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Why Low Cost Airlines Performed Very Well

Introduction

In recent years, the legacy carriers (carriers established previous to the deregulation of the airline markets) grant a position to the recently formed ‘low-cost’ carriers. While the ‘low-cost’ carriers performed very well, the legacy carriers performed poorly; several carriers are on the edge of economic failure, while others had to go into alliance unions or joining to make certain their long-run survival (Pels, 2008). Low-cost carriers are recently formed carriers, with innovative strategies, while legacy carriers were recognized decades ago. The legacy carriers present ‘quality’, as they have completed for many years, and have the duty to serve up international markets which have not yet been deregulated, and face agreements with workers and contractors which are not simply changed. Setting up a low-cost branch is extremely hard for a legacy carrier, as it needs a new way of ideas. Low-cost carriers could barely make money on ticket sales but might make money on board from sales of snacks, and from the airports, they fly to and from.

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Since low-cost carriers were recognized after the U.S. and E.U. markets were deregulated, they could decide whichever markets they would like to serve within the USA or the E.U. Some low-cost airlines manage directions that start or end at the main airport but will only do so if it anticipates that the route will be beneficial. If it turns out to be unbeneficial, the low-cost carrier discontinues serving the market in question. The low-cost carrier catches the attention of travelers from the legacy carriers, therefore presenting rivalry and reducing cargo factors and incomes for the legacy carriers. Legacy carriers cannot simply pull out from a market, even if it is hardy gainful, because this affects the whole system. A legacy carrier’s connection between a hub airport and a spoke airport serves a lot of different (indirect) markets. If this course is stopped since the load factor reduces owing to competition on the market between the hub airports and spoke airport, travelers, and thus proceeds, in all other markets, using this connection are lost.

Legacy airlines

Legacy airlines do not only think about the direct incomes from a definite market but also the incomes from customers in markets served in some way using the same aircraft. If a legacy airline calls off all flights in, for example, a short-haul market since revenues are comparatively small, it loses all customers, and thus revenues, from customers in connecting markets using the same flights. Since these involving travelers no longer can fly on this airline, regular costs will be comparatively high on other relations in the system due to density economies. This means that legacy airlines cannot run off markets as simply as low-cost airlines (Mason, 2005).

The beginning of low-cost airlines

When low-cost airlines come out, they were initially seen as role carriers, proposing low fares to and from minor airports. Certainly, airlines such as Ryanair opened up innovative markets and attracted new travelers with a comparatively low willingness to pay. But low-cost airlines as well attract business travelers. Mason and Alamdari (2007) account that since 2000, the number of business travelers using business class tickets has turned down, and that is particularly in short-haul markets in Europe, business travelers turn out to be more responsive to prices and 71% of business travelers accounted to have used low-cost carriers for business trips in 2004/2005, compared to 28% in 1998/1999. Mason and Alamdari (2007) contribute this to lower fares and the increased number of destinations offered by low-cost carriers.

Income

Low-cost airlines, as a result, offer competition to legacy airlines on markets where earnings can be made, and capture an important share of business travelers. Business travelers are significant to legacy airlines since they are accountable for a moderately large part of incomes; their system with a ‘frills’ service is intended to contain such passengers (Williams, 2005). When legacy airlines lose such passengers to low-cost airlines, legacy airlines lose incomes and may be faced with higher standard costs due to density economies. The short-haul connections on which competition from low-cost airlines develop into more and more vital are, however, essential to provide for the intercontinental system of legacy airlines.

Seating density

The point of view that travelers do not agree to a moderately high seating density on long-haul flights may not be acceptable: charter airlines fly long-haul routes with a comparatively high seating density. But there are a small number of reasons that may make long-haul low-cost flights complicated. First, since seating density needs to be high to recover all costs, it may be essential that large aircraft are used (larger than the present aircraft used by low-cost airlines). If such aircraft (and flight crew) cannot be leased, the single aircraft plan is no longer possible, which leads to additional costs for training, etc. Next, not all airports can handle international flights, so that in some markets low-cost airlines will have to revert to costly and crowded primary airports. This means that expenses will once more be moderately high. But if secondary airports are accessible that can handle international flights, this may provide potential low-cost flights a competitive benefit over legacy flights using crowded centers. Lastly, a key feature of low-cost systems is a short turnaround time at airports, which allows for fairly high aircraft operation (Pels, 2008). Fast turnaround times are more complicated on long-haul flights due to the needed time for off-loading luggage and a large number of travelers, aircraft checking and clean-up, etc. Given the changing traveler choices and the stoppage experienced on some of the main centers, it, therefore, appears that there are several possibilities for low-cost long-haul flights if the needed airport capacity can be attained (Knorr & Arndt, 2005).

Conclusion

Legacy airlines use center-spoke systems and have small or no motivation to go into each other’s local markets because of the anticipated loss in proceeds due to retaliation and system effects. Low-cost carriers use ‘simple’ point-to-point networks, in which the network effect stemming from indirect travel is not present, that lets them enter any market they see fit. This makes low-cost airlines the main competitors on many short-haul routes. This does not mean that conventional airlines do not contend: in long-haul markets, competition may be extreme. Legacy airlines present ‘quality’, while low-cost airlines intend to keep costs as low as possible. Given the current accomplishment of low-cost airlines, it might come into view that the costly hub-spoke approach is getting obsolete. According to surveys by the Company Barclaycard, a comparatively large part of the business travelers (71%) used low-cost airlines for business trips. This is a sign that passenger preferences may be changing. Though, legacy airlines as well offer low-fare (limited) tickets on short-haul routes and use short-haul routes as feeders for the intercontinental markets where they make the majority of incomes, even though competition for indirect travelers is strong. The indirect travelers allow conventional airlines to uphold a large intercontinental network with comparatively high frequencies. Charter airlines showed that a low-cost plan is possible on long-haul flights. But charter airlines have the comfort of having tour operators filling their aircraft, and may leave at relatively inconvenient hours. A low-cost airline sells its tickets, and its flights need to be planned at such hours that there is sufficient demand, which means that they may work at relatively busy hours or need to find airports with sufficient facilities. Low-cost airlines require a new kind of aircraft to enter long-haul markets, which conflicts with their single airplane type plan. Turnaround times are longer, so aircraft usage will most likely not be as high on long-haul flights. So there are arguments against low-cost airlines entering long-haul markets. However, when low-cost airlines first appeared, there were also uncertainties about the possibility of the ideas. On short-haul routes, they have established themselves by selecting profitable routes and opening new markets.

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References

  1. Pels, Eric. (2008). Airline network competition: Full-service airlines, low-cost airlines and long-haul markets. Research in Transportation Economics 24 68–74
  2. Knorr, A., & Arndt, A. (2005). Most low-cost airlines fail: why did Southwest airlines prosper? In P. Forsyth, D. W. Gillen, O. G. Mayer, & H. M. Niemeier (Eds.), Competition versus predation in aviation markets Aldershot: Ashgate.
  3. Mason, K. J. (2005). Observations of fundamental changes in the demand for aviation services. Journal of Air Transport Management, 11(1), 19–25.
  4. Mason, K. J., & Alamdari, F. (2007). EU network carriers, low cost carriers and consumer behaviour: a Delphi study of future trends. Journal of Air Transport Management, 13(5), 299–310.
  5. Williams, G. (2001). Will Europe’s charter carriers be replaced by ‘no-frills’ scheduled airlines? Journal of Air Transport Management, 35, 14–25.

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