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The entire report reflects different aspects of Virgin Atlantic and Frontiers Airline. The different pricing strategies have been highlighted with certain cpst effectiveness and rationale discussion by highlighting certain practical examples. Along with this , recommendations as well as conclusion ave also bene provided with focus on the strageic issues and the marketing of both the Airlines.
This report aims to provide an analytical economic comparison between two competing low-cost carriers within the united states, being Frontier Airlines and Virgin America. In order to derive critical lessons and provide recommendations for the reader, The scope of this report will be further limited to 2011 until the present day. This report will achieve this firstly by identifying the key aspects that make Frontier Airlines and Virgin America comparable ‘Low-Cost Carriers’. Secondly, by identifying critical similarities in the economical pricing strategies of the two service providers in order to prove the airlines are of a comparable state. This report will then determine the differences in approach and how they have positively or negatively impacted the airline. Lastly, through the identification of key lesson indicators, this report will provide recommendations to assist in effective economic management.
2.1 Frontier Airlines- Brief History
Frontier Airlines was re-founded in February 1994 and commenced operations later in July of the same year by the previous executives of the first generation Frontier Airlines. In 1993 the executives developed a business plan to take advantage of Continental Airlines service scale back in Denver. The company found great success through this plan and “By 2001, the airline was on Fortune magazine’s list of fastest-growing companies.” (Beyman, M. J. (2018, March 21). The History of Frontier Airlines. Retrieved April 16, 2020.)
The airline filed for bankruptcy in 2008 after struggling financially from a spike in oil prices in 2007. However, in 2009 Republic Airlines purchased the struggling airline and continued its operation as a subsidiary of Republic. One year later Republic Airline Holdings would merge Midwest Airlines and Frontier and continue to operate under Frontiers name. In 2011, Frontier Airlines would find glory again and win ‘North America’s Leading Low- Cost Airline’ award. Since then Frontier Airlines has solidified itself as the go-to low-cost carrier for the American public.
2.2 Virgin America- Brief history
Virgin America airline intended to start flights mid-2005; however, The new airline struggled to obtain investors and meeting US regulation and after a rocky start-up began selling fares in July 2007, with their first flight in August 2007. Virgin America utilised aircraft from the A320 Series to service their consumers. The nanagement serves best experiences and comforts along with proper cabin facilities. It always appraises the passengers and try to provide low cost quality services. It covers many destinations and use only biofuels
3.1 Pricing (and revenue?)
3.1.1 Frontier Airline
Use economy only but charge for extras, leaving the choice with the customer on their willingness to pay reference inconvenience. On the other hand, the marketing strategy of Frontier Airlines is to make a physical presence outside its hometown. The Frontier Airline is well known in this context among the hometown customer base and it have also its penetration in midsized market where there exists certain recognised airlines like that of Southwest having a certain foothold (David, 2018). The other positioning strategy of the Frontier Airline is the revamping of its 40 year old terminal with the help of which the passenger traffics can be easily stopped brought in by Frontier’s Airbus A319 jets along with 124 seat flights. Denver based company have employed around 3100 aviation professionals and also featured a single-class configuration systems. The management of the company have also successfully provided capacity information’s and the other operating statistics on the website through which its product can be readily differentiated from the other airlines (Ingmar, 2018).
3.1.2 Virgin America Airline
Find information regarding differential pricing, and how the separation of classes is advantageous for picking up potentially missed revenue (L table). The Marketing strategy of Virgin Atlantic is in providing Premium Economy Class Riders those who will be having separate check-ins area and is also having the boarding priority. The legroom on the other side is also satisfactory with a convertible flatbed system. The passengers those who will be in the cabins have also accessibility to the chauffeur drives. It had been noted that Virgin Atlantic is treated as one of the most important pioneer in the context of the personal entertainment as per the passengers staying abroad (Seth, 2020). This actually helps the firms in communicating well and transparent to the target customers by highlighting their brand concepts.
3.2 Cost
Cost is arguably the single most important factor affecting an airlines price for its service. For low-cost carriers such as Frontier and Virgin, it is imperative for the revenue received by its passengers for a flight to outweigh the cost of operating the flight. Put simply, revenue per passenger mile (RPM) flown must cover the cost per passenger mile (CASM). Shown in diagram 1 below, we can see that Virgin America has chosen to operate a business/first-class cabin in addition to the economy class. While a premium cabin class service demands a higher cost of operation, the revenue earned from such services still outweighs the cost of operation. In the subparagraphs below, this report will compare Frontier Airlines and Virgin America’s individual operational cost and provide insight into how each airlines revenue is spent on business operation.
3.2.1 Frontier Airline
In 2011 Frontier Airlines reported its total operating cost was 1.77 billion dollars. This number can be broken down significantly into categories, which can assist substantially in analysing expenditure data. These categories are Administrative Costs and Functional Costs. The pie graph below illustrates the overall cost broken down into company mandated or ‘US form 41’ sub-groups. Administrative costs include wages and benefits, Insurance and taxes, landing fees and airport rent. Alternatively; fuel, maintenance and repair are categorised as functional costs. Separating the sub-groups into these two categories, we can see that functional expenses account for 51% of total operating expenses, leaving 49% taken up by administration costs.
An important note with the pie graph below, ‘Other’ expenses refers to “costs of crew training, crew travel, airport, passenger and ground handling related expenses, all hangar and administrative lease expenses, professional fees, and all other administrative and operational overhead expenses not included in other line items above. Additionally, if incurred, this expense will include aircraft return costs, gains and losses on disposal of assets, reorganisation costs, severance costs and bad debt expenses.” (Bryan K. Bedford (2012, March 15). Form 10-K. Retrieved April 20, 2020.)
According to Frontier airlines Form 10-K, 1.77 billion dollars in operating expenses translates to a total cost per available seat mile of 12.64c. Cost per available seat mile, in this context, is used for comparison between the various airline carriers to provide a more comparable result. This is because larger airline carriers can have much higher costs due to operating, for example, a more extensive fleet and or service. By dividing total cost by the number of available seats provided by the particular carrier, we arrive at a more relatable result.
Diagram 2: Total Operating Cost Breakdown
1.77b in total operating costs
Total operating expenses per ASM= 12.64c
Labor and maintenance expenses= 0.28b (per ASM=2.34c)
In the case of the Frontier Airlines , the low fares of the Airlines got mixed with the best customer experiences and have also found to be busy in making an effective realignment of the network by bringing the senior management in its competitive spectrum based on which thee customer service can be improved. Greater amount of facilities have been delivered by the management of the headquarter at Denver and it have remained important throughout based on which the operations of the airlines have been easily diversified (Seth, 2020).
The existence of the dynamic market have got affected by the overall aviation environment of US. In this context, mergers have found to be necessary for the carriers viability through which the revenues can be increased and the costs can be readily reduced. This way the Frontier Airlines is getting benefited mostly. The low rate of the oil prices have encouraged the management of Frontier Airlines to enter into public consciousness and incredibly to survive a razorthin margins based on which the excessive profiteering can be scrutinised well (flightradar24, 2020)
3.2.2 Virgin America Airline
Also, in 2011, Virgin America airline Reported a total operating cost of 1.6 billion dollars. Slightly less than its Frontier rival. Comparing the two graphs, we can see that there is a significant variance in the two airline carriers expenditure characteristics. For example, when comparing ‘Aircraft and engine rent,’ we can see that Virgin America’s is nine percent higher than that of Frontier Airlines. Virgin Americas higher aircraft and engine rent percentage in combination with the comparatively low depreciation suggests that Virgin America was operating a new fleet of aircraft. This assumption is further solidified by Virgin America’s comparatively low maintenance costs, being young aircraft the servicing requirements are much less than that of Frontier.
In the context of Virgin Atlantic, there have occurred crude oil awakening where the airlines like the Virgin Atlantic have been forced in the development of the new strategies so that the revenues can be maximised with the reduced costs. The flying costs of Virgin Atlantic have announced around 73 percent of the entire airline operational costs which includes fuel expenses, labours and at the same time the ground handling and the landing fees. In this context, the flying costs are found to be variable by nature and have been incurred as a form of the direct results of flights operation (mit, 2020). The ownership costs in this regard are fixed and have been incurred in such a way so that the specific flight can be operated easily.
In the context of the Virgin Atlantic Airlines , the cost on the aircraft ownerships are found to be fixed and have been incurred on specific operational flights and been accounted for 14 percent of the entire airline costs in 2010 including aircraft rental expenses , depreciation and mantainance. The presence of differences in the operational costs of the aircraft through the equipment effect ultimately creates an impact on the route’s contribution on the entire profitability of the airlines. In the recent times, an increase in the fuel price have been found as one of the external shocks based on which the airline industry gets confronted (flightradar24, 2020).
Virgin America’s total operating cost per available seat mile was also lower than its rival airline, at 10.76c.
1.6b in total operating cost
Total operating expenses per ASM= 10.76c
Labor and maintenance expenses= 0.16b (per ASM= 1.65c)
Fuel cost= 391Mil
4.1 Frontier Airlines
the seating charges of the Frontier Airlines varies between USD 6 to USD 20. However Frontier Airlines makes an advertisements that they are dealing with the low fares rightly and hence the passengers also need to make sure that the passengers are receiving the greatest deal. The management of the concerned Airlines have developed an application known as my Frontier frequent flyer programme through which the different discounts on Frontier Airlines can be made easily. Frontier Airlines have involved itself as full service airline hub and it have also been supported highly through Indigo partners through which it have turned into an ultra-low-cost carrier (flyfrontier, 2019).
In the context of productivity, the management of Frontier Airlines have made some of the recent developments like ULCC transformation which encompasses greater amount of seasonality with an aim of the higher productivity. The management of Frontier have doubled its size by carrying around 12.7 million additional passengers at a CAGR rate of 13 percent. In this airline around 35000 passengers flies indirectly where the average fare rates lies in between USD 250 for 824 mile flight stop operation.
Frontier Airlines have been defined as one of the fastest growing airlines and recently it have also included some of the air-routes at affordable pricing rates. This way the demand for the affordable air travels can be recognised well and hence the economic growth of the area have also gets contributed properly. Through this the additional flexibility as well as the increased reliability can be gained automatically (mit, 2020). The Airlines is also having largest A320 neo fleet in US through which the highest noise level reduction and the efficiencies in the fuel can be well generated. The seating configurations is also developed in this Airlines which have made the airlines more fuel efficient and this way the customers have started to enjoy pleasant and reliable experiences of flying with the airline.
4.2 Virgin America
There are different offers that have been supported by the management of Virgin Atlantic airlines like Economy delight through which the airport services can be speeded up through the use of the Premium checks in the desks through which the priority boarding can be easily enjoyed. The first bids on the overhead storages needed to be received first before settling down the extra legroom seats. Again the Economy Delight provided from the end of the Virgin Atlantic America is defined as the speed where the Premium check in desks have been used and again comes the economy class where paying extra is not the big deal to get the adequate number of seats people actually wants (Michael, 2018).
Virgin Airlines through its entire journey have reinvented the air travel through the adequate incorporation of innovative features like mood-lit cabins, custom designed leather seats, fleet wide Wi-Fi and also certain power outlets and different entertainment options. The particular company have completely invested in industry best-in-class wards and this way , it have tried in making an innovative approach so that the energy efficiencies can be restored and along with that the fleet of the Virgin Atlantic can become more significantly fuel based and also efficient than that of the average US domestic carriers.
During its early years , the management of Virgin Atlantic have received adequate amount of support from US blue-chip investors well as the Virgin Group. It have also made a capitalisation of USD 1.2 billion which will ultimately benefit the initial investors. It was also termed as the low cost airline fleet of 57 A320s based on which 7 million passengers can be easily get covered on 20 destinations both in the US and Mexico each year (flyfrontier, 2019).
In terms of planning , the management of Virgin Atlantic have significantly increased its long haul route networking in both domestic as well as European routes to expand the airport. On the other hand , it have also decided to facilitate the competition in between the airlines through the proper allocation of the slots. It have also decided in enhancement of the connectivity to the international destinations which are currently unserved now. Again the route network planning of Virgin Atlantic have enabled government in meeting certain objectives and also bringing in new competitive aspects across domestic , European as well as global routes with the help of which the British passengers can be bale to benefit themselves from two flag carriers competing hard for their customs (Seth, 2020).
5.1 Aircraft Seating
The seating layout of passenger-carrying aircraft is vital to the performance and survival of a low-cost carrier. Using diagram 1 below, we can see that Frontier has opted out of having first or business class seating, doing so allows the Airbus A320 to carry up to 180 revenue-earning passengers. The removal of the premium classes means the airline has increased its available seat mile (ASM). If we compare the two airlines utilisation of the same aircraft via the images below, we can see that Virgin America has chosen to include a premium seating arrangement which has reduced the total number of available seats to 146, 34 less than its rival. Having fewer available seats influences other key performance indicators such as unit cost, revenue passenger mile (RPM) on maximum capacity flights, and also on a larger-scale the average network load factor.
Diagram 1- Aircraft Seating Layouts
5.2 Revenue Passenger Mile (RPM)
Revenue passenger mile refers to the number of miles flown by paying customers. The formula for calculating revenue passenger mile on any given flight is: RPM= occupied seats X distance travelled. From this formula, we can conclude that if distance remains constant, increasing the available seats in which could be filled will, in turn, increases our revenue passenger mile on a maximum capacity flight. Using this information, if Frontier and Virgin were to fly the same route using their respective aircraft configurations, Frontier would attract a higher total sum of revenue passenger mile and a higher sum of available seat miles, and in 2011 this was indeed the case. Frontier finished the year with a Sum of RPM =1.03E+10 miles, versus Virgin America coming in at a Sum of RPM= 8.024E+09 miles. (Reference 9.2 & 9.3 http://web.mit.edu/airlinedata)
5.3 Available Seat Mile
The ASM of an airline measures how many passenger travel miles are available at a given time. Available seat mile is the commonly used expression to demonstrate the capacity of the airline numerically. Similarly to Revenue seat mile
5.4 Average Network Load Factor
Frontier 2011 Sum of RPM=1.03E+10, Sum of ASM= 1.187E+10 (ANLF= 0.8677)
VA 2011 Sum of RPM= 8.024E+09, Sum of ASM= 9.853E+09 (ANLF= 0.8144)
Higher load factor values make the airline more profitable by spreading fixed-cost expenses across more passengers
5.5 Unit Cost
Higher available seats per flight lowers unit cost.
Virgin Airlines is defined as one of the long haul carrier flying from UK to US , Africa , Asia as well as Caribbean. It is having key bases in Heathrow as well as in Manchester with a fleet of 45 wide body aircraft. The management of Virgin Atlantic is also apart of the consortium which have been owned by Flybe having more than 60 narrow body aircraft and this way the management of the company have undertaken active interest in the development of the airlines routes and hence connected the propositions (flightradar24, 2020). The route of Virgin Atlantic to LA London operates on a daily basis. A new aircraft known as A350 have been developed in the route by replacing Boeing 789. This particular aircraft will operate in alternate days. The Airlines like Virgin Airlines have cut their flights and also ground other flights rather than operating the ghost flights. The latest routes of this particular airline have been provided below:
Source: https://www.virginatlanticcargo.com/gb/en/our-network/reduced-schedule.html
On the other hand , the fleet routes of Frontier Airlines involves Atlanta to Denver , Chicago to Las Vegas and Cincinnati to Lo Angeles and Denver to Chicago.. These are some of the important routes that have been covered by the management of the Frontier Airlines. The Frontier Airlines have recently announced 15 new routes an alongside also 13 domestic routes as well as International routes subject to certain government approval. The flight to San Juan will be around USD 29 and the rest routes will begin in March and will end in April 2020. It have also been found that the Airlines have also been planning for buying 50 new airbus A321XLRs (flyfrontier, 2019). The Airlines have been planned more regional routes and have announced in flying to Hawaii once it will receive Airbus A321XLFRs.
The management of the organization have also announced regarding 25 new non-stop routes and have planned in creation of new base so that the low cost services can be well celebrated. Therefore Frontier Airlines is considered as one of the low fare carrier airline which have already celebrateditself with the two destinations namely the Dominican Republic and the other is offering the faresvat the lower prices for SD 39. It have opened its lower service carrier with the additional flexibilities and hence the reliabilities have also been increased. This way the communities have felt proud in bringing the brand of Low Fares Done Right in front of the public so that they can be easily popular among the target aaudiences and also will lead to proper branding (mit, 2020).
To conclude the management of every airlines should provide adequate support to the passengers wth the help of which their demand as ell as the rabd recognition can be recognised easily. Along withthis , the prices also need to be competitive in the market where the low cost need to be provided well and at the same time the current business strategies also need to be fxed in an adequate manner
To be competitive in order to survive
To be low cost carrier
To estavblsuh new developed routes
To fix the market strategies properly
To take dertain decsions on the care for the passengers
To be aware of the other market competitors so that the revenues can be adequately maximised
References
David, S. (2018). Modular Approach for the Electrification of City Bus Fleets. ATZ worldwide, 28-33.
flightradar24. (2020). myFlightradar24 user reviews . Retrieved from myFlightradar24 user reviews : https://www.flightradar24.com/data/airlines/f9-fft
flyfrontier. (2019). Frontier Airlines Announces 25 New Routes, Including Service to Central America.
Hiroshi, Y. (2018). Verification of cosmic neutron doses in long-haul flights from Japan. Radiation Measurements, 6-11.
Ingmar, L. (2018). On Not Muddling Lunches and Flights. Science & Technology Studies, 52-74.
Michael, B. (2018). The History of Frontier Airlines. Retrieved from The History of Frontier Airlines: https://traveltips.usatoday.com/history-frontier-airlines-22009.html
mit. (2020). Frontier Airlines Aircraft Operating Statistics- Actuals.
Seth, M. (2020). Frontier Airlines pushes new route plan for CARES Act compliance. Retrieved from Frontier Airlines pushes new route plan for CARES Act compliance: https://paxex.aero/2020/04/frontier-airlines-pushes-new-route-plan-for-cares-act-compliance/
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