Fariba Alamdari

Impact of the adherence to the original low‐cost model on the profitability of low‐cost airlines

Undoubtedly, low‐cost operation has been a very successful business model in the airline industry. Over the past 5 years, there has been a widespread departure from the original low‐cost model introduced by Southwest Airlines. The low‐cost carriers tended to follow a differentiation strategy as opposed to cost leadership on which the original low‐cost model was based. The objective of this paper is to assess the degree by which the original low‐cost model has been modified over the years, and to ascertain whether the degree of adherence to the original model has any impact on the profit level of low‐cost airlines. The performance and business models of ten longer‐established US and European low‐cost carriers are analysed and evaluated against the original model of Southwest Airlines. Analysis indicates that although an increasing number of ‘hybrid’ low‐cost models are achieving low operating costs, offering low fares and returning attractive operating profit margins, there is a case for recommending adherence to the original model to ensure greater profitability.

Passengers’ choice of airline under competition: the use of the logit model

The continued liberalization of the airline market in the European Community offers the prospect of competition in terms of price, frequency of service and many other attributes. Understanding these factors that influence passenger demand and incorporating them into a demand function poses a substantial theoretical and empirical challenge. A basis for estimating demand functions is the logit model. This paper examines the value of a logit share model in explaining how the share of airlines between airports varies as a function of measured and unmeasured attributes. It shows how demand functions are necessary for understanding a competitive market and evaluates the progress to date in identifying accurate coefficients of the logit function.

AIRLINE LABOUR COST REDUCTION: POST-LIBERALISATION EXPERIENCE IN THE USA AND EUROPE.

US and European carriers have been developing strategies to reduce costs in response to the growing competition in their markets following airline deregulation in the USA since 1978, and liberalisation in Europe since 1988. The most obvious area of costs for airlines to tackle has been labour. This paper analyses trends in labour unit costs (labour expenses per available tonne kilometre) of major US and European carriers from 1978 and 1985 respectively. The results indicate that both US and European airlines have been successful in reducing labour unit costs. This was achieved in the US by some reduction in real wages (labour costs per employee) and periods of increased productivity (ATKs per employee). European airlines reduced unit labour costs by productivity increases, offset by increases in real wage levels. In Europe, some reduction in real wage levels might be expected, following the US experience and in order that they might achieve globally competitive unit labour costs. These might be accompanied by the more widespread use of profit sharing and stock options.