Level by International Airlines Group, the parent company of British Airways and Iberia.
IAG
Low-cost carriers accounted for 28% of all passengers traffic in 2016. It's a percentage that's still growing.
The rise of low-cost carriers has disrupted an industry traditionally dominated by major legacy carriers.
These major airlines are now fighting back with low-cost options of their own.
The availability of more low-cost flights is ultimately better for the consumer.
Over the past two decades, low-cost carriers have turned the airline industry upside down. In 2016, the purveyors of cheap, no-frills flying accounted for 28% of all passenger traffic around the world. That's up 10% since 2014.
Low-cost airlines have transformed the way people fly in the developed world. But for many in the developing world, these airlines made commercial air travel an actual reality.
The effect low-cost carriers have had on modern society is tremendous. But one group that has been caught off guard is the legacy airlines that once operated with impunity around the world. For a big legacy airline, an upstart low-cost carrier is a small nuisance. But once that small nuisance grows in size and market power, low-cost carriers can hold tremendous pricing power. In that, they drive down fares. Great for consumers, but a real pain the in the butt for legacy airlines.
In the US, when Southwest Airlines, the world's largest LCC, enters a market fares drop. It's happened so many times there's even a name for it, "The Southwest Effect."
But beyond individual markets, LCCs have shown the ability to massively disrupt an entire continent. A great example of this is the rise of AirAsia. Commercial air travel in Southeast Asia has traditionally been dominated by a collection of large, well-respected legacy airlines like Singapore, Thai Airways, and Malaysia Airlines.
In 2001, a music industry executive named Tony Fernandes along with several others took control of AirAsia for $0.25 and an agreement to assume the airline's $11 million in debt. Over the past 16 years, the two-plane operation has grown to a fleet of more than 200 aircraft. In 2016, AirAsia accounted for 49% of commercial air travel in Malaysia. The airline also holds a 22% market share in Thailand.
"People didn't take us seriously and that was good because Malaysia Airlines thought 'Oh it's another stupid idea that'll die soon,'" AirAsia Group CEO Tony Fernandes told Business Insider. "By the time they took us seriously we were too big and too popular."
AirAsia is but one example of how a low-cost carrier can shake up the airline business. In Europe, LCCs now account for more than 40% of the airline market on the back of carriers such as Ryanair, EasyJet, and Norwegian.
"My personal view is that for especially the first decade of their existence, network carriers like ourselves sort of underestimated, ignored — almost arrogantly ignored — the rise of low-cost carriers," KLM Royal Dutch Airlines CEO Pieter Elbers told us. "With that, we can see that their share in the European landscape has steadily increased and is now anywhere between 42% and 45% of all flights in Europe are with low-cost carriers, and a percentage which is significantly larger than in the US, where it's about a third."
In response, KLM has made drastic changes to the way it conducts business.
"With that, we have embarked on a program in KLM a few years ago whereby we sort of said, 'We're going to defend our European network, and we're going to make sure that we do the right thing for our customers on the European network,'" he said.
"So we have lowered our cost. We have increased our fleet utilization. We have changed our commercial offers on probably 60% of all our European destinations, which are about 80 destinations. We do have levels which are matching the low-cost carriers. So this combination of cost-cutting on the one-hand side, investing in our product and our service."
Legacy airlines flight back
In Europe, legacy airlines are fighting back by operating low-cost carriers of their own. KLM has Transavia while sister company Air France launched Joon earlier this month. According to Air France-KLM, Joon will not only be used as a counterpunch to low-cost carriers, it will serve as a testbed for new ideas that could help make the entire company more competitive in terms of costs, efficiency, and customer service.
In 2012, IAG, the parent company of British Airways and Iberia, took full control of Spanish low-cost airline Vueling, which services destinations across Europe. Earlier this year, IAG launched Level, a low-cost long-haul carrier designed to take on Norwegian and WOW.... Major airlines are taking on the biggest threat to their business — and it's great for consumers
