EU Airline Industry: Low Cost Carriers vs. Incumbents
(2002)Department of Business Administration
- Abstract
- The airline industry is undergoing hard time after the deregulation. Incumbents are facing increased competition from the new entrants- low cost airlines and try to keep their market share, which is mainly composed of business travelers to themselves. At the same time low cost airlines by providing low cost, point-to-point services try to compete with incumbents. Strategies of both incumbent and low cost carriers are shaped by five competitive forces dominant on the market. These forces determine the success of each of the category of airlines to some extent and influence their choice of certain strategies. the most important force, which shaped the strategies of the incumbent airlines was regulated environment. Since for a long time until... (More)
- The airline industry is undergoing hard time after the deregulation. Incumbents are facing increased competition from the new entrants- low cost airlines and try to keep their market share, which is mainly composed of business travelers to themselves. At the same time low cost airlines by providing low cost, point-to-point services try to compete with incumbents. Strategies of both incumbent and low cost carriers are shaped by five competitive forces dominant on the market. These forces determine the success of each of the category of airlines to some extent and influence their choice of certain strategies. the most important force, which shaped the strategies of the incumbent airlines was regulated environment. Since for a long time until the deregulation of 1993, governments had great control over the flag carriers, and bilateral agreements guaranteed virtually no competition, that could damage European incumbent carriers, they started to pursue, expensive strategies, which are used to great extent at present as well. The strategies include operations from big centralized airports, building hub-and-spoke networks, participation in CRS, high remuneration of the work force, ticketing services, luxurious lounges for business travelers. As for the strategies of low cost carriers, which entered the market after deregulation and thus had more freedom to adapt and act according to the market conditions than incumbents, which were used to obey governments’ advice, different kind of costs served as forces for shaping their strategies. If the environment had been the same as before the deregulation, probably costs would not have been such an important factor, however, since new entrants needed to compete with already established incumbents lower fares, which can only be offered when managing costs effectively, was seen as the initial point of departure for entering competition. As a result low cost carriers fly short haul routes, focus only on point-to-point traffic, one cabin, have large share of their sale via internet and call centers. This kind of operations make it possible for low cost airlines to keep their costs low, expand by entering new markets and increase their share of profits. For a while after the emergence of the low cost phenomenon in Europe incumbents did not see any threat in the competition with them. However, it seems that the approach has changed as BA’s launched GO in 1998, fares were lowered by some incumbent airlines , they also increased use of FFPs. In general there are five strategic options available and used by incumbents in competition with low cost airlines. Cost reduction is an important strategy since incumbents have inherited high costs due to the salary structures, frill-services and the hub airports they operate from. Alliances are important since they allow for the economies of scale and in general put incumbents in better competitive situation by strengthening their hub operations and increasing the scale of their networks. Code Sharing enables incumbent airlines to create the image of operating the flight, which in reality is served by their partners. Code sharing makes the feeling of direct flight, which naturally in turn helps to attract more customers. Price fixing, which is illegal but still sometimes pursued by incumbents facilitates agreement on certain prices between incumbents and it can cause damage to low cost airlines since lowered fares might disturb its ability to match the fares and thus even might undercut its expansion potential in new markets. Predatory pricing is also illegal activity, which nonetheless historically has been pursued by airlines in order to drive new entrants out of business. Of these five options, probably the most easily achievable and sustainable strategies are entering alliances and code sharing. Cost reduction is not an easy strategy and can be accomplished in the long-term perspective after wise planning of activities. Both price fixing and predatory pr (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/1342015
- author
- Khvedeliani, Marika
- supervisor
- organization
- year
- 2002
- type
- H1 - Master's Degree (One Year)
- subject
- keywords
- airline industry, airline, low cost carrier, incumbents, traffic, Management of enterprises, Företagsledning, management
- language
- English
- id
- 1342015
- date added to LUP
- 2002-06-04 00:00:00
- date last changed
- 2012-04-02 14:25:24
@misc{1342015,
abstract = {{The airline industry is undergoing hard time after the deregulation. Incumbents are facing increased competition from the new entrants- low cost airlines and try to keep their market share, which is mainly composed of business travelers to themselves. At the same time low cost airlines by providing low cost, point-to-point services try to compete with incumbents. Strategies of both incumbent and low cost carriers are shaped by five competitive forces dominant on the market. These forces determine the success of each of the category of airlines to some extent and influence their choice of certain strategies. the most important force, which shaped the strategies of the incumbent airlines was regulated environment. Since for a long time until the deregulation of 1993, governments had great control over the flag carriers, and bilateral agreements guaranteed virtually no competition, that could damage European incumbent carriers, they started to pursue, expensive strategies, which are used to great extent at present as well. The strategies include operations from big centralized airports, building hub-and-spoke networks, participation in CRS, high remuneration of the work force, ticketing services, luxurious lounges for business travelers. As for the strategies of low cost carriers, which entered the market after deregulation and thus had more freedom to adapt and act according to the market conditions than incumbents, which were used to obey governments’ advice, different kind of costs served as forces for shaping their strategies. If the environment had been the same as before the deregulation, probably costs would not have been such an important factor, however, since new entrants needed to compete with already established incumbents lower fares, which can only be offered when managing costs effectively, was seen as the initial point of departure for entering competition. As a result low cost carriers fly short haul routes, focus only on point-to-point traffic, one cabin, have large share of their sale via internet and call centers. This kind of operations make it possible for low cost airlines to keep their costs low, expand by entering new markets and increase their share of profits. For a while after the emergence of the low cost phenomenon in Europe incumbents did not see any threat in the competition with them. However, it seems that the approach has changed as BA’s launched GO in 1998, fares were lowered by some incumbent airlines , they also increased use of FFPs. In general there are five strategic options available and used by incumbents in competition with low cost airlines. Cost reduction is an important strategy since incumbents have inherited high costs due to the salary structures, frill-services and the hub airports they operate from. Alliances are important since they allow for the economies of scale and in general put incumbents in better competitive situation by strengthening their hub operations and increasing the scale of their networks. Code Sharing enables incumbent airlines to create the image of operating the flight, which in reality is served by their partners. Code sharing makes the feeling of direct flight, which naturally in turn helps to attract more customers. Price fixing, which is illegal but still sometimes pursued by incumbents facilitates agreement on certain prices between incumbents and it can cause damage to low cost airlines since lowered fares might disturb its ability to match the fares and thus even might undercut its expansion potential in new markets. Predatory pricing is also illegal activity, which nonetheless historically has been pursued by airlines in order to drive new entrants out of business. Of these five options, probably the most easily achievable and sustainable strategies are entering alliances and code sharing. Cost reduction is not an easy strategy and can be accomplished in the long-term perspective after wise planning of activities. Both price fixing and predatory pr}},
author = {{Khvedeliani, Marika}},
language = {{eng}},
note = {{Student Paper}},
title = {{EU Airline Industry: Low Cost Carriers vs. Incumbents}},
year = {{2002}},
}