Theoretical framework

Future growth

As mentioned in the introduction, the low-cost carrier sector is a fast changing sector. It is expected the latent demand of low-cost carrier traffic will reduce and the market will get saturated. The low-cost carriers will keep on growing and try to attract customers from other airlines (McKinsey, 2003; Bingelli, 2005). The market share of low-cost carriers will continue to grow. From a study of Mercer Management Consulting (2002) it is expected the low-cost carriers will have a market share of over 25% in 2010. Airline Business (2005) expected this would be even higher at 33%. Larger low-cost carriers need to compete with smaller ones in order to expand their own market share. Meanwhile full-service carriers are looking for another strategy to profit from the low-cost carrier market. Both low-cost and full-service carriers need to reconsider their strategy and try to keep their head above water.

Normally airline companies have different strategies available to strengthen their position against the competition. Sometimes it is possible to start a partnership or completely take over another carrier. Franchising is another method, in which the airline company lends its name and identity to another company and in that way increases its brand reach, without direct economical risks. Other methods of cooperation are joint-operations and code-sharing. These methods can take place sporadically or one-off only, or contineously by participating in international alliances (see also ‘about airline alliances’). The reach of the individual airline company will increase by cooperating with other companies and benefit from their services. Alliances offer multiple advantages, for example an increase in passengers, reductions on fixed costs and an extensive frequent flyer program (Iatrou, 2005). These strategies appear not to be sufficient for a full-service carrier to successfully compete on and profit from the low-cost carrier market.

Full-service carriers should reconsider their European flights and check if they operate profitable. Low-cost carriers don’t operate according to the settled hub-and-spoke strategies and demand a different approach from full-service carriers if they want to compete with them. Franke (2004) suggests three points which full-service carriers could improve to compete more successful. Firstly it is important to reconsider their whole hub-and-spoke network and drop unprofitable flights. Secondly they need to simplify their customer processing. Because there is almost no distinguishing between the tourist and business passengers, and between destination and transfer passengers, they offer for each passenger a whole range of possibilities which most passengers do not need. These extra services could be offered separately to passengers who would like them and are willing to some additional costs. Lastly the distinguishing between tourist and business passengers could be taken one step further by totally separate them. This way special services can be offered to business passengers without increasing the complexity of the whole process. According to Dennis (2005) there are in Europe, compared to the USA, to many secondary hubs located too close to each other and lacking financially performance compared to primary hubs. He expects these secondary hubs will lose their hub function and only a couple of hubs will remain.

Low-cost carriers need to reduce costs even more and operate cheaper then their competition. This can be obtained best by operating fully according to the low-cost carrier model (Travel Business Analyst, 2003). Low-cost carrier which can’t survive should try to operate according to a whole new strategy. For example, a low-cost carrier could profile itself as a feeder carrier³ and orient itself on a hub airport and start cooperating with a full-service carrier. Another method would be to start its own frequent flyer program aimed on low-cost carriers. Such a program could bind customers on the long term and that way be profitable (Klophaus, 2005).

Full-service carriers who start their own low-cost carrier can get into trouble in the end. According to Morrel (2005) they cannot overcome the cost difference on the long term, because the full-service and low-cost model differ too much from each other. Costs will stay high because they use more expensive pilots, marketing, taxes, management et cetera, who normally work for the full-service carrier. Graf (2005) does think full-service carriers who start a low-cost carrier have a change to succeed. They do need to fulfill to a long list of conditions, for example they really need to operate the low-cost branch separately from the full-service carrier. The problem between contradictory operating models also arises between travel organizations and their low-cost carrier branch. To which extend can they operate their former charters as a low-cost carrier? If they continue to operate their low-cost carrier mixed with the original charters, they could face the same problems as the full-service carriers with their low-cost carrier.

About airline alliances An important development in the aviation sector is the arrival of the worldwide airline alliances. With the help of alliances, airline companies can extend their individual reach by cooperating with other airline companies. By participating in an alliance, the number of destinations will increase, flight schedules can be combined, as well as frequent flyer programs. Also, it is possible to buy jointly and share the costs of different services and infrastructure (Dennis, 2005). An overview of the different alliances is given in figure 4. Figure 4, Airline alliances Alliance About Members Since: 1999 Passengers: 343,6 million Daily flights: 15.207 Countries: 133 Destinations: 684 AeroMexico, Air France-KLM, Alitalia, Continental Airlines, Czech Airlines, Delta, Korean Air, Northwest Airlines.   Since: 1998 Passengers: 242,6 million Daily flights: 8.110 Countries: 134 Destinations: 599 Aer Lingus, American Airlines, British Airways, Cathay Pacific, Finn Air, Iberia, LAN, Qantas.   Since: 1992 Passengers: 382,6 million Daily flights: 15.000 Countries: 138 Destinations: 790 Air Canada, Air New Zealand, Asiana Airlines, Austrian, BMI, LOT Polish Airlines, Scandinavian Airlines, Singapore Airlines, Spanair, TAP Portugal, Thai, United, US Airways, Varig. Source: Skyteam (2005), Oneworld (2005), Star Alliance (2005)

-Top-