AIR TRANSPORT BUSINESS: A LITERATURE REVIEW ON THE LOW-COST CARRIERS RESEARCH DEVELOPMENTS FOR THE PERIOD 1990–2005
A. AVRAMOPOULOS
Adjunct Faculty Member, Hellenic Open University
ABSTRACT
Research in the last two decades has greatly improved performance of both scheduled/traditional and low-cost carriers.The so called low-cost carriers (LCCs) are a significant dimension in the modern development and competition strategies of the air transport industry.In this study is reviewed LCCs literature from 1995 to 2005 which has been classified into main distinct areas such as: air transport deregulation/liberalization, air transport policy, LCCs business models & operating features, market segmentation, Case Studies, LCCs and scheduled airlines, LCCs networks, LCCs –airports relationship, LCCs Strategy, market entry and pricing strategies, LCCs and Charter Carriers, LCCs & Tourism. The findings of this study have relevant practical implications concerning the air transport industry literature developments.
Key Words: air transport business, low cost carriers, literature review, business models, airlines strategy.
1. INTRODUCTION
From the overview of the historical development of international transport, as well as the study of the course of international tourism, it is clear that the development of aviation and tourism follow parallel routes. On the one hand, the growth of transport has steadily pushed the expansion of tourism in qualitative and quantitative terms and, on the other, the development of tourism contributed to the creation of a dynamic segment in the aviation industry.
Air transport has been a key component of the travel industry, which has played a key role in the development of international tourism, particularly in the second half of the 20th century, making air travel the dominant form of modern international travel and tourism. The leisure trip, even outside the country of permanent residence, a symbol of the pre-war social classes, post-war is transformed into the socially necessary commodity for increasingly large numbers of social strata in industrialized countries, and international demand for tourist trips is rising sharply (Zacharatos, 2003:15).
The air transport industry, as we know it today, is shaped as a consequence of the removing of US controls in 1978 and in Europe during the 1980s. Deregulation in the US and Liberalization in Europe may have led to significant changes in the number of air carriers but primarily helped in the creation of a new type of airlines, (low cost carriers or no-frills carriers), which support their sustainability in providing low demand services while reducing transport costs.
One of the most impressive features of the aviation industry at the beginning of this century was the provision to consumers of a new concept for air travel. Low cost carriers (LCCs) offered a whole new product: no decorative items, no meals, no drinks, no spacious seats, no travel booking through travel agents, but a very low price (Barbot, 2004: 2).
Their simplified business model offered a competitive alternative at a time when passengers began to look for ways to avoid paying the high prices that regular carriers were demanding to maintain complex hub & spoke systems for their flight distribution (Franke, 2004:15).
2. LITERATURE REVIEW
Despite the initial estimates, engaging the international scientific literature with Low Cost Carriers (LCCs) covers a remarkable number of scientific articles (both theoretical and empirical), although this was a relatively recent phenomenon in the field of air transport. Furthermore, there are various approaches to the research that are engaged in the field of air transport: airlines (Carmona Benitez, & Lodewijks, 2008), low cost airlines (Dhingra, T., Yadav, M.,2018), airports (Bezerra, & Gomes, 2016), air transport (Ginieis, Sánchez-Rebull, Campa-Planas, 2012), Air transport and tourism (Spasojevic, Lohmann, & Scott, 2017).
3. RESEARCH METHODOLOGY
At the beginning, the most renowned “Air Transport” journals from 1995 to 2005 were identified. The researcher used several recognized lists of journals, portals with full-text access to journals, e-books and to bibliographic databases such as HEAL Link portal, ABDC list of journals, Elsevier Transportation journals, The SCImago Journal & Country Rank, JSTOR, SpringerOpen, Penn State University Press, Taylor & Francis Online etc.
A list with the number of LCC studies published in each journal from 1995–2005, is reported in Table 1.
Table 1: List of International Journals used for this review
Low-Cost Carrier content was examined for the articles in these 21 top journals from 1995- 2005. Articles were considered within the domain of Low-Cost Carrier (LCCs) and associated topics like full-service carriers, charter services etc. are not covered in the study because of the diverse variety in those studies.
4. THE STATE OF THE ART OF THE AIR TRANSPORT AND TOURISM LITERATURE
4.1 RESEARCH ANALYSIS & FINDINGS
Despite the initial estimates, engaging the international scientific literature with low-cost carriers (LCCs) covers a remarkable number of scientific articles (both theoretical and empirical), although this is a relatively recent phenomenon in the field of air transport. Deregulation, which has led to the emergence of low-cost airlines, was first implemented in the US in 1978 with the adoption of the Airline Deregulation Act and later in EU with Liberalization through three packages of measures that began to be implemented in 1993 and completed in April 1997. This record includes 61 articles published in scientific journals from 1995-2005. The research framework for low-cost airlines is mainly defined by studies that could be classified as follows:
Table 2: Categories of Low-Cost Carriers (LCCs) articles and topics included
|
LCCs Research Category |
Topics included |
Total LCCs articles/studies in current research Journals |
|
1. Air Transport Deregulation |
Entry Exit; Contestability; Game theory; Transportation; Airlines Frequency; Deregulation; Liberalisation; Routes; External costs. |
4 |
|
2. Air Transport Institutional Framework, Policy and Law |
European Commission; Start-up aid; LCCs; Regional airports. |
2 |
|
3. Airlines Business Models and Operating Features |
Low cost airlines Growth; International development; Airline strategy; Network carriers; New business models; hub-and-spoke; full-service airlines and low-cost carriers, operation models; Hub & spoke airlines; No-frills; Network carriers; Network economics; Business models; Airline competition. |
6 |
|
4. Airlines Marketing |
Business travel market; cross-market comparisons; Industrial organization; Airport competition; Airline competition; Vertical relationships; FSCs; Marketing strategy; Air transportation; Business travelers; Business travel; EU; Corporate travel; strategic airline alliances; Short haul markets; Internet based booking tools and travel agency IT. |
6 |
|
5. LCCs Case Studies |
Leadership; Motivation; Service quality; Awards; TQM; Ryanair; cost-cutting techniques; cost strategy; Belief; Employee attitudes; Organizational performance; Values; competition; Southwest; Case study; easyjet; entrepreneurial management; Multi-airport regions; Southwest effect; market entry; Prices; Route entry; Discount carrier; ValuJet; Established carrier’s hub. |
9 |
|
6. LCCs and Scheduled Airlines |
Market entry; Cityjet; Case study; deregulation; Entry Exit; Accommodation; Predation; Service quality; Flight delays. |
4 |
|
7. Airlines Networks |
Airports; Aviation networks; Concentration index, European aviation network; Deregulation; Cluster analysis; Hub airport; Gini index; Concentration; Airline network. |
3 |
|
8. LCCs and Airports |
Full-service carriers; Airline competition; European aviation; Airport–airline interaction; Airport charges; Airports Facilities management; Strategy. |
4 |
|
9. Strategy |
Competitive advantage; Airline–airport relationship; Southwest model; Airport business; Strategic choice; Response to environment; Airline industry; strategy; strategic groups; US airline industry; Competitive strategy model; Michael Porter; strategic management; Airline industry; Horizontal integration; Corporate strategy; Market power. |
7 |
|
10. Airlines Market Entry |
Market Entry, Airports, routes competition; Pricing strategies; Market entry; Deregulation; Market Density; LCCs; Canada; Airlines Barriers to entry; Deregulation; Managerial perception; LCCs market entry; US; Contestability. |
7 |
|
11. Airlines Pricing Strategies |
Deregulation; Productivity; No frills; Island location; Secondary airports; Sustainable contestability; Revenue management; Low-fare airline entry; Airline pricing; strategy; Capabilities; Low cost strategy, Fleet Capacity; Load Factor; easyJet; Buzz and Ryanair; Pricing behavior; London–Paris; Aviation; Internet; pricing; spatial competition; Air transportation; Low fare air carriers; Airline pricing; Southwest; US; Cost; fares. |
7 |
|
12. LCCs and Charter Airlines |
Charter carriers; No-frills airlines; Aircraft utilisation; Labour productivity; Seat only markets |
1 |
|
13. LCCs and Tourism |
Tourism; Regional airports; Airline business models; Panel data analysis. |
1 |
5. LCCs Literature Review
5.1 Air Transport Deregulation
In relation to the results of liberalization, the various empirical studies have shown positive effects on prices and increases in consumer welfare (Morrison and Winston, 1990; Schipper, Rietveld and Nijkamp, 2003). If a market liberalization is socially beneficial, it is centered around creating the conditions for a viable market for a free market entry and exit. These include low fixed costs and the existence of potential competitors that can easily enter and exit (Bailey and Panzar, 1981; Motta, 2004). In general, an airline is considered to be potentially incoming if it already serves one or both extreme points of a route (Berry, 1992, Morrison and Winston, 1990).
Such a presence, where the cost of entry and exit are low, is supposed to be sufficient to limit the exercise of market power (market power) (Hurdle at al., 1989, Ito and Lee, 2004; Goolsbee and Syverson, 2004). Other airlines’ market studies, however, reveal how the competitive effect is best attained when potential competition turns into real competition (Borenstein, 1992). Interestingly, in a combined entry and exit study, Joskow et al., (1994) find that entry and exit have opposite effects on average price levels, but not on performance. One particular type of actual and potential competitors has become increasingly important in recent years is that of low-cost carriers (LCCs), with most individual examples being the Southwest Airline US and Ryanair and Easyjet companies in Europe (Boguslaski et al., 2004, Piga and Filippi, 2002). These have put a very significant competitive pressure on traditional carriers, and on the roles of potential and actual competitors (Gil-Moltó and Piga, 2006).
To address the question of whether market forces operate as freely as possible, several studies have been carried out to investigate which factors affect an entry or exit decision. The presence of airports seems to be a key factor for profits from activation after entering a given city pair (Berry, 1992). In addition, the entry of an airline and exit and entry behavior is significantly influenced by its own network (but not by that of its competitors) (Morrison and Winston, 1990). Both results support the notion that hub-and-spoke networks have been assessed in the US after deregulation, not only for the savings (resources) they have allowed, but also for market power (market power) they offered (Borenstein, 1989).
5.2 Air Transport Institutional Framework, Policy and Law
Völcker (2005) refers to the start-up aid of low-cost carriers by regional airports as a policy perspective. Grant to airlines departing from such airports is treated as aid to those airports in order to develop the "critical mass" needed to become commercially viable, and ultimately to reduce their dependence on state funds.
Barbot (2006) creates a model of horizontal diversification to analyze the effects of the state subsidy stemming from the agreement between Ryanair and the local authorities of Walloon (owned by Charleroi airport in Brussels) at suburban airports as well the effect of lower charges on competition between LCC's and FSC's. FSC's are negatively affected by subsidies, but competition can affect them more. The empirical analysis with elements of Ryanair and its competitors indicates that the presence of at least one additional LCC does not affect the prices charged by the air carrier and the dominance at an airport and its advantages at the level of fees) does not pass on to the passengers.
5.3 Airline Business Models and Operating Features
Pender and Baum (2000) study low-cost carriers in terms of their operating characteristics and examines the implications for European aviation markets. The authors conclude that low-cost carriers seem to have taken part in the business of land and ocean carriers by creating a new aviation market.
Tretheway (2004) studies the inherent weaknesses in the business models that have been sought by major air carriers. It also identifies a number of modifications to be made to the business model of regular air carriers in order to maximize their market share.
Hansson, Ringbeck, Franke, (2002) and Hansson, Ringbeck, Franke, (2003) are working on and proposing a viable functional model that could be adopted by Full-Service Carriers and influenced by LCCs. Franke (2004) records the difficulties in the business model of scheduled air carriers against low-cost carriers and notes that they need to redefine their business choices by analyzing the main axes of this transition to a new level of balance.
Francis, Humphreys, Ison & Aicken (2006) deal with the development and business model of LCCs worldwide, attempting to investigate and identify the factors that have encouraged the development of LCCs spatially and temporally. Alves & Barbot (2006) investigate whether different business models in the same industry (air passenger transport) lead to different corporate governance models. The authors find that low cost carriers (LCCs) organize board committees other than FSCs in order to achieve the lower cost and faster decision-making process required by their business model. They also found that LCCs and FSCs solve potential cost problems differently. FSCs have more committees to control management, and LCCs have a closer coincidence of interests between shareholders and management.
5.4 Airline Marketing
In some studies, the authors study LCCs from the point of view of Marketing and in particular by segmenting and focusing on specific target groups. Mason (2000) deals with a segment of the aviation market and details the intention of European business travelers to use low-cost carriers for short-haul flights. The findings of the survey support the view that low-cost carriers would be more attractive for business and employees working in small and medium-sized businesses. Mason (2001) in a subsequent research deals with the marketing of LCCs in a particular market segment. He presents the results of the survey to see if business travelers who use Heathrow Airport on the one hand and Luton on the other hand belong to the same market segment. Despite the fact that the results of the survey did not show the existence of two groups of clients, to some extent workers - in large enterprises - show some differences from those working in medium and small enterprises.
Mason (2002) presents a survey of twenty major businesses and their business travelers to identify and assess the effects of pressures on the business travel market in the future. The survey reflects differences in views between travel and tour manager on corporate travel policies.
The Gillen and Morrison (2003) study investigates the interaction between scheduled air carriers and low-cost air carriers in the air travel market where flight is only one component in a package of services. It examines two important dimensions of the market for "packaged" air transport services i.e. horizontal product differentiation (between "air transport" products) and vertical integration between air carriers and airports.
Jarach (2004) analyzes the new market scenario in the airline industry focusing on the European field. It also analyzes the major marketing tactics that European air carriers could adopt in order to cope with the large wave of entry of LCCs and to survive in the modern "harsh" environment. One of the selected studies is that of Evangelho, Huse and Linhares, (2005) which investigates whether there is a marked differentiation between the segment of the business travelers market using low-cost carriers and those using regular air carriers in Brazil. The article examines whether there is a significant distinction between the business segment of business travelers using incoming low-cost carriers and those using full-service carriers and also examines the perception of these travelers about the basic properties of the services offered. The conclusions show that there is segmentation in the business travel market, suggesting that preference for traditional airlines is more a matter of culture in larger organizations, rather than depicting any type of bias about the low-cost model.
5.5 LCCs Case Studies
A section of the studies deals with the specific low-cost carriers with the largest number of studies and related literature to focus on the first low-cost carrier i.e. Southwest Airlines.
SouthwestAirlines
Bunz and Maes (1998) are looking for the sources of Southwest's success as a company with a high level of incitement to its employees. In the conclusions of the article, Southwest represents the "excellent" company according to the criteria established by Peters and Waterman in 1984. Milliman and Ferguson, (1999) study this airline in order to explore ways who manifest the spirituality within the Southwest and to verify the effects of spirituality on employees, customers and organizational performance of the company. Southwest Airlines also deals with Laszlo (1999), whose work presents a detailed analysis of how a key customer service organization was built to achieve and continues to improve by implementing quality management principles.
Apart from the abundance of bibliography for Southwest Airlines, Morrison (2001) deals with Southwest Airlines and its significant influence in the success of US airlines' liberalization. This study uses a real package of competition variables to assess the extent of this influence in 1998 and concludes that travel savings are estimated at 12.9 billion. US dollars, or 20% of domestic airline revenue. The role of Southwest in changing fares and passenger traffic on an air link and its effects on areas with many airports, examines Vowles (2001). A comparison between links that covers connections that Southwest does not serve, indicates that elements of its impact even appear in markets where Southwest does not provide services.
ValueJet
Windle and Dresner (1999) concluded that the entry of low-cost airline companies resulted in lower prices for the air links they entered. Their study extends this analysis by examining the implications of entering a "discount" air carrier on an airline link (ValueJet at Atlanta's main airport and an established carrier such as Delta) and exploring the price change in air links to which low-cost airlines did not enter. The results of the survey have shown that Delta has reduced its fares to competitive links that had arrived at Atlanta Airport as a response to ValueJet's competition.
easyJet
The Easyjet Case Study by Sull (1999) records the rapid growth of easyJet that began its operations in November 1995 at London Luton Airport. In two years, it was widely regarded as a low-cost European model airline and a strong competitor of national carriers. The business has clearly defined marketing functionalities, e.g. type of aircraft, point-to-point short-haul trip, no meal in flight, fast recycling time, very high utilization of aircraft, direct sale, cost-oriented customers - prices and extensive subcontracting. The case is followed by the critical analysis of three expert commentators in the field. In this Case Study, the company's executives track down three ΕasyJet's near-cost low-cost rivals, while detailing the strategies of these competitors. EasyJet focuses on Rae's study (2001) to explore the concept of business management through a low-cost airline case study.
Ryanair
Lawton (2000) examines Ryanair's cost-cutting techniques, one of Europe's most successful low-cost airlines, and promotes a business model for other smaller and medium-sized carriers in Europe.
5.6 LCCs and Scheduled Airlines
Air France's "response" to the entry of low-cost air carriers is being studied by Barrett (2001). The article is a case study for CITYJET, the airline of scheduled flights purchased in 2000 by Air France, and acts as the "low-cost" segment of this major airline. The Cityjet case study shows that traditional air carriers face many difficulties in - after the withdrawal of restrictive regulations - market. Dominant positioners exercise control over hubs and have effective frequent flyer programs.
New entrants are subject to additional retail costs in order to ensure the support of travel agents. The new full-service airlines also face competition from "cheap" airlines whose message is that in-flight services are not worth spending on short-haul routes. EU policy on "predatory" pricing is weak in line with the two new entrants that are being examined. Ito and Lee (2004) analyze the response of established hub-and-spoke carriers at the entry of LCCs on routes served before and from their hub airports over the past decade. Their analysis also shows that the likelihood of a LCC entering a hub-and-spoke market is independent of the response of the dominant carrier. Graham and Vowles (2006) deal with the segmentation of these carriers and their market as a repositioning to meet the challenge of low-cost competitors through the creation of (carriers-within-carriers – CWCs) at lower unit cost versus of the parent company.
The research determines that traditional air carriers have radically different responses and attitudes towards (carriers-within-carriers – CWCs) strategy and that there is very limited evidence that this is an effective response to low-cost competition.
Rupp and Sayanak (2008) examined the performance of the low-cost carriers (LCCs) in comparison with the other major carriers. Recent Growth of LCCs indicates that passengers will have LCCs options in the future. They found better LCCs performance is due to fewer flight cancellations and higher on-time arrival rates.
5.7 Airline Network
Certain studies deal with airlines networks, including LCCs. Reynolds-Feighan's (2001) examine the methods of air traffic distribution of low-cost US air carriers using the same methods as regular carriers (Gini index, Theil index, Herfindahl index). It shows that low-cost carriers have a lower average level of aggregation than full-service carriers.
Low-cost carriers focus their air traffic around a limited number of key hubs that function more as entry and exit points than transfer points.
Burghouwt and Hakfoort (2001) examine whether the liberalization of aviation in the European Union followed the same course followed in the US with regard to the adoption of the Hub-and-spoke system. They analyze the evolution of the European aviation network in the period 1990-1998. Burghouwt, Hakfoort, and Ritsema van Eck, (2003) examine on how the geographic structure of airlines' networks in the period 1990-1999 has changed, including LCCs. With regard to LCCs, and unlike the US, low-cost European airline operators focus their services on a limited number of airports by 1999. Of course, there are signs of changes such as rapid growth, the opening of new connections, entry of British LCCs in Europe and the use of secondary airports.
5.8 LCCs and Airports
Pitt and Brown (2001) study airports and airlines' relations. They examine the strategic response of Dublin airport to the presence of two types of air carriers demanding different services as well as the difficulties faced by airport managers in forecasting different levels of service required for different customers. The study concludes that airport organizations must move towards a more divided form that will serve both types of airline at an airport. In their article, Francis, Fidato and Humphreys (2003) use case studies to capture the effects of LCCs on two European airports. Case studies have shown that airport managers estimate that future development at suburban and regional airports will depend on the incentives they can offer to low-cost carriers.
Barrett (2004) explores the challenge of adapting European airports to the provision of services to low-cost air carriers and the specificities they face “vis-à-vis” scheduled airlines.
Francis, Humphreys ana Ison (2004) investigate how airports have responded to the obvious opportunities that emerged from the rise of low-cost carriers. They comment on the behavior of a number of different airports in Europe and identify the important airport management issues to be taken into account when negotiating with low-cost airlines.
De Neufville (2006) deals with product diversification, which airports must adopt to meet the needs of LCCs. Warnock-Smith and Potter (2005) argue that low-cost carriers are an increasingly important part of the European aviation industry. Airport selection is a critical factor in determining success or failure. According to Warnock-Smith and Potter (2005), while airports and LCCs have been investigated with regard to airport selection factors, the related classifications have not been previously investigated. Their study looks at this through an exploratory survey of eight European low-cost airlines. The study concludes that the demand for low-cost services is the most important factor of choice. Furthermore, the analysis reveals different requirements depending on the characteristics of the air carriers.
5.9 Airline Strategy
Among the first studies to the issue of new entrants, is that of Kling and Smith (1995) which attempts to identify strategic groups in the US aviation industry using the model of Porter's competitive strategy. Among the 9 major airlines in 1993 is Southwest, the first low-cost airline, for which Kling and Smith say they are pursuing a "focused" strategy.
Schnell (2003) study whether the effectiveness of airlines' strategies has changed in recent years. One important finding is that the observed effectiveness of many strategies has changed significantly. The type of change shows that conventional carriers are beginning to adopt ways traditionally applied to LCCs.
In the wake of the liberalization of air travel in Europe, Kangis and O 'Reilly (2003) examine how Rynair and Air Lingus responded to this external motivation and revealed remarkable differences in strategy. Research in the article has shown that different companies in the same "industry" can adopt different attitudes, possibly perceiving different threats or opportunities from the same external stimulus.
Lawton (2003) returns to a study that examines and compares the principles of strategic management and the operations of leading low-cost carriers. This study explores how the market power and resilience of the business model of LCCs derives from a dynamic approach to Strategic Management, subject to an aggressive customer search associated with a clear and particular emphasis on operational efficiency. Companies within and beyond the "airline industry" can draw valuable management ideas from these principles and practices of pioneers in the LCCs market.
The study of Lindstadt and Fauser (2004) raises the question of how regular air carriers should plan their organization and develop more distinct products in a changing environment. It compares the effectiveness of integrating or separating regular carriers into individual entities (and LCCs) from the corporate strategy point of view.
Barbot (2004) examines two issues related to low cost (LCC) competition: first whether they respond to price changes by a full-service carrier (FSC), and second whether they compete with each other and how this competition operates. It presents a theoretical model that combines vertical and horizontal differentiation. An empirical test is then carried out for the Paris-Milan route, where three LCCs and one FSC operate. The empirical study confirms some of the results of the theoretical model. That is, there is a strong price competition between LCCs and almost always in the way predicted by the model. On the contrary, the results suggest that their competition with FSC's is limited to an entry regulation, and they ignore the price changes by national carriers after entry.
The study of Gillen and Lall (2004) identifies the competitive advantage of low-cost carriers such as Southwest, Ryanair and easyJet, as well as the role of airports.
5.10 Air transport Market Entry
An important part of the low-cost airlines related research focuses on market entry, primarily in the USA (Windle & Dresner, 1995, Dresner, Lin & Windle 1996) and Europe (Morrell 1998, Barrett 1999, 2001) and less in other countries such as Canada (Mentzer, 2000), Australia (Forsyth, 2003) and recently Brazil (Evangelho, Huse & Linhares, 2005). Competition between incoming lowcost carriers (LCCs) and dominant –hub-and-spoke – carriers has become an issue of widespread interest in the deregulated passengers’ air transport industry both in the US and abroad (Ito and Lee, 2003, 2004, Forsyth 2003, Morrison 2001, Dresner, Lin, and Windle, 1996).
Windle and Dresner (1995) study the effects of the introduction of new airlines on US domestic lines for the period 1991-1994. With the completion of their research, they concluded that: Southwest's entry into an airline link had different effects from those of other airlines and also resulted in a much higher fare reduction (-48%) and an increase in air traffic (up to 200%).
The Dresner et al. (1996) research extends previous research to explore the competitive effects of low-cost airlines entering the market. In particular, it examines the impact of the entry of LCCs on the operations of air carriers on other air connections from the airport where the entry occurred and the effect of entering LCCs on the operations of air carriers at nearby competing airports with respect to the airport the entrance occurred. The conclusions show that the presence of a low-cost airline has contributed to lower returns and higher air traffic both on the air link in which "entry" occurred and competitive air links. The study's conclusions also show that the presence of LCCs has an impact on other competitive links and that the benefits to passengers show to be more than originally expected.
In April 1997 the final phase of a series of measures that contributed to the liberalization of aviation in the European Union was completed. Morrell (1998) examines the progress made so far to achieve the liberalization of aviation in Europe, also taking into account the entry of new airlines. The author concludes that only a limited number of satisfactory air traffic routes are available to new entrants. The overall effect of liberalization on air fares shows a positive image of the availability of seats and the size of discounts offered.
Gudmundsson (1998) proposes a different approach to New-entrant airlines' life-cycle analysis. His research shows that new entrants have similar characteristics to companies operating in other 'industries'.
Windle and Dresner (1999) extends their analysis of the impact of LCCs on the fares of the routes they enter by examining the impact of ValuJet's entry on the hub of an established air carrier such as Delta and by examining the change in prices on routes that do not "enter" a low-cost carrier. They have found that Delta has lowered its prices on non-competitive routes (those completed or through Atlanta, the Delta hub) in response to competition from ValuJet. They have not found evidence that Delta has increased prices on non-competitive routes (whether those who finish at Atlanta or Atlanta) to offset lost revenue on competitive routes. The final result is in contrast to the DOT cases and supports the position that companies are implementing rational pricing on their hub-and-spoke networks.
The entry of low-cost carriers to Canada is being examined by Mentzer (2000) to determine whether the entry of a low-cost air carrier into a Canadian domestic airline squeezes the prices of a major carrier and concludes that, as in the United States Southwest, so in Canada, WestJet's presence pushed down on domestic flights.
The impact of the entry of low-cost air carriers in Australia is studied by Forsyth (2003). In the conclusions of the article, we see that their entry may indicate that it has failed as an undertaking but is an important part of the competition processes and affects the behavior of established scheduled air carriers.
The study by Ito and Lee (2003) documents the growth of low-cost carriers (LCCs) in the US aviation industry since 1990. They confirm that LCCs have concentrated their entrances primarily in the very dense markets - airport pairs during the previous decade. In addition, they show that if LCCs continue to penetrate similar density markets at the same rate, the revenue share of home network carriers may eventually be exposed to direct competition by LCCs could increase appreciably from approximately 30% today to just below from 50% in the future. In another study, Ito and Lee (2003) document the increase in low-cost carriers (LCCs) in the US aviation industry since 1990 and at the same time quantify the market characteristics that have affected the non-stop entry of LCCs in the 351 city -pairs markets over the past decade.
Schnell (2004) explores whether there are still effective barriers that work to prevent entry into liberalized aviation markets. While most airline markets have been liberalized, there seem to be still barriers to entry. They find that the conditions of industry (air transport), the objectives of an airline, characteristics and strategies contribute to the effectiveness of individual barriers to entry.
Mardi & Sedlenieks (2004) explore the future prospects of LCCs in transport, and in particular the commercial aviation market between Riga/Tallinn and Stockholm. They assess the suitability of the current market structure for entering LCCs as well as assess whether the preferences and behavior of air and sea passengers on the Riga/Tallinn - Stockholm market coincide with the theoretical predictions of Kelvin Lancaster’s model.
Following the empirical studies, Gil-Moltó and Piga (2006) analyze the entry and exit activity in the period after the liberalization of air transport and study the traits of differentiation between traditional and low-cost carriers on the markets of British airlines. In addition to the features traditionally emphasized as entry determinants (eg airport presence and network economies), the authors find that the existence of chartered or seasonal air carriers, product diversification opportunities and the quality level provided by dominant occupants correlates with the explanation of entry and / or exit. Despite of liberalization policies, the possibilities for free entry and exit of important large markets still appear to be limited.
5.11 LCCs Pricing Strategies
The effects of LCCs on fares and passenger traffic have been well analyzed (Dresner et al, 1996). Whinston and Collins (1992) found that the entry of the "new" LCC carrier People Express resulted in a 34% drop in average prices on 15 air links in 1984-85. Bennett and Craun (1993), in their research for the US Department of Transportation, looked at the influence of Southwest on a number of California markets. The authors found that Southwest's entry into the Oakland-Burbank intra-California route in 1990 resulted in a 55% drop in price and a six-fold increase in passengers.
Lawton (1999) explores the implementation of embedded strategic models in a particular industry (air transport) or a particular company (Ryanair). Among the conclusions it is stated that the strategic choice of "low-cost" by itself is insufficient to ensure a long-term competitive advantage of the business on the market.
Vowles (2000) examines the role of low-cost carriers in the determination of air fares in the US using a model. The final results show that low-cost carriers play a determinant role in determining air fares in the US.
Piga and Filippi (2002) develop a theoretical framework for analyzing the strategic behavior of low-cost European air carriers, with emphasis on the role of product differentiation. They also use real research data to verify the effectiveness of LCCs distribution strategies. The study has shown that the success of LCCs may not only depend on their ability to keep their costs low, but also on the application of price strategies, which attract different market segments thus increasing their average occupancy.
Najda (2003) examines the current structure of the US domestic airline market to determine the magnitude of market power exerted by incumbent carriers, market dynamics on short and long-distance routes and the impact a new carrier (LCC) in the distribution of air fares. The analysis attempts to determine whether the pricing strategies of competitors differ depending on the presence of a LCC on that airline link.
Pels and Rietveld (2004) analyze pricing behavior in the London-Paris airline linking low-cost air carriers as well as regular air carriers. The results show that most airlines in the London - Paris market do not show a distinctive competitive behavior.
Gorin and Belobaba (2004) present the impact of Revenue Management on fares on scheduled carriers following the entry of a low-cost carrier on an air link.
Barbot (2004) attempts to investigate whether there is price competition between FSC's and LCC's through a theoretical model that is being tested for 18 links between Paris and Milan. The results showed that LCC's respond to the price changes of their respective LCC's competitors. However, price competition with the FSC seems to exist as an entry regulation by the latter without any further response to price changes after entry.
Knorr and Zigova (2004) study innovative pricing strategies as a competitive advantage of LCCs. Their spectacular success, through an innovative pricing approach as a critical element of in-depth thinking through a consequent mix of Marketing, demonstrates that even in highly competitive markets there are impressive and lasting profit opportunities and can be exploited by implementing the appropriate pricing strategy.
Barrett (1999) examines the viability of Ryanair's "low-cost" product in relation to customer preferences, the labor market, and external costs such as airports and bookings.
Chopra and Lisiak (2005) study the difference in financial performance between low-cost carriers (such as Southwest and JetBlue) and traditional air carriers such as American Airlines, Delta Airlines and United Airlines between 2001 and 2004. During this period, low-cost carriers have earned an operating income of 0.934 cents per available mile (ASM), while traditional carriers have lost 3.933 cents per ASM.
5.12 LCCs and Charter Airlines
An important dimension of the entry of low-cost carriers is related to the impact on charter carriers. Williams (2001) compares the operating costs of charter flights and LCCs and concludes that when the difference is noticeably reduced, charter carriers still have the advantage.
5. 13 LCCs and Tourism
Papatheodorou and Lei (2006) study the relationship between tourism and air transport. Their study emphasizes this relationship, focusing on the impact of the three main business airline models (traditional - scheduled flights, charter airlines and low – cost carriers) on regional airports using Great Britain as a case study. The results of their empirical study show that despite the current perception, low-cost carriers are not the only ones that can make a significant contribution to airport aeronautical and non-aeronautical revenue.
The results of their empirical study show that despite the current perception, low cost carriers are not the only ones that can make a significant contribution to airport revenue from airport or other airport benefits.
6. DISCUSSION
The framework of Low Cost Carriers related research topics, are mainly defined by studies that refer to: institutional framework, civil aviation policy and legislation, the air transport deregulation, business models and operational characteristics, Marketing and market segmentation, relation between LCCs and scheduled airlines, airlines flight networks LCCs and their interaction with the airports they serve, competition and strategy issues, airlines market entry strategies and pricing strategies, LCCs and charter airlines, LCCs and tourism as well as LCCs Case Studies.
In relation to the results of deregulation, the various empirical studies show the positive - and not only - effects in prices and in consumers well-being. If a market deregulation is socially beneficial, it revolves around creating the conditions for a sustainable contestable market structure. In general, an airline is considered a potential entrant if it already serves one or both extreme points of a route. Such a presence of LCCs, when the cost of entry and exit is low, is supposed to be sufficient to limit the exercise of market power. Other studies of the airline market, however, reveal how the competitive effect is best approached when potential competition becomes real competition. In a combined entry and exit study, the researchers found that entry and output have opposite effects on average price levels, but not on performance.
The presence of airports seems to be a key factor in gains from activity after entering LCCs in a given city pair. Moreover, the entry of an airline, and the exit and entry behavior, is significantly influenced by its own network (but not by that of its competitors). With regard to state aid subsidies departing from such airports, this is treated as assistance to those airports, to develop the "critical mass" required to become commercially viable, and thus ultimately reduce their dependence on state funds.
With regard to the business model, low-cost carriers organize board committees in a different way than full-service carriers in order to achieve lower costs and faster decision-making required by their business model.
In terms of segmentation and market study, some studies have shown that low-cost carriers would be more attractive to passengers travelling for business and working in small and medium-sized enterprises.
On the response of traditional carriers to the entry of low-cost carriers, Cityjet's case study shows that traditional carriers face many difficulties in the market after deregulation.
The dominant carriers control hub airports and have effective frequent flyer programs. New entrants are subject to additional retail costs in order to secure the support of travel agents. Another study shows that the likelihood of an LCC entry in a hub-and-spoke market is independent of the dominant carrier's response.
On the subject of airline networks, a study shows that low-cost carriers have a lower level of concentration on average than full-service carriers. LCCs focus the flow of their air traffic around a limited number of hubs that act more as entry and exit points than as transfer points.
Of course, the issue of LCCs is also related to the airports they choose and the strategic choices of airports in order to meet their requirements. The commercial dimension concerns many airports, especially the smaller ones, which have been forced to look for new ways of finding income as well as reshaping the "airport-airline" relationship.
On the subject of the strategy of new entrants, the following is found: the effectiveness of many strategies has changed significantly. The type of change shows that conventional carriers are beginning to adopt ways that were traditionally applied to LCCs. Different companies in the same industry may adopt different attitudes, possibly perceiving different threats or opportunities coming from the same external stimulus.
Otherwise, the presence of at least one additional LCC does not affect the prices charged by the carrier and on the other hand the dominance in an airport and the advantages that this determines in terms of fees (charges, fees) are not passed on to passengers. Their competition with FSCs is limited to an entry arrangement, and they ignore price changes by national carriers after entry.
A significant part of the low-cost air carriers’ studies is focused on the strategies of entering the air transport market. Competition between incoming low-cost carriers (LCCs) and established hub-and-spoke carriers has become a subject of expanded interest in the deregulated air transport passenger industry, both in the US and abroad.
As regards barriers to entry, conditions of the air transport industry, an airline's objectives, characteristics and strategies contribute to the effectiveness of individual barriers to entry. Despite liberalization policies, the potential for free entry and exit (contestability) of major markets still seems to be limited.
A relevant study has shown that the success of LCCs may not only depend on their ability to keep costs low, but also on the application of price strategies, which attract different segments of the market, thereby increasing their average occupancy. Revenue management also has implications for fares to FSCs following the entry of a low-cost carrier into an air transport connection.
Their spectacular success, through an innovative approach to pricing as a crucial element of in-depth thinking through a therefore applied marketing mix, proves that even in highly competitive markets there are impressive and lasting profit opportunities and can be exploited if the appropriate pricing strategy is applied.
Low-cost carriers have consistently operated with a lower number of employees per ASM than traditional carriers. An airline can choose to be cost oriented or revenue-oriented, but it is difficult to be on both. Of course, gradually the business model of low-cost carriers is changing, and we are now facing low-cost hybrid models.
Initially there were notable differences between the product offered by low-cost carriers and those maintained by traditional air carriers, network carriers and regional airlines. Almost all of these benefits are now available to low-cost passengers but usually at extra charge. On the contrary, some other elements of the low-cost air transport model play a role in the strategy of Full-Service Carriers, in particular revenue from ancillary services.
7. CONCLUSION
The air transport industry has experienced significant challenges in the last decades, leading to a new perspective of the airlines business. The study of aviation sector includes a wide range of scientific approaches which intensified in the second half of the 20th century. The involvement of international scientific research in the aviation sector brings together a large number of articles in the post-war transport sector, covering an expanded and multi-layered approach to international aviation issues. There is no doubt that the emergence and growth of low-cost carriers is one of the most significant global developments in the air transport industry. This research deals with of air transport literature review within the context of strategic choices of a singular form of air transport, such as low-cost carriers. This “new” type of air transport has thoroughly and decisively stirred up the status quo in air transport and specifically, the so-called traditional air transport networks, through the introduction of the low-cost model that permits these airlines to offer low fare tickets to their customers. The low-cost carriers are a significant dimension in the modern development and competition strategies of the air transport industry. An in-depth study of the data of that period shows why LCCs seemed to be viable and attract significant markets. Research articles and other relevant documents published between 1995 and 2005 were analyzed, following explicit criteria and replicable procedures. The classification of low-cost carriers’ literature of a specific time period and findings arising from this study may be taken into account for a more comprehensive approach to the relevant literature within the air transportation context.
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