Low-Cost Carriers in the European Airline Industry - Essay Example

Running Header: LOW COST AIRLINES Low Cost Airlines in APA Style by The proliferation of low cost carriers in the European airline industry is a living example of how the strategic directions of business organisations are strongly affected by the changes, trends, and developments and their external environment. Currently, it can be seen that traditional business class airlines are still in operation but budget airlines are in the limelight due to the strong patronage of customers. It can be seen that the European airline industry has evolved from being dominated by large, business class air carriers to one which is increasingly controlled by budget airlines. The wide popularity and acceptance of budget air travel which has significantly increased air traffic and gave a boost to the tourism industry has began putting pressure on large airlines to create their own low profile brand in order to regain their market shares. The emergence of budget airlines is directly attributed to the transformation of the global business environment. The major drivers which facilitated this trend are: the deregulation of the European air travel sector; the establishment of the European Union; the 9/11 tragedy; the rapid technological advancement; and change in customers' lifestyle and preferences. It is irrefutable that the deregulation of the European airline industry primarily contributed to the rise of low cost carriers. It can be recalled that deregulation has lowered the barrier to entry in the industry as well as enhanced the competitiveness of the players which are previously receiving subsidy from the government. This, in turn, largely contributes to the cost efficiency of airline operators allowing them to charge lower prices to passengers. The establishment of the European Union affects the airline industry has the same effect like the deregulation of the sector. This has opened up markets and lowered operating costs, encouraging the proliferation of low cost carriers (Sorensen 2006). The 9/11 tragedy which left terror worldwide has also helped in lowering the cost of air travel in order to fill up empty seats in the airline. This is coupled by the public's preference of budget airlines since they want to maximize the value of their money in response to the economic recession. Lastly, technological advancement has significantly enhanced company's efficiency. It can be recalled that the internet technology has lowered the airline's costs in terms of booking and servicing customers by eliminating travel agent costs. This has paved way for huge costs savings which cut down the cost of airline operations (Sorensen 2006). It can be seen that all of the aforementioned factors which paved the way for the emergence and wide acceptance for low cost air travel have altogether pushed the prices of airline operation down allowing the fast entry of prospective players and allowing industry participants to price more competitively. It can be seen that the business model employed by a typical budget airline is primarily affected by these changes in the external environment of companies. A low cost carrier which competes in the European airline industry typically a business model which offers only a single passenger class and a single type of airplane which is usually an Airbus320 or Boeing737 which allows the company to cut on training and servicing costs. Budget airlines also typically employ a very simple fare scheme which rewards early reservation by increasing the fare charged as the plane fills up. There is usually no reserved seating in order to allow customers to choose their own seats thereby encouraging early and quick boarding. In order to drive down operation costs, technological innovation particularly the internet is used in order to eliminate the huge commission usually passed on to travel agencies. Budget airlines also prefer flying on secondary and simplified routes as well as having relatively shorter flights and faster turnaround times. Budget airlines, unlike larger air companies usually skip in-flight catering and other complimentary services replacing this with optional paid-for-in-flight food and drinks (Low Cost Airlines 2006). In order to insulate themselves from future increases in oil prices, budget airlines often undertake aggressive fuel hedging, that is, "making advance purchases of fuel at a fixed price for future delivery" (Fuel Hedging 2006). Currently, the intensity of rivalry in the European airline industry is high as competitors aggressively battle for larger market share. Competition is further heightened by the emergence and proliferation of budget airlines which drastically and dramatically stole the shares of business class airlines. The intensity of rivalry is also intensified by the increasing knowledge of customers of the different players' products and services. The internet has given customers an easy access on the delivery of service and prices among competing airlines. This pressures airline companies to barge into more aggressive strategies in competition such as offering of added features to boost passenger's experience or lowering of air travel prices. In response to this higher competition, upscale air carriers have also created their lines of low cost air transport. Even though these full fare operators still stick to their traditional business models of catering to the more affluent customers, they are now devoting at least part of their operations to the low fare concept. It should be noted that this intense rivalry can be directly seen on how airlines like British Airways are promoting their new line of no-frills air travel in order to ward off further cannibalization of market share. In order to do this, large airline companies often capitalise on their size and economies of scale. Full-fare operators are matching the services offered by budget airlines often at much lower prices. This cutthroat pricing scheme is afforded by large carriers as they can easily pass on other costs in the low fare segment in their upscale market. Large airlines can easily subsidize their low cost segments at the expense of their other carriers. However, this practice clashes with the European Commission's regulation on air transport which prohibits the use of illegal subsidies which inhibits good competition in the marketplace. With the current performance of the low cost segment in the European air travel industry, the future prospects are irrefutably bright. The high acceptance and preference given by customers to low-cost and no-frills air travel is overwhelming. For full-fare operators, it has apparently become even disturbing. It is expected that demand for this type of services will be fueled by the customers' aim of maximizing their purchasing power. However, the success and even mere survival of low cost air carriers are strongly threatened by the aggressive responses of the full-fare operators. It is expected that there will be a cutthroat competition among the participants as they will try to capitalize on their expertise and efficiencies in order to win market shares. The opening up of the European airline industry as well as access to routes which were previously restricted only to flagship carriers due to the European Union integration lowers the barriers to entry and cost of operation. Thus, a key determinant in the survival of low cost operators is their ability to manage their costs and boosts their efficiency in order to support the low price that they charge (European Airlines Take a Round Trip Flight 2004). References European Airline Take a Round-trip Flight. 2004. Estrategia. Published 10, March 2004 Fuel Hedging. 2006. Wikipedia: The Free Encyclopedia. Retrieved 07 January 2007, from http://en.wikipedia.org/wiki/Fuel_hedging Low-cost Carrier. 2006. Wikipedia: The Free Encyclopedia. Retrieved 07 January 2007, from http://en.wikipedia.org/wiki/Low-cost_carrier Sorensen, Chris. 2006. Low cost airline flying high. Financial Post. Retrieved 07 January 2007 Read More