Competitive Strategy for Low Cost Airlines

Proceedings of the 13th Asia Pacific Management Conference, Melbourne, Australia, 2007, 431-436

Competitive Strategy for Low Cost Airlines

Hongwei Jiang

RMIT University, Australia

Abstract The aim of this paper is to identify challenge faced to Low-Cost Carriers (LCCs) or Low-Cost Airlines and provide new insights into the development and competitive strategy for LCCs. LCCs are still a relatively new phenomenon in Australia since Virgin Blue and Jetstar came to the market. There are over 30 LCCs have been launched since 2002 worldwide. In fact, LCCs have been very successful in the USA and Europe since 1990s. For example, in 1994 less than 3 million passengers flew on LCCs. In 1999, five years later, this figure had risen to about 17.5 million. Five years further on, in 2004, 100 million or so European passengers use LCCs. For example, Ryanair's passenger-Kilometres grew on average about 45 percent per annum from 1998 to 2003. The emergence and growth of no frills, low-cost carriers have radically altered the nature of competition within the industry. Those major low-cost carriers have exploited different operation methods to lower their cost and provide lower average fares. However, not all LCCs are profitable, only the market-leading operators are able to produce a consistent level returns above their cost of capital. With the disappearance of two major LCCs: Go (subsidiary of British Airways) and Buss (subsidiary of KLM Airlines) and others in the US (80%-85%) and Europe (60%) (Taneja, 2003), many issues have been identified for the failure of LCCs. The question at this point is what the future of LCCs and what competitive strategy could help LCCs to survive? Porter's Competitive Strategy Model and case studies will be used in this paper. The expected outcomes of this paper are to evaluate cost and market share issues for LCCs and find long-term sustainable strategies and solutions for LCCs.

Keywords: Low-Cost carriers; LCCs; Low-Cost airlines; Competitive strategy 1. Introduction One of the most striking features of aviation industry in the beginning of this century was the availability for consumers of a new concept of flying. LCCs open a totally new product: no frills, no food, no drinks, no spacious seats, no travel agencies bookings, but a very low price (Barbot, 2004). This "low-cost revolution" (Doganis, 2001) has then forced the traditional network full-services carriers to respond this phenomenon progressively. Therefore, the competition between LCCs and full-services carriers has become a significant issue of widespread interest regarding the airlines industry. The emergence and growth of no frills, low-cost carriers have radically altered the nature of competition within the industry. Those major LCCs have exploited different operation methods to lower their cost base and provide lower average fares. In terms of strategic positioning, in order to provide low-fares the LCC business model focuses on its distinct low cost strategy. However, not all LCCs carriers are profitable, only the market-leading operators are able to produce a consistent level returns above their cost of capital. This paper starts with introduction of Airline Business Models, followed by feathers and challenges of LCCs, Porter's strategic competitive model and case studies are used to analyse issues for LCCs and find long-term sustainable strategies and solutions for LCCs. Figure 1. Industry Environment Challenges

(Source: Boeing, 2005)

2. Airline Business Models Boeing Company described Airline business models as shown in the following diagram (Figure 1). As this paper aims to focus on the business model of LCCs, the origins and key features of LCCs business model are introduced in this section.

3. The Origins of LCCs The term "low-cost airline" is for the first time used in the United States in 1949. The first successful low-cost

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Proceedings of the 13th Asia Pacific Management Conference, Melbourne, Australia, 2007, 431-436

carrier was Pacific Southwest Airlines, which pioneered the concept. Often, this credit has been incorrectly given to Southwest Airlines, which began service in 1971, and is the only one airline to have been consistently profitable in every year of operations since 1973 (Grotte, 2005). Today, Southwest Airlines operates more than 3,100 daily flights to 62 cities across the United States, and registers yearly more than 80 million passengers. What began as a small Texas airline, Southwest now has grown to become one of the largest airlines in the United States1. European history of low-cost airlines is much younger, but those airlines are for sure trendsetters of the 1990s. The expansion of LCCs in Europe coincided with the final deregulation of the market during the 1990s. Genuine lowcost operations began in Great Britain in the 1990s with the Irish company Ryanair (founded in 1985 and started operating flights in 1986), which was patterned on American Southwest Airlines. Following Great Britain, LCCs have successfully developed on the Continent (Grotte, 2005). In the year 2005, there are 60 low-cost airlines operating in Europe2. Prior to 2002, there were no significant low cost scheduled carriers operating in the Asia Pacific rim. The initial slow development was in part due to the perception that the low cost model adopted in the United States and Europe could not be replicated in Asia, because of the longer aircraft stage lengths, lack of secondary airports and regulatory restrictions preventing access to international markets. The latter being particularly relevant given that the bulk of traffic and revenues are drawn from international markets in Asia. Thus, the low cost experience is a relatively new phenomenon in the Asia Pacific rim with much of the necessary management experience brought in from outside the region, for example, from Ryanair. Asian LCCs accordingly are in the initial growth phase of their development, while many of their American and European counterparts are approaching or have reached maturity (O'Connell and Williams, 2005). 4. The Key Features of LCCs Business Model According to the Statistics and Forecast (STATFOR) Service of Eurocontrol, there is no single best definition of low-cost carrier (Eurocontrol, 2006). However, it is general accepted that a low-cost airline, also known as nofrills or discount airline, is such carrier, which offers generally low fares but eliminate most traditional passenger services. The "low-cost carrier" business design could be defined by the following three key