Effects of Low-Cost Airlines on the Development of the Aviation Industry - Research Paper Example

?Introduction The current climate in the aviation industry is nothing short of difficult. However, one sector in this industry seems to be and has been performing exceptionally well i.e. the Low Cost Carriers. These carriers in contrast to flag carriers are experiencing increased passenger capacities as well as profits. As a result they are expanding as the others cut back on routes, reduce their workforce and other measures to cut on cost so as to break even. It is now more evident than ever that the low cost/no frills carriers are dominating the aviation industry in many regions notably Europe and United States due to their low fares and point-to-point route strategies. The seemingly bright future of these carriers poses interesting questions in regards to what effect they have and will have on the whole aviation industry. America’s Southwest Airlines and Europe’s Ryanair both offer the best examples of low cost carriers that have transformed the airline industry in the regions they operate. This paper will analyse the effects that the low cost airlines have on the development of the aviation industry. The Southwest Effect Short Background In the American aviation industry Southwest is the fastest growing airline having been established back in 1971 with just 3 aircrafts. Today is has about 540 aircrafts (all of which are Boeing 737s) which form the most modern flee in the world. This airline has an unbeaten profit record in the American industry of 17 consecutive years when considering all the quarters of every financial year till 2008 first quarterly report (Southwest 2011). Southwest also boasts of a customer base of more than 85 million per year which is more than that of Delta, American and United airlines. It is notably in the high-end competition due to its low fares, quality of customer service and on-time arrivals. Its major and direct competitors are JetBlue, Air Trans and others like Delta. Due to its low cost model of operations the airline spends 50 to 70 percent less than the major carriers in the same market (Stevenson 2008). This hugely explains the low fares, high quality of service, huge fleet of modern aircrafts and long profitability streak. In essence the Southwest Effect is described using three principles. These principles translate to the major impacts that low cost airlines have on the industry. The first is that with the presence of Southwest Airlines in a market, passenger numbers will increase. This is dictated by the fact that the airline brings in competition especially in ticket prices thereby attracting more customers. The second is that competing airports to those that Southwest operates in witness a decrease in passenger traffic (Nigel, David & George 2003). The third is that Southwest brings in more competition in a market or route which forces competing airlines to lower their fares in order to remain competitive in their segment. On many occasions when an airline starts serving a new route it begins by offering low fares to attract customers. After some time these airlines adjust their fares upwards to level up with competitors’. However, this is not the case with Southwest Airlines which starts by offering low fares and maintains them as such (Doring 2009). This is a major pricing behaviour depicted by Southwest in comparison with its airlines. When Southwest enters a new route it not only results in lower fares from competitors but also increased Passenger per Day Each Way (PDEW). The following graph shows how fares generally decreased as passenger traffic increased between some of the most active years in the American airline industry; Fares and passenger traffic (Robinson, 2009) The graph below shows the percentage of change in the market that Southwest operates which shows that almost all reduced their fares for both leisure and business travels. Percentage of change in the market that Southwest operates (Robinson, 2009) Deregulation The airline industry in the United States received a complete turnaround soon after the low cost airlines started emerging. Southwest airlines wanted to expand by flying inter-state from its Texas local market. However, there were regulations hindering such flights and the airline thereafter faced a stiff battler even at Congress level where bigger airlines used their political influence to block any attempts to endorse such a move (Harvey 2007). The basic reason for this was that they had seen how Southwest had captured the local Texas market and feared if allowed to fly further into their markets, it was to take a huge market share. However, an agreement termed as the Love Field Compromise was reached upon allowing Southwest to engage in inter-state flights on short haul point-to-point basis. This opened up avenues for more reforms and at the end the American airline industry was fully deregulated (Cento 2008). This move was taken up by Congress in order to improve competition and limit barriers of entry. It is also important to note that such deregulation was employed in all other sectors like energy, telecommunications and banking among others. However, one of the major reasons for deregulation was overturned when many airlines went bankrupt and others withdrew with some merging particularly between 1983 and 1988. Deregulation also reduced the average air fares for customers and reduced profits for the carriers. In Europe the scenario is pretty much the same with only different variables playing part like that of deregulation where the EU played a huge role. Deregulation was in three packages starting from 1987 where new rules emerged with abolition of old ones which culminated to a full deregulation in 1993 (Carol & Julian 2000). Deregulation in Europe created numerous opportunities for airlines to travel to any destination of their choice in all EU member states as long as they fulfilled all special requirements with individual airports. The following diagrams show the opportunities created in major European cities and the developments of the low cost carriers over time. European cities and low cost carriers (Miriam 2010) Low cost routes (Miriam 2010) Ryanair is the first airline in Europe to take up the full low cost strategy. It was established in 1985 with a single aircraft with a capacity of 15 passengers (Ryanair 2011). Last year the airline had a passenger capacity of 73 million from over 25 countries in Europe (Miriam 2010). Its direct competitor EasyJet is also a high potential airline although it has certain differences in strategy and future projections as depicted by the following chart of planned development of aircraft fleets. Planned development of aircraft fleets (Miriam 2010) Ryanair alone flies to over 160 destinations in the continental Europe and it is increasing them year after year. These low cost carriers have made London airports their nursery especially Stansted, Luton and Gatwick (Stefanie 2007). Flag carriers in Europe have faced huge competition in respect to fares, quality of service to customers and luggage handling efficiency (Fojt 2006). These are attributes which the low cost carriers have mastered notably Ryanair which is the leading carrier at the moment. The low cost effect just like the Southwest Effect has crept into the European market as well. Due to the increases number of flights and seats from Ryanair and its direct competitors in the low cost category, some flag carriers have faced a stagnated growth while others a contracted one. British Airways and Lufthansa have particularly lost home markets to these airlines thereby losing on their importance to offer services in the same routes as those offered by low cost carriers (Charles and Gareth 2009). Since most flag carriers are long-haul they have in turn concentrated on their large networks after failing to capture the LCC markets by establishing subsidiaries. British Airways for example, established Go as a subsidiary so as to expand its market share and effectively compete with Ryanair and EasyJet but without success and it was later bought by EasyJet. Additional Revenue Sources With increased competition and need to ensure sustained growth and market leadership many low cost airlines have forced their competitors to seek alternative sources of revenue. Ryanair for example has a whole package of ancillary services which have increasingly added to its revenue bucket actually at 16 percent of the total revenue (Barnhart, Belobaba, and Odoni 2009). Some of these services include car hire, accommodation and travel insurance among others. On seeing this, competitors started their own. The following caption shows circled ancillary services that Ryanair offers; Ryanair ancillary services (Ryanair 2011) Conclusion The rise in the low cost carriers has had benefits as well as drawbacks that have affected the landscape of today’s airline industry. Low cost carriers have led to increased competition in respect to destination coverage, frequency of flights, fares diversity and quality of service. Flag carriers and network airlines have been forced to make adjustments to their competitive strategies in order to cope. It is unfortunate for them that low cost carriers are increasing their market share year after year as well as profitability. In the course of competitors revising their cost structures they have generated lower profits and in other cases increased their operational costs due to their high-end services to customers. It is however important to question whether the continued monopoly of routes by these low cost carriers will lead to impossible competition in future and what strategies will competing network and flag carriers put in place to compete effectively in future. Answers to this can only remain to be answered by the future occurrences in the airline industry and particularly the development in the low cost sector. References Barnhart, C, Belobaba, P and Odoni, A 2009, The global airline industry, John Wiley and Sons. Carol, HA & Julian, WV 2000, Strategic marketing management: Meeting the global marketing challenge, Houghton Mifflin. pp. 232 – 261. Charles, H and Gareth, J 2009, Strategic management theory: An integrated approach, Cengage Learning. Cento, A 2008, The airline industry: Challenges in the 21st century, Springer. Doring, D. 2009, The “No Frills” Strategy of Low-Cost Carriers: And their impact on the regional economical importance of Frankfurt Hahn Airport, GRIN Verlag. Fojt, M 2006, The airline industry, Emerald Group Publishing. Harvey, G 2007, Management in the airline industry, Routledge. Miriam, M 2010, An analysis of Ryanair’s corporate strategy, GRIN Verlag. Nigel, E, David, C & George, S 2003, Strategic management for travel and tourism, Butterworth-Heinemann. Robinson, P 2009, Operations management in the travel industry, CABI. Ryanair 2011, History of Ryanair, viewed 16 Apr 2010 . Shaw, S 2007, Airline marketing and management, Ashgate Publishing, Ltd. Southwest 2011, Fact sheet, viewed 16 Apr 2010, . Stefanie, H 2007, The low-cost airline Ryanair: A critical evaluation of the Ryanair phenomenon and its future prospects with taking the European airline industry into consideration, GRIN Verlag. Stevenson, WJ 2008, Operations management, 10th edn, McGraw-Hill Irwin. Read More