Theoretical framework

History

The American airline 'Southwest Airlines' is seen by most as the first low-cost carrier (Francis, 2005), and stood example for the current low-cost model. Southwest originated in the USA after deregulation of the airline industry (Francis, 2004). At the core of the low-cost model are the cost-reductions, which partly end up in cheaper tickets for passengers. To obtain these cost-reductions, Southwest operates according to two important principles which separates the low-cost model with other operating models. First, instead of flying according to a hub-and-spoke system, Southwest focuses on short distance point-to-point flights. Second, they only fly with one class, which a reduced service.

By operating according to these two points, different cost-reductions can be made. Characteristic for Southwest are the different parts on which they save money. The figure below compares Southwest airlines with US Airways and gives an overview of the different costs of an average flight. Apparently there are large differences in respectively the salary, the operating costs of a carrier, and the remaining costs. Reductions on the salary costs consist next to a lower wage, also of a more productive staff. Southwest also has relatively a higher flight frequency compared to others airlines like for example US Airways. That way, airplanes are more productive (Morrell, 2005). They also have a higher productivity because they operate with only one fleet consisting of the same equipment, and have shorter turn-around times 1. Cost reductions related to the maintenance and managing costs of the fleet are obtained by operating with smaller aircrafts. Overall low-cost carriers also operate with newer aircraft types, which are more economical and require less maintenance. They offer only one service class with no seat reservation. On flights there are no meals offered. By choosing smaller regional airports turnaround times are shorter, and costs are saved because the landing and gate costs are lower. In conclusion, Southwest Airlines is a success because of the predictability, and the straightforwardness of the operating model. Their success became clear at the end of 2002 when airlines in the USA had the last couple of years considerable loses, whereas Southwest still gained profit (Gillen, 2004).

Figure 1, Average costs US Airways Vs Southwest Airlines
Source: Morrell (2005)

The first low-cost carriers in Europe started in the 90s, when the deregulation of the airspace continued throughout the European Union. The British Ryanair and EasyJet continued building on the Southwest low-cost model. They copied their efficient operating model, only instead of offering reduced services, they offered no service at all. During a flight one needs to pay for food and beverages, there is no money back guarantee, no reservation option et cetera. In short: no service. They also started to sell tickets directly over internet. In 2001 both Ryanair and EasyJet sold over 80% of their tickets through the internet, the other part was sold mainly through call-centres (Francis, 2005). The figure below gives an overview of the amount of cost reductions on different parts in the operating process on a flight between London and Nice. Total costs of the flight are £5.591, profits from ticket sales are £6.136. Remarkable are credit cards as a separate expense. This is because most tickets sold over the internet are paid by credit card. Low-cost carriers expanded aggressively and profited from first-mover2 benefits when negotiating with different airports. In the beginning they also avoided competition with other carriers resulting in almost no overlap of their flight networks.

Figure 2, Overview costs flight EasyJet
Flight London (Luton) Nice, amount is in pounds sterling. The left column displays the costs, the right column displays the income from ticket sales.
Source: Pratley (2003)

Spatially low-cost carriers developed in Europe as is represented in figure 3. Low-cost carriers first arise in England and Ireland in 1995, and started expanding to the rest of Western Europe. From 1997 the European low-cost network developed itself more to the tourist areas in the South. As of 2002 the network expanded to Eastern Europe and Scandinavia (Francis, 2005; Garringa, 2004).

Figure 3, Spatial low-cost carrier network development over time
 

After deregulation of the airport industry the full-service model was the dominant strategy of most established carriers. Gillen (2003) indicated that full-service carriers in comparison with low-cost carrier offer three important benefits to their passengers. The first benefit is the extended service network which is available on many different places and is easy approachable by their costumers. Secondly they offer high quality services related to luggage processing and their seating system. There is a low risk in baggage loss and different flights are better connected to each other, reducing waiting times. Finally the frequent flyer programme is improved. Another unmentioned important characteristic can be added. Full-service carriers operate according to a hub-and-spoke system, offering a large amount of destinations to their customers.

-Top-


1 The turn-around time is the time which is needed to get the airplane in the air again after it has landed.
2 First-mover advantages arise when a low-cost carrier starts flying on a region and can choose between multiple airports located in the region. This gives the low-cost carrier a stronger position when negotiating with an airport to reduce airport related costs.