The Increased Uptake of Low-Cost Airlines - Essay Example

? Low Cost Airlines Low Cost Airlines Introduction Irrespective of the decreasing trend facing the airline industry, low-cost airlines are realizing higher levels of success, which is evident from their increment of the number of passengers using their services, profit levels and turnover (Brander and Zhang, 1993). Although the tragic events that have taken place in the past, and those of recent years have had a major impact on the air transportation industry, low-cost airlines appear relatively immune to the changes and the environmental changes threatening traditional airlines. For more than a decade now, the potential of the low-cost airline business has been evident from the huge capitalization of these airlines at stock market spheres (Brock, 2000). For example, at the start of the current decade, in 2002, Ryanair realized a market capitalization of 4.9 billion Euros, which was 45 percent more, when compared to the levels realized by British Airways (Rhoades, 2008). The increased uptake of low-cost airlines was evident from its revenue levels, which were approximated at 20 times compared to that of the traditional competitor (Dempsey and Goetz, 1992). The huge success of starter low-cost airlines in the industry has led to the emergence of new airlines in the same category and using the same business, trying to mirror their strategies. The success of these airlines can also be traced from the fact that they have stimulated a new class of demand, which offers evidence that they are not getting their customers from traditional airlines; low-cost airlines are attracting new demand and customers into the industry (Dresner, Lin and Windle, 1996). Due to the major impact of low-cost airlines, traditional airlines have acknowledged the threat of the growing competition; therefore, have reacted to the new business model, especially in the line of business travel (Meyer and Menzies, 2000). This paper will explore the success strategies of low-cost airlines; explore the factors behind their success, analyze their business model and prospect their growth. The deregulation of air transport Following the enactment of the Airline Deregulation Act of 1978, the control of airline business and services was, to some extent, moved from the political system to the market system (Dempsey and Goetz, 1992). Deregulation refers to the change of the control exercised over air travel from the Civil Aeronautics Board (CAB), which administrated the entry of airlines into the business, their exit and the pricing of airline services, to the partial control and administration of business systems and infrastructure. Deregulation also featured the abolishment of the CAB’s control of mergers, intercarrier agreements and customer affairs (Dempsey and Goetz, 1992). The complete shift of the control took place after the endorsement of the CAB sunset ACT of 1984, which gave way to the economic liberalization of the management of air travel, which was part of deregulation, which was started after the realization that the political control of the economy did not serve the best interests of the public (Dempsey and Goetz, 1992). The air freedoms that came after deregulation Following the deregulation of the management and the control of airline services, all airline operators were allowed the freedom to operate on any route that they chose to operate. The operators of air travel services were allowed the freedom to set the fares of their travel services like they deemed fit, which would be influenced by the forces of demand, and the supply of air travel services (Dempsey and Goetz, 1992). During the time before the deregulation, there were some carriers that were not allowed to operate out of specified states, but after deregulation, these carriers were allowed to fly and operate across the country, without any limitations. Following the deregulation of the air travel industry, the restrictions that had been set in the way of entry into the industry were abolished (Dempsey and Goetz, 1992). The abolishment of the entry restrictions led to a sudden increase in the airlines operating within the industry, where the new entrants that were started after the freedoms were offered included Southwest Airlines, People Express and New York Air. The new players in the industry offered their services in innovative ways, and allowed customers' access to cheap costs – which led to the rise of the concept of low-cost airlines services. The three packages of liberalization The liberalization of air travel and transport took a series of three phases, starting with the package of 1987, the 1990 package and the package of 1992. The three packages covered the endorsement of new conditions and rules, regarding market competition and access, throughout the European air travel and transport market. The first package, which was effected between 1988 and 1990, rules were enacted to give the European commission the authority to enforce Article 81 and 82 to the management of air travel and transport within the European Union (Peters, Viertelhauzen and Velden, 2007). The package, also offered the commission, the authority to adopt exemptions and to evacuate the competition issues that arose in the EC merger regulation. The second package, which took place between 1990 and 1992 features the enforcement of measures aimed at checking the access of the market to airlines. The package also featured the development of new regulations about the sharing of capacity, the fares to be charged for scheduled services, the competition allowed between airlines and also the specifications for the licensing of airlines (Peters, Viertelhauzen and Velden, 2007). The third package, which was enforced between 1993 and 1997, was one of the most important phases towards the liberalization of air transport. The package featured the introduction of the freedom delivering services within the EU. After 1997, the package featured the freedom of cabotage, which allowed the airlines from a member state to ply the routes available in other member states. After some time, the coverage of the market freedoms was extended to cover other countries like Switzerland, Iceland and Norway (Peters, Viertelhauzen and Velden, 2007). Critical success factors for low cost airlines The success factors that foster the success of low-cost airlines, which stemmed from the deregulation of the air transport industry, include offering services at a low cost, where cheap fares are sustained through different cost-cutting practices like point-to-point services. In this case, passenger and baggage transfers are less common and there is the adoption of cheaper service designs, where free items like newspapers, drinks and food are not offered (Smith, Bailey and Brynjolfsson, 2000). The airlines prefer using secondary airports, which charge lower costs and the companies prefer direct sales over platforms like the Internet, which eliminates the costs of brokerage. These were the results of the freedoms that resulted from the deregulation, because it allowed different airlines to offer services at different rates and to package their services differently. Following the resultant freedoms, instead of using free services to increase customer satisfaction, the airline operators improved on core service areas like reliability, safety, reliability in baggage delivery and handling; punctuality and customer support – which keep them above legacy airlines. The positioning of services for low costs In positioning the services of low cost customers, they do their business using a value-based outlook – unlike their legacy counterparts – where they focus on the aspects that are most important to its customers. Towards realizing low costs, they offer point-to-point services, where there is no tolerance to delays, due to passenger and baggage transfers. These operators offer low-cost service designs, where the items that compel traditional airlines to increase the costs of services are not covered or served. For example, these airlines – unlike legacy airlines – eliminate free drink and food services, and do not offer free newspapers to their travelers. Low-cost airlines rely on the standardization of their fleet, which reduces the finances channeled towards fleet maintenance. Also, they utilize a lower aircraft outlay, spend less on training, and they source cheaper equipment and parts for their vessels (Richards, 1996). Through the elimination of brokerage fees, low cost airlines are able to offer their services at a cheaper price, unlike their legacy counterparts, who rely on the services of brokers. This is realized through eliminating the role of sales brokerage firms and agents, and instead focuses on the sourcing of direct sales over the Internet and other platforms that allow for direct selling. Low cost airlines A low-cost airline is defined as an airline that offers services at relatively lower fares, but also offering travelers less comfort. To recover the revenues lost through offering cheaper ticket prices, these airlines charge for extra services like seat allocation, food and drink services, priority boarding and baggage carriage among others (Gross & Schroder, 2007). Comparison between Low-cost and legacy airlines Following the deregulation of air transport, low cost airlines were started, and in many cases – they differ from their legacy counterparts in different ways. The comparison between the services offered by legacy and low-cost airlines is evident in different areas, including that the services of both airlines types are reducing extra services (C.S, 2013). For example – recently – British Airways and KLM introduced fees for baggage carriage on European flights, and this was initially a characteristic of low-cost airlines like AirAsia and EasyJet (C.S, 2013). Similar to low-cost airlines, legacy airlines are offering less fancy to their travelers. Some of the services eliminated from the portfolio of legacy airlines include in-flight food, among its economy flight passengers (C.S, 2013). To illustrate, airlines like Iberia and Aer Lingus sell snacks and food to the travelers plying their short-haul routes. Like low-cost airlines, legacy airlines are establishing strategic mergers, which are aimed at increasing their market positioning (C.S, 2013). One example is the merger between US Airways and American Airlines. The factors behind the success of Low-cost airlines The factors behind the success of low-cost airlines can be traced to their strategic approach to their operations. These include the utilization of the space in the air vessel, where they try to offer a high number of seats, through reducing the number and the size of flight kitchens, and buying aircraft that offer high space levels of utilization. These success factors have not been implemented by their legacy counterparts, although some like KLM are slowly adopting the business model. The second success factor fueling the success of low-cost airlines is their specialty in offering low cost services, which are realized through the utilization of cost-cutting strategies (Zhao and Zheng, 2000). The major cost-cutting strategies include offering less free items and services to travelers, redirecting flights to secondary airports, which charge less costs and through direct sales, which eliminate brokerage costs. These success strategies are also becoming increasingly common among traditional airlines, among them being KLM, which are charging their travelers for baggage carriage. Their success can also be traced to their ability to keep customer satisfaction at its highest, which requires the airlines to offer highly reliability, safety, punctuality and flight flexibility. The business model The Low Cost business model In their choice of aircraft, many low-cost airlines use aircraft configured for one passenger class, and in many cases, they also use the aircraft model that offers more efficiency in fuel consumption. Some of the common models used by these airlines include Boeing 737 and Airbus A320. These aircraft types also require less per passenger crew cost and lower maintenance costs. In their choice of networks and routes, many low-cost airlines maximize their coverage by operating in hubs not utilized by traditional airlines; some focus on different cities (Reynolds-Feighan, 2001). The reasons behind the growth of low-cost airlines The reasons behind the success of low-cost airlines include that they use newer planes. Through this operational strategy, they ensure that they use aircraft that offers the highest levels of fuel efficiency; the newer aircraft also allows for higher levels of safety and comfort – which help increase customer satisfaction. The second success strategy is that they employ smart fuel-saving strategies in reducing their operational costs. Considering that the costs of fuel are becoming a major determinant of the costs of services, different techniques like fuel hedging allow for the consumption of less fuel costs – which is transferred to the customer as price reduction (Vowles, 2001). Low-cost airlines also charge for value added items. For example, some airlines charge more from customer, which needs seats that allow larger leg room. Low-cost airlines compete based on service and experience, where customers are offered exceptional customer care at check-in points (Bamber, Gittell, Kochan and Von Nordenflytch, 2009). Conclusion Despite the adverse global financial balance, low-cost airlines have continued to realize profits, as compared to many traditional airlines. The trend has compelled many traditional airlines to compete for the market on price, where they are adopting the strategies of low-cost airlines also. Low-cost airlines services intensified after air travel freedoms allowed for easier entry and a reduction in operational restrictions. The critical success factors of low-cost airlines include cost-cutting, direct sales and improved customer services. Many legacy airlines are altering their service plans and models, to mirror those of low-cost airlines, which improve their market positioning. The reasons behind the growth of low-cost airlines include their innovativeness in operations management and their increased sensitivity to customer retention. References Bamber, G. J., Gittell, J., Kochan, T. and Von Nordenflytch, A., 2009. 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