Airline Cost Structure. Low-cost carriers (LCCs). Research Paper

Airline Cost Structure
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Airline Cost Structure
Low-cost carriers (LCCs) are understood as airlines that do not have many of the usual services offered in the fare, leading to fewer comforts and lower fares. For these airlines to compensate for revenue lost in reduced ticket costs, they might charge for extras, for instance, baggage, seat allocation, priority boarding, and food (Minkova, 2013). This paper analyzes the airline cost structure of low-cost carriers. It also examines the methods that LCCs use to achieve sustainable competitive cost advantages over the network full service airlines.
The idea of an LCC began in the 1970s with Southwest Airlines, an American domestic carrier. It aimed to offer cheap airfares to airline passengers. This led to a situation in which the legacy airlines or the established traditional full cost airlines lost a substantial amount of their market share to the newly formed LCCs, solely due to the capacity of these low-cost carriers to charge lower prices over the traditional carriers (Hunter, 2014). At the moment, Southwest Airlines is the largest LCC in the world.
LCCs tend to have a lower cost structure than the traditional network airlines. Their common cost-saving practices are keeping labor costs low, providing a single-class product, depending on direct sales, using the same kind of aircraft, increasing the utilization of the aircraft, operating at secondary airports, as well as avoiding frequent-flyer programs. Though the use of these practices, low-cost carriers have been able to decrease unit cost by 20 – 40% in comparison to the traditional airlines (Alamdari & Fagan, 2015). Thanks to their lower cost structure, low-cost airlines have been able to decrease airline fares, which greatly stimulate traffic. For this reason, the model used by these carriers has demonstrated to be successful worldwide and has helped to drive the growth of air travel.
To obtain sustainable cost advantages over the traditional full cost airlines, LCC employed various methods. These are based upon Southwest Airline’s low-cost operation model, or they have utilized a modified version of this particular model. The success of LCCs is for the most part attributed to the low-cost leadership position strategy that such airlines have adopted. For low-cost leaders, the aim is essentially to keep their costs to the lowest about the competitors in the industry and attain a cost advantage over rivals (Francis et al., 2013). The original low-cost leadership strategy was demonstrated by Southwest Airlines, and it comprised the following elements:
Network High frequency, point-to-point airline routesAirportSecondary airfields FaresUnrestricted and cheapFleetThe same type of airplane across the entire fleet, high utilizationDistributionCall centers and travel agents, no ticketsSector lengthShort sector lengthEmployees Competitive salaries as well as profit sharing, high productivity staffs
The basis of operation of LCC around the world is still the same: to offer the lowest price for customers through undercutting the price levels of the traditional full cost airlines (Francis et al., 2013). The notion behind the concept of the LCC is generally to cut costs so that the carrier can be able to provide its passengers with a cheap product with the basics. Today, low-cost carriers use several methods to attain this and in the end achieve competitive cost advantages over the long haul airlines. These methods are as follows:
Fleet Utilization and Fleet Standardization
Low-cost carriers seek to have a similar type of airplane. This could have a major decrease in maintenance and training costs. Also, it helps to increase efficiency as it gives greater flexibility for the airplane crew (Alamdari & Fagan, 2015). The utilization of an airline’s f...