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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 pas-
senger-Kilometres grew on average about 45 percent per annum from 1998 to 2003. The emergence and growth of no frills, low-cost car-
riers 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 2. Airline Business Models


One of the most striking features of aviation industry Boeing Company described Airline business models
in the beginning of this century was the availability for as shown in the following diagram (Figure 1). As this pa-
consumers of a new concept of flying. LCCs open a totally per aims to focus on the business model of LCCs, the ori-
new product: no frills, no food, no drinks, no spacious gins and key features of LCCs business model are intro-
seats, no travel agencies bookings, but a very low price duced in this section.
(Barbot, 2004). This “low-cost revolution” (Doganis, 2001)
has then forced the traditional network full-services carri-
ers to respond this phenomenon progressively. Therefore,
the competition between LCCs and full-services carriers
has become a significant issue of widespread interest re-
garding the airlines industry.
The emergence and growth of no frills, low-cost carri-
ers 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 fo-
cuses on its distinct low cost strategy. However, not all
LCCs carriers are profitable, only the market-leading op-
erators are able to produce a consistent level returns above
their cost of capital.
This paper starts with introduction of Airline Business Figure 1. Industry Environment Challenges
Models, followed by feathers and challenges of LCCs, (Source: Boeing, 2005)
Porter’s strategic competitive model and case studies are
used to analyse issues for LCCs and find long-term sus-
3. The Origins of LCCs
tainable strategies and solutions for 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 Simple Product: Catering on demand for extra pay-
the concept. Often, this credit has been incorrectly given to ment; planes with narrow seating (but bigger capacity) and
Southwest Airlines, which began service in 1971, and is only a single class; no seat assignment; and no frequent-
the only one airline to have been consistently profitable in flyer programmes.
every year of operations since 1973 (Grotte, 2005). Today,
Positioning. Non-business passengers, esp. leisure
Southwest Airlines operates more than 3,100 daily flights
traffic and price-conscious business passengers; short-haul
to 62 cities across the United States, and registers yearly
point-to-point traffic with high frequencies; aggressive
more than 80 million passengers. What began as a small
marketing; secondary airports; and competition with all
Texas airline, Southwest now has grown to become one of
transport carriers.
the largest airlines in the United States1.
Low Operating Costs. Low wages; low airport fees;
European history of low-cost airlines is much younger,
low costs for maintenance, cockpit training and standby
but those airlines are for sure trendsetters of the 1990s.
crews due to homogeneous fleet; high resource productiv-
The expansion of LCCs in Europe coincided with the final
ity: short ground waits due to simple boarding processes,
deregulation of the market during the 1990s. Genuine low-
no air freight, no hub services, short cleaning times; and
cost operations began in Great Britain in the 1990s with
high percentage of online sales.
the Irish company Ryanair (founded in 1985 and started
operating flights in 1986), which was patterned on Ameri-
can Southwest Airlines. Following Great Britain, LCCs
have successfully developed on the Continent (Grotte,
2005). In the year 2005, there are 60 low-cost airlines op-
erating 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 interna-
tional markets. The latter being particularly relevant given
that the bulk of traffic and revenues are drawn from inter-
national markets in Asia. Thus, the low cost experience is
a relatively new phenomenon in the Asia Pacific rim with
Figure 2. LCCs Business Design
much of the necessary management experience brought in (Source: MERCER Management Consulting, 2002)
from outside the region, for example, from Ryanair. Asian
LCCs accordingly are in the initial growth phase of their There are two LCCs models:
development, while many of their American and European
counterparts are approaching or have reached maturity 1. Independent Airlines (e.g. Southwest, Jetblue,
Ryanair, and Easyjet)
(O’Connell and Williams, 2005).
2. Subsidiary of a legacy airline (e.g. Go, Buzz, Jet-
4. The Key Features of LCCs Business Model star, Jetstar Asia, Valuair, and Tiger)
According to the Statistics and Forecast (STATFOR) In summary, the LCC model comprises:
Service of Eurocontrol, there is no single best definition of
• low fares;
low-cost carrier (Eurocontrol, 2006). However, it is gen-
• high frequency flights;
eral accepted that a low-cost airline, also known as no-
• point-to-point service;
frills or discount airline, is such carrier, which offers gen-
• no free meals or drinks on board;
erally low fares but eliminate most traditional passenger
• no seat pre-assignment;
services.
• short flights; and
The “low-cost carrier” business design could be de- • flights using secondary airports.
fined by the following three key elements (MERCER
Management Consulting, 2002, See Figure 2).

5. Challenge for LCCs


1
http://www.southwest.com/about_swa/airborne.html [Access on 22/08
2007]. In a climate of continual change and uncertainty, air-
2
http://www.etn.nl/lcosteur.htm [Access on 22/08/2007]. lines in the coming years will face critical problems and

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

serious challenges (Doganis, 2006). He identified four


main challenges for LCCs.
• The first major problem that the low-cost sector
had to face in the period after 2004 was the dra-
matic surge in new capacity which was creating
substantial overcapacity in the market. As men-
tioned earlier, There are over 30 LCCs have been
launched since 2002 worldwide.
• The second challenge being faced by low-cost
operators after 2004 was the continued decline in
yield or average fare. This was an inevitable con-
sequence of over-capacity on an increasing num-
ber of routes. But it was also due to the new pric-
ing policies of most of the conventional airlines
as they fought back to hold on to their market
share. Airlines such as British Airways intro-
duced some very low aggressive fares in 2003-4, Figure 3. Porter's Generic Strategies (Porter, 1980)
especially on routes or markets where they com-
peted with low-cost carriers. This forced the latter scope and strategic strength. Strategic scope is a demand-
to maintain lower fares than would otherwise side dimension and looks at the size and composition of
have been the case. Price competition became the market you intend to target. Strategic strength is a
most acute in markets where new-entrant low- supply-side dimension and looks at the strength or core
cost carriers tried to compete head-on with the es- competency of the firm. In particular he identified two
tablished low-cost operators such as Ryanair or competencies that he felt were most important: product
Easyjet. The result was that yields on the larger differentiation and product cost (Figure 3).
low-cost airlines declined steadily after 2000.
Ryanair's average fare per passenger dropped 7. Competitive Strategies for LCCs
from around €60 in that year to €46.50 in 2003, a In view of the above challenges, low-cost airlines must
decline of 22.5 per cent.
do three things to ensure their long-term survival.
• Controlling costs is the third problem area faced
• Firstly, Cost Leadership. LCCs must maintain a
by low-cost airlines. Rapid growth places an air-
sustainable low-cost advantage over their full-
line's management and organisation under strain,
service competitors. LCCs must ensure that their
and controlling costs becomes more difficult.
costs per passenger-km continue to be 50 per cent
• The fourth challenge, which also has cost impli- or more below those of full-service airlines and
cations, is whether and how low-cost carriers continuing to reduce their own costs too.
should develop their bask model. While increasing
competition between low-cost carriers will be cre- • Secondly, Differentiation Strategy. LCCs must
ating downward pressure on costs, such competi- focus on differentiation of their product, that
tion will also push airlines to try to differentiate mean they must also offer a product with some
their product. This may well mean higher costs. frills, which is very highly rated by passengers in
With so many players in the European low-cost terms of value for money. For examples Virgin
market and with aggressive pricing strategies by Blue in Australia and JetBlue in the USA. Virgin
conventional carriers, low fares may no longer be Blue was the first carrier outside North America
a sufficient differentiator. Low-cost operators will to introduce multi-channel real-time satellite TV
increasingly try to brand themselves and differen- to its flights called Live2Air. The strategies of
tiate their product as they have done in the United most LCCs are twofold to take on the legacy car-
States. riers and attract higher-yield passengers, and to
6. Porter’s Competitive Strategy Model add points of difference from other LCCs (Tho-
mas, 2005).
Porter (1980) has described a category scheme
consisting of three general types of strategies that are • Thirdly, Market Share and Market Segmenta-
commonly used by businesses. These three generic tion Strategy. LCCs must ensure that on most of
strategies are defined along two dimensions: strategic their routes they become the number one or num-
ber two carrier in terms of market share. This
dominance, combined with their low fares, gives
them a very powerful defensive position should

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

new competitors attempt to enter, while also en- Cost Cost item Levers for reducing costs
suring a strong cash-flow base on which to mount category
further expansion. Southwest's survival and suc- Aircraft • Ownership Structure • Anti-cyclical purchasing
cess is due in no small measure to its growth Ownership • Fleet Structure • Optimise owned / leased mix
strategy, which has focused on becoming domi- Costs • Aircraft Utilisation • Fleet harmonisation
nant in most of its markets. It is the largest carrier • Optimise mix of older and new aircraft
in over 90 of its top 100 markets (Doganis, 2006). • Reduce turnaround times
Cost Leadership • Reduce maintenance downtime
Fuel Costs • Route Efficiency • Shorter en-route and approach times
As mentioned earlier, the chief difference between low • Purchasing Costs • Reduce delays, use smaller airports
cost carriers and traditional airlines fall into three groups: • Weight Reduction • Reduction in service fees
service savings, operational savings and overhead savings. • Use of fuel hedging strategy
Low cost airlines tend to focus on short haul route. To • Calculation of “no show” passengers
achieve the low operating costs per passenger, this type of • Through product innovation e.g. seats
carriers need to have as many seats on board its aircraft as Maintenance • Fleet • Fleet harmonisation
possible, to fill them as much as possible, and to fly the Costs • Service Costs • Reduce average fleet age
aircraft as often as possible. Low cost carriers will affect • Optimise maintenance activities
the traditional airline hub-and-spoke networks poses inter- • Joint purchasing of some work
esting questions for the airlines industry and policy mak- Crew Costs • Productivity • Improved planning of crew logistics
ers3. • Wage-related Costs • Lower block hour restrictions
Low cost positioning means choosing to perform a • Crew Costs • Fewer and/or less senior cabin crew
system of activities differently from that of traditional ri- • Reduction of extra-wage allowances
vals and providing a coherent set of key activities that re- • Reduce need for overnight stays
inforce each other to achieve such position in a sustainable • Reduce allowances for overnight stays
manner (Porter, 1996). Handling • Service Level • Standardisation of SLAs (Service Level
Costs • Insourcing Agreements)
Despite the challenges faced, the low-cost model appears • Reduce Handling • Revise SLA components
to be sustainable in Europe as it has been in the United Fees • Pre-cleaning activities by cabin crew
States and elsewhere. It has a different and substantially • Loading/unloading support from crew
lower cost structure than the conventional network model, • Global contracts with key suppliers
because the latter imposes higher costs on those who oper- • Off-peak pricing
ate network systems. While network airlines can reduce Catering • Reduce unit costs • Simplification of meal choice
their unit costs further, they cannot match those of the Costs • Reduce volumes • Reduce logistics costs for delivery
low-cost airlines on short-haul routes. The charter airlines • Monitor passengers vs. available meals
will compete for a part of their own traditional markets • Improve waste management
with low-cost carriers, but will increasingly generate most
of their business from the denser, short-haul, inclusive-
Distribution • Ticketing • Development of E-ticketing
tour markets and from long-haul routes. Within Europe, in
• Sales Channels • Self-service check-ins
North America and in time most major regions, low-cost
• Sales Commissions • Divert customers to on-line channels
airlines will become the dominant carriers in domestic and
• Efficient customer service call centre
short-haul markets. They are not a passing phase. They are
• Target-driven contracts with agents
here to stay and they will dominate most of the markets
• Reduce commissions
they enter. Table 1 lists typical LCC levers for reducing
unit costs.
JetBlue Airways is a major American low-cost airline
Differentiation Strategy -Case Study (JetBlue Airways)
owned by JetBlue Airways Corporation
(NASDAQ: JBLU). The company is headquartered in the JetBlue Airways was one of only a few U.S. airlines
Forest Hills neighborhood of the borough of Queens in that made a profit during the sharp downturn in airline
New York City. Its home airport is John F. Kennedy travel following the September 11, 2001 attacks.
International Airport. JetBlue is a non-union airline.
JetBlue adopted different strategy with its counterpart
Table 1. Typical LCC Levers for Reducing Unit Costs Southwest Airlines, JetBlue is offering some service based
(Source: Airline Cost Performance) on “true value of money”. In 2002, JetBlue acquired
LiveTV, LLC for $41 million in cash and the retirement of
3 $39 million of LiveTV debt. LiveTV equips JetBlue with
The impact of low cost carriers in Europe, Feb, 2003.
36 channels of live DirecTV satellite TV programming at

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

every seat. Two years later, JetBlue announced it would • Internet booking
add 100 channels of XM Satellite Radio, Fox TV • Reservations and sales offices
programs and 20th Century Fox movies to its in-flight • Authorised travel agents
entertainment. The movies are free on flights outside of • Improving customer service
the US mainland (as DirecTV service is not available), and Safety first
are available for a small fee on other flights4.
AirAsia’s cost optimisation philosophy is in no way at
Market Share and Market Segmentation Strategy the expense of the airline’s safety. The airline’s fleet of 30
Boeing 737-300 fully complies with the conditions of the
Case Study-Air Asia
International Aviation Safety and are regulated by the in-
AirAsia is a low-cost airline based in Kuala Lumpur, ternationally reputed Malaysian Department of Civil Avia-
Malaysia. It operates scheduled domestic and international tion. In July 2002, AirAsia signed a US$20 million agree-
flights and is Asia's leading low fare, no frills airline. It is ment with GE Engineering Services for engine mainte-
also the first airline in the region to implement fully ticket- nance and later in the month, a US$3million aircraft en-
less travel and unassigned seats. With the Philosophy gine and aircraft frame parts leasing agreement with Vol-
'Now everyone can fly', AirAsia’s philosophy of low fares voAero. AirAsia also signed a US$7 million agreement
is aimed to make flying affordable for everyone. AirAsia with ST Aero, covering the airline’s engineering compo-
also aims at making travel easy, convenient and fun for its nents support for seven years.
guests. Its promotion airfare started from 1 Malaysian
Cost optimization operations
Ringgit (A$0.34). Most of their prices are cheaper than
bus and train. They compete with road transportation AirAsia strives to maximize profit and provide low
Market Segmentation not just legend airline’s market. fares at quality service. The airline has optimised costs by
operating a faster turnaround time, improving aircraft
AirAsia’s operations are based on the following key
utilization and crew efficiency, providing a 'no frills' ser-
strategies5:
vice, using one type of aircraft to save training costs, all of
Low fare, no frills which result in savings which are passed back to consum-
ers in the form of low fares.
AirAsia’s fares are significantly lower than those of
other operators. This service targets the guests who will do 7. SWOT Analysis of LCCs
without the frills of meals, frequent flyer miles or airport
SWOT Analysis is a tool to figure out those internal
lounges in exchange for fares up to 80% lower than those
factors such as strengths and weakness and external oppor-
currently offered with equivalent convenience. No com-
tunities and threats to objectives. The following table lists
plimentary drinks or meals are offered. Instead, AirAsia
respective area from selected Low cost carriers as follow-
recently introduced 'Snack Attack', a range of delicious
ings:
snacks and drinks available on board at very affordable
prices and prepared exclusively for AirAsia’s guests.
Guests now have the choice of purchasing food and drinks Strengths Weakness
on board. y Low cost operations y Service resource is limited
y Fewer management level by lower costs
Frequent flights could do effective, fo- y Limit human recourse could
cused and aggressive not handle irregular situa-
AirAsia’s high frequency service ensures guest con- management tion
y Simple proven business y Exposed to regulatory inter-
venience is met. The airline practices a quick turnaround model that consistently ference on airport deals and
of 25 minutes, which is the fastest in the region, resulting delivers the lowest fares passenger compensation
in high aircraft utilization, lower costs and greater airline in the industry y Government interference
y Penetrate & stimulate to and subsides have under-
and staff productivity. potential market mined industry profitability
y Multi-skilled staffs means on a structural basis and de-
Guest Convenience efficient and incentives layed the much-needed con-
workforce solidation of the industry.
AirAsia believes in providing convenient service to
y Single minded focus on y Non-Central location of
make traveling easier and more affordable for its guests. cost reduction positions secondary airports
Guests can make bookings through a combination of the the Group as industry’s y Brand is vital for market
following: lowest cost producer position and developing it is
y Strong balance sheet and always a challenge
• Nationwide call centre strong cash generation y Heavy reliance on outsourc-
gives it resources to ing leaves it exposed to 3rd
• Ticketless service weather short-term diffi- party delivery
• Easy payment channels culties y Market remains hugely
y Single type fleet minimize price sensitive, as service
4 maintenance fee and easy has become commoditized
http://en.wikipedia.org/wiki/Jetblue [Assess date: 22/08/2007] for pilots dispatch and open to new entrants
5
http://www.airasia.com/site/my/en/home.jsp [Assess date: 22/08/2007]

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

y Point to point model is y Lack of contingency plan Doganis, R. 2006. The Airline Business, Routledge, Oxon.
lower unit cost and uplifts Grotte, P. D., 2005. The success story of European LCCs in a changing
aircrafts utilization
y Distinctive corporate airworld, GaWC Research Bulletin No. 174.
culture MERCER Management Consulting, 2002. Impact of Low Cost Airlines –
Opportunities Threats Summary of Mercer Study.
O’Connell J. F. and Williams G., 2005. Passengers’ perceptions of low
y Long haul flight is an trial y Legacy airlines start cut
to get undeveloped market costs to compete with those cost airlines and full service carriers: a case study involving Ryanair,
share LCCs Aer Lingus, AirAsia and Malaysia Airlines, Journal of Air Transport
y Differentiation from old y Entrance of other LCCs Management, 11, 259-272.
LCC models by adding y Some major airlines have
customer service or opera- attempted to reposition Porter, M. E. 1980. Competitive Strategy: Techniques for Analyzing
tion as full service airline themselves as low cost car- Industries and Competitors. New York, Free Press.
with low fare riers with varying degrees of Porter, M. E. 1996. What is strategy? Harvard Business Review, Novem-
y Ongoing industry consoli- success
ber–December, 61-78
dation has opened up y High fuel price decreases
prospects for new routes yield Taneja, N, K. 2003. Airline survival kit: breaking out of the zero profit
and airport deals y A serious accident could game. Ashgate.
y Different industry mutual undermine confidence in
Thomas, G. 2005. To Frill or Not to Frill. Air Transport World, Octo-
cooperation provide re- low cost carriers
lated service and uplift ex- y As subsidiary of legacy ber, 34.
tra sales profits airline could be risky due to http://www.airasia.com [Assess date: 22/08/2007]
y Demand is price driven ambiguous market http://en.wikipedia.org/wiki/Jetblue [Assess date: 22/08/2007]
and should grow irrespec- y Heavily reliance on the
tive of economic cycles internet as sales channel ex- http://www.southwest.com/about_swa/airborne.html [As-
y Dominant/monopoly poses them to risks associ- sess date: 22/08/2007]
position in many routes ated with system disruption http://www.etn.nl/lcosteur.htm [Assess date: 22/08/2007]
will offer some pricing y Environmental taxes could
power (albeit seasonal) disrupt the cost equation
y High fuel prices will y Accident, terrorist attack
squeeze out unprofitable and disaster
competitors y Aviation regulation and
government policy
y From no frills to limit frills
will increase operation cost

8. Conclusion
The low-cost airline revolution has injected a dose of
democracy into the travel world - but can it last? The
price of a return flight ticket can be cheaper even than a
train. It seems too good to be true in the past, but the
cracks are showing in the budget aviation world really.
Low-cost airlines have succeeded in taking over a large
part of the market.
With targeted markets and networks, low-cost carriers
nearly halve turnaround times, increase aircraft utilisation,
reduce congestion, and significantly improve their produc-
tivity; and still are in compliance with safety regulations.
Moreover, low-cost carriers get ready to take off more
quickly; enabling them as competitive airlines to schedule
more flights and provide more attractive schedules for
passengers.

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