How Has History Played a Part Being a Gap between Full-service Airline and Low-Cost Carrier - Essay Example

Full-Service Airlines versus Low-Cost Carriers Name: Course: Tutor: Date: Introduction The aviation industry has changed tremendously since the post World War II period. This is in line with a dictum in the industry that “the only thing that is constant in aviation is change” (Pleul 2008). Unlike the situation in the past when air travel was dominated by relatively expensive full-service carriers, liberalization of the air travel market caused an entry of low-cost airlines into the industry with a boom. But the entry of such airlines in countries such as the United States and many others in Europe was not easy as they met stiff competition from the well established and already popular full-service carriers (Chowdhury 2007). In spite of the competition, further deregulation of the market in countries such as the United States caused entry of more airlines into the aviation industry, operating as low-cost carriers. It is now evident that low-cost carriers have captured and command a large market share unlike the situation in the past. For instance, Southwest Airline is the prime domestic airline in the United States and also ranks as the world’s biggest and most profitable airline providing services at low cost. The situation is much alike in Europe where over 14 percent of serviceable seat miles are low-cost carriers, of which two giant operators- Ryanair and easyJet account for about 9 percent (O’Connell & Williams 2005). This paper will evaluate how history has played a part in creating a gap between the two types of air transport providers. This will include a discussion of the operations of full-service airlines and low-cost carriers. The next section in will entail a discussion on low-cost carriers, including an appraisal of their services. Finally the paper will seek to elaborate whether it is possible integrate the services of the two kinds of air service providers by creating a full service low cost carrier in the future. History of full-service airlines and low-cost carriers The world aviation industry has witnessed a significant change in the past twenty to thirty years, and the change still persists. About twenty or so years ago, the air travel industry in Europe was dominated by a few state-owned airlines with famous names such as Air France, British Airways, and Lufthansa- which operated as full-service carriers. Travelling using these airlines would cost a fortune, which as Pleul (2008) notes, “a flight between any two capital cities in Europe would take an average worker’s one week’s salary”. The airlines’ expensive nature was caused by the services provided to travellers right from the time of booking a flight through the entire journey. But the entry of low-cost carriers meant that a significant cost reduction was done by cutting down on some services. Full service airlines operated under no major competition in the United States until 1978 when the market was deregulated to allow entry of low-cost carriers. In the same magnitude, Ireland and the United Kingdom allowed the entry of low-cost carriers into their skies in 1986. In other European countries, market liberalization was done between 1993 and 1997 (Graham, Papatheodorou & Forsyth 2008). This means that low-cost carriers are still a new phenomenon in many countries. The economic impact of the low-cost carrier was based on the fact that it favoured consumer opposition to exorbitant costs involved in air travel and the generally high operating costs of the non-competing full-service airlines. The services offered by low-cost carriers are generally much simpler and less costly to produce, which significantly lowers their cost on the side of the consumer. The entry of low-cost carriers into air travel therefore meant that travelling costs were significantly reduced with a rise in the airlines’ popularity. The trend seems to be increasing more and more as countries are liberalizing their air travel markets to allow competition among players (Graham, Papatheodorou & Forsyth 2008). According to Graham, Papatheodorou and Forsyth (2008), air travel fares have significantly dropped due to the strategies used by low-cost carriers such as Ryanair, easyJet and Southwest Airline. The strategies involved include an enhancement of staff productivity, implying that fewer staff can perform tasks that would traditionally be done by a significantly larger number of staff. In addition, most low-cost carriers outsource their services, which significantly lowers their operating costs. Variations in products and services offered by full-service and low-cost carriers As mentioned above, the gap between full-service airlines and low-cost carriers can be attributed to how the two kinds of airlines have historically handled their products. The cheaper product range offered by low-cost carriers has rendered some of the initially famous full-service carriers such as Sabena Airline and Swiss Air almost redundant as they struggle to cope with the stiff competition (Pleul 2008). Key features of service difference between full-service and low-cost carriers are highlighted in table 1. Table 1: Key features of services offered by full-service carriers and low-cost carriers Product features Full-service carrier Low-cost carrier Fares Complex fare structure Simplified fare structure Brand Brand extended to fare and service One brand: generally low fare Distribution Online, travel agent and direct booking Direct and online booking Airports Primary Secondary (mostly) Check-in Ticketless, operated under IATA ticket contract Ticketless Connections Interlining, global alliances, code share Point-to-point Class segmentation Two class (seating capacity diluted ) One class (treated as high density) In-flight Complementary extras such as hot meals availed Passengers pay for extra amenities Turnaround time Low turnaround: congestion/labour Mostly 25-minute turnarounds Aircraft utilization Medium to high: union contracts Very high Product Multiple products incorporated One product: target on low fare Aircraft Multiple types: scheduling complexities Single type: commonality Seating Generous pitch, offers seat assignment Small pitch, no assignment Customer service Full service to passengers, offers reliability Limited passenger service Operational activities Extension services e.g., maintenance, cargo Main focus on flying Ancillary revenue Advertising, on-board sales Focus on the primary product Source: Adapted from O’Connell and Williams (2005), Chowdhury (2007) and Holloway (2008) As it can be noted from table 1, the gap between full-service airlines and low-cost carriers was created because the low-cost carriers came up with strategies that targeted diverse customers as opposed to the full-service airlines, which as it can be noted, targeted the affluent. For instance, while full-service airlines provide expensive meals whose costs are included in the air tickets, low-cost carriers provide an opportunity for passengers to buy snacks of their choice, commensurate with their financial ability. In addition, many full-service airlines use the services of travel agencies in passenger booking as opposed to low-cost carriers which strictly prefer direct and online booking. The use of travel agents in booking can be likened to traditional marketing which significantly raises the cost of the final products, as opposed to network marketing in which the service or product provider reaches the consumer directly without having to involve agents (as is the case of low-cost carriers). The gap between full-service airlines and low-cost carriers has further been increased by economic assumptions in that consumers want an activity that satisfies them at a lower cost. This is fundamentally what low-cost carriers have done: they have capitalized on the weak areas of full-service airlines which amplified the cost of their services. Low-cost carriers have historically ensured that all their activities satisfy the consumer. This is why Graham, Papatheodorou and Forsyth (2008), note that consumers will continue to buy low-cost airline tickets. In fact, consumers have responded to the opportunities offered by low-cost carriers by increasing the number of trips they make between different destinations, much to the benefit of the carriers (Graham, Papatheodorou & Forsyth 2008). Is there a true low-cost carrier? It is difficult to answer this question by simply looking at the air fares offered by low-cost carriers. This is because although a gap has traditionally exists between low-cost carriers and full-service airlines, it seems to be decreasing by the day due to changes in which airlines are constantly shifting their strategies and borrowing the attributes of each other in order to survive in the now highly competitive industry. To illustrate the above point, most full-service airlines in North America have eliminated the conventional hot meals offered during flights as a way of lowering travel expenses (Chowdhury 2007). They have also significantly changed their fare structures in that they now resemble those of low-cost carriers. In the same way, low-cost carriers have borrowed many features from full-service airlines. This is shown by the following examples of low-cost carriers offering services traditionally reserved for full-service airlines: Southwest Airline offers frequent flyer services; AirTran offers hub-and-spoke network system facilities; Frontier airline now offers in-flight entertainment services to its passengers; and jetBlue has a wide array of aircraft type as opposed to most low-cost carriers, which use a single type of aircraft (Chowdhury 2007). In addition, many full-service airlines are now offering low-cost services on some routes as a matter of service diversification (Chowdhury 2007). In a bid to diversify its services, British Airways, a renowned full-service airline, entered the low-cost carrier services. This move did not disappoint as the company was voted the best low-cost carrier during the summer of 2003 in an opinion poll organized by the Guardian and Observer (Lee 2006). This shows that although there is a category of airlines dubbed “low-cost carriers” the essence of the categorization is air travel pricing and services offered. Therefore, low-cost carriers are not necessarily a particular group of airlines but are classified so because of the service they offer and their relatively low prices. In view of the above discussion, it is not an overstatement to say that there is no true low-cost carrier since airlines are using new packages, including low fares as their key marketing strategies. Hence, even the most well established full-service airlines such as British Airways have to constantly offer low-cost services whenever the market dictates so in order to retain their customers. In addition, it is it not sufficiently logical to term some airlines as low-cost carriers in the context of passengers since passengers are interested in fares, not costs. Perhaps this why when Ryanair and easyJet- some of the leading low-cost carriers in Europe formed a lobby association, they named it the European Low Fares Association (Holloway 2008). The incorporation of mixed features by various airlines offers hope that the future may witness the emergence of full service low cost carriers. This is because such a move is inevitable in view of the need to provide excellent services to customers at the most affordable cost. This is described in the next section. Possibility of having a full service low cost carrier Although there is common perception that airlines traditionally operating as full-service carriers such as British Airways and Air France rarely react to price changes by low-cost carriers (Lee 2006), it is interesting to note that they are also progressively offering their services at low costs (as noted of British Airways). This coupled with fact that many full-service airlines (such as USAirways’ MetroJet, British Airways’ Go, Continental’s Lite and the United Shuttle) have recorded failure in some instances due to their high costs (Rhoades 2008), means that airlines have to consolidate their strategies in order to be successful in the competitive business. In addition, even though low-cost carriers have been doing well, the need for consolidation of market strategies is necessitated by the fact that high cost of necessities such as oil is rendering some airlines redundant. For instance, high oil prices mean that some low-cost carriers are hardly making any profit. This caused some twelve low carriers in Italy such as Volareweb to be declared bankrupt in 2004, an opportunity that was readily capitalised upon by dominant low-cost carriers namely Ryanair and EZY, which quickly launched their flights to Italy (Pleul 2008). Full-service airlines have also noted the pressure posed by low-cost carriers and changed their tactics accordingly. Hence, where they are not offering low-cost services, they are merging with low-cost carriers to enhance service delivery at lower costs as exemplified by the merger between Virgin Express, a low-cost carrier and SN Brussels, a full-service airline (Pleul 2008). The aviation industry is now characterised by three phenomena as airlines strive to be smart in their operations. The first one is organic growth, in which new low-cost flights are created as a means of attracting customers in highly competitive hubs. The second one is substitution in which low-cost carriers are emerging fast to replace full-service airlines that withdraw from the market. Thirdly, there is re-branding in which flights that previously had the features of full-service carriers are blended to include the features of low-cost models (Eurocontrol 2006). Although Holloway (2008) notes that the gap between full-service airlines and low-cost carriers cannot be fully eliminated, it is evident that the two kinds of airlines will continue offering products that are almost similar; such as hot meals in long journeys undertaken by low-cost carriers, and low fares being offered by full-service airlines. With such as an alignment, the idea of a full service low cost airline is not far from being achieved. Along this line, Forsyth et al (2005) note that the idea of low-cost carriers has been embraced by consumers and states should therefore consider simplifying the complexities engulfing full-service airlines in order to foster the development of new innovative alliances in aviation. Conclusion The aviation industry has significantly changed from the time when it was dominated by expensive non-competing full-service airlines to the present era when there is stiff competition from low-cost carriers. Although this has created a gap between the two kinds of airlines, competition means that they have to offer products that resemble each other. Thus, they have borrowed ideas from each other in order to satisfy consumers at low costs. In view of this, there seems to be no true low-cost carrier as most operations are simply mechanisms to woo customers. This therefore increases the possibility of there being a full service low cost carrier in future. References Chowdhury, E 2007, Low cost carriers: How are they changing the market dynamics of the U.S. airline industry? Unpublished Honours essay submitted to Carleton University. Eurocontrol 2006, Low-cost carrier market update, Available from http://www.eurocontrol.int/statfor/gallery/content/public/analysis/LowCostMarketUpdateDec06_V01.pdf (May 29, 2009). Forsyth, P; Gillen, D W; Mayer, O G & Niemeier, H 2005, Competition versus predation in aviation markets: a survey of experience in North America, Europe and Australia, Ashgate Publishing, Ltd., London. Graham, A, Papatheodorou, A & Forsyth, P 2008, Aviation and tourism: implications for leisure travel, Ashgate Publishing, Ltd., London. Holloway, S 2008, Straight and level: Practical airline economics, Ashgate Publishing, Ltd., London. Lee, D 2006, Competition policy and antitrust, Emerald Group Publishing, New York. O’Connell, J F & Williams, G 2005, Passengers’ perceptions of low cost airlines and full service carriers: A case study involving Ryanair, Aer Lingus, Air Asia and Malaysia Airlines, Journal of Air Transport Management, 11:259–272 Pleul, A 2008, How to survive the skies over Europe - European low cost carriers, GRIN Verlag, London. Rhoades, D L 2008, Evolution of international aviation: Phoenix rising, Ashgate Publishing, Ltd., London. Read More