“They know that just hoping no-frills carriers will go away never works. You lose market share and revenue and allow the no-frills carrier to become stronger.  Matching fares and creating a war of attrition is expensive and ineffective, mostly because the no-frills carrier has lower cost base.  In many cases the best way to deal with the emergence of a no-frills carrier in your market is to evolve and adapt – and that’s what the VFC business model is all about.”

Report by Phil Davies