Low Cost Carriers : The Shift in Business Paradigm

Since the birth of the civil aviation, many airline players have come and gone, with some being able to lay a mark on the industry. These airlines have practiced different business models to gain profits and maximize their market share. One among these is the Southwest Airlines, who with its entry into the industry brought along a new concept of the Low Cost Carrier (LCC) Business Model. This model brought with it a rapid change in the US aviation industry within a short span which later spread across the globe. Since its birth then in 1978 till today, the LCC model has given a tough competition to the legacy or full service carriers (FSCs) and has been able to capture a good amount of market share throughout the world. As per International Civil Aviation Organization (ICAO), market liberalization has also played a major role in the growth of LCCs.

Over the years the traditional LCC model, once given by Southwest Airlines, has undergone a variety of modifications so as to maintain its competitive and cost advantage against the legacy carriers. The LCCs today are born either as a new airline altogether or as a subsidiary of FSCs or charter airlines.

As part of my dissertation work, back at the university, I had the chance of studying and analyzing such changes in the traditional business models and I would like to share the same with you. The analysis demonstrated in this article focuses on the low cost airlines with respect to South & South-East Asia. Before I throw a light on the changes in the LCC model, lets take a look at the international development of the low cost airlines in Table 1. It also gives a picture of the timing of market deregulation which has acted as a catalyst for the development of low cost operations.

Deregulation.pngTable 1 : International Development of LCCs (Source: Where next for low cost airlines? A spatial and temporal comparative study – Journal of Transport Geography)

The LCC Business Model

ICAO defines a Low cost carrier as an air carrier that has a relatively low-cost structure in comparison with other comparable carriers and offers low fares and rates. Such an airline may be independent, the division or subsidiary of a major network airline or, in some instances, the ex-charter arm of an airline group.

Simple LCC Model

The LCC model focuses on business and operational practices that bring down airline costs. A typical business model of a LCC would be one as demonstrated in Figure 1. This model focuses on three key components:

  • Simple Product: The airline focuses on the basic need, i.e. transportation of passengers from one place to another. It does not provide any frills.
  • Positioning: It has short haul, point-to-point services with high frequencies; goes for aggressive marketing; focuses on leisure and budget passengers.
  • Low Operating Costs: The airline focuses on use of secondary airports, low wages, low maintenance costs, high aircraft utilization, simple boarding processes, and sales through its own website.

All these components put together, form a typical low cost carrier.

Picture1.pngFigure 1 : Typical Low Cost Model (Source: The Success Story of
European Low-Cost Carriers in a Changing Airworld by P. Groote)

Traditional LCC Model

The Southwest Airlines with its entry into the airline industry laid the very foundation of the LCC business model. Hence the traditional LCC model is often referred to as the Southwest Airlines business model. Figure 2 gives a bird’s eye view on the activity map of the same.

Picture2.pngFigure 2 : Activity Map of Southwest Airlines – The Traditional LCC Model

The Shift in the Paradigm

The emergence of more and more LCCs have lead to an aggressive market competition which has changed the entire dynamics of the business models. Trying to compete with the low cost airlines, the legacy carriers have reformed their business parameters adopting few characteristics of the low cost airlines giving the latter a tough competition. In response to this, the traditional so called pure LCCs are now adopting few characteristics of the legacy carriers and hence, it would not be wrong to call them “Hybrid” airlines.

ComaprisionTable 2 : A comparison between the Traditional & Hybrid LCC Model (Source: The evolving low-cost business model: network implications of fare bundling and connecting flights)

The Analysis

The methodology adopted is based on the paper ‘Low cost carriers going hybrid: Evidence from Europe – R. Klophaus et al. (Journal of Air Transport Management)‘. For the purpose of analysis, I have chosen carriers from South & South -East Asia, with a majority from India followed by Singapore, Malaysia, Sri Lanka, Philippines, Indonesia and Pakistan.

Table 3 portrays the preferred criteria to assess whether the airline follows the traditional or so-called text book LCC business model.

Criteria.jpgTable 3: Criterion for LCC business model as per the text book definition

The concept of secondary airports has not been considered as this criterion either does not prevail or prevails to a very little extent in South & South-East Asia. Also the sales of tickets have been overlooked as almost all the LCCs use both GDS (Global Distribution System) as well as their own websites to sell tickets.

A binary method of ‘0’ and’1’ has been used in the analysis (for the criterion shown in Table 3), i.e.’ if the result matches the expected value of a certain criteria then the value is ‘1’ else ‘0’. Say for example, as per the text-book definition of an LCC, it has a single aircraft type. Hence if the airline has a fleet of similar aircraft family like B737s comprising of B737-900, B737-400; then we would consider it as a single aircraft type. Thus the value in this case becomes ‘1’.

For the purpose of distinguishing, airlines which gained the total value more than 10 have been categorized as ‘Pure LCCs’, those with values between 8 to 10 fall under ‘Hybrid Carrier with dominating LCC characteristics’, the ones with values between 5 to 7 correspond to ‘Hybrid Carrier with dominating FSC characteristics’ and the remaining airlines with value below 5 are categorized as Full Service Carriers. After juggling with all the values, I have converted them into their respective percentage fulfillment towards being a Pure LCC and the result of same has been shown below in Table 4.

Indexing.jpgTable 4 : Indexing of the Carriers in South & South-East Asia

Conclusion

The results show that none of the LCCs in South & S.E. Asia fulfill all the criteria 100%. IndiGo with an index value of also complies with only 75% of the traditional model that was once given by the Southwest airline. Majority of the airlines including Air Asia which once proclaimed themselves as a pure LCCs, are now turning hybrid though retaining dominating LCC features in order to compete against the FSCs and their low cost subsidiaries. They generally differ from the Pure LCC criteria on the basis of fare offerings, example Spicejet offers more than one fare at any time but still maintaining a single class configuration.

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