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Low Cost Carriers Not Necessarily Cheap

A Carlson Wagonlit Travel study showed that potential cost savings on low-cost carriers (LCCs) for large multinationals are, in at least half the cases, just 10% off normal costs. Carlson said effective marketing of low price offers by these carriers often leads multinationals to overestimate the potential impact of LCCs on the total air travel budget.

The company’s research, based on interviews of 38 European travel managers of major multinationals, measured the gap between the perceived and real savings that low-cost carriers could provide on the 24,500 routes used by business travelers in Europe.

This does not mean that multinationals should ignore low-cost carrier offers, said Carlson: It just highlights the gap between reality and perception and stresses the need to evaluate potential savings on a route by route basis.

More than half of those interviewed referred to growing pressure from both senior management and the travelers themselves to include LCCs in their travel policy. And for 25% of companies, the pressure from the business traveler is even stronger, which reflects a new sense of responsibility that employees feel about the cost of their business travel.

According to the findings of the Carlson Wagonlit Travel research, two thirds of travel managers consider savings from LCCs fares as opposed to their negotiated corporate fares vary from 30% to 70%, which is in line with Carlson Wagonlit Travel’s own estimates.

“On the sample we analysed, these estimates show that, on average, LCCs ticket price of tickets bought by business travelers on main LCCs routes are 56% lower than the average fares negotiated with conventional Airlines” said Carlson.

Nonetheless, nearly half (40%) of companies interviewed consider savings could amount to no more than 10% while Carlson Wagonlit Travel believes the maximum to be 3 to 5%.

This is linked to the fact that LCCs are only servicing 102 of the 24,500 routes studied, 15 of which from major airports such as London Heathrow, Paris Orly or Frankfurt Main.

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“On the business travel sample we analysed, LCCs routes only account for 8% of travel volume,” said the company. “If we look at routes operated by LCCs with more than two flight frequencies per day, we estimate that an achievable market share for LCCs is just 5,5%.”  Even if the average LCCs ticket price is lower on a given route, potential savings are far from the current perception of the situation.

For example, many LCCs use smaller airports, such as Beauvais (France), Charleroi (Belgium), Stansted (UK) or Hahn (Germany), that are up to two hours away from major city centers.

Not only that, but the lowest fares need to be booked a long time before departure, ticket exchanges and refunds are less flexible than with major airlines, flight schedule options are fewer as are the alternatives offered in the event of any operational difficulties.

Finally, savings are not automatic and part of the complexity comes from the LCCs dynamic pricing model. (Prices for a given seat/route may change rapidly and continuously according to demand, and the cost of one leg may even alter by a factor of four to five times on the return leg.)

Carlson reminds that the situation varies on a case by case basis and each requires a customized approach to ensure optimal cost. To service its business customers, Carlson is currently equipping its reservation centers with search and booking technologies. It hopes to ensure that low-cost carriers are included within the total range of services offered. And if the low-cost carrier service is the most appropriate for a business trip, it will be booked on behalf of clients.

Meanwhile, Carlson believes that today major airlines continue to look at potential cost cutting methods and this is likely to grow in the months ahead. Major savings opportunities await companies, provided they are able to take full advantage of them.

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