MGT 6753 Industry Analysis
Low-Cost Carriers in Europe
Julian Geiger, Michael Schlottke, Marcus Schrade
Low-cost carriers in Europe
The market for low-cost carriers first emerged in the US with Pacific Southwest Airlines, pioneering the concept in 1949. The European market did not really develop until aviation deregulation came into effect in the 1990’s, making flights affordable for a wider range of customers. Building on the inclining demand for cheap flights mainly by private individuals (average annual growth of 9.4% for leisure travelers between 1996 and 2003 , Figure 2), the industry has experienced rapid growth since ...view middle of the document...
Ryanair’s average ticket price is about $63 , whilea ticket for a high speed train connection between for example Munich and Berlin is often way above $100 . These days increasing fuel prices are affecting the whole airline industry and LCCs in particular. Fuel markets are volatile and influenced by geopolitical factors. Therefore efficient financial management of fuel reserves including trading with options and futures is getting more and more important to keep cost down and be competitive in the market place. Another factor promoting the rapid growth of the airline industry in general is the ever increasing demand for mobility. Being limited to business travelers in the past, a great majority of private persons now travels frequently via airplane to holiday destinations or weekend trips. For the majority of private travelers, price is the primary decision factor. This spurs on the tough competition in the LCC market since loyalty to a particular carrier is no longer found in most travelers – the cheapest price wins. There also were numerous technological advances in the past few years that facilitate low-cost air transportation. For example the “turn-around time”, the time required for a plane from arrival to next departure at an airport was reduced from roughly one hour in the past to less than half an hour. This is made possible through advanced methods like aircraft fueling simultaneously with passengers boarding. Since low turn-around times are essential for higher margins, this is a crucial factor for LCCs’ capability to offer lower fares. As the number of passengers increases steadily and more people can afford flights for leisure activities, environmental groups warn that the impact on the environment will be severe . Comparing the CO2 2
Low-cost carriers in Europe
emission of a traditional driving vacation inside England with today’s increasingly common vacation via plane for example to Murcia, Spain, shows the tremendous difference: for two persons, 20kg of CO 2 are emitted on the car trip as opposed to 1.4 tons of CO 2 emitted on the air plane trip . Easyjet recently started the initiative of carbon offsetting, offering customers the opportunity to contribute to UN certified emission reduction projects in proportion to the CO 2 emission caused by their individual air travel .
Porter’s Five Forces
Bargaining Power of Suppliers
The market for airplanes is very restricted worldwide. Only two suppliers can satisfy the average requirements of today’s commercial airliners, Airbus and Boeing. These two suppliers control the market for planes with a capacity of more than 130 seats and stand in high competition to each other. This allows LCCs to get lower prices and good services when purchasing new aircraft. However, once a LCC has made the decision for a certain model, the costs of switching to another model of the same supplier are very high and are even higher when switching to...