The emergence of low-cost carriers (LCCs) has been a key catalyst for the development of the aviation industry in the last decade. Indeed, extensive research has been undertaken to analyze the business model and impact on the aviation sector and beyond. Despite recent developments in the LCC markets in Asia and Latin America, much of the research has been focused on developed countries. Therefore, the purpose of this book is to identify the premises and prerequisites of the LCC model, and assess whether this business model could be successful in other less-developed countries, in particular the countries of Sub-Saharan Africa.
This book identifies various definitions that have been applied to describe the LCC business model. In essence the majority of researchers define LCCs as carriers which, through a variety of operational processes, have achieved a cost advantage over full-service carriers (FSCs). This cost advantage is, in most cases, translated to the consumers by a lower fare offering. Although many carriers are defined as LCCs, the LCC model has developed into many different variations since the original “Southwest Airlines model,” the first U.S. LCC, which began operations in the 1960s.
There are a number of key characteristics that can generally be found in LCCs. These include (a) simple service offering focusing on the key service of transport and removal of all “frills” (for example, free baggage, on-board meals, assigned seating) or charging additional fees for them; (b) short-haul, point-to-point route structure rather than traditional complex and oftentimes expensive hub-and-spoke network; (c) usage of secondary airports with lower airport charges, higher availability of slots, and reduced congestion; (d) high aircraft utilization achieved through shorter turnaround times, longer routes,1 or higher flight frequency; (e) fleet commonality and generally newer, more fuel-efficient fleet to minimize aircraft-specific expenditures (such as maintenance and personnel), increase purchasing power in aircraft procurement and reduce fuel costs; (f) high-density one-class configuration to maximize aircraft capacity; (g) low-cost distribution through online selling; (h) high labor utilization through a higher number of average block hours per employee and/or higher passenger-per-employee ratio.
Although these common operating practices can be identified across a range of low-cost airlines, there is no one particular LCC model or a single driving element responsible for its competitive advantage. The LCC business model has also been evolving rapidly in recent years with a considerable shift in operating practices. Many LCCs, particularly those in Europe and the United States have, for example, been “hybridizing” their models as more mature LCC competition, higher fuel prices, and powerful network alliances turn their focus to higher yield opportunities. Even airlines such as Southwest have shifted more toward traditional models that cater to business traffic by using primary airports and adjusting their schedules. Their network counterparts, under competitive pressures from the new entrants, have also become more cost sensitive. Furthermore fuel prices have had a considerable impact on this convergence, with LCCs losing their advantage of more fuel-efficient aircraft to the fleet renewal process currently under way at most traditional airlines.
It is well documented that the development of air transport services can have a substantial impact on the aviation market—as well as on other related and even unrelated industries (see for example ICAO 2004; Button and Taylor 2000; Oxford Economics 2011). These studies, varying in scope and methodology, have shown air transportation to have a considerable positive impact on employment, gross domestic product (GDP), trade, tourism, and productivity, among other factors.
Research on the impact of low-cost airlines has been scarce due to the difficulty of linking the impact of increased air transportation to a particular business model. However, a number of studies have confirmed the significant positive impact of LCCs on air transport and related markets. Although some anecdotal evidence from developing countries is available, research on LCC entrance is also almost entirely focused on developed countries, particularly in Europe and the United States. This is largely due to the more recent emergence of LCCs in developing markets and the required data often being unavailable.
Specific focus has been paid to the impact of LCCs on traffic stimulation through lower fares and their overall impact on competition and fare levels in the market. Coining the term “Southwest Effect,” the U.S. Department of Transportation (DoT) researchers Randall Bennett and James Craun concentrated on three different aspects of how Southwest Airlines impacted the aviation market, namely through: (a) a direct competitive effect in terms of passenger growth and fare reduction on a given route where Southwest had entered; (b) the lowering of fares at surrounding airports through Southwest’s entry; and (c) the role model effect, exhibiting the impact Southwest has on the business models of new entrants in other markets (Bennett and Craun 1993). Focusing on the California corridor, the study presented evidence that Southwest’s entry had a significant impact on all three aspects outlined above. On the Oakland–Burbank route, for example, where Southwest entered in 1990, prices dropped by 55 percent, and passenger traffic increased sixfold between its entrance and the 3rd quarter of 1992 (Bennett and Craun 1993).
However, the effects of low-cost airlines go far beyond fare levels and passenger traffic. The aviation literature includes a particularly well-documented correlation between LCC entrance and tourism. The European Low Fares Airline Association (ELFAA) has grouped these benefits for tourism into three categories: (a) an increase in tourist destinations due to usage of secondary airports, for example, the London–Strasbourg route, previously used primarily for business travel, has proved a popular tourist destination with the entrance of Ryanair; (b) more even distribution of traffic throughout the year reducing “seasonality effects”; and (c) low off-peak fares, which have enabled mid-week holiday travel. This distributes traffic more evenly across the week and reduces congestion at airports (ELFAA 2004). A number of studies have also focused on other LCC impacts. Williams and Balaz (2007), for example, focused on the impact of LCCs on the flows of labor, migrants, knowledge, business connectivity/investment, and mobile markets including tourism.
The effects of reduced fares and traffic simulation could also be observed in developing countries, such as in the cases of Mexico and South Africa. Both countries have seen rapid LCC growth in the last decade, which has significantly benefited air travelers.
In Mexico, the emergence of LCCs has considerably stimulated traffic growth, with LCCs capturing almost 60 percent of the domestic market in 2012. They not only increased traffic from existing air travelers, but also attracted new flyers into the market (CAPA 2013). This was facilitated by the LCCs’ considerably lower fares, as well as an expansion of the historically limited domestic network. VivaAerobus, a Mexican LCC, estimates that a quarter of its customers are actually first-time travelers (VivaAerobus 2012). Bus travelers, who had been enduring long rides on the country’s dilapidated road infrastructure, proved to be a critical customer base for the airline.
Similarly, in South Africa, traffic was drawn from users of alternative modes of transport. On the Johannesburg–East London route, which takes more than eight hours by car, the entrance of LCCs increased air traffic by 52 percent between the second quarter of 2004 and the second quarter of 2006. This is seen to have been a major factor in revitalizing the region’s tourism industry, resulting in a more than 50 percent increase in holiday packages. As one of the poorest regions in the country (US$1,400 per capita GDP), tourism is a key contributor to the region’s economy. Estimates show that the 52 percent increase in foreign tourists translates into 62,000 additional tourists per year, resulting in 65.8 million South African rand (US$10 million) in tourism expenditures (ComMark Trust 2006).
The cases of both Mexico and South Africa offer some preliminary notions about the impact that LCCs can have in developing countries. However, the success of LCCs in these markets was dependent on certain market conditions. This book, which involved extensive research and stakeholder interviews, identifies the following key factors: (a) economic growth and a sizable middle class to drive demand; (b) air transport liberalization and privatization of monopolistic state-owned carriers; (c) the availability of adequate, low-cost air transport infrastructure; (d) availability of qualified human resources; (e) appropriate safety and security standards; (f) low-cost distribution channels; (g) availability of cost-effective financing for aircraft; (h) fuel availability and cost; and (i) good governance to provide a sound investment climate.
Based on this framework, the case of the East African Community was chosen for further study. Although a preliminary assessment, the analysis indicates that, given the limited traffic domestically and in the region, combined with numerous challenges—such as the lack of a significant middle class driving demand, stalled liberalization efforts, limited safety and security oversight, few navigational aids, and limited human and financial resources to create a low-cost airline—the emergence of profitable LCCs in the region may be premature. However, in light of traffic forecasts, projected economic development, and a growing tourism industry, considerable opportunities may arise in the near future.
In order for LCCs to capitalize on these opportunities, stakeholders in the aviation industry will have to proactively address some of the challenges highlighted above. Although an LCC model may not be suitable at this point in time, there are significant opportunities for lowering costs and fares, and consequently stimulating the development of a competitive air transport market. This will in turn create the proper environment for LCCs to emerge. In the case of the East African Community as well as other developing countries, measures which can be taken to capitalize on these opportunities include: (a) the fostering of a competitive environment by removing any market distortions (for example, monopolistic state-owned carriers, restrictive air transport policies, and bad governance); (b) investments, where required, in air transport and air traffic control infrastructure, in particular communications, navigation, and surveillance (CNS) infrastructure; (c) improvements in safety and security oversight through capacity building efforts in civil aviation authorities and airport operators (for example, training programs); and (d) reduction in input costs (for example, fuel and airport charges and taxes).
1. Still within short to medium haul.
Bennett, R., and J. Craun. 1993. U.S. Department of Transportation, The Airline Deregulation Evolution Continues: The Southwest Effect. Office of Aviation Analysis, U.S. Department of Transportation.
Button, K., and S. Taylor. 2000. “International Air Transportation and Economic Development.” Journal of Air Transport Management 6 (4): 209–22.
CAPA (Centre for Asia Pacific Aviation). 2013. “Mexico Returns to Double-Digit Domestic Growth in 2012, Boosting Outlook for Aeromexico and LCCs.” Centre for Asia Pacific Aviation (online) 6 February 2013. http://centreforaviation.com/analysis/mexico-returns-to-double-digit-domestic-growth-in-2012-boosting-outlook-for-aeromexico-and-lccs-96464.
ComMark Trust. 2006. Clear Skies over Southern Africa: The Importance of Air Transport Liberalization for Shared Economic Growth. http://www.tourisminvest.org/Mozambique/downloads/Investment%20climate%20background/Infrastructure/Clear%20Skies%20over%20Africa.pdf.
ELFAA (European Low Fares Airline Association). 2004. Benefits of LFAs. http://www.elfaa.com/documents/ELFAABenefitsofLFAs2004.pdf.
ICAO (International Civil Aviation Organisation). 2004. Economic Contribution of Civil Aviation. http://legacy.icao.int/ATWorkshop/C292_Vol1.pdf.
Oxford Economics. 2011. Economic Benefits of Air Transport Country Studies. Available at: http://web.oxfordeconomics.com/OE_Cons_Aviation.asp#.
VivaAerobus. 2012. “Overview of VivaAerobus.” Unpublished presentation.
Williams, A., and V. Balaz. 2007. “Low-Cost Airlines, Economies of Flow and Regional Externalities.” Regional Studies 43 (5): 677–91.