Airline Services

An example of a brief position paper:

Low Cost Airline Business Models

The so-called low cost airline business model has at its foundation the following key attributes:

Ø       Simplicity in Network and Process

Ø       Growth in Revenue outstripping Growth in Costs

Ø       Enthusiastic Workforce – lower salaries

Ø       City pairs that can sustain growth 

2         History 

Airlines come and go, literally. In the low-cost arena though, there are a few landmark companies who have helped to define the low-cost paradigm. 

1971 Even before US deregulation, Southwest had commenced operation as a small local-service carrier with a different way of doing business. Without any formal statements of vision and mission, Southwest set out to be different in every way. It established itself in markets by charging low fares and offering good frequency. In addition, Southwest did all it could to make flying fun for both customers and staff. 

1977 Laker Airways set out to break the price fixing on the lucrative North Atlantic route. By following a low-cost strategy and by using simple distribution methods, Laker was able to undercut the legacy airline fares by as much as 100%. The airline did not survive, however. 

1994 Ryanair had initially been formed as a “regular” airline offering service from its base in Ireland. But a visit to Texas by the new Chief Executive in the early 1990’s set Ryanair on a new path – become the “Southwest” of Europe. 

1995 A Greek shipping millionaire who wanted to try something different is largely responsible for what is now one of the world’s largest airlines, easyJet. Born and based in Luton, traditionally a charter holiday launching point, easyJet still operates from PortaCabins adjoining the main apron. 

3         What Do they Have In Common

  Primarily the belief that by charging extremely low fares one can stimulate enough growth in a market to sustain it. 

Other common factors include:

(i)                 point-to-point service

(ii)               lowest labour rates

(iii)              homogeneous aircraft fleets

(iv)             simple business processes

(v)              lean and mean workforces

(vi)             informal management structures

(vii)           employee ownership schemes

(viii)          ruthless cost control and management

(ix)             tough supplier negotiations

(x)    smart revenue management 

4         Sustainability

Southwest has a long history of sustained profitability in a market littered with the corpses of airlines. However, in 2004, even Southwest had to go to the labour force to extract special concessions to help it keep a clean record. USA airline trading conditions have never been worse, and the current fuel price crisis is doing nothing to help. 

Ryanair and easyJet are traditional rivals, but only recently has real competition emerged between these two market leaders, and with other new entrants. It seems that the low-cost model is very successful when pitted against legacy rivals, but that once two or more low-cost carriers face each other head-to-head, then the familiar airline competition model kicks in, with each competitor chasing market share and losing yield. 

Essential to success is steady revenue (network) growth. It appears that some of the margin in the low-cost model arises from the lag between revenue growth and cost growth. One could hypothesise that in a constantly growing business there is a built-in time lag between volume(revenue) and cost growth, and as long as a firm can ride the crest of the revenue wave, profit margin will exist. The time lag can be attributed to the delay in putting in place all the management mechanisms needed, and the associated co-ordination costs that go with them.

The gap between "legacy" carriers and "low-cost" carriers is continuously shrinking. On a given day and city-pair, the low-cost carrier may be offering higher fares than legacy carriers. In addition, the legacy carriers are also aggressively driving costs down, and achieving load factors comparable to the low-cost carriers.

In South Africa, the CEO of kulula has suggested that the low-cost model will no longer work in Africa, possibly due to the high level of regulation and low volumes. 

5         Primary and Secondary Airports

Ryanair differs from most of the others in that it chooses to fly to secondary airports. The rationale for this strategy is to keep airport handling and associated costs as low as possible. There must, however, be an associated yield penalty for the inconvenience that customers face in having to travel large distances to their actual final destination, which is sometimes even in a different country to that advertised! In leisure markets the disadvantage may be minimal. 

Southwest received its first major breakthrough when it chose to serve downtown Dallas instead of using the huge Dalls-Fort Worth gateway airport. The journey time was a key differentiator for Southwest business customers. Although Dallas downtown was a secondary airport, it was in fact closer to the destination than the new primary airport.

We do not regard the airport strategy as a make-or-break issue, or major differentiator. Of course the customer may be best served by the creation of low-cost terminals at existing high-cost airports. There may be further examples where a small downtown airport encourages more travel. 

6         References

Calder,Simon. No Frills. Virgin Books. London, 2003. ISBN 0 7535 0770 6.

Cassani, Barbara. Go. Time Warner Books. London, 2003. ISBN 0 316 72662 1.

Freiberg, Kevin & Freiberg, Jackie. Nuts. Broadway Books, New York. ISBN 0 7679 0184 3