Research Paper Help on Business Model of a Low Cost Carrier

Business Model of a Low Cost Carrier

Introduction

A low-cost carrier is also called a budget airliner. A low-cost carrier is an airline that charges lower airfare than the average in the region, but has a lower level of comfort compared to its counterparts. The companies engage in such practices as working from secondary airports and using one type of aircraft. They also  increase the usage of their aircraft, bank on direct ticket sales, and offer a single-class product. Evading frequent-flyer programs, and maintaining low costs of labour are also some measures they put in place. Activities, such as these helped Low-cost carriers in reducing unit cost by 20% to 40% paralleled with full network service aircraft. These low-cost carriers have changed the airline industry, especially in the medium range aircraft sector.

Originally, the low-cost carrier notion was presented in the 1970s in the United States. In the early 1990s, it started spreading across Europe and the rest of the world.  When compared to full network service Airlines, the low-cost carriers could cut up to 50% of their operational costs. However, this has not been recently realized due to factors, such as rising costs of fuel and the global economic crisis. The full network service airlines also modified their business models to suit the present conditions in the market. This was done in ways, such as introducing new products in the market and reorganizing their activities. In its earlier years, the low-cost airline model was purely based on varying hypothesizes in its region of operation. This was in response to traditional business models. Some of the prosperous Low-cost carrier forerunners are Southwest Airlines in the United States, Ryanair in Europe, and Jambojet in Kenya.

There are three basic aircraft business models, namely the full network service aircraft, low-cost carriers, and charter aircraft. The full network service carriers are preferred to carry out operations over large geographical areas. The low-cost carriers carry out operations along medium haul routes, and charter aircraft are preferred over long haul routes. There has been a trend in the airline industry of engaging in mergers and acquisitions. For this reason, it has become increasingly difficult to understand and explain aircraft categories. Therefore, it is important for this paper to take a deeper look at these basic categories.

Full Network Service Airlines

They offer a wide variety of services, such as class division of passengers in the cabin of the airplane and an option of connecting flights. They can also be called a hub and spoke airlines, as they use the hub and spoke model. This is a model where the local airports provide transport to a central, larger airport that can accommodate larger aircraft for long distance flights. In Europe, most of the national carriers represent the traditional airlines. This is evident in countries, such as Germany (Lufthansa), Netherlands (KLM), Britain (British Airways) and Kenya (Kenya Airways). Outside the European Union, ownership of airlines differs   from one republic to another. In many countries in Africa and Asia, only the state-owned airlines are allowed to carry out operations.

Charter Business Model

Charter airlines keep their focus mostly on tourism. This is why they are commonly called leisure or holiday airlines. Previously, most charter companies sold flight tickets together with charter packages by different tour operators, hence the name charter airlines. However, they started operating on schedule using only one or two seasonal charters. By concentrating on ‘point to point’ flights, the charter airlines can realize low seat per nautical mile costs. Charter companies are mainly popular in Africa because of the focus on tourism in game parks and heritage sites that are inaccessible by road. Examples of charter companies include KASSAS in Kenya, air arctic in Alaska, and fortune air in South Africa.

Low-Cost Carriers

Low-cost carriers concentrate on reduction of operating costs to implement top market strategies in their respective markets. Their fleet comprises medium sized aircraft, such as the Boeing 737/800 and Airbus A320. These aircrafts require low costs of maintenance and fuel as compared to their larger counterparts, such as the Airbus A380. A high number of seats in the cabin results in low unit costs counting fixed charges like the air traffic control. An increase in aircraft loading, however, increases the amount of fuel consumption by the aircraft. Usage of less congested, smaller airports reduces the possibility of delays, and prevents maximization of daily block hours. Smaller airports also have lower charges compared to hubs.  The absence of divisions according to class in the seating arrangement also helps in reducing operating costs as it prompts passengers to board the aircraft earlier hence further reducing the possibility of delays.

Since its arrival in Europe in the mid-1990s, low-cost carriers have significantly increased the market share they hold. This has forced traditional airlines to modify their strategies in the medium haul category.  In Europe, there are more than forty low-cost airlines in operation. According to Vidović et al. (2012), they account for more than 36% of the total passengers and 23% of instrument flight rules activity. However, this changed in recent years. Their market share has reduced significantly as earlier stated.  Fusion of various strategies is currently common in many airlines that were previously known to be in the low-cost airline classification. They are now categorized as hybrid airlines.

According to Klophaus et al. (2012), Spain, Germany, Italy ,and the UK are the major low-cost carrier markets in Europe. They account for two-thirds of the total passengers, and offer more than half their destinations. Compared to a mean average growth of 4.5% in 2010, the seating capacity grew by 1.8%, which shows that the market is maturing.

They also increased the amount of routes they offer by 9.4%, expanding routes along with a growth in aircraft seating capacity. This is a true mirror image of the business strategy of most of the low-cost carriers in Europe. Airlines like EasyJet are coming up with new routes instead of augmenting the regularity of their flights to already present termini. Because of the significant disparities between past costs of operation and current ones, there is no possibility of reducing the costs further. This is because of the reduced difference between low-cost carriers and full-service network airlines when it comes to costs of operation.

The ever-changing airline market and the introduction of low-cost carriers caused their full-service network carrier counterparts to change their business models to reduce the difference in operational costs. The low-cost carriers also followed suit and changed their low-cost models in response. Although the pricing remains the main area of consideration, low-cost carriers are also adopting new measures, such as merging with other companies.  They are also focusing on low costs of maintenance of their aircraft to make up for the high cost of fuel. Integrating services, such as improving their customer service and trying out long-range flights are also areas of focus by low-cost carriers (Hamsathul, 2012).

However, low-cost carriers are able to reduce their costs further by avoiding the low-cost carrier postulates. If airlines adapt using the same aircraft model in their fleet, they will be able to reduce costs, such as crew training and licensing of the airplanes as well as a maintenance crew. An example of this is JamboJet, which only uses the Boeing 737/400. Low-cost carriers can also adapt to the strict use of local airports that do not contain a lot of traffic. These are airports that have less than 2 million passengers every year.

Another factor that should be taken into consideration when opting to reduce costs further is reorganizing the sales network. Ryanair, which is one of the most prosperous low-cost carriers, took measures to cut out use of intermediaries. These are parties that provide a link between the passengers and the airline, such as travel agencies and global reservation systems. Ryanair considered the commission paid to these agencies and opted to review their network model. This helped them to reduce their costs and remain one of the biggest market players. However, contrary to the observations of Ryanair, many low-cost carriers have opted to offer additional tariffs per flight. Higher ticket prices comprise supplementary services like choosing a seat, changing the date of the flight without incurring additional charges, and a provision for additional luggage (Kurth, 2008).

Conclusion

Challenges, such as rising cost of fuel, airport charges, and increasing competition among airlines triggered the introduction of the hybrid business model that is a mixture of the low-cost carrier and the full network service airline. This is a leap in the aviation industry and is also one of the benefits presented by the low-cost carriers. However, there is a reason for concern over the security challenges they pose. Since they try to minimize their costs as much as possible, it may have an effect on the quality of the security measures they put in place because they travel all around the country. Many low-cost carriers also use older models of aircraft while trying to minimize their maintenance costs. This may lead to malpractices, such as ignoring some maintenance schedules that are costly.

This would have an effect on the safety of the crew and anyone associated with the aircraft (Doganis, 1994). The airlines also try to minimize the costs of training their crew that leads to inadequate knowledge of the aircraft, safety, and emergency systems. Some airlines train their crew on the basics and examinable areas only. Therefore, the crew would be unable to follow due procedures in the light of an emergency. They would also be prone to mistakes when under pressure because of inadequate knowledge. I would recommend that the airlines be audited at random to avoid these malpractices that have led to deaths in the past. I also recommend that the civil aviation authority set a minimum price limit that corresponds to the minimum safety standards. The minimum cost of training, maintenance, and security detail should also be taken into consideration.

References

Klophaus, R., Conrady, R., & Fichert, F. (2012). Low cost carriers going hybrid: Evidence from Europe. Journal of Air Transport Management, 23(2012), 54-58

Vidović, A., Mihetec, T., & Steiner, S. (2012). Low-Cost Airlines Traffic Evolution in South-East Europe. Journal of Society for Development of Teaching and Business Processes in New Net Environment in B&H.

Kurth, W. (2008). A Review of Regional Growth and Sustainability in the LCC Market. In Proceedings of the 22nd Annual Geneva International Aviation Forum, Aircraft Finance & Commercial Aviation, MBA Workshop.

Hamsathul, H. K. (2012). Airline Management Critical Review of LCC VS Legacy Carrier.

Doganis, R. (2007). The airline business. Second edition, Routledge, USA. Edition, Routledge, USA. 307 p.

Gillen, D., Gados, A. (2008). Airlines within airlines: Assessing the vulnerabilities of mixing business models, Research in Transportation Economics.