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US airlines industry, as well as the other countries', has a significant change because of the present of the Low-Cost Carriers. The point-to-point route, low fares, friendly and high-quality services are some of their specific characteristics that attract market demand. This report aims to discuss and make a comparison of Low-Cost Carriers (LCCs) and Full-Service Carriers (FSCs) and analyse the reasons behind the LCCs' success.
The unique business model of Low-Cost Carriers in comparison with the Full-Service Carriers
Low-Cost Carriers entered US airlines industry after The US Congress passed the Airline Deregulation Act in 1978. This act removes all the government control of fares and services provided by the airline industry (U.S. GAO 1996). It means that airlines are free to make their own decision in term of fares and services. Southwest Airlines was the first one who adopts the unique business model based on low-cost process and quality services. By this, the airlines then launched a very aggressive pricing strategy in order to gain more demand (Sampaio, R 2009).
Profitability of the LCCs in comparison with FCCs
Since 1990, LCCs has grown dramatically as they now has large market share of airline industry. Ito and Lee (2003) provide statistics of market share of domestic origin and destination passengers that support the statement, which are shown in the Table 2. From that table we can see that in the early 1990's there was only one LCC with market share more than 1%. It was changed in the early 2000's because there were four LCCs which has market share exceeded 1%. And, for the first time ever, Southwest Airline gained the largest domestic market share.
The reason behind the successful of the LCCs is because they use their resources more effectively than the FSCs (Finch 2008). By using their resources effectively they created values and gained profitability from that. Resources here include technology, flight structure, labour, and every thing that belong to the company which can be use to achieve the company's goal.
Gary Kelly, the Vice Chairman of the board and the CEO of Southwest Airlines, on the interview with Baseline magazine editor Tom Steinert-Threlkebl (Baseline, ), briefly explained the secrets behind the success of the Southwest Airlines. The key factor is they try to remain the low-cost producer in the airline industry in order to meet their customer need. Southwest use technology to be more effective and efficient in term of using their resources and lowering their operation cost. They started to use electronic tickets in their middle 1990's. This system saves customer's time rather than using manual transaction. It also benefits the company in term of operation cost because they save around 10% of cost. In the old ways they have to pay to the travel agency around $10 per booking, now they only pay around $1 per booking for electronic transactions. Southwest also provides self-service kiosks at multiple points in the airport so that customers can get their boarding passes from those kiosks rather than stand on the long queue.
Southwest also use Varolii, a service provider that can automatically contact, answer or call, their passengers by phone call, text messaging and email (Baseline ). This effort is made to satisfy the customers need. But Southwest was not the first one that use this kind of proactive customer service. Some major airlines such as Northwest and Delta Air had used it before Southwest. By this means that LCCs not always pioneer in term of using technology to satisfy the customers. They look and analyse what the major airline did and if it is good for them then they will copy that. JetBlue did different thing but same goal as technology also becomes a key factor of their success. JetBlue now apply a system called SAP business software in order to get more capability on tracking their day-to-day operation (Dignan 2005).
Another option of reducing the cost is by having minimum number of labour. Southwest has done very well on this matter. In the past the used to have around 95 employees per aircraft, they now reduce it to 74 employees per aircraft (Baseline ). This can be achieved by the use of technology such as electronic tickets and self-service kiosks. Some LCCs also cut down the number of their aircraft crew by giving different type of service in the air compare to the premiers' one. Instead of giving extra food and drinks during the flight, which would end up with expensive fares, these airlines now give options for passengers by selling food and drinks in the air. So the presence of the aircraft crew in the aircraft is just to make sure that all safety procedure is done by the passengers and other small services. It does benefit the airline in term of labour and remain their low cost. It also convenient for the passengers because of the low-fares and the chance of choosing food and drinks they want, or even not both of them means they are free not to buy it and bring their own.
This kind of cheap-service is hard to copy by the FSCs because the full-service type is already become their brand. Let say, Delta or USAir, they have a dignity that hampers them to lower down their service to that level. The legacy airlines maintain their full-services such as extra food and drinks, music, live TV and movies during the flight, and so on. Surely, it will cost them more on purchasing those all kind of things to provide it to the passengers and at the end they have to increase the fares to cover all those cost. One thing that benefits the FSCs of doing this is they have 'permanent' customers, usually come from high-class people, who really need these full-services. This high-class people, for example, are state officials, conglomerates, celebrities, etc. For these people money is not a big problem as long as they have the best services that they want. The FSCs work with these people and maintain their good relationship with them.
Another key factor is while remain in the low-cost process; the LCCs still try to give their best services for the customers. David Neeleman, the CEO of JetBlue Airways, was interviewed by the Executive Editor, Robert C. Ford, said that "I don't care what business you are in or what you are selling; if you have the best product of the lowest cost and the best people run your business, then you are going to be successful" (Executive Magazine ). Neeleman formed his management team from the airline industry veterans. JetBlue also has some unique models that make them different with the other airlines. They pioneered a unique call centre which they call a home-reservationist system. This means all calls to JetBlue's reservation number are handled by reservationists working out from of their homes. The advantages for the company are they reduce the cost for stationery and office services and also reduce the salary for the reservationists. On the other side, these employees are high-motivated because they work from home which is convenient for most people. In order to satisfy the customer JetBlue also has specific model for their airline that is they put live TV on the seatback. This becomes a brand of JetBlue airplanes for years until the other airlines started to copy it. Other kind of unique service is that JetBlue provide the delayed-fight customers some financial compensation that can be used for their future flights and JetBlue cover all the expenses caused by that.
Major airlines also offer high-quality services to their customers. As said above, full-service and high-quality already become their brand. In order to attract passengers major airline use to work with other major company such as hotel and tourist agency to offers packages, say, vacation packages. For example, USAir sometimes offers packages for family who want to travel overseas. It still not cheap but it is full entertainment and luxurious services (Del Russo, Travel Weekly). It usually happens on vacation season such as Christmas time and it does increase their benefit.
Another thing that both Southwest and JetBlue does to lower their operation cost is their point-to-point route. This becomes a specific character of all LCCs (Finch 2008). It means that they fly straight to the destination as a straight line or single leg. By doing this the airlines reduce their cost on baggage transport and fuel, and obviously cost of using all facilities in the airports. It also keeps the planes to have more times in the air which means more return on assets.
Contrariwise, the FSCs use to fly with hub-and-spoke structure means that the passengers have to fly to the hub, usually a larger airport, and then fly to their final destination (Finch 2008). This type of flight structure put more cost on the usage of the more than one airport, fuel, and all the services that being used by the aircrafts and its crews. It also time consuming for the customers whose destination in the 'spoke' one.
To sum up, the LCCs main secret of success is they try to meet what customers need. General question, what is the people need? Something that is cheap but best quality. This is the main reason why people use LCCSs rathen than FSCs. They can have 'equal' services but in low fares. Equal here does not mean same services as the PSCs' one. It is different and unique one but still provide same satisfaction for the passengers.
Most of the PSCs now try to copy what LCCs has done. They try to reduce operation cost in many ways but maintain their full-service for the passengers. Obviously, they will not get lower fares at the LCCs level because they still have to put more budgets on providing the full-service but at least they can cut their fares. As Gary Kelly said "all carriers are now low-cost carriers" means all airlines now look at the possibility of reducing their cost in order to be more competitive in the airline industry.