External shocks, such as terrorist attacks, wars in Afghanistan and Iraq, the SARS epidemic and the worldwide economic downturn have hit the aviation industry badly. Many airlines have posted substantial losses (Lindstädt and Fauser 2003, 23). According to the chairman of Lufthansa’s supervisory board, Jürgen Weber (“Fliegen, bis der Geier kommt”: 58), about half of the [network] airlines are de facto bankrupt. Franke (2004: 15) argues that “the severe crisis of the global aviation industry has primarily struck the classical network carriers (NCs) with their complex hub&spoke [sic!] operation platforms”. Low-cost carriers (LCCs), however, were not hit by the downturn. With their lean business models they offered a good alternative at a time when passengers began to look for ways to avoid paying the high prices NCs demanded (Franke 2004:15).
This paper analyses the competitive environment in the airline industry. I shall briefly describe the different business models in the industry: the LCC and the NC model. I will then analyze the role airports play. The main purpose however, is to identify possible future scenarios in the industry.
Table of Contents
1 Introduction
2 Business models
2.1 The LCC business model
2.1.1 The LCC business model of Southwest Airlines
2.1.2 The LCC business model of Ryanair
2.2 The NC business model
3 The role of airports
3.1 Airport requirements of LCCs
3.2 The airport’s point of view
4 Outlook on the future
4.1 Is the network airline business model broken?
4.2 Future of the LCC model
5 Conclusion
Objectives and Topics
This paper examines the competitive dynamics within the global aviation industry, specifically contrasting the traditional Network Carrier (NC) model with the increasingly successful Low-Cost Carrier (LCC) model. It aims to identify the structural reasons for the success of LCCs and evaluates the long-term viability of the network carrier business model in a changing market environment.
- Analysis of LCC business models using Southwest Airlines and Ryanair as case studies.
- Evaluation of the role of airports and their specific requirements regarding airline operations.
- Assessment of current industry trends such as consolidation and international alliances.
- Investigation into future survival strategies for traditional network carriers.
Excerpt from the Book
2.1.1 The LCC business model of Southwest Airlines
So far Southwest Airlines (SWA) seems to be the world’s most successful LCC. For more than 30 years SWA has been operating as a LCC. By any yardstick, SWA has been an example of “what Harvard strategists would call – sustainable competitive advantage” (Gillen and Lall 2004: 42). Exhibit 2 shows the net income for the US airline industry and for SWA. The airline’s great performance is also reflected in the stock market. “Southwest stock has been the best performing stock in the US since 1972 yielding an annualized return of 25.99 per cent” (Southwest Proxy Statement 2002, quoted in Gillen and Lall 2004: 42). SWA also became the airline with the highest stock market value in the world (Mercer 2002: 6). Exhibit 3 compares the performance of Southwest stocks with the performance of the Dow Jones Transportation Index.
Their claim to be “the only shorthaul [sic!], low-fare, high-frequency, point-to point carrier in America” (Southwest Airlines 2004a) might not be true anymore. However, SWA has been the first to make “a strategic choice to be different” (Porter 1996: 70) and its first mover advantages now pay back.
Nevertheless at first glance Southwest’s concept does not obviously stand for success. The hub-and-spoke system NCs use allows consolidation of traffic and therefore high load factors. This is what SWA gives up when it provides point-to-point service. Further, short-haul service implies that there are more take-offs and landings so aircraft spend more time on the ground (Gillen and Lall 2004: 42). At closer inspection, however, these are exactly the cost saving characteristics of the LCC model as mentioned in section 2.1.
Summary of Chapters
1 Introduction: This chapter highlights the crisis in the aviation industry triggered by external shocks and introduces the fundamental differences between Network Carriers and Low-Cost Carriers.
2 Business models: This section details the operational efficiencies of LCCs through case studies of Southwest Airlines and Ryanair and contrasts these with the traditional, infrastructure-heavy NC model.
3 The role of airports: This chapter examines the shifting relationship between airlines and airports, focusing on the specific cost-saving requirements LCCs demand from airport operators.
4 Outlook on the future: This section analyzes market trends including consolidation, alliances, and the potential for network carriers to restructure their business models to ensure long-term survival.
5 Conclusion: The summary concludes that while the LCC model will continue to grow, the NC model remains necessary but must undergo significant consolidation to survive.
Keywords
Airline Industry, Low-Cost Carriers, Network Carriers, Business Models, Southwest Airlines, Ryanair, Hub-and-Spoke, Airport Charges, Cost Efficiency, Aviation Market, Strategic Consolidation, Air Travel, Operational Effectiveness, Interlining, Airline Alliances.
Frequently Asked Questions
What is the primary focus of this research paper?
The paper focuses on the competitive landscape of the 21st-century airline industry, specifically analyzing the clash and coexistence of Network Carriers and Low-Cost Carriers.
What are the central themes discussed in the work?
Key themes include cost structures of different airline models, the impact of these models on airport operations, industry consolidation, and future market scenarios.
What is the main objective of the study?
The primary objective is to analyze the competitive environment and identify potential future scenarios for the airline industry, specifically regarding the viability of the network carrier model.
What research methodology is employed?
The study utilizes secondary research, comparative analysis of business models, and evaluation of case studies like Southwest Airlines, Ryanair, and Lufthansa to provide industry insights.
What does the main body of the paper cover?
The main body covers a comparison of LCC and NC business models, the requirements LCCs impose on airports, and an outlook on future market developments and structural changes.
Which keywords best characterize this work?
The work is characterized by terms such as Low-Cost Carriers, Network Carriers, cost efficiency, hub-and-spoke networks, and airline consolidation.
How does Southwest Airlines manage to maintain its competitive advantage?
Southwest maintains its advantage through a "strategic choice to be different," utilizing lean production, point-to-point services, and high-frequency flights which result in significant cost savings compared to network carriers.
Why are airports often hesitant to partner with low-cost airlines?
Airports are hesitant because low-cost airlines require low fees and quick turnaround times, which do not align with the higher aeronautical revenues typically generated by full-service network carriers.
What is the "hub-and-spoke" network and why is it considered costly?
It is a network strategy that allows for extensive connectivity but requires expensive infrastructure and complex coordination, leading to high complexity costs that many network carriers struggle to manage.
- Quote paper
- Christian Hammer (Author), 2005, The Airline Industry in the 21st Century - Competition between Network Carriers and Low-Cost Carriers, Munich, GRIN Verlag, https://www.grin.com/document/61822
