Low-cost carrier industry: A focus on Germanwings strategy

INTRODUCTION - AN OVERVIEW OF THE MARKET FOR LOW-COST CARRIERS 3

GERMANWINGS - AN ANALYSIS OF THE GERMAN LOW-COST CARRIER 8

CONCLUSION 12 REFERENCES 14

BIBLIOGRAPHY 16

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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 lowcost 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 PESTanalysis the major business models of low-cost carriers in contrast to the full-service carriers has to be explained.

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Source: O’Connell (2005)

The table shows the most significant general strategic differences of low-cost carriers (LCC) and full-service carriers (FSC). Whereas full-service carriers follow a generic strategy of differentiation, the low-cost carriers try to achieve cost minimisation and cost leadership (Hunter 2006). This second model is mainly based upon the effort to reduce any kind of complexity costs, in order to guarantee low prices for the customer. To realise this strategy, for instance a single type of aeroplanes is often used which reduces the costs for additional training and services. Unreserved seating encourages the passengers to board early and quickly which promotes a smoothly boarding. Moreover, flying to cheaper secondary airports early in the morning or late in the evening avoids air traffic delays and uses the advantage of lower landing fees.

What especially Germanwings does to economise its business will be analysed in the second part of this elaboration, as a part of the strategic mapping. While not every low-cost carrier is focusing on all of these issues, some carriers modify their low-cost strategy to reach an outstanding position compared to its competitors.

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