Introduction:
A major consequence of the global pandemic is the severe economic recession that has plagued most countries. This was a situation that caught the world off-guard with no policies in place to protect individual industries, organizations and professional practices. While, in India, the Honourable Prime Minister along with the Finance Ministry has attempted to provide concessions and tax rebates[1] to alleviate economic burdens, the challenge that still presents itself is how industries such as the aviation sector and manual labour will recover from lack of clientele during mass shutdowns, especially those of borders and imposition of travel restrictions.
When dealing with such a question, one has to first understand that the idea of negative economic growth is not always dependent upon external contingencies such as the current “COVID – 19 situation” which has led to most businesses, industries and professional practices seeing an economic contraction[2] for an indefinite period. Economic recessions have been a time-worn impact on the nature of deficit any organization may face, not limited to the fore-warned COVID-19 Recession, the 1930 fall in US GDP[3] due to Depression, or the “Lawson Boom and Bust” inflation of the 1980s[4], and may be caused by internal factors within an industry such as in the case of “Boom and Bust Recessions”[5] wherein the rise in economic growth within an organization in a particular period subsequently leads to the rise in interest rates on assets in the succeeding years, which later affects prices negatively, lowers consumer confidence and leads to a recession for organizations belonging to a particular industry. This can also be seen in airline companies.
This leads us to understand that industries are never truly protected from recession of any kind, simply because internal unpredictability is just as involuntary as external markets. This is also coupled with the fact that the aviation sector does not simply comprise one particular service but is a series of primary and secondary services working together including airlines, airports, and other on-ground set-ups, and a recession, irrespective of the economic safeguards guaranteed by the Government would still affect different segments of the field even as an industry.
Despite certain concessions and governmental schemes to protect the sector and to make preparations to ensure lucrative safeguards for airline companies, it was understood that the attempts at providing better opportunities during such periods had no positive impact to negate the recession since it largely varied depending on the actual nature of the recession that hit various services within the industry. In such a situation, the question that arises is whether Low Cost Airlines can survive during such times with the existing strategy they follow.
What are Low Cost Airlines?
Low Cost Airlines or LCAs have certain distinct features that set them apart. These include[6]:
- Single type, modern aircrafts which are cheaper to maintain, require a smaller cabin crew and are designed to be more fuel efficient,
- They provide flight routes only between two points with simpler networks of flight navigation and no transfers,
- They usually only make ticket sale available directly online to avoid additional intermediate agent costs,
- They require fewer on-ground facilities and services, and do not need aerobridges or such terminal facilities, and
- The aircrafts are built to accommodate larger numbers of passengers by increasing seating capacity. This also helps reduce the number of scheduled flights required.
Thus, the main objective is to cut costs that are generally incurred by airlines, while also ensuring maximum optimum utilization of individual aircrafts. These airline companies also adopt a model of providing incentivized additional services to passengers such as hotel booking discounts and contracted rental car services.
Low Cost models adopted by these airlines are also applied to the flight routes and their travel network. This involves the choice of airports to help cut costs. Low cost airline companies use secondary airports instead of international airports since operation costs are lower[7]. These are smaller airports that depend on ancillary retail services such as airport parking for revenue, and are usually used by smaller chartered aircrafts. A major reason for this is that most low-cost airlines have smaller remote towns as their target users where they attempt to enter a niche market not dominated by larger airline companies[8]. With this strategy, such airlines only have to deal with local transportation like trains as competition for domestic travel routes. This also ensures exclusivity of air routes for these airlines as is seen in the case of RyanAir where 93% of its routes are exclusively served by it and no other airline[9]. Secondary airports are present in abundance but are underserved and this gives low cost airlines the option to bargain for lower costs[10]. The model also forced these secondary airports to provide concessions to LCA companies so as to sweeten the deal and acquire their services.
Based on this characteristic, LCAs are also popularly called low-fare or budget flights owing to the low cost of tickets, and the low maintenance and operation costs. The issue is that when the LCA model focuses primarily on low fare prices, they come in direct competition with short haul regular airlines which usually also sell cheaper tickets such as Air Berlin which runs low cost domestic flights across Germany. To avoid this, LCAs place more importance on a business model which cuts complex operating costs[11].
There are four types of low cost airlines[12], which are:
- The low-cost original models which are airlines established from scratch or are simply remodelled by entrepreneurs and independent companies, for example RyanAir.
- The low-cost charter airlines which are aircrafts set up by charter companies for low-cost scheduled one-way routes with a single fleet.
- The low-cost regional airlines are aircrafts that solely fly domestically and adopt a low-cost model similar to low-cost charter airlines.
- The low-cost full service airlines are the commercial aircrafts that work with major airline companies, solely in the low-cost market, providing regular services but at lower fares.
These airlines usually operate as subsidiaries of major companies. However, some LCAs also operate with subsidiaries, and financial incentives and support provided by their respective Governments which in turn allows them to charge lower fares.
The Effect of Deregulation of Aviation Markets Globally on LCAs:
Deregulation of markets always promotes competition and encourages new start-ups to emerge since barriers to entry are reduced, and a more conducive environment is created for innovation. This was seen in the 1970s when the US aviation market deregulated, allowing new kinds of airline services to come to the fore. This had a positive impact on the economic growth as was seen in the early 2000s when airline mergers caused the US market revenue to jump from 307 billion dollars in 2001 to 535 billion dollars in 2008[13].
This deregulation also nurtured the rise of LCAs, initially within the domestic market[14]. Newer companies worked to reorganize and modify the existing structure of management, so as to increase profits, while increasing their market hold. One way of doing this was to provide reduced airfare tickets by eliminating unnecessary ancillary services on-board, which was a common strategy adopted by South-West Airlines[15]. Since the company had already become an established competitor in the US market, its model became the basis for LCA models.
This soon became a wide-spread global phenomenon, adopted mainly because international air transport is a necessary part of economic and social growth through international and domestic passenger flights, and through goods carriage which is an important part of the global trade network[16]. This was noticed in 2008 where established LCAs had seen a 9% rise in passenger traffic from 2007 and had carried almost 580 million travellers[17]. Over the years, LCAs that had emerged in deregulated markets became worthy competitors to regular and legacy airlines due to the early innovation and change in managerial models.
The positive effect of deregulation was also seen in the Indian market where there was a drastic increase in the number of airline companies due to a revolutionary change in the aviation industry around the 1990s. Prior to this, the Indian market was dominated by some luxury carriers that only catered to the upper wealthy classes of society, starting with the first domestic flight from Karachi to Delhi in 1912[18]. This was followed by a merger of certain airlines into Indian Airlines in the 1950s which existed as a monopoly in the Indian market under the control of the Air Corporations Act. However, in the 1990s, LCAs guaranteed an affordable line of aircrafts that would improve connectivity, even to more remote cities[19]. This, in turn, led to a growth in the number of passengers and air traffic, which encouraged the government to release an open sky policy for LCAs in 1991. This allowed new companies like Jet Airways and Air Sahara to enter and operate successfully in the Indian industry[20] with their own niche marketspace and an identity that eventually developed with well-planned financial strategies.
This inspired LCAs to also enter the market with Air Deccan becoming the first in 2003. Since India’s LCA sector emerged at a comparatively later stage than most other nations, the model proved to be a huge success since the low-cost market was mostly untapped and would cater to middle and lower class cost-conscious people who make up a major part of society.
In Europe, a similar revolution was seen in the 1990s when airline companies like RyanAir and EasyJet were set up based on the South-West Airlines business model. These two companies, being the first, effectively followed a passenger-friendly strategy, allowing them to become Europe’s leading LCAs[21]. Eventually, several new companies also arose in the EU market, with a domestic and international presence.
The Challenges with the LCA Model:
While LCAs have created their own distinct marketspace, general travel planning and the behaviour of passengers changes in the case of LCAs, owing to their characteristics and limited routes. However, this has an indirect effect on the sustainability of this model, especially if companies fail to constantly adapt to changes in market preferences and the global economic condition. When market instability is created by recessions or due to a global pandemic such as COVID-19 which leads to the shutting down of borders, the airline industry suffers since fewer people choose to travel by air. This problem affects every kind of airline, especially in respect of its sustenance over prolonged periods of instability, since there is a drop in the revenue earned which causes financial growth to stagnate.
LCAs may benefit from the fact that they are more budget friendly and hence encourage the sparse number of travellers to use these airlines when they are forced to be cost conscious in such times. This was evident from the financial reports of LCAs like Go Air and Indigo Airlines which showed a comparatively higher revenue growth in challenging operating environments than other established companies like Spice Jet which had incurred huge operational expenses[22]. However, once the markets open up and more people begin flying again, with an economic resurgence, the small operational fleets may not generate large revenue as compared to regular airlines which will be more preferable for international travel. This challenge will arise due to the niche market share that LCAs hold.
Another issue is that while having to cut costs, LCAs focus on reducing the facilities they make available at airports. This unintentionally leads to uncertain and precarious work conditions for ground staff, while also putting pressure on the available customer services and post-sales services[23]. This is primarily because the LCA model is geared towards short-term financial planning, without taking into account long term social aspects necessary to create value[24]. So while present day financial reports may indicate a successful model, the sustainability of these airlines at the expense of luxury and comfort may be uncertain.
LCA companies face many problems on the ground such as employee strikes, customer complaints that remain unresolved and constant issues with baggage handling and carriage. If these companies were to pay more attention to solving these problems, they would have to hire third-party services which would inherently increase transaction costs[25]. So, while the objective is to act as cost-oriented airlines to minimize costs of operation and management to cater to poorer sections of society, the business model creates a conundrum where one aspect must be sacrificed for another. The strategies and policies followed to reduce company expenditure on personnel, fuel and aircraft maintenance have led to dissatisfaction amongst the workforce, evident through regular strikes. The LCA model fails to reinvent and adapt to changing markets and passenger demands which is necessary to survive in the long run. Once a permissible limit on cost cutting is reached, the airline company will find it difficult to make further improvement or to innovate. This will also become a major challenge in the future where an increasing need will arise to develop strategies which combine customer satisfaction with corporate social responsibility[26].
Conclusion:
It becomes clear that the concept of low-cost airlines is relatively new and has several necessary strategic plans that need to be implemented towards sustainable operations. This form of air transportation has become essential in modern aviation, especially in Europe and the US. In Europe, LCAs hold a substantive share in the commercial market space, targeting point-to-point traffic from secondary airports which are relatively underused and are routes that would otherwise have had low connectivity. Similarly, in developing nations such as India, LCAs have quickly grown in deregulated markets which are driven by cost conscious travellers.
The distinct characteristics of LCAs give them a competitive advantage over regular airlines through consistent profitability that has been reported over the years. While the various players in the market may adopt different operational plans, they uniformly follow a cost-cutting, minimal service model. This allows them to sell cheap fare tickets, while sustaining their financial growth.
However, a challenge with this principle is that cost cutting can only be permissible to a certain extent, after which LCA companies have to factor in the high fixed operational costs associated in the industry. Beyond a certain point, the existing competition in the market makes it difficult to further reduce prices without incurring losses. This raises questions about the future viability of the model. But, at present, airline companies like Indigo and Go Air have proven the value of effective cost management. These airlines have also consistently guaranteed satisfactory on-time performance, which makes it clear that travellers want convenient services without having to pay high fares. For as long as LCAs can provide this, they will continue to grow in demand.
Another factor that will determine the success of these airlines is the nature of government policies and norms, especially in times of economic instability which may put more pressure on the industry, in general. Several nations like in the EU have also framed laws and policies directed towards the growth of LCAs. These include better regional access with ease of movement within the country and the freedom to set their own fares and routes, and have had an impact on the choices travellers make in respect of their destinations, travel budgets and the airports of use. This is evident from the emergence of short holiday trips that people take to neighbouring towns on a frequent basis. But, the benefit isn’t only in respect of increased demand for air travel, but has also led to an ease of migration.
However, one major issue with using secondary airports is that while location doesn’t matter in the LCA business model, airline companies sometimes neglect the need for good infrastructural facilities to attract passengers. In such cases, regional planning in the city’s network becomes important around secondary airports, especially so that more localities can gain faster access. Over time, tourist flow will increase and spread out over those regions. This will, in turn, influence the way LCA companies choose to market themselves and the services they provide at these local airports.
While this is a necessary step, the unpredictable nature of the LCA market must also be kept in mind, and airline companies must be ready to adapt their plans and strategies accordingly.
[1] Rohit Jain, “Covid-19 Relief Package: Top Five Income Tax Relaxations”, May, 2020, www.bloombergquint.com
[2] Statistics of US Businesses, 2020; Federal Reserve Banks’ Small Business Credit Survey, 2019; Annual Business Survey, 2020
[3] St. Louis Federal Reserve, 1932 – A101RL1A225NBEA
[4] Economic Growth, UK – Economics Help ONS, 1992
[5] ibid
[6] ELFAA, Graham & Shaw, “Characteristics of the Low-Cost Model”, 2007
[7] Barret, S. D, “The Sustainability of the Ryanair model’ in International Journal of Transport Management”, 2004, Volume 2, Issue 2, pp 89-98
[8] Dobruszkes, F, “An Analysis of European Low-Cost Airlines and their Networks”, 2006, Journal of Transport Geography, Volume 14, Issue 4, pp 249-264
[9] ibid
[10] Rodwell, M., “Interview with airport’s Chief Executive Mark Rodwell”, 2009, Glasgow-Prestwick Airport, Prestwick, Scotland
[11] Van der Zwan, J, “Low-cost Carriers – Europe, Research on the Development of Low-Cost Networks in Europe”, 2006, University of Utrecht
[12] Button, K. J. & Vega, H, “The Effects of Air Transportation on the Movement of Labor”, 2008, GeoJournal, Volume 71, Issue 1, pp 67-81
[13]Fortson, D, “Airline Mergers Take Off”, 2008, http://www.independent.co.uk/news/business/analysis-andfeatures/airline-mergers-take-off-779834.html
[14] Hannon D, “Despite Lower Jet Fuel Prices, Fewer Airlines Hedging”, 2009, http://www.purchasing.com/article/227089- Despite_lower_jet_fuel_prices_fewer_airlines_hedging.php>
[15] Delfmann, W Baum, H Auerbach, S & Albers S, “Strategic Management in the Aviation Industry”, 2005, England, Ashgate Publishing Ltd
[16] Hardy, F.W, “Air Arabia, The World’s Most Profitable Airline: The Low Cost Model that Outperforms Other Discount and Legacy Airlines”, 2009
http://airplanes.suite101.com/article.cfm/air_arabia_the_worlds_most_profitable_airline
[17] Mitchell, L.D. & Mills, S, “Special Report Low Cost Carriers: Low Cost Traffic Ranking”, 2009, Airline Business, p 74-75
[18] Kumar, J.R. & Natarajan, R., “A DEA Study of Airlines in India”, 2015, Asia Pacific Management Review, 20(4), pp. 85-92
[19] Air Scoop, “Ryanair’s Business Model”, 2011, http://www.air-scoop.com/pdf/Ryanair-business-modelAir-Scoop2011.pdf
[20] Dhamija, A, “Strategic Management: Porter Analysis for Civil Aviation Industry”, 2006, http://akdhamiia.webs.com/consultancv/Porter%20Airline%20Industry1.pdf
[21]Civil Aviation Authority, “Aviation Trends – Quarter 4”, 2008, www.caa.co.uk/aviationtrends
[22] dgca.nic.in, Operator, 2015, http://dgca.nic.in/reports/Traffic- ind.htm
[23] Barrett, S. D, “Ryanair and the Low-cost Revolution”, 2016, Air Transport in the 21st Century, pp. 163, Routledge
[24] Valle, Esteban, J. & Pérez, “Corporate Social Responsibility and Sustainability Committee Inside the Board”, 2019, European Journal of International Management, 13(2), 159–176
[25] Lieshout, R, Malighetti, P., Redondi, R., & Burghouwt, G, “The Competitive Landscape of Air Transport in Europe”, 2016, Journal of Transport Geography, 50, 68–82
[26] Botta-Genoulaz, V, & Millet, P, “An Investigation into the Use of ERP Systems in the Service Sector”, 2006, International Journal of Production Economics, 99(1-2), 202–221
YLCC would like to thank Dylan Sharma for his valuable inputs in this article.
