Case study 10.2: Low cost airlines – the main beneficiaries of the single airline
market
Prior to the three airline liberalisation packages, Europe’s airline industry was dominated by
national, largely state-owned flag carriers which were shielded from the forces of competition
by restrictions on market access, fares, and other regulations alluded to above. Liberalisation
changed all that. European carriers were granted the freedom to choose their routes,
schedules and fare with only minimal government interference (usually on public service
grounds). Commercial considerations became the primary motive for new routes and for
changes to fares and to capacity. As a result of the new opportunities, a whole new segment
of the European airline sector – the low cost or budget airlines – was born, a segment that
could not have possibly existed under the previously highly regulated system.
Following deregulation of the US airline sector, the low cost model was pioneered in the late
1970s by Southwest Airlines, the original low cost airline which transformed itself from a
regional into a low cost carrier operating from a secondary airport in Dallas, Texas. The
airline has subsequently become the biggest domestic carrier in the US, operating over 3,400
flights per day. Southwest developed many aspects of the low cost model adopted by
Europe’s low cost operators, several of whom have publicly acknowledged how Southwest
inspired them.
The low cost airline business model is based on driving each aspect of an airline’s costs down
as far as possible (see Table 10.1). This enables the successful low cost operator to lower its
fares, attract more passengers and ultimately increase revenues and profits. Low cost airlines
typically offer direct flights on short-haul routes from secondary and regional airports located
near major population centres (or, in many cases, not so near, incurring criticism for
misleading promotion of their flights). They do not operate a hub-and spoke service like
some of the conventional scheduled airlines. Although hub-and-spoke can offer more
destinations, point-to-point flying avoids the costs of through services, including baggage
transfer and passenger assistance costs. Secondary and regional airports are also less
congested than major international airports, thereby offering greater punctuality, faster
aircraft turnaround times (enabling carriers to utilise their assets more intensively) and do not
have the slot restrictions that can limit services from other airports. General airport fees and
other related costs tend to be lower at secondary and regional airports.
Table 10.1: Comparison of airline business models
Low cost airlines
Traditional scheduled airlines
Online ticket sales and online check-in –
Multiple sales channels including travel
avoids costs of call centres, agents and
agents. Online check-in possible not
check-in staff.
compulsory
No business or first class.
Economy, business and first class
available
‘No frills’ – charges for all extras (e.g.
Full service – entertainment, catering,
catering, reserved seating and baggage,
business and first class, lounges, etc.
etc.).
included in fare
Reduces staff numbers and costs.
Higher plane utilisation because of quick
More time spent on ground – slower
turnaround times – helped by simpler
turnaround time
boarding procedures.
Use of regional and secondary airports –
Use of international airports – higher
lower airport fees and quicker turnaround. airport fees and slower turnaround time
Standardised fleet – reduces costs of
Wide range of aircraft types – increases
maintenance and training and bulk
maintenance costs
purchase of aircraft.
Higher seating density.
Lower seating density
Direct flights, short haul, no transfers –
Long and short haul with transfers.
no need to manage transfers of pay
Greater complexity
compensation for mixed flights.
Staff incentives (higher percentage of
High basic wage costs with few staff
variable wage costs) – keeps unit wage
incentives
costs down.
From the first contact with the customer, the emphasis of the low budget airline is on cost
reduction. For many LCCs, tickets sales are carried out entirely online, thereby removing the
need for call centres and the payment of agency fees. Similarly, check-in has moved online to
reduce check-in costs for airlines. Services are eliminated or kept as simple as possible to
keep costs down. Hence, low cost airlines do not offer free in-flight meals (passengers are
charged if they want a meal, for example) and seats are not pre-assigned.
Fares are structured to fill the aircraft and vary significantly on the same flight, although even
the most expensive seats tend to compare favourably with those on traditional scheduled
services. Low fares are intended to stimulate demand, especially from leisure and costconscious business travellers who may not travel or perhaps have used alternatives such as
the train without the promise of lower fares. Fares are set according to demand for a
particular flight and with reference to the period remaining to departure. Higher fares are
charged on flights with higher levels of demand for bookings made nearer departure.
The greater competition created by liberalisation in general and by the low cost airlines in
particular has forced all airlines to pay more attention to efficiency, especially the national
flag carriers which, in pre-liberalisation days, were immune from normal commercial
pressures. Many flag carriers have changed key practices as a result of the low cost airlines.
For example, in view of thee greater flexibility offered by LCCs, scheduled airlines dropped
their convention of only selling return tickets, requiring a minimum period of stay and/or
staying over a Saturday night for their cheaper flights. Previously, single tickets had
frequently cost more than a return ticket and it had proved expensive and complicated to
follow an itinerary which involved returning to the original starting via stops at multiple
destinations. Aer Lingus, subject to intense pressure from Irish low cost carrier, Ryanair,
adopted a low cost strategy on its short-haul flights from 2002. The competition continued
and Aer Lingus has been the subject of several takeover bids from its chief rival – bids which
have not been welcomed by the European Commission, among others, on the grounds that it
would give Ryanair too much control over routes out of Ireland. .
In more general terms, the emergence of low cost airlines has met the objectives of the EU
liberalisation package and supported the creation of the SEM by facilitating free movement
around the European Union, offering greater consumer choice, stimulating restructuring of
the sector and generally simplifying travel. The low cost carriers have also had a positive
effect on regions, creating jobs at regional airports and in related aviation activities. The
boost to regional airports stimulates inward investment and tourism, boosting the local
economy and creating jobs beyond the aviation sector. In terms of the environment, low cost
airlines claim that their high levels of capacity utilisation and greater density of seats per
plane reduces the amount of pollution per passenger. On the other hand, the total of flights is
higher because of the low cost sector with all the attendant environmental implications.
Case questions
1. Explain why liberalisation of the airline markets was necessary in order for the low cost
budget airlines to develop and prosper.
2. What have been the main impacts of the phenomenal growth of budget airlines in Europe
since the implementation of the EU’s three airline packages?
3. Changes in airline regulation have led to both entries and exits into and out of the low
cost sector. Investigate why some companies have left?
4. How sustainable is the low cost model in the long term? What factors might make it
difficult to sustain?
5. Choose a low cost carrier and explain how it has established it market position.