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

Abstract

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.

Notes

Go was acquired by easyJet, and Buzz by Ryanair in 2002. Debonair was made bankrupt in 2000.

Unit cost is the industry standard for calculating and comparing various airlines’ operating costs. The formula involves dividing the carrier’s total operating costs by the total number of available seat‐km (ASK) produced by the carrier for a specific period: ASK = total kilometres flown × total number of seats for sale. The resulting unit cost is the cost of producing one seat and transporting that one seat over 1 km.