Running head: DISCUSSION POST 1

James M Wooddell

Embry-Riddle Aeronautical University

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Type your title here

Discussion 3.3 Airline Response to Recession

Choose one element of archetypal low-cost-carrier business model (see Doganis, Chapter 6).
Explain how it reduces cost compared with a large international network airline.
Why do global network carriers not incorporate this element in their business model?

The primary goal of any enterprise is to achieve and sustain competitive advantage,

additionally the operational effectiveness and strategy are the essential elements to superior

performance (Porter, 1980). Low cost carriers (LCC) business model as described by (Doganis,

2010) is generic and elementary, keep it simple and create demand. Doganis elaborates on the

differences of LCCs and traditional network airlines as being simple and complex

respectively.

There are several elements of cost savings in which LCCs are more effective and

efficient in comparison to traditional network carriers. The element in which I chose to elaborate

on is the cost advantage of indirect operating cost. Doganis (2010) points out this area of savings

is by far the most dramatic in proportion, in most categories. Indirect operating cost are those

expenses associated with advertising and promotion, aircraft servicing, amortization (non-flight

equipment), depreciation (maintenance equipment), passenger services, reservation and sales,

and traffic services (FAA, 2017).

Because the LCCs are a no frills, point to point carrier, the effectiveness of keeping it

simple drives demand and increases the bottom line at the same time. One of the primary

reductions of cost for LCCs comes from the marketing and handling related expenses (Doganis,

2010). These expenses, station and ground handling, according to Doganis are a major part of a

network airlines business model. At each location where the airline services, there are staff,
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lease space for lounges, aircrew, offices, and equipment, these create a large portion of expense

for the network carriers. LCCs reduce this expense by outsourcing a majority of their passenger

and aircraft handling to third party vendors and only have a small number of full time staff. By

outsourcing the ground handling services, the LCCs are able to take advantage of competitive

bidding, whereas network airline ground servicing typically consist of directly employed workers

unionized, with a contract.

Other areas of savings include the amenities offered by network carriers that are not

offered by LCCs. With each additional service comes an additional increase in labor, cost,

and supplies generally. When network carriers deplane passengers, typically a company

contracted to service the plane prior to boarding the next leg of the flight will clean the cabin,

refuel, reload meals, drinks, snacks, etc., and handle the baggage offload and upload. The LCC

typically offers drinks for purchase (Doganis, 2010), but requires the crew to collect the trash as

passengers are deplaned.

LCCs typically are what you see is what you get in my opinion. The ability to travel

from point a to b, directly with little or no amenities, at a fare that is lower than that of a network

carrier is appealing to generally the cost minded traveler, as well as business travelers.

Legacy carriers, and other network carriers have based their business model on the

satisfaction of the flight process by the customer. The catered to passenger segments such as

business class, first class, and economy all have various degrees of cost associated with them.

The network airlines have such a large footprint, in order to stay competitive they must innovate

and reevaluate their model to align with the substantial increase of LCCs. In some cases, many

network carriers have adopted the LCC model in terms of outsourcing the ground handling,

services, and sales and distribution (Doganis, 2010) additionally, Doganis reiterates that the
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network carriers have reduced the number of services that are free, and have incorporated online

ticket sales and automated check-in as well as restructured the cabin classes on many of their

legs in the network.

Although some network carriers have adopted some of the LCCs model, completely

incorporating the LCC model into the network airline(s) would eliminate the ability of the

customer to have a choice. Customers that are air warriors want the ability to choose amenities

based on the airline, as such they will pay a premium for those services. Network carriers are

holding on to that customer dynamic in an effort to sustain, not grow (in my opinion that market

niche is getting smaller with the broader selection of LCCs and increasing element of time is

money mentality). As the success of Southwest has shown, many airlines are following suit by

creating a LCC within their network model in an effort to compete.

References

Baye, M. R., & Prince, J. T. (2017). Managerial economics and business strategy (9th ed.). New

York, NY: McGraw-Hill.

FAA. (2017). Economic values for FAA investment and regulatory decisions guide. Retrieved

from https://www.faa.gov/regulations_policies/policy_guidance/benefit_cost/media/econ-

value-section-4-op-costs.pdf

Porter, M. E. (1980). Competitive strategy: Techniques for analyzing industries and competition.

, New York: Free Press.

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