Expansion of Low-Cost Carriers in Full-Service Carriers Saturated Market

Airline Industry: Expansion of Low-Cost Carriers in Full-Service Carriers Saturated Market
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Airline Industry: Expansion of Low-Cost Carriers in Full-Service Carriers Saturated Market
In 1978, more than four decades ago, the United States deregulated the airline industry resulting in an increasing number of carriers dominating the airspaces that follow the low-cost strategy. Before this time, the Civil Aeronautics Board determined how much airlines could charge and their operated routes. However, 1978 saw the end of non-price competition strategies in attracting customers among other marketing strategies such as higher quality meals for frequent travels. By 1997, rapid growth and market success were witnessed among many airlines, which the U.S. Department of Transport (DOT) called a "low-cost airline service revolution (Wolla, 2018)." Today, this low-cost airline (LCC) service revolution continued to expand in markets, resulting in a substantial rise in competition with network carriers. Following the publication of the "Low-cost airline service revolution" report by the DOT in 1997, it was evident that an increasing number of passengers were benefiting from the LCC through reduced fares. However, it was predicted that such a watershed development in domestic aviation could have profound impacts on competition, efficiency, and consumer and industry structure.
While the introduction of LCC has improved the accessibility of destinations, offered attractive transportation means to low-income travelers, and stimulated suppressed demand, Pratt and Schuckert (2018) have observed that these effects have limited net economic contributions to the host economy with a robust transport market such as the United States. However, from economic analysis and literature published in recent years, low-cost carriers significantly impact both emerging and developed markets in host economies. They have become major threats to legacy full-service carriers due to the different business models employed by the two types of airlines. This report examines the ease of expansion of low-cost carriers in full-service carriers saturated markets.
Literature Review
Investigating the impact of LCC on domestic tourism and economic growth of New Zealand, Tsui (2017) has found that LCC services, regional tourism indicators, cost of land transport, and gross domestic product (GDP) per capita had significant impacts on the country's domestic tourism. LCCs have attracted different types of air travelers, ranging from business to leisure travelers, to visit many destinations with lower airfares, loyalty programs, more frequent flights, and shorter turnarounds times. Since the concept of a low-cost airline business model was first proposed by Southwest Airlines during the early 1970s, it has rapidly developed globally and impacted the tourism sector. LCC has been instrumental in promoting tourism destinations, transporting air travelers, and generating tourists to both mature and emerging destinations (Tsui, 2017). New Zealand, an island country, is one of the most famous international tourist destinations that travelers visit for adventure and sightseeing. Tsui (2017) notes that between 2014 and 2015, the number of international visitors arriving in the country increased to 3.13 million, down from 2.86. Simultaneously, the number of New Zealand residents that traveled overseas also grew to 2.41 million, down from 2.86 million. Despite these statistics, Tsui (2017) laments that the domestic tourism that New Zealand has yielded is poorly researched since it has little value in generating the country's foreign exchange and earnings. According to Tsui (2017)., solely depending on international tourists who visit New Zealand may not sustain the tourism industry in the country, particularly during the pandemics, global financial crises, and other external shocks such as the United States 9/11 attacks, the SARS of 2003, or the COVID-19 or 2019. While these events have had negative impacts on international tourism, local or domestic tourism has often looked prosing in the long term (Tsui, 2017). Therefore, according to Pratt and Schuckert (2018), LCC has an important domestic economic impact on both emerging and developed markets.
Tsui (2017) has reviewed the impact of LCC on improving the economy of host countries from the perspective of the tourism sector, although such benefits are also derived from a reduction of fares in airlines. In complimenting Tsui's (2017) review, Panduwinasari et al. (2019) have offered an extensive review of the impact of LCC on economic growth from the cost perspective in terms of minimizing and reducing the cost accrued by companies. From primary data collected from interviews conducted among workers of PT Citilink and PT Garuda Indonesia, as well as secondary data from websites and reports on LCC, results show that LCC reduces or minimizes flight costs, the overall operation cost of companies, and through government policies in terms of laws regulating flights and fixed rates. The authors conclude that LCC has positive impacts on the economy, particularly on the tourism sector of host countries as well as the travelers (Panduwinasari et al., 2019). According to the authors, LCC overcame several challenges that consumers face, directly associated with expensive flight ticket prices. Panduwinasari et al. (2019 also observe that the wider community in the developed world can also use aviation services that charge less and shift their mindsets that only people using full-service carriers (FSC) are only from the upper middle classes while those that use LCC are from lower-income backgrounds.
The success of LCC has been through strategic airline costing that has made competition in the airline sector even more extensive with the instruction of liberalization. Fair costing on the side of passengers has resulted in an increase in revenues for LCC airlines and reduced the cost of operations while increasing productivity even at times of the post-pandemic. Both FSC and LCC have to factor in two major sets of cost when running their business: administ...