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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:
Simplicity in Network and Process
Growth in Revenue outstripping Growth in
Enthusiastic Workforce – lower salaries
City pairs that can sustain growth
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
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
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.
What Do they Have In Common
Primarily the belief that by
charging extremely low fares one can stimulate enough growth in a market to
Other common factors include:
lowest labour rates
homogeneous aircraft fleets
simple business processes
lean and mean workforces
informal management structures
employee ownership schemes
ruthless cost control and management
tough supplier negotiations
(x) smart revenue
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
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.
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
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.
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
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