Low Cost Strategies a Failed Business Model?

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LOW COST AIRLINES: A FAILED BUSINESS MODEL? Kenneth Button University Professor Director of the Center for Transportation, Policy, Operations, and Logistics, and Director of the Aerospace Policy Research Center School of Public Policy George Mason University (MS 3C6) Fairfax, VA 22030, USA. E-mail: kbutton@gmu.edu

“You fucking academic eggheads! You don't know shit. You can't deregulate this industry. You're going to wreck it. You don't know a goddamn thing!” Robert L. Crandall, CEO American Airlines, addressing a Senate lawyer in 1977

“If the Wright brothers were alive today Wilbur would have to fire Orville to reduce costs” Herb Kelleher, Former President of Southwest Airlines, 1994

INTRODUCTION The low cost airline model (often called the “no frills” model in Europe – we tend to stick with the American vernacular) has been the subject of intense interest and study. The “Southwest effect”, basically the drop in fares that occurs when a low-fare airline begins serving an airport that had previously had no low-fare carriers, has become part of the vocabulary of air transportation. This paper looks at just how successful the low cost model is taken in it broadest context. In particular, while there have clearly been airlines pursuing the low cost approach that have largely endured and prospered, the question is whether that is because of the underlying business model, or a function of good management exercised, perhaps combined with an element of Napoleonic luck on the part of the individuals running these companies. The importance of low cost carriers as major suppliers of air services in short-haul markets is exemplified in by Ryanair being the larger movers of air travelers within Europe, and Southwest having the same position in the United States. Low-cost airlines are also becoming significant factors in airport planning. Their requirements differ from those of 'legacy' carriers. They have thus been driving the development of secondary airports and cheaper, specialized terminals at large established airports (De Neuville, 2008; Barrett, 2004a). To preempt our conclusions, the low cost airline model has served many carriers very well , and has had a profound impact on the airline industry throughout the world, but it has been far from a ubiquitous success. It is also a model that has many dimensions, and has tended to morph over the

 

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years1. There are, in addition, reasons to suspect that the model as we have seen it in the past, will need to change to succeed in a dynamic market and, in the short term, to function well in the depressed macro-economic environments of 2009. We begin by exploring the criteria against which success should be measured, and the nature of the market environment in which low cost carriers have emerged, and then move on to see how they have faired in the Spencerian (Spencer, 1874 to 1896) world of Lamarckian evolution in which they operate.

THE CONCEPT OF SUCCESS To assess the achievement of any business model one needs criterion to set it against; essentially some form of matrix and a benchmark. Success in business can be assessed on several dimensions. In terms of the business community it may relate to profits, the standard neo-classical rent seeking criteria, but business success may also be seen in relation to market share or in terms of sales revenues (Baumol, 1962). Internally, the management of a firm may also see success is the context of performing well in a number of defined areas (Williamson, 1975), or it may more broadly ‘satisfice’ (Simon, 1959) and think in terms meeting a much wider range of objectives – sales, profits, market share, labor force retention, share price, etc. From the perspective of antitrust authorities, success is the absence of the exercise of market power, either in terms of extracting economic rents from consumers or through the enjoyment of X-inefficiency2. From a technology perspective, success is normally associated with new...
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