The world financial crisis has an outstanding impact on the development of society, economy, and the business. The significant reduction of the level of incomes triggered the great change process resulting in the reconsideration of the financial policy of various establishments, companies, and households. In this regard, price became the main competitive factor impacting the performance of companies and their popularity. Under these conditions, the attempt to increase the customer demand by decreasing price and spending is now considered as one of the major concerns. Numerous companies reorganize their functioning, aiming at the creation of the competitive advantage resulting from low prices. At the same time, there are still companies which underline their focus on the high quality and expensive services that guarantee the great level of satisfaction. These differences condition the growth of the popularity of two different business models the Low-Cost and Full-Service ones.
In recent decades, the commercial passenger air travel industry has changed dramatically and obtained a number of new features (Lordan 2014). The given process of change was triggered by the increase of the level of rivalry within the industry. The world financial crisis initiated the struggle between airline companies aiming at the attraction of new customers. The need for the new incomes determined the reconsideration of several approaches and creation of new strategic development plans. For these reasons, the majority of the modern airline companies adhere to low-cost or full-service business model. The choice of the model is impacted by the character of the company and the goals established by its officials.
Low-cost business company implies the extremely low prices for its customers combined with the absence of many traditional passenger services. A low-cost carriers (LCC) emphasize the first point, underlining the fact that they save the costs of passengers by the exclusion of the unnecessary ad luxurious services which are not needed for the successful flight. The growth of the popularity of the given model is conditioned by the significant changes of the paying capacity of people and their desire to save money in terms of the crisis. The number of companies using this pattern is big, and there is the tendency towards its growth. Low-cost business model is very often taken as an ideal solution for regional airline companies.
The usage of the full-service business model includes the provision of “a wide range of pre-flight and onboard services, including different service classes, and connecting flights” (Ehmer et al. 2008, p. 8). Full-service carriers (FSC) are characterized by the high prices and their focus on the representatives of the privileged class of society. A company adhering to the given business model tends to underline the importance of the provided services for the comfortable flight. Additionally, the pre-flight services also help to impact the customer, creating the luxurious atmosphere. Despite the aftermath of the world financial crisis, there are still many companies which function according to this pattern and continue to struggle for new customers, creating the innovative strategies and promoting the importance of a wide range of services.
Analyzing the above-mentioned business models, it is crucial to compare the offered services and products, pricing cost structure and distribution models. The analysis will contribute to the better understanding of the nature of these models. Investigating the provided services, one could admit that the low-cost model is mainly focused on the procedure of flight. In other words, a passenger is guaranteed that he/she will be delivered to the needed place. Most of the LCC have a single type of the aircraft and a single passenger class (Casadesus-Masanell & Tarzijan 2012). A passenger is not able to choose better or worse conditions. These companies also prefer to use the range of narrow-body planes which are do not demand the great investments. Passengers are not provided with pre-flight services, and they are not able to demand some additional conditions. However, they can enjoy the low price of the flight.
Conversely, the full-service business model implies the provision of the maximum of services to guarantee the comfort for a passenger and increase of his/her level of satisfaction with the company. Additionally, this sort of companies uses various aircraft types, from narrow-body to wide-body ones. The choice of the plane is determined by the route of the flight and the flying conditions. The passengers might choose between 2-4 service classes, including business and first class (The Evolution Of The Airline Business Model n.d.). The pre-flight services include the reservation, operations with the baggage, overbooking, and a number of other ones. For these reasons, the full-service carriers tend to provide a wide range of services to satisfy the privileged passengers and attract new customers.
The differences in the nature of these business models also impact the main channels of their distribution and marketing. The low-cost carriers are popular with the representatives of the middle class. The low price and the absence of some additional services, combined with simple and efficient pricing strategy attract a number of people who prefer to save money. The companies of this sort sell tickets in various airports and guarantee a passenger a certain seat. However, some carriers do not provide the service of the online bookings, and it could be difficult to buy the needed ticket. Additionally, the distributional pattern of this model implies the sales of tickets among the potential customers to support the company and increase the theoretical incomes.
As for the full-service model, it uses another marketing and distributional pattern. First, the character of the customers of FSC implies the focus on the satisfaction of their needs. For this reason, the majority of ticket sales are performed with the help of the Internet. The booking service is very popular with the passengers who use the services of the companies of this sort. Furthermore, the great percent of tickets are bought not by the passengers but by their special representatives. It impacts the change of the distributional patterns and creation of the conditions needed for the satisfaction of the main needs of the customers. Finally, the airline companies of this sort tend to create the positive image and highlight the possibility to use various pre-flight services.
The cost structure is another important concern related to the functioning of these two models. In terms of the low-cost business model, there is the focus on the cost reduction. For this reason, many employees perform multiple activities. For instance, a flight attendant might also clean the aircraft or work as the gate agent (Jorre 2013). There is also the practice of “free seating” which encourages passengers to boat faster and avoid delays resulting in extra spending (Ehmer et al. 2008). The combination of these practices, the usage of the narrow-body planes, and some other strategies contribute to the significant decrease of spending and introduction of the low prices vital for the further existence of the company. The bigger part of all funds is spent on flights and planes maintenance.
The full-service business model has another cost structure which results from the provision of a number of expensive services. The greater part of the funds is used to guarantee the high quality and outstanding services for the passengers. Carriers of this sort allocate funds for the constant improvement of the suggested services and the introduction of the new ones. Hence, the maintenance of the wide-body planes also demands significant investments. Finally, as against the low-cost model, this one provides high salaries for workers. Moreover, there is a strict segregation of duties within the company to guarantee the high level of the professionalism of the staff. In these regards, the cost structure of this business model is more complicated and demands greater spending.
Finally, comparing the revenue of the above-mentioned models, the low cost one proves the idea that it is possible to achieve better results at minimal cost. Statistics show that companies adhering to the given pattern are characterized by the stable level of incomes and the constant growth of the number of customers (Jorre 2013). This fact and the focus on the reduction of spending result in the increase of the level of incomes and introduction of the good perspectives for the further evolution of the company. Hence, specialists doubt whether the net profit of these companies could be compared to the net profit of full-service carriers because of the difference in approaches and spending. Yet, the revenues of the low-cost airline companies contribute to the development of the given model and promote its evolution.
The full-service business model implies the greater level of incomes. The high price of tickets and services provided by carriers result in the better revenues. However, it is vital to keep in mind that the net profit is significantly lower because a part of these funds is used to compensate the introduction of the additional services, their maintenance, and pre-flight activities. Additionally, the servicing of aircraft also demands certain spending. For these reasons, the revenue of the companies of this sort is impacted by the number of factors related to the activities performed by its departments. However, like low-cost carriers, full-service carriers remain profitable as the high price of tickets compensates the spending needed for the creation of the needed conditions.
Altogether, the low-cost and full-service business models are characterized by different approaches towards the pricing policy and the provision of extra services. While the first one aims at the reduction of prices in exchange for removing almost all passenger services, the full-service business model tends to provide a passenger with the comfortable conditions needed for his/her travel. These differences result in the creation of the opposite approaches towards the work with the customers and organization of flights. The last dramatic changes in the world economy triggered the increase of the level of rivalry between various airline companies. That is why they try to choose the models which could guarantee them a serious competitive advantage. Yet, the adherence to one of these models could contribute to the development of a company and attract a certain audience.
Reference List
Casadesus-Masanell, R & Tarzijan, J 2012,When One Business Model Isn’t Enough. Web.
Ehmer, H, Berster, P, Bischoff, G, Grimme, W, Grunewald, E & Maertens, S 2008, Topical Report: Airline Business Models. Web.
Jorre, A 2013, Low Cost Airlines: a constantly evolving model. Web.
Lordan, O 2014, ‘Study of the Full-Service and Low-Cost Carriers Network Configuration’, Journal of Industrial Engineering and Management, vol. 7, no. 5, pp. 1112-1123. Web.
The Evolution Of The Airline Business Model n.d., Web.