Price rivalry in airline markets: a study of a successful strategy of a network carrier against a low-cost carrier

In the post-liberalization period, competition has increased in airline markets. In this context, network carriers have two alternative strategies to compete with low-cost carriers. First, they may establish a low-cost subsidiary. Second, they may try to reduce costs using the main brand. This paper examines a successful strategy of the first type implemented by Iberia in the Spanish domestic market. Our analysis of data and the estimation of a pricing equation show that Iberia has been able to charge lower prices than rivals with its low-cost subsidiary. The pricing policy of the Spanish network carrier has been particularly aggressive on less dense routes and shorter routes.     

Triggering competition in the Spanish airline market: The role of airport capacity and low-cost carriers

We analyze the influence of increases in airport capacity and the entry of low-cost carriers on airline competition. We use parametric and non-parametric techniques to analyze a sample of Spanish routes. We find that capacity increases in large airports produce more competitive airline conduct only in routes departing from non-hub airports. Also, we find that the natural monopoly threshold decreases with time. Finally, low-cost carriers have a moderate but still significant effect on prices and increase alternatives even in low-density routes.     

The impact of social media and offline influences on consumer behaviour. An analysis of the low-cost airline industry

This study analyses the impact of social media as well as offline environments upon tourist online purchase and recommendation behaviour of low-cost airline services. Drawing on the Theory of Reasoned Action (TRA), this research considers the effect of offline social influences (interpersonal and external influences) and analyses online Consumer-to-Consumer (C2C) information exchanges as a driver of customer attitude towards online purchases. We propose that these factors improve online repurchase intentions and positive word-of-mouth communication (WOM and e-WOM) in low-cost settings. Using structural equation modelling, the conceptual model is tested with a sample of 441 Spanish Internet buyers of low-cost airline services. Interpersonal offline influences (e.g. friends, relatives, and family) have a significant effect on online repurchase intentions and WOM but do not affect e-WOM. External offline influences (e.g. media and experts), however, only affect consumer intentions to recommend future purchases of low-cost airline services on social networking travel sites and have no effect on online repurchase intentions or WOM. Findings also show that online C2C information exchanges influence attitude which, in turn, has a significant effect on repurchase intentions WOM and e-WOM.     

Measuring the LCC effect on charter airlines in the Spanish airport system

Using a robust transfer function model methodology, the present paper seeks to offer empirical evidence regarding the size and type of effects that low-cost carriers (LCCs) have had on traffic for charter carriers (CCs) in the Spanish airport system by geographic market. We show an unmistakable substitution relationship between CCs and LCCs in the latter's typical niche markets, national and European flights, while there is no reaction from the CCs in the segment of international flights outside the EU. Furthermore, substitution effects are smaller between CCs and LCCs on the domestic level than effects between LCCs and network carriers (NCs) and slightly larger on the European level. Lastly, CC traffic's different sensitivity to terrorist attacks, day of the week, air accidents and the economic crisis is also evident. CCs should therefore be considered an independent category that warrants individualized analyses.     

The geography of the Spanish airport system: spatial concentration and deconcentration patterns in seat capacity distribution, 2001-2008

This paper analyzes the geography of seat capacity at Spanish airports between 2001 and 2008. Concentration and deconcentration patterns for different markets have been identified. For this purpose, we use the Herfindahl-Hirschman Index (HHI), the Concentration Ratio (CR) and the Lorenz curve. From our analysis, we conclude that seat capacity follows a deconcentration pattern due to the growth of low-cost carriers at small- and medium-sized Spanish airports. This is in line with earlier studies for Europe as a whole. Intercontinental seat capacity still remains very much concentrated in Madrid and, to a lesser extent, in Barcelona. However, new strategies by long-haul airlines bypassing the primary European hubs foster the deconcentration of seat capacity in the Asian and North American markets. In the case of Spain, the recent liberalization of the EU-US market may become an important enabler of such network strategies, e.g., Delta has operated a route from Valencia to New York-JFK since 2009. In other intercontinental markets, capacity is more and more concentrated in Madrid. We highlight the restructuring of Iberia’s network as an important factor behind the increasing dominance of Madrid in intercontinental markets.     

Airline type and tourist expenditure: Are full service and low cost carriers converging or diverging?

Since some years ago low-cost carriers (LCCs) are becoming less and less low-cost-like, as well as full-service airlines are becoming less and less full-service-like, thus contributing to lessen the differences between users of one airline type and the other. LCCs have made air travel available to all budgets and enabled tourists to spend more at destination by reallocating their trip expenditure. The objective of this article is to observe if airline types have been converging regarding travellers’ expenditure allocation and total trip expenditure. We use repeated cross sections of the Spanish tourist expenditure survey between 2006 and 2014, and compositional data analysis with a total in order not to confound effects involving expenditure allocation with those involving expenditure volume. Results show that users of both airline types converge in their allocation of the trip budget (between transportation and at-destination expenses, and within at-destination expenses), but diverge with regard to total trip expenditure.     

The evolving low-cost business model: Network implications of fare bundling and connecting flights in Europe

In a context of limited organic growth, some low-cost airlines have considered business strategies that are changing two key principles of the low-cost airline business model: fare unbundling and point-to-point operations. Using a multivariate analysis we identify the influence of several route characteristics on the share that European pure low-cost and hybrid low-cost carriers have on the routes they operate. Results show that, from a network perspective, the distance between the archetypical low-cost carrier business model and the adapted low-cost carrier business model with a hybrid approach is widening. Differences are also clear between hybrids offering connecting services and hybrids offering fare bundling. The results are also important from an airport policy perspective, since secondary airports and legacy airports in transition could be able to reduce the gap between them and the main hub airports.     

The economic viability of long-haul low cost operations: Evidence from the transatlantic market

The recent strong performance of long-haul low-cost carriers AirAsia X and JetStar have re-raised the question of the long-term feasibility of long-haul low-cost operations. For the first time, this study contains a detailed financial assessment of low-cost operations on the transatlantic market using best-in class aircraft technology, the Boeing 787. The study's main findings demonstrate how challenging the successful running of a European long-haul low-cost carrier can be. In particular, on-going operating profit appears to be very sensitive to variations in demand and fuel prices, despite the use of new, highly efficient B787s. The findings show any prospective long-haul low-cost carrier that pursuing a demand focussed network strategy can ensure financial viability. This involves the creation of higher seating densities, higher cargo revenues and additional ancillary revenues.     

Measurement of airlines’ capacity utilization and cost gap: Evidence from low-cost carriers

The aim of this paper is to evaluate the capacity utilization and cost gap between actual and global long-run minimum costs. Based on the data for thirteen low-cost carriers around the world for the year 2010, an input-oriented data envelopment analysis model is used to estimate the physical capacity utilization and cost gap between actual and global long-run minimum costs. The empirical results show that more than half of low-cost carriers should improve their capacity utilization, and all low-cost carriers should enhance their market efficiency and reduce their excess costs. Of the thirteen low-cost carriers, three should improve their technical efficiency, four should re-distribute the mix of variable inputs, all thirteen should pay lower prices for all variable inputs, and ten should enhance the utilization rate of their fixed factors.     

End of the free lunch? The responses of traditional European airlines to the low-cost carrier threat

The short-haul operations of traditional European airlines such as British Airways and Lufthansa have come under increasing pressure from the growth of low-cost carriers. This paper examines their competitive responses. These are found to include reductions in labour costs, greater use of regional aircraft and a run-down of secondary hubs. Minimum stay requirements on cheap fares have been axed in many markets, while changes to the on-board service and a move to direct-sell bring these airlines closer to the low-cost carrier product. The network strength is largely maintained, however, which appears a better strategy than setting up a low-cost subsidiary.     

The effect of low-cost air transportation on the local economy: Evidence from Southern Italy

This paper investigates how the entry of low-cost carriers in Southern Italy has supported local and regional economic development in different ways: spreading the traffic demand during the year, increasing the rate of international tourism, generating new jobs and improving the income of the area. The evidence of traffic de-seasonality is quantified by an index, resulting in a decrease to all those airports specialized in low-cost services. Additionally, an assessment shows that the net impact driven by a low-cost route on the local economy is about €14.6 million per year.     

Legacy carriers fight back: Pricing and product differentiation in modern airline marketing

The adoption of the low-cost carrier business model has applied competitive pressure on established network or “legacy” carriers, by offering fares at prices that legacy carriers find it difficult to match and still cover their fixed costs. This paper reports how two medium-sized national airlines-Air New Zealand and Air Canada-have coped with the low-cost threat by, in effect, turning their fixed costs into profit centres. Features such as full regional networks, long-haul connections, frequent flyer programs, membership in global alliances, lounges and business class cabins can be bundled into products which can be marketed and sold profitably to business and even some leisure travellers, and which cannot be easily replicated by low-cost carriers. Although not panaceas, the innovations of Air New Zealand and Air Canada to the competition they face in their domestic and trans-border markets demonstrate the possibility of an effective legacy carrier response to the low-cost carrier business model.     

Airport–airline interaction: the impact of low-cost carriers on two European airports

This paper uses case studies to look at the impact of low-cost airlines on two European airports. Low-cost airlines continue to exert an influence in air transport markets and small airports face pressures to compete for their business. The low-cost model motivates airlines to negotiate contracts that significantly reduce aeronautical revenues, leaving airports to compensate by seeking commercial revenues from the increase in passengers. This has consequences for the airports, their passengers and the relationship between the airport and its existing operators. It is found that it is important for airport management to see both passengers and airlines as customers and to understand the resultant revenue streams, before negotiating preferential contracts with low-cost carriers.     

Opaque Web practices among low-cost carriers

The low-cost airlines' adoption of Web technologies to facilitate direct sales has accelerated their market penetration. However, some low-cost carriers are increasingly using Websites to create distance between themselves and their consumers in specific areas of their operations, while simultaneously developing excellence in sales transaction completion via self-service. The ‘opaque’ practices many low-cost carriers employ appear to be intentional design features and are contrary to the ethos of designing a ‘good system’ to facilitate the full spectrum of customer service. As a result, the low-cost sector has come under increased scrutiny for engaging in unfair practices and violating consumer protection law.     

The end of growth in residential tourism destinations: steady state or sustainable development? The case of Calpe

This article discusses how the slowdown in the real estate market during the most recent economic and financial crisis has affected residential tourism destinations on the Spanish coast. The afore-mentioned crisis, which gave rise to a standstill in residential activity, coincided with the turbulences experienced in the competing destinations of Northern Africa, which brought about a record number of international tourist arrivals to Spain. The resulting situation enables us to explore the future scenario of all the Spanish destinations that, due to the depletion of available land, are reaching their maximum levels of urban growth. Examining the case of Calpe, a destination which is representative of the Spanish Mediterranean, the study analyses whether the foreseeable dynamics for the future are conceptualized in the favourable terms that characterize “sustainable development” or, on the contrary, exhibit negative implications which the classic economists refer to as the “steady state”.     

Segmentation of low-cost flights users at secondary airports

Low-cost carrier services are important for many tourist destinations. However, there is little information about the characteristics of travellers using low-cost airlines, and their flight preferences. The typical segmentation of air travellers is business versus leisure travellers; and business versus tourist fares. We use segmentation analysis focusing on low-cost travellers’ valuations of various flight attributes and trip-related characteristics, most notably those related to destinations, based on a sample of foreign travellers who used Girona Airport, Spain.     

Connectivity levels and the competitive position of Spanish airports and Iberia’s network rationalization strategy, 2001-2007

This paper examines the connectivity of the Spanish airport system between 2001 and 2007. Over the period, network carriers considerably strengthened the connectivity between Spanish airports and major European hubs. Although OneWorld is still the dominant alliance in Spain, SkyTeam and Star achieved a larger connectivity share through the growth of indirect services provided through their northern European hubs. In addition, the network rationalization strategy of Iberia and its decision to concentrate operations at Madrid-Barajas had important implications for the connectivity of other Spanish airports. Low-cost carriers have boosted direct connectivity from secondary Spanish airports.     

Impact of introducing eco-innovation measures on productivity in transport sector companies

This paper analyses the impact of factors related to innovation and the environment, among others, on labour productivity in the Spanish transport sector. The methodological approach used in this study was based on the CDM structural model. The main advantage of this model is its capacity to integrate investment in R&D and the generation of knowledge and production innovation. The data used in the estimations were obtained from the Technological Innovation Panel (PITEC) database. PITEC is a panel-type database jointly prepared by the Spanish National Institute of Statistics (INE) and the Spanish Foundation for Science and Technology (FECYT). The econometric results show that reducing the environmental impact has a statistically significant and positive effect at all stages of the innovative process and above all on labour productivity of transport firms, where the improvement of labour productivity can reach 8.35% compared to non-ecoinnovative companies. This finding could alert firms in the transport sector to the need to improve their activities by adopting environmentally proactive attitudes.     

Mapping causalities of airline dynamics in long-haul air transport markets

The introduction of low-cost air transport services to short-haul routes has significantly shaped the structure of this market segment. Recent research investigates and discusses the transferability of the low-cost carrier business model to long-haul routes and identifies respective challenges such as lower cost advantages over the competing full-service network business model. Our paper complements the existing research with a review of airline dynamics in long-haul air transport markets and the subsequent development of a causal loop diagram of the transatlantic air transport market using systems thinking. The objective of this paper is to provide an overview of specific characteristics regarding airline operations in the transatlantic air transport market to investigate the market potential of long-haul low-cost carriers competing with full-service network carriers in this market. We implement these characteristics in a causal loop diagram which comprises the most important elements of and causalities within the long-haul air transport market that affect the development of these elements. These include the generation of transatlantic air transport demand, passenger choice, and airline ticket price and fleet development. The causal loop diagram serves as a framework for qualitative investigation of the market potential of long-haul low-cost services. The paper proves systems thinking to be a feasible approach to map causalities based on knowledge from scientific literature.     

Spain's airport infrastructure: adaptations to liberalization and privatization

This paper gives an overview of Spanish airports and their traffic and identifies Spain's infrastructure needs. The advantages and disadvantages of public and private management of airports in Spain are discussed. Moreover, key legislative reforms are suggested in anticipation of the structural and administrative changes needed to permit private investment in the development of Spain's airports. Investment proposals for the busiest Spanish airports are examined, including handling services. To conclude, global trends in the development of airport infrastructures are compared with those shaping the present and future growth of Spanish airports.