The entry of low-cost carriers (LCCs) in the early 1990ies revolutionized the European airline industry. Before the LCCs entered the European short-haul market, incumbent full service carriers (FSCs) were able to operate relatively unhindered. Supported by many deregulations, LCCs set their focus on a cost base as low as possible, so they were able to offer fares tremendously lower than incumbent players. Even though they took some market share from the FSCs, the main success was based on the ability to reach new customer segments. Passengers, previously travelling by car or long-distance busses, took advantage of newly affordable airline fares and were willing to incur limited comfort.
Now, around 20 years after the first entry of European LCCs, the short-haul market is not expected to continue growing significantly. Hence, if the LCCs want to continue their expansion, they need a ‘new market’, and it seems just like a question of time until they add long-haul routes to their route network. Nevertheless, the long- and short-haul market are comparable just to a limited amount. As we will see in the following analyses and discussions, several specific characteristics require fundamental changes in the current LCC business model, which is optimized for short-haul operations.
The focus point of this thesis is the development of an auspicious entry mode, based on theoretical economic frameworks. In comparison to the short-haul market, competitive interactions between incumbent FSCs and entering LCCs are expected to be much more intense on long-haul routes. This is based on the fact that LCCs will not be able to sustain their high cost advantages also on long-haul routes. For long-haul flights it is also not possible to reduce provided comfort and additional services in such a way the LCCs currently do on their short-haul operations. Hence, on long-haul routes, entering LCCs and incumbent FSCs will be active much more in the same market than they currently do, which implies a much higher degree of competition. This provides several points of contact for game theoretical considerations, as we will see in the following chapters.
Table of Contents
1. Introduction
2. Characteristics of LCCs
2.1 Route network and additional services
2.2 Distribution channels & pricing
2.3 Operational aspects
2.4 Strategic positioning
3. Characteristics of the long-haul market
3.1 General structure and incumbent players
3.2 Requirements
3.2.1 ‘Feeding’ and ‘de-feeding’
3.2.2 International code-share alliances
3.3 Entry Barriers
3.3.1 Theoretical background
3.3.2 Entry barriers to the long-haul market
4. Entering the long-haul market
4.1 The transferability of the low-cost model from short-haul to long-haul
4.1.1 Transferable characteristics of the business model
4.1.2 Required adjustments
4.1.3 Conclusion: The low-cost long-haul business model
4.2 Judo economics as an auspicious framework for entry
4.2.1 Overall Framework
4.2.2 Capacity limitations: Theoretical background and transferability to this topic
4.2.3 Quantitative model for the ‘movement step’ of the Judo strategy
4.3 Practical implications for the entry
4.3.1 Overcoming barriers of entry
4.3.2 The Judo entry
5. Empirical evidence: Norwegian Airlines
6. Conclusion
7. List of references
Research Objectives and Core Themes
This thesis examines the economic feasibility and strategic implementation of low-cost carrier (LCC) entry into the European long-haul market. It investigates whether established short-haul business models can be adapted to long-haul routes, identifies potential entry barriers, and utilizes "Judo economics" as a framework to propose an auspicious entry strategy that minimizes the risk of aggressive competitive reactions from incumbent full-service carriers (FSCs).
- Analysis of the adaptability of the LCC business model to long-haul operations.
- Evaluation of structural and strategic entry barriers in the long-haul airline market.
- Development of a game-theoretic "Judo strategy" to facilitate successful market entry.
- Empirical case study of Norwegian Airlines' entry into the long-haul market.
- Assessment of capacity limitations as a credible signal to incumbent players.
Excerpt from the Book
4.2 Judo economics as an auspicious framework for entry
The entry of a LCC into the market for long-haul flights is of special interest for economists from different perspectives. On the one hand, in the short-haul market the entry of LCCs was driven by a tremendous success based on a revolutionary business model. On the other hand, due to lower cost advantages on long-haul routes, the majority of potential customers for the LCCs will not choose between not travelling or travelling with another kind of transport and flying with the LCC. Hence, the key to success for LCCs on long-haul routes will be a successful competition with the incumbent FSCs. The LCC’s outcome will therefore be based on the ability to take market share from the FSCs. The strength of the incumbent FSCs is based on several reasons. Due to long-haul operations for several decades, the FSCs possess long-term experience, existing route networks, installed capacities and high valued brand images. Even though most of the FSCs were privatized in the last one or two decades, governments still tend to protect their former national flag carriers. To sum up, by entering the market for long-haul routes, the LCCs betake themselves into a challenging competition with strong incumbent players, influenced by existing barriers to entry (see previous analysis).
Economic literature contains many different models and frameworks of how an entering firm could overcome entry barriers and strength of incumbent firms. Due to limited space, this thesis will focus on one specific framework, namely Judo economics. This framework seems to be the best fitting and most expedient one for the underlying topic. On the one hand, it allows quantitative analyses connected to formal theory. On the other hand, all derived results have the clear focus on practical implications and empirics in reality. Furthermore, the required ‘setting’ regarding market structure and involved players is congruent with the scenario from the topic of this thesis, as we will see in the following paragraphs and chapters.
Summary of Chapters
1. Introduction: Presents the revolution of European aviation by LCCs and sets the research focus on the expansion into long-haul markets, outlining the key challenges and thesis objectives.
2. Characteristics of LCCs: Details the operational and strategic pillars of the traditional LCC model, including point-to-point networks, ancillary revenue generation, and cost-leadership strategies.
3. Characteristics of the long-haul market: Examines the regulatory environment, the role of incumbent flag carriers, the necessity of hub-and-spoke networks, and the prevalence of entry barriers like code-share alliances.
4. Entering the long-haul market: Evaluates the transferability of the LCC model, develops a game-theoretic model based on Judo economics, and proposes practical strategies for overcoming entry barriers.
5. Empirical evidence: Norwegian Airlines: Applies the theoretical findings of the previous chapters to the real-world example of Norwegian Airlines' strategic entry into long-haul operations.
6. Conclusion: Synthesizes the main research results, confirming the potential for LCC success in the long-haul sector if a limited entry strategy is adopted and managed correctly.
Keywords
Low-Cost Carriers, LCC, Full Service Carriers, FSC, Long-Haul Market, Judo Economics, Entry Barriers, Game Theory, Airline Strategy, Market Entry, Capacity Limitation, Competitive Interaction, Norwegian Airlines, Business Model, Ancillary Revenue.
Frequently Asked Questions
What is the core focus of this research paper?
The paper explores the economic viability and optimal entry strategies for European low-cost carriers (LCCs) aiming to enter the long-haul flight market, which is currently dominated by full-service carriers.
Which key themes are analyzed in the work?
Key themes include the differences between short-haul and long-haul market requirements, the transferability of cost-saving models, the identification of entry barriers, and the application of Judo economics as a strategic framework.
What is the primary objective or research question?
The main goal is to determine an "auspicious" entry mode for LCCs into long-haul routes that balances the need for market entry with the requirement to avoid aggressive retaliation from established incumbents.
What scientific methodology is applied?
The research uses a combination of literature analysis regarding economic theory and a self-developed game-theoretic, two-staged decision model to derive optimal entry strategies.
What is covered in the main section of the thesis?
The main section evaluates structural and strategic entry barriers, discusses the transferability of the LCC business model, and mathematically models the competitive interaction between a new entrant and an incumbent firm.
Which keywords best characterize this work?
The work is characterized by terms such as Low-Cost Carriers, Judo Economics, Long-Haul Market, Entry Barriers, and Competitive Interaction.
How does the "Judo strategy" help a new airline entrant?
The Judo strategy suggests that a small entrant should enter with a limited number of routes (small entry) to signal non-aggression, thereby avoiding a costly competitive response from the larger, stronger incumbent.
Why is Norwegian Airlines used as a case study?
Norwegian Airlines serves as a primary example because it is the first European LCC that successfully implemented long-haul operations, and its strategy mirrors the theoretical "Judo entry" described in the paper.
What role do "feeding" and "de-feeding" play in long-haul success?
These terms describe the need to transport passengers to and from the origin and destination hubs, a critical requirement for filling large long-haul aircraft that point-to-point LCCs must address.
How do frequent flyer programs act as entry barriers?
Frequent flyer programs create high switching costs for loyal passengers, making it difficult for new entrants to attract existing customers from established FSCs who rely on these loyalty incentives.
- Quote paper
- Jakob Stemmler (Author), 2013, The Entry of Low-Cost Airlines into the Market for Long-Haul Flights, Munich, GRIN Verlag, https://www.grin.com/document/300435
