EC 420 10 Economics of Business

Strategy

Coursework assignment ­ Low-cost carrier industry,

focused on Germanwings

Author: Volker Küpper

INTRODUCTION ­ AN OVERVIEW OF THE MARKET FOR LOW-COST CARRIERS

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GERMANWINGS ­ AN ANALYSIS OF THE GERMAN LOW-COST CARRIER

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CONCLUSION

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REFERENCES

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BIBLIOGRAPHY

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Introduction ­ An overview of the market for low-cost carriers

Since the world′s first airline company has been established (German Airship

Transport Corporation in 1909), especially the new style of low-cost airlines

increased the competition on the market for commercial flights. Towards the end of

the century low-cost airlines offered first no-frills products at a low price. The concept

originated in the U.S., before it spread to Europe in the early 1990′s and

subsequently to the rest of the world (Chan 2000). One main reason for the

accelerated increase of low-cost flights can be seen in the EU enlargement, where

open skies arrangements were extended. As a result low-cost routes were

established by existing and new operators. The main characteristic of this new

strategic orientation was the lower operating cost structure than this of the traditional

market participants. The traditional airline industry had to face an essential change in

the market, with an increase of competition and new business models.

Focusing on Europe, there were only a few low-cost airlines before the year of 2000.

However, today about 60 low-cost carriers moved mainstream in Europe with a total

market share of 24%, whereas in Germany 23 low-cost airlines operate (Berster

2007).

Low-cost carrier (LCC), low-cost airline, no-frills carrier or discounter carrier are all

different names for the same occurrence: An airline that generally offers low fares in

exchange for eliminating many traditional passengers services. Thus, the low-cost

sector can be clearly distinguished from the traditional full-service sector, which is

primary based upon the quality of the service (Calder 2003). Other models within the

aviation industry are cargo flights, general aviation, regional carriers and charter

airlines, which will not be focused in the following elaboration.

Furthermore, low-cost airlines can be further separated into different types of

carriers, as they are influenced by different types of traditional carriers.

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Carriers and their relation to low-cost carriers

Source: Garriga 2004

This overview shows the classification and the correlation of low-cost airlines in the

aviation industry. The full-service carriers have been subdivided into two different

sectors. The first tier consists of full-service leaders, which are member of one of the

international airline alliances (e.g. Lufthansa, British Airways). The second tier covers

smaller carriers, which are basically supported by its home country (e.g. Swiss,

Austrian Airlines). Thomas Cook and LTU can be seen as typical operators for the

charter airlines, which do not operate during the whole year and can be rented by

travel agencies during the tourist season. The regional carriers are similar to the low-

cost carriers in some attributes, but vary especially in the range of offered services.

Influenced by these characteristics four different types of low-cost carriers can be

identified (Berster 2007):

· Low-cost carrier charter type

· Low-cost carrier full-service type

· Low-cost carrier original type

· Low-cost carrier regional type

The classification of Germanwings and its strategic position will be analysed later on.

Before explaining the main external influencing factors for the industry in a PEST-

analysis the major business models of low-cost carriers in contrast to the full-service

carriers has to be explained.

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