The size of an aircraft has a profound effect on airline unit costs. The larger the aircraft, the lower will be its operating cost per passenger (Williams 2001). European low-cost carriers in the recent past have enjoyed tremendous growth. Notably, well established low-cost carriers (LCCs) have proved to be more resilient across the regions, despite the differing economic as well as market dynamics. However, the strong performance posted by the players of low-cost sector can be said to have been short-lived as a past examination of the last two years shows that there are casualties of declining in LCC industry with major indicators for this trend being Slovakia based Sky Europe, the UK based Flyglobespan and MyAir of Italy which were major casualties during 2009 financial meltdown. Having set the stage for the assignment’s scope, this paper aims at analyzing the low-cost carriers and their networks in the European airline market.
The profitability trend of the European LCC has been on the constant rise despite several problems associated with the industry. Despite the hard economic periods experienced in the last two years, some players in the market, such as Ryanair as well as Easy Jet continued to operate profitably even when most competitors in the larger airline industry were reporting a massive nosedive in profits especially during the 2008 to 2009 economic crunch. The impressive performance has been enabled by the LCC’s continued ability to attract passengers in huge numbers and keeping other operating costs associated with airline bureaucracies low.
When the LCC’s industry is examined, it can be established that it is a high active industry. The year 2010 recorded a high number of passengers who preffered to use the LCCs as opposed to traditional airlines. This may have been caused by the absence of complex pricing and regulation limiting passengers, such as those associated with traditional airlines. These reduced bureaucracies have continuously been the main selling points for the LCC industry.
Another area that makes LCCs have a better profitability trend is their cost structures. A rough estimate shows a 40-60% difference in unit cost between LCCs and the classical network airlines. The major cause of such cost difference includes higher productivity among the LLCs. LCCs are fringe-free airlines that have higher sitting capacities and lower human capital hence making them more profitable. The airlines also use less crowded secondary airports to ensure that costs are driven down while at the same time, there is no too many unnecessary personnel.
The described cost advantages allow LCCs to fly side by side and withstand any reaction from the classic airlines of tit for tat price competition. This new demand makes it easier for direct connection between smaller cities possible. Before the proliferation of LCCs into the airline market, smaller cities were accessible only from major hubs.
Another reason why the LCC industry has been growing is Changes in passenger behavior. Economic growth, business confidence and an increased desire to travel are the key impetus for the growth of the sector across Western Europe. The increasing trend of leisure travel than business travels also boosts the sector.
After liberalization of Australian domestic airline market in early nineties, there were new entrants into the low-cost airline industry where companies such as Compass airlines as well as Compass Mk II pioneering this industry. Just like their European counterparts, Australia has ventured in low cost carriers with the establishment of Jetsar and Tiger airlines. The Australian Jetsar faces challenges which include fluctuating fuel costs just like any other industry player. This drives strategic change in operational cost. Recent worldwide credit crisis and fluctuating fuel prices have resulted in collapse of unprecedented airlines leading to industrial uncertainties. In addition to fluctuating fuel prices Australian Jetsar and Tiger airlines faces increased competition of new entrants in the market. This has led to changes in business strategies of the airlines to ensure that routes remain viable.
The significant stake occupied by Low-cost carriers in Europe cannot be overlooked especially the market share for Easy Jet and Ryanair, whose targets are beyond the broad current networks. As a result of liberalization of the airline industry, more players are bound to enter into the market. Therefore, there is need for current players to keep on innovating to newer strategies that would guarantee continued profitability and success.
As a recommendation, LCCs must device avenues that will ensure that their costs are lowered since the industry growth has reached its maturity stage. There is also a need to device new avenues for revenue generation. For instance, Ryanair has pioneered this strategy where it has adopted various revenue streams with 16 percent of its income being derived from sources such as credit cards, hotel bookings, car booking and finally retailing. There is also a need for low-cost airlines to come up with measures that will ensure that adequate response is given to the narrowing strategies between the low-cost carriers and their rivals.