Research in Transportation Economics, Volume 24, Issue 1,
The Economics of Low Cost Airlines, 2008, Pages 61-67
Can long-haul low-cost airlines be successful?
Dr Peter Morrell
Cranfield University, Beds MK43 0AL, UK
Phone: +44 1234 754242; Fax: +44 1234 752207
A key question is whether the very successful, largely short-haul LCC business model can work over long-haul sectors? This paper compares the cost and other advantages of LCCs and evaluates how far they might be applied to long-haul sectors. It is estimated that cost advantages might be much lower than the 50-60% on shorthauls. Other factors such as the adoption by network airlines of some LCC features and their likely competitive response, the limited potential for market stimulation, the need for dense markets and feed traffic all combine to cast doubt on the widespread establishment of the business model for long-haul flights.
Keywords: airline operations; long-haul air services; low-cost airline viability
The idea of a low-cost long-haul airline is not new but previous attempts have not been successful. Since their demise, however, new technologies and business processes have been developed, so that it is appropriate to re-examine the economics of these services. One of the first of such ventures was Laker Airways that in 1977 transformed its UK charter operations into a long-haul ‘no frills’ airline. Its first ‘SkyTrain’ flight was London Gatwick to New York and it subsequently added Los Angeles and Miami. The features it had in common with today’s low-cost business model were:
Point-to-point operations, with no interlining or transfers
In flight catering available at extra cost
High density single class seating
The airline had a single aircraft type, the McDonnell Douglas DC10, with one class 345 seats, and offered an introductory fare of £32.50 compared to the lowest existing equivalent fare of just under £100. It is doubtful whether this cut in fares was sustainable, another LCC feature being the ability to offer large reductions in fares based on significantly lower unit costs. In order to reduce the disadvantage of having no distribution system, initially it took no advance bookings, with passengers having to queue at the airport or town terminal for each flight. It failed in 1982 as a result of the economic downturn in the early 1980s, strong competition from other transatlantic carriers and the rapid depreciation of its base country currency. The nature of the SkyTrain product changed considerably from its introduction, first offering bookable and advance purchase tickets and later adding a ‘Regency Class’ cabin (Banks, 1982).
The Laker venture was a stand-alone operation. Soon after its demise, in 1983, a US based low-cost airline People Express started international operations from New York to London Gatwick, later adding Montreal and Brussels. This differed in being an expansion from a very successful low cost domestic base, and in providing connecting flights at its Newark hub. It also had some premium class seats, although (in common with Southwest and later LCCs) its mantra was simplicity. It also charged US$3 for checked baggage, a practice that seems to be making a revival. Over-expansion and management problems led to its demise in 1987.
Since the failure of these two long-haul LCCs, the internet has become an effective tool for selling airlines seats. This would have allowed them to go direct to the market, bi-passing costly travel agents that were often tied to network carriers. Laker’s alternative of the sale of seats on the day of departure at the airport or town terminal would never have been accepted by much of the potential market. Second, LCCs have developed a simpler means of fare differentiation by time of booking, which has become an effective alternative to the previously very successful revenue management techniques...
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