Transferring the Successful Business Model of Short-Haul Low-Cost Airlines to the Long-Haul Market – Why Does It Not Work?

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Transferring the successful business model of
short-haul low-cost airlines to the long-haul
market – why does it not work?

Universidad del Pacifico
Globalization, Multinational Corporations & Foreign Direct Investment Research Paper
3.12.2012

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1. Introduction

In terms of financial achievements the airline industry has not performed well over the past decades. It has even been stated as ‘an example of how not to run business in the 21st Century, when looking at hard numerical facts’ (Button & Ison , 2008). However, there have been exceptionally flourishing cases, especially in the low -cost short-haul airline industry. Companies such as Ryanair in Europe or Southwest Airlines in the USA have gained considerable profits throughout the past decade. Even during the aftermath of the September 11, 2001, terrorist attacks, incurring severe losses in the airline industry, they have remained profitable (Button & Ison, 2008, Flouris & Walker 2005). As opposed to full -service carriers, most low-cost carriers’ (LCC) business models consist of one especially important feature, namely its price. Rigorously simplifying the consumer product and focusing on the core of air transportation enables LCCs to charge significantly lower fares and thus to compete with convent ional airlines. Low-cost shorthaul airlines have been gaining considerable market shares and now dominate many markets (Button & Ison, 2008). The successes of these low-cost carriers however are only present in the segment of short-haul distances and have yet to be achieved in the segment of long-haul flights. Several attempts to enter the low-cost long-haul airline segment have been made in the past but eventually all trials revealed to be unprofitable. Naturally the following question here is: Why? Is the low-cost ‘no-frills’ airline model economically not viable for long-haul flight routes? This paper compares the cost and other advantages of LCCs and evaluates how far they might be applied to long-haul sectors.

It starts by discussing the vital success factors used by short-haul LCCs in their business models and then continues to analyse previously failed attempts to enter the low-cost long-haul segment and speculates about proposals of how the LCC model could work. Finally a conclusion will be drawn for why the LCC model has not yet been successfully transferred from the short -haul to the long-haul flight segment.

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2. Characteristics and key success factors of short-haul low-cost airlines

2.1 Airport choice
A significant part of airlines’ expenses are airport fees so LCCs clearly have an incentive to avoid these costs. Fees charged by airports are generally relative to demand. Therefore, major airports such as Frankfurt International or London Heathrow eviden tly charge more to airlines than an adjacent secondary airport, e.g. Frankfurt -Hahn or London Stansted. This can be seen throughout Europe and North America where the majority of LCCs are solely based on such airports. Additional beneficial features of the se secondary locations are that they are less congested and enable faster turnaround times of aircrafts. This allows for more flight capacity per day, meaning an increase in aircraft and crew utilisation.

2.2 Type of aircraft
A commonly observed and very important characteristic of short-haul LCCs is the use of only one type of aircraft. Southwest Airlines for example, entirely uses Boeing 737s and Ryanair operates more than 290 Boeing 737 -800s (Flouris & Walker, 2005). Operating various types of aircrafts not only increases costs for maintenance and crew training but can also be a cause of efficiency loss. If flight attendants, pilots and maintenance workers exclusively use one type of aircraft, routine behaviour will lead to more efficient use of labour. Additionally, replacement parts of aircrafts can be bought in large orders creating price advantages through economies of scale. This is not only true for spare parts but...
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