Low Cost Subsidiary Carriers: The Good, the Bad and the Ugly

Ever since low cost carriers came to fruition and started to really challenge air travel markets globally, full service network carriers have been grappling on and desperately trying to find ways to retain their valuable market share – to mixed success. One popular reaction to the no-frills boom was to set up subsidiary low cost airlines. From late nineties flops to modern, successful and hugely profitable low cost airlines – lets take a look at the good, bad and ugly examples of low cost subsidiary carriers.

The Good

Jetstar

Let’s start with arguably the biggest success story. Jetstar has been a revolutionary carrier within Australia and the Pacific. Founded by Qantas in 2003 as a response to the emerging Virgin Australia, Jetstar began to grow domestically and now has a solid regional, domestic and international network covering both short and long haul services.

The business model has been implemented throughout Asia and the Pacific with sister airlines Jetstar Asia, Jetstar Japan, Jetstar Pacific and Jetstar Hong Kong also making up the overall Jetstar Group. I suppose that goes to show the success of this carrier. It’s not a low cost subsidiary carrier anymore, it’s a full-scale low cost subsidiary group. In 2019 the airline brought in a tidy operating profit of $282 million USD, proving their financial viability and contribution to the wider Qantas group.

Go Fly

Go was a low-cost airline started by British Airways in 1998 as a response to the growing easyJet and Ryanair. Whilst Go never went on to truly be a long-term profitable carrier for BA, the subsidiary definitely worked well to disturb the low-cost market. BA successfully created a carrier that was popular among budget travellers and helped to slow the growth of competitors.

It allowed BA to explore the low cost model and to experiment with the market. The model was reminiscent of the simplistic, no-frills easyJet model and in fact many claim that BA flat out copied the company’s business plan. In the end Go was part of a management buyout for $135 million USD and went on to be bought by easyJet for a remarkable $505 million USD in 2005. Although the carrier isn’t operating today, they clearly ruffled some feathers and provoked the low cost market successfully.

Eurowings

Eurowings was originally started as a regional airline, and slowly morphed into a low-cost carrier as Lufthansa increased their ownership to become majority shareholders. The airline offers a cheaper, less premium product offering to that of the full service carriers under the Lufthansa Group umbrella, and they have shown to contribute well to the group as a whole. Eurowings made up 11% of the Lufthansa Group revenue in 2019, coming in at $5 billion USD. Although this did translate into an operating loss of $203 million USD, the airline was on course to becoming profitable in 2021 before Covid-19 strangled the industry financially.

The group has been successful in growing and sustaining high revenues – if they can work to eventually lower costs over time and work to ward off the damaging effects of Covid-19 they could become a mainstay in the European air travel market and a real catalyst for the success of the overall Lufthansa Group.

The Bad

For every one successful low-cost subsidiary airline – you could easily name 5 failed ones. These carriers have come and gone – been regarded as experiments and in many cases been completely chalked off as something to forget about. To analyse ‘bad’ low cost subsidiaries we’ll look at a couple of the early on attempts by US carriers to break into the market.

United Shuttle and Delta Express

These two carriers were both started in the mid 1990s as a reaction to the ever-growing success of Southwest Airlines, who had been undercutting the legacy US carriers drastically on price and, crucially, doing so with a heavily reduced cost base. These two LCC subsidiaries copied the simple Southwest model of low-frills and high frequencies, essentially ripping out premium elements and lowering ticket prices as a result. Gone were hot meals and inflight entertainment, and United also tested electronic ticketing systems too.

Although this had the short term impact of reducing the masses of passengers lost to Southwest, it wasn’t sustainable. Due to several factors, notably including the long-term relationship between trade unions and the US legacy carriers, this low-cost operation simply couldn’t be done profitably. These “low-cost” airlines were simply low on price to the passenger without the necessary gutting of overhead costs to the airline. After noticing unremarkable revenues, both of these carriers ended up being integrated back into their parent airlines.

The Ugly

Now to move on to two low-cost subsidiaries the parent carriers will be very likely to want to forget as failed projects. For a number of reasons, these experiments went horribly wrong.

Continental Lite

Continental Lite is now, among many, an infamous example of a drastic failure in strategy. Much like United Shuttle and Delta Express, this carrier was a response to Southwest. It also incorporated low-frills and worked to cut many costs in order to lower fares. So why did it fail to an even higher degree than the other two? Firstly was the choice of routes. Continental decided to predominantly target its business-heavy routes – and kept the subsidiary carrier very integrated still within the main network.

This did little to set the expectation of passengers. The usual business passengers still expected a premium service and were therefore let down terribly by the ‘Lite’ offering. The subsidiary wasn’t marketed enough as a separate entity, so many business passengers were completely alienated. The OnePass frequent flyer program, which had been the top loyalty program in the industry, quickly fell down the rankings as Continental suffered a great loss in business pax, which wasn’t offset at all by a rise in economy passengers. A combination therefore of poor route choice, high costs due to trade union affiliation and an inability to separate the main carrier from the subsidiary caused Continental Lite to end in disaster.

Joon

Joon was a very different experiment to that of Continental Lite. Starting operations in 2017, Joon was a subsidiary of Air France. An airline marketed to ‘youth’ and millennials. The business model was aimed at providing a new generation of travel experience with an airline on the side. A funky, modern and youthful product at a low cost.

The airline lasted just two years and was quickly withdrawn and merged back into Air France. Joon failed because their brand was difficult to understand, and they simply didn’t attract and entice their target market. The model was too complex, too thought out and too in depth to compete with other low cost carriers. A large part of the success of LCCs has been grounded in simplicity. The vision of Joon was to kick off a new era of modern travel – something which doesn’t go hand-in-hand with ‘keeping things simple’.

What can LCC subsidiaries teach us?

The history of low cost subsidiaries can tell us a range of things – what works, what doesn’t and why. It is quite clear from the range of case studies above that the more successful low-cost subsidiaries have:

• A simple, non-complex business model

• Limited integration with the main carrier and a structure that keeps it as a separate entity

• A low cost base and limited affiliation with trade unions

• A solid marketing strategy which effectively hits a target market without alienating the market of the main carrier

The unsuccessful LCC subsidiaries can tell us just as much. The mistakes of the past have been learning curves for the future – many full service carriers are now opting to move away from subsidiary airlines and focus on creating a more cost effective economy class in their main business. Those still working with a subsidiary should look to take the negatives of the last few decades as a way to improve and create robust low-cost strategies. For now, it’s great to see the success of airlines such as Jetstar – lets see what the future holds for these subsidiary carriers and how they can overcome the Covid-19 crisis, coming out the other side as strong financial competitors to the growing low-cost airlines.

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