At what price? Low cost carriers and safety

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Image: Adrian Pingstone

Flight Safety Australia looks back on an article from our November/December 2013 edition of the magazine to revisit how budget airlines handle safety and what impact their bottom-dollar approach might have…

 

All air travel has become cheaper in recent years, but the cheapest of all has been a new breed of airline: low cost carriers that have offered fares as low as one cent. Have they cut corners, or have they found a way to make safety part of the bargain?

1. Enjoy your flight? The changing face of air travel

The song says it all. In 1958, Come fly with me was a hit for Frank Sinatra. In 2013, a song about the glories of air travel is harder to imagine.

In the era of Sinatra and the Lockheed Constellation, going by air was an expensive dream for most people. Now flying is a commonplace reality. Instead of white tablecloths and silver service, the majority of modern air travellers endure busy queues, extensive security checks and, on some airlines, separate fees for things that were once part of the service, above and beyond the seat alone.

Yet behind these changes is a story of sustained rapid growth in passenger numbers—and a simultaneous fall in accident rates. When Sinatra first sang those corny lines about ‘far Bombay’ more than 80 per cent of Americans had never set foot on an aeroplane. Now 50 per cent fly at least once a year. In Australia in 1958, just over two million passengers took a plane trip. In 2012 the number was 55.6 million.

2. Swing low sweet chariot: how air travel changed

The worldwide history of low-cost air travel splits into two eras—before and after deregulation. From the 1940s to the 1970s, it was accepted wisdom that governments needed to approve the routes, fares and competitors of air travel in their territories: who should fly, where they could fly, what they could charge, and in many countries, what type of aircraft they could operate.

Even under this regime there were irrepressible, and from a government point of view, awkward competitors such as Dan-Air in the UK and Butler Air Transport in Australia. These competitors used second-hand, often war-surplus aircraft and operated mixed fleets.

The safety record of these low-fare pioneers was dire by modern standards, but not greatly different from their government-owned or anointed competition. Dan-Air killed 268 passengers over its 39-year corporate existence. Over a similar period more than 500 passengers and crew died in British European Airways crashes. (Butler, to its credit, never lost a passenger, but did write off an aircraft). Low-fare travel was associated with old aircraft, exploiting loopholes in charter regulations and a certain frisson of danger.

In 1978, the United States deregulated the airline market. An airline that until then had operated only in Texas found itself with a head start in this new world. Air Southwest Co. had been founded in 1967, and, after legal strife, had been permitted to operate without economic regulation within Texas. (It was still subject to safety regulation). When economic regulation was abandoned in 1978, Southwest Airlines, as it was then known, had a developed a unique business model.

The Southwest model was based on simplicity. There was only one aircraft type, the Boeing 737; no hub-and spoke routing system; no business or first class; no sectors longer than four hours (meaning that all aircraft could fly several revenue-generating sectors in a day); a basic frequent-flyer program (which did not appear for 20 years); and no free meals on board. Southwest also developed a distinctive culture, with cabin crew singing announcements and joking. The airline’s mantra, according to founder Herb Kelleher, was that staff should take themselves lightly but their job seriously.

As well as being cheap, Southwest Airlines developed an exemplary safety record: one in sharp contrast with the general US airline crash rate of the 1970s and ’80s. Southwest has never harmed a passenger and has only one fatality associated with it in 46 years—a child was killed when a Southwest flight overran a runway and struck the car he was travelling in. In Europe, low-cost carriers, Ryanair and easyJet, have never killed or seriously harmed a passenger. Jetstar in Australia has a similarly clean record over its 10 years of operation, as did Virgin Blue, before it was reconfigured into the full-service Virgin Australia.

Managers in the low-cost sector bristle at any suggestion that low fares imply cost cutting in essential areas.

‘We’re sometimes battling the misperception of low-cost equals low safety. In fact nothing could be further from the truth,’ says Mark Rossiter, the head of safety for Jetstar Australia and New Zealand.

Tigerair Australia chief executive, Rob Sharp, says the key to the low-cost model is not cutting corners but simplifying.

‘You typically fly point-to-point. You end up back home every evening without the complexities of networks … you maximise utilisation of the aircraft and you bring the costs down dramatically.’

Simplification often enhances safety, Sharp says. ‘For example, we have two bases, Sydney and Melbourne, and generally, every night our people return home. That adds stability. We have a more manageable issue with fatigue, and we can be an employer of choice for crew because of the stable lifestyle we offer. Safety’s not just about the aircraft—it’s the whole system.

Sharp says one feature of the low-cost model is the virtual airline concept—back-office functions, including maintenance, are contracted out. Done correctly, this can enhance safety by giving an airline the freedom to deal with the best in an area rather than try to become the best itself. This was the thinking behind Tigerair’s recent decision to outsource its aircraft maintenance to BAE Systems.

Rossiter says concepts such as safety management systems (SMS) tend to be well developed and work well in the stable and predictable low-cost environment.

‘When you’re trying to deliver safe and compliant operation you also deliver an efficient and effective operation. They work hand-in-hand, he says.

No discounts here: the regulator’s perspective

CASA doesn’t care how much an airline charges to sell a seat. That era is over. As far as Australia’s aviation safety regulator is concerned any operator offering regular public transport (RPT) service is subject to the same intense scrutiny.

In CASA’s 2012-13 to 2014-15 Corporate Plan the regulator made clear that it saw the growth of the low-fare model as an emerging challenge and was developing its risk-based surveillance system in response.

One of the risks CASA sees is the potential difficulty for a ‘virtual’ low-fare carrier in making sure all its safety-critical subcontractors, such as engineers, are performing up to an acceptable standard.

The carrier has to have robust oversight and quality control systems. CASA initial inspections for air operator’s certificates use the ‘show-me-day’ concept, where everything that an operator says it has the capability to do is tested in real time.

Deregulation down under

Airline market deregulation came to Australia in 1990. Over the next ten years, the two-airline model appeared to remain intact as two companies called Compass Airlines came and went. In 2000, Virgin Blue took to the skies. The following year Ansett went bust. Qantas founded its low-cost subsidiary, Jetstar, in 2003; and in 2007, Singapore-owned Tiger Airways began a low-cost service. Low-cost competition became intense in Australia, with Jetstar and Virgin offering one-cent promotional fares in 2008. In 2011, Virgin Blue rebranded as Virgin Australia.

By adding refinements such as business class, it is no longer a low-cost airline—it leaves that role to Tigerair Australia, of which it has owned 60 per cent since May 2013. Last year, more than twice as many passengers flew in Australia as in 2000, the year Virgin arrived.

Do it cheap, do it right: the low-cost model

  • Single aircraft type—brings economies in training, scheduling and maintenance
  • High utilisation—requires newer aircraft to withstand an intense duty cycle. New aircraft also use less fuel, lowering cost*
  • Point-to-point service, rather than a hub-spoke network of connecting flights
  • Direct entry—recruit pilots and crew rather than ‘grow your own’
  • Short routes—more profitable with low fares than long routes
  • Unbundling 1—passengers buy a seat—and pay for extras such as meals and checked luggage if they want them
  • Unbundling 2—specialist and back-office services are contracted out rather than done in-house
  • There are exceptions to this, such as US low-cost carrier Allegiant Air that refurbishes 30-year-old McDonnell Douglas MD-80s, but uses them less intensely than new aircraft.

3. Who are you calling cheap? Why safety culture is priceless

Low-cost airline managers say safety has several components. Compliance with regulations and procedures is vital, but the manager’s challenge is to ensure this occurs consistently across an organisation. The way to do it is by creating a safety culture, where staff understand and value their role in creating safety.

‘Organisational culture absolutely impacts on your safety culture—they are intertwined,’ says Sharp. Communication—by whatever channel is appropriate or available—is the building block of safety culture, he says.

‘A lot of our staff go to an airport or an aircraft, finish the day and go home. They don’t have an office, so how do you interact with them? We’re using video. We can record messages about safety, brand or whatever we’re emphasising. These go out not just internally, but to our partners and their staff—to anyone who’s working on our account. The feedback we’re getting is that they listen and find it a great way of communicating.’

Sharp came to Tigerair from Jetstar and Qantas, where he was involved with introducing the A330 and A380 aircraft. He joined Tigerair in May 2013 after the temporary suspension of the airline in July 2009, following several safety-related incidents. He says that the safety systems and culture at Tigerair had already improved when he joined he airline. ‘I was quite pleasantly surprised when I came in to find there had been a lot of work done in that area.’

Once processes are in place, continuous improvement comes by nurturing and refining safety culture, he says.

‘We have robust safety management and reporting systems in place, but more broadly, you also need a supportive business culture. We want an environment where people feel comfortable to raise issues, for example using suggestion boxes. That open culture is something we want to have.

‘How does that link into safety? It reinforces “just culture”. We’re big believers in that. You don’t blame people, but you pick up on the lessons and continuously improve. That’s fundamental to what we do.’

Rossiter, too, says he was impressed by the level of safety culture when he started at Jetstar. ‘It’s easy to achieve things because when it comes to safety and compliance; people just get it. That’s right from senior executive managers to front line staff and everyone in between.’

‘You don’t need as much of the traditional internal quality approach if your culture is right,’ he says. ‘That’s because things that are not as they’re supposed to be are not tolerated. Staff themselves won’t accept it. Deviance gets managed at the grass roots level when everyone’s aware that safety is a genuine priority, and not just a banner over the door.’

Rossiter says Jetstar’s safety culture can’t be taken for granted, however. ‘We manage the cultural aspects in exactly the same way as the hard business metrics. We are constantly monitoring our staff mindset. This involves extensive and frequent surveying from the safety and engagement perspectives.’

4. Same difference? Convergence of low-cost and legacy models

The bitter old joke that you make a small fortune in aviation by starting with a large one, says much about the state of the air transport industry. The 21st century has seen once-hallowed names disappear, merge or reorganise, often by adopting elements of the low-cost model.

The result is a measurable lessening of differences between the old guard and the upstarts. British Airways now charges extra for checked luggage on its shorter European routes, for example.

Convergence also affects the bottom line. This year’s KPMG airline unit-cost survey reported that over six years, the cost gap between legacy and low-cost carriers narrowed from US3.6c to US2.5c per available seat kilometre.

KPMG concluded:

  • the remaining cost gap between long haul and short haul may narrow further, but will not be eliminated, as it is inherently structural in nature
  • legacy airlines are likely to explore new business models in their short-haul feeder networks
  • low-cost carriers are likely to take one of two routes: certain airlines will remain ruthlessly low price (and by necessity, low cost which is the strategy of the likes of Ryanair), while others will compete against legacy carriers for their higher value customers (as shown by the evolution of Virgin Australia).

However, low-cost airline executives see limits to convergence. Low-cost and full-service airlines will co-exist, say Sharp and Rossiter.

‘Will they converge? I suspect not,’ says Tigerair’s Sharp. ‘The more you add in, the more complex the model becomes, and it takes you away from your roots of being an efficient carrier—complexity equals cost.’

Rossiter says there is a long history of legacy airlines attempting to start low-cost carriers and failing. ‘Is there a convergence or drift towards each other? I would say not. With Qantas and Jetstar that happens in a very successful twin-brand model.’

The pay-off: decline of the road trip

Air travel is just one component of transport system safety. The Australian Bureau of Statistics records a 35 per cent increase in air transport hours flown between 2003 and 2012. Tigerair’s Sharp, and Jetstar’s Rossiter, say this modal shift has undoubtedly saved lives by taking travellers off the roads.

Sharp notes that highway coach crashes were a feature of Australian life 20 years ago, and that the road death toll was higher.

Rossiter says Jetstar has helped to kill off a bonding but dangerous tradition: ‘The Kingswood with a family travelling through the night to the Gold Coast from Melbourne, you see less of that these days, and more of families flying safely for a reasonable cost,’ he says. ‘At any point in time, ten to 15 per cent of our passengers are first time flyers.’

Aggressive safety: Ryanair

Like many low-cost airlines, Irish-based European carrier, Ryanair, was born from the ashes of a failing operation. Businessman Michael O’Leary, a former shop owner who once boasted about doubling the price of batteries when he opened the shop on Christmas Day, studied Southwest Airlines and applied its business model to Ryanair when he took charge in 1991. Ryanair now operates 303 aircraft serving 180 destinations in 30 countries.

Like Southwest, Ryanair has a young and uniform fleet of aircraft. The Boeing 737 New Generation is the airline’s favoured type, with an average age of just under five years. Like Southwest, Ryanair has never killed a passenger. Crashes are a crude measure of safety, but figures from the UK air traffic services provider NATS show the Irish low-cost carrier has significantly fewer level busts, callsign confusions and failures to follow ATC instructions than average.

Ryanair also has a reputation for aggressive cost control. Passengers must print boarding passes themselves to avoid a £70 ($A120) charge for doing so at the airport, for example. Staff work as contractors, not employees, and O’Leary makes a regular practice of publicly announcing outlandish and technically unfeasible cost-recovery plans such as making passengers stand, as though on a bus. (This would, among other things, breach ICAO rules on the ratio of passengers to emergency exits.)

‘Short of committing murder, negative publicity sells more seats than positive publicity,’ O’Leary told Marketing magazine this year.

The company is embroiled in a legal dispute with British broadcaster Channel 4 and an unrecognised pilot association, the Ryanair Pilots Group, over a TV program, aired in August, that alleged deficiencies in safety. The airline sacked its chief pilot, who had appeared on the program to discuss his concerns, and took legal action against him. Ryanair also sued the Irish Daily Mail and reached a settlement in September.

Ryanair says it is proud of its 29-year safety record, but some commentators see the airline’s aggressive culture as a possible barrier to further safety assurance.

Writing on Flightglobal.com, aviation commentator David Learmount said—while acknowledging Ryanair’s safety record and without buying into the current dispute—that tense labour relations represented a potential safety risk.

‘The Ryanair employment model represents a risk in its own right,’ Learmount wrote. ‘That self-employed contractor model predisposes to a culture of mistrust and discontent, and no matter how hard the airline tries to instill high operational standards via SOPs and high-quality training, this culture will always undermine its efforts.’

Further information

Australian aviation statistics from the Bureau of Industry, Transport and Regional Economics

Fascinating Aida: Cheap flights A musical take on the low-cost model from a British cabaret group

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