Low-cost Outsourcing – A New Trend with Doubtful Benefits

One after the other, the ‘legacy’ carriers endeavour to establish low cost subsidiaries. Mostly this is done without involving the pilot associations whose members are directly concerned by such changes. This new trend is a radical break with the pre-existing culture of cooperation between pilots and management.

At a time when the airline industry is being restructured and tries to consolidate the markets it operates, the legacy carriers are trying to enter the low-cost market. And many are eying the Ryanair business model. So, why is this model so enviable and so unattainable at the same time?

 The so-called ‘legacy’ carriers are companies built on a solid regulatory framework and are sometimes built on a heavy administrative structure. They built their business model on creating a network within a particular market, developing passengers’ services and offering connections all over the world. Low-cost carriers, however, fly point-to-point destinations and do not offer connections to their passengers.

In 2008, British Airways set up a low-cost airline, called ‘Openskies’, targeted at the business segment of the market.  The year after, Iberia took over Vueling and Clickair. In 2010, Olympic re-emerged from bankruptcy as a low-cost company. And this year, Iberia is striving to set up its own low-cost subsidiary Iberia Express.
These are just a few examples of this new trend. The problem in their attempt to compete in the low-cost market, is that they kept their own business model and focused on lowering their costs and/or outsourcing their activities. The commercial success of Ryanair is not only due to lower costs but Ryanair actually turns costs into profits.

Where a legacy carrier or its subsidiary pays airport fees, Ryanair receives subsidies. Where companies focus on reducing  pilots’ salaries, Ryanair gains money on pilot training, ID cards, uniforms etc. Ryanair’s strategy is to open bases in secondary airports and hence be able to exercise pressure on the local authorities to maintain favourable conditions that no other airline can expect. While legacy carriers consider the passengers as their clients, the Irish low cost airline considers the local authorities to be its clients.

Hence we see a trend from companies to turn against Pilot unions and professional associations and to point the finger at them for being the cause of their financial turmoil. This is mistaken. Pilots and their unions are not the reason why airlines cannot compete fairly within the European market. The EU leaders should take their responsibility and make sure that competition in the European aviation market is not distorted and that EU rules on competition are enforced on all players in the market.

Pilot unions are quite often valuable partners for the management in times of economic change, and promoters of a safety culture within companies. The next edition of Cockpit News will explore this role in more detail.