Low-cost carriers related issues

In the airline industry, low-cost carriers (hereafter LCCs) have reshaped the competitive environment within liberalized markets and have made significant impacts in the world’s passenger markets, which had previously been dominated by full-service carriers (hereafter FSCs) (O’Connell and Williams, 2005). Mason (2000) pointed out that LCCs could achieve a significantly lower cost base than FSCs by adopting operational and commercial strategies that differed from those of FSCs, and LCCs tended to focus on short-haul routes operated using only one aircraft type to reduce maintenance costs, and maximize crew flexibility. He further used a stated preference survey of European business travelers to assess the propensity for these travelers to use short-haul LCCs. The results showed that price was the most important purchase factor, and most business passengers that had adopted the low-cost product would consider using it again for future business trips.

He also demonstrated the effect of company size on traveler’s selection of airlines and the utilities placed on the variables examined. Mason (2001) indicated that although the capture of UK short-haul business travel traffic by LCCs has been viewed as unplanned when LCCs entered markets, the business travelers sector now represents a major market for LCCs. He also carried out a survey of short-haul business travelers, and found that travelers were becoming increasingly price sensitive, and a half of those travelers on FSCs indicated that their companies encouraged the use of LCCs. It also showed that there is a group of travelers who had begun travelling for business since the prices offered on LCCs made such travel worthwhile. There were 79% of travelers who thought that business class service did not offer value for money for short-haul travel, suggesting that LCCs were more likely to attract these travelers. Importantly, 98.7% of the travelers using easyJet would consider using LCCs for business in the future.

Clarke (2004) indicated that the market share of LCCs had increased to 20% of European airline passengers, and believed that the market still offered considerable growth opportunities. He further showed that LCCs had a 43% share of the UK domestic market, compared to 28% in the US. Company Barclaycard (2005) showed that although the original focus of LCCs was on leisure and tourism travelers, 74% of UK business travelers said that they had used the service of LCCs for business trips. O’Connell and Williams (2005) pointed out that LCCs had pursued simplicity, efficiency, productivity and high utilization of assets to offer low fares to passengers. Specifically, the characteristics of LCCs include a simplified fare structure, use of secondary airports, point-to-point direct flights, short turnaround time, a single type of aircraft, payment for in-flight services, and so on. They indicated that prior to 2002, there were no significant LCCs operating in the Asia Pacific rim, so the experience of LCCs was a relatively new phenomenon in the region with much of the necessary management experience brought in from outside the region. They

further conducted a survey of passengers in both Europe and Asia to compare passengers’

selection criteria between FSCs and LCCs. It showed that the positioning of secondary airports long distances from the major cities did not seem to pose a significant barrier to the use of LCCs, and if FSCs reduced their fares by 30%, then 43% on average of LCCs’

passengers would switch over to FSCs.

Fourie and Lubbe (2006) indicated that there were some differences in the European, Brazilian and South African airline operating environments, and then conducted a survey of passengers in South Africa to investigate factors that may influence business travelers in their selection of FSCs or LCCs. They found that compared to similar studies, travelers in different countries viewed service attributes such as frequent flyer programs (FFPs), the flight frequency, in-flight service and business lounge options in a similar way. However, they showed that for those travelers who preferred LCCs and those who preferred FSCs, there was no significant difference between them when they placed the importance on price.

It may due to that the domestic FSC of South Africa had been competing strongly on price in recent years, with its price often the same as that of LCC. Huse and Evangelho (2007) investigated business traveler heterogeneity using data from a survey carried out amongst airline passengers, and used factor analysis techniques to find types of travelers through grouping of preferred attributes. The results showed that passengers who had previously used LCC services did not value FFPs as highly, i.e. there was a negative and significant effect on the valuation of this attribute. It also indicated that previous exposure to the LCC made passengers re-evaluate their preferences towards in-flight service in a way that was more favorable to the LCC. In addition, a substantial portion of business travelers, who previously did not fly for business reasons, would use LCCs. Table 2.6 summarizes the main issues and features as well as important results in the existing literature on low-cost carriers.

Summary:

The literature on LCCs focused on investigating the behavior of LCCs’ passengers and FSCs’ passengers, and the heterogeneity and differences existing between them. These studies demonstrated that a significant number of business travelers are using LCCs for short-haul services, although this kind of travelers is not the original focus of LCCs. These travelers were showed to reassess the valuation of some service attributes after they used LCCs, and said that they will consider using LCCs again for future business trips. It suggests that LCCs are more likely to attract these travelers than FSCs. However, the literature has rarely explored how the behavior of travelers is affected by the social influences or word-of-mouth influences, which come from the opinions and information of social neighbors around travelers, and which may have a certain level of power to adjust travelers’ purchase decisions. In addition, few studies have investigated the influences of small-world properties of a social network on the traveler decisions and the LCCs diffusion in the network.

Table 2.6 Main issues, features and results on low-cost carriers related literature Authors Main issues and features Important results Mason (2000) Conduct a stated preference

survey of European business travelers to assess the propensity for these travelers to use short-haul LCCs

Most business passengers that have adopted the low-cost product would consider using it again for future business trips, and the company size affects the traveler’s selection of airlines and the utilities placed on the variables examined

A half of those travelers on FSCs indicate that their companies encourage the use of LCCs, and 98.7% of the travelers using easyJet would consider using LCCs for business in the future O’Connell and

There were no significant LCCs operating in the Asia Pacific rim prior to 2002, and if FSCs reduced their fares by 30%, then 43% on average of LCCs’ passengers would switch over to FSCs

Compared to similar studies, travelers in different countries view service attributes such as FFPs, flight frequency, in-flight service and business lounge options in a similar way

Huse and Evangelho (2007)

Investigate business traveler heterogeneity using data from a survey carried out amongst airline passengers

Previous exposure to the LCC make passengers re-evaluate the valuation of some service attributes in a way that is more favorable to the LCC

Source: this dissertation