In the current favourable environment of relatively cheap oil, Low Cost Carriers (LCCs) find themselves operating in the right consumer segmentation to accommodate growth of the middle class and the consequent increase worldwide in the propensity to fly. This has translated into a compound annual growth rate (CAGR) of 7.1% for LCCs in the last decade while the total global market (including all commercial flights) achieved only a 3.5% CAGR.
The top performing regions for LCCs have been Central America (led by the important growth in Costa Rica by JetBlue with a +14% 5 year CAGR and WestJet with a +70% 5 year CAGR) and South America.
Figure 1: Growth of the low cost carriers v's regional sector growth - 2007 to 2016
Focusing on the European market and comparing the capacity of the LCCs and the pricing evolution of fares three months before departure, we can observe that the mature market such as Western Europe has a clear advantage as the high seat capacity (compared to other countries) is supported by low prices - especially to the key tourist destinations and leisure markets.
Figure 2: Fare analysis (3 Months ahead of scheduled flight) against capacity per country – 2016
By looking at the fare data plotted against the capacity of each LCCs focused on Europe we can clearly identify the leaders in the low cost market, with Ryanair and easyJet leading the group, considerably ahead of the competition. First mover advantage has been important in establishing market leadership for these two carriers. As Ryanair continues to adapt it's business model towards operating to more primary airports, it will be interesting to see in the future whether the airline will be able to narrow the gap with easyJet on an average fares per kilometre basis.
Figure 3: Low cost and selected other carriers’ annual seat capacity with fare per KM – 2016
In terms of market share of the LCCs and its growth, more mature markets can be found to have increased in size by around a 25% to 50%, translating into compounded growth rates of between 3% and 18% with outperformers such as Cyprus, which has a market size similar to Croatia, but having grown by a CAGR of 64% for the past decade compared to 17% in the Croatian market.
Figure 4: 5 year CAGR LCC growth against LCC market share per country– 2012 to 2016
Overall the penetration of the LCCs in the European market has been a mainly driven by leisure demand and the growth of the propensity to fly of the population. This growth is as a result of lower fares and, for some, higher average earnings.
The less mature markets are set to catch up with other countries in the coming years. If Figure 2 is correlated with Figure 4, looking at for example Cyprus (Greece and Bulgaria are other good examples) looks set to continue its growth despite generating some of the highest fares on average and this promises to deliver sustainable growth opportunities in the future for the low cost carriers within Europe. Below is a chart representing the market share of the LCCs per country against legacy and regional carriers. We clearly see the importance of the low cost carriers in the majority of Eastern European countries while some countries will see the LCCs continue to earn market share.
Figure 5: Market share of the LCCs per country against legacy and regional carriers
Untapped markets (where the LCCs penetration is low and below average) are the next target of these airlines. Facing competitor part of alliances, the penetration of the LCCs is limited to the demand for cheaper fares and need for connectivity but ultimately will result in economic benefit for the region surrounding the airport. ACI Europe released an econometric analysis where the findings state that a 10% increase in connectivity has a direct impact on GDP per capita growth of 0.5%, which supports the need for highest market penetration for LCCs in some markets which would increase the connectivity, hence the economic growth.