Evolving Competition Between Low-Cost Carriers and Full-Service Carriers

Evolving Competition Between Low-Cost Carriers and Full-Service Carriers

The airline industry has undergone major changes in the last few decades. One of the most significant developments has been the rise of low-cost carriers (LCCs) and their increasing competition with full-service carriers (FSCs). This evolution has dramatically reshaped the competitive landscape in the airline sector.

LCCs, also known as budget airlines, offer cheaper fares by eliminating many traditional passenger services and amenities. FSCs, in contrast, offer comprehensive services including checked baggage, seat assignments, onboard meals, entertainment, and airport lounges. The business models of these two carrier types differ considerably.

This article provides an in-depth look at the evolving competition between LCCs and FSCs. It examines the history and growth of low-cost carriers, their cost structures and competitive advantages versus full-service carriers, the strategies used by legacy airlines to compete, impacts on airfares and the travel market, and outlook for the future.

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The Rise of Low-Cost Carriers

The origins of low-cost carriers can be traced back to Pacific Southwest Airlines, which began intrastate flights in California in 1949 with lower fares by offering no-frills service. However, the modern LCC model really took off in 1971 when Southwest Airlines began operations in Texas.

Southwest’s use of a single aircraft type (Boeing 737), high aircraft utilization, fast turnarounds, no seat assignments, no meals, and point-to-point routes proved a successful formula. By eliminating much of the complexity and cost structures of legacy carriers, Southwest was able to operate profitably with lower fares.

The 1990s and 2000s saw the proliferation of low-cost carriers in the U.S. and Europe. Carriers like Ryanair and easyJet in Europe, and JetBlue and Spirit in the U.S. followed Southwest’s model. Deregulation allowed new entrants and supported the LCC growth.

Today, low-cost carriers represent over 30% of the worldwide airline capacity. Notable budget airlines include easyJet, Ryanair and Wizz in Europe, AirAsia in Asia, and JetBlue, Southwest, Spirit, Frontier and Allegiant in North America. LCCs have stimulated demand from price-sensitive travelers.

Business Model and Cost Advantages of LCCs

Low-cost carriers have a structural cost advantage over full-service carriers of around 15-20%. This stems largely from differences in their operating models:

  • Simplified service – By eliminating complimentary amenities like checked bags, meals, seat selection and airport lounges, LCCs reduce costs significantly. Southwest doesn’t even have a frequent flyer program.
  • Short-haul point-to-point flights – LCCs favor this route structure rather than hub-and-spoke. It allows faster turnarounds and better aircraft utilization.
  • Single aircraft type – Operating a single plane type (A320 family or Boeing 737 family) improves efficiency in maintenance, training and operations.
  • High density seating – More seats per plane mean lower cost per seat. EasyJet fits 156 seats in an A319 compared to 124 seats on United’s A319s.
  • Secondary airports – Flying into smaller airports allows LCCs to get cheaper landing charges and quick turnarounds.
  • Online direct sales – By eliminating travel agent commissions and GDS fees, LCCs reduce distribution costs substantially.
  • Workforce productivity – Highly efficient processes and point-to-point structure allow LCCs to have significantly higher labor productivity.
  • Ancillary revenue – Revenue from checked bags, seat selection, onboard food/drinks, etc. represents a significant earnings stream.

This lean cost structure has enabled LCCs to offer much cheaper base fares than full-service competitors. It’s a structural advantage that has proven hard for legacy airlines to replicate.

FSC Response to LCC Competition

Full-service carriers were initially slow to respond to the incursion of LCCs, which they viewed as serving a different market segment. However, as budget carriers like Southwest expanded into major airports and longer routes, they began luring away traditional airline customers with their low fares.

Legacies have adopted a variety of strategies to counter the LCC threat:

  • Cost-cutting – Restructuring operations, increasing workforce productivity, and reducing amenities in economy class. Lufthansa’s Eurowings and IAG’s Level are FSC low-cost subsidiaries.
  • Basic economy fares – Matching LCC fares by offering no-frills basic economy options while maintaining premium cabins.
  • Hub fortress – Concentrating service at hub airports where they hold a dominant position and fleet/facility advantages.
  • Scope clauses – Labor agreements that limit outsourcing to regional carriers to prevent erosion of mainline jobs and brand.
  • Frequent flyer programs – Leveraging loyalty programs and corporate contracts as an advantage LCCs can’t match.
  • Strategic acquisitions – Buying LCC competitors – Delta acquiring a stake in JetBlue as a hedge.

Despite these efforts, FSCs have not been able to fully close the cost gap with LCCs on short-haul routes. Their complex hub operations and service structures incur higher costs that low-cost rivals don’t share.

Impacts on Airfares and Travel Markets

The entry of LCCs has had tangible impacts on airfares and travel markets:

  • Airfares have generally declined on routes served by low-cost carriers, often dramatically so. Competition from Spirit cut fares by 30% on average city-pair routes.
  • LCCs have stimulated new demand by expanding the pool of air travelers. Cheap fares make flying viable for more cost-conscious customer segments. Markets expand.
  • Incumbent airlines have dropped fares to match LCC competition on routes, though they limit losses by cutting capacity or dropping out of markets altogether.
  • Long-haul and international air travel have been less impacted as few budget carriers fly extended routes. However, that is starting to change with players like Norwegian expanding long-haul low-cost.
  • Short-haul leisure routes have been most disrupted. LCCs now exceed 50% market share in intra-Europe and domestic U.S. travel. Transatlantic leisure routes are seeing LCC growth.
  • Low-cost transatlantic flights are expanding with budget subsidiaries like Level and Eurowings. But barriers still exist – costs structures differ across regions.

Business travel has been less affected as corporate travelers value amenities. But LCCs are making inroads by offering more business-friendly timings, flexibility and corporate deals. Overall, LCCs have forced down base fares and enabled more affordable air travel across markets.

Outlook for Low-Cost Carriers vs. Full-Service Carriers

The growth of low-cost carriers has permanently changed the competitive landscape in the airline industry. Several key trends will shape the future evolution:

  • Continued LCC expansion in emerging markets – Huge potential exists as rising middle classes and travel demand outstrip limited FSC capacity.
  • Disruption of long-haul international – New generation aircraft like the A321XLR will enable budget carriers to profitably serve transatlantic and other long routes.
  • Segment adaptation – We’ll see LCCs add elements like premium cabins and FSCs remove frills in economy. Airfare choices and brand differentiation will matter more.
  • Service quality convergence – Incumbents will improve base service to compete while LCCs moderate the no-frills model to attract more business travelers.
  • Technology gains – Data analytics, AI and automation will help airlines optimize pricing, operations and services. This can benefit all carrier types.
  • Industry consolidation – Mergers may continue leading to fewer mega-carriers, though antitrust concerns remain. Consolidation increases efficiency and pricing power.

The low-cost model seems poised for growth in both developed and emerging airline markets around the world. However, full-service carriers will likely retain advantages in long-haul, business and premium travel segments. The ultimate equilibrium between LCCs and FSCs remains an evolving competitive dynamic.

Frequently Asked Questions

What are the main differences between low-cost and full-service carriers?

The key differences are:

  • Fares – LCC fares are much cheaper; FSC fares are higher but with more amenities included.
  • Routes – LCCs fly mainly short, point-to-point routes. FSCs use hub-and-spoke with bigger networks.
  • Seating – LCCs have high-density cabins. FSCs have more legroom and seat options.
  • Baggage – Checked bags are extra on LCCs whereas they are free on FSCs.
  • Food – Minimal onboard snack options on LCCs versus meal service on FSCs.
  • Entertainment – LCCs have no inflight entertainment. FSCs offer seatback screens on long-haul.
  • Frequent Flyer – Most LCCs don’t have a loyalty program. FSCs use these programs to retain customers.
  • Airports – LCCs favor alternative airports while FSCs fly into major hubs.
  • Customer Service – FSCs cater more to premium passengers; LCC service is bare-bones.

How have legacy airlines responded to the threat of low-cost carriers?

FSCs have responded by:

  • Cutting costs and unbundling amenities in economy class
  • Introducing basic economy fares to compete on price
  • Focusing on breadth of network and frequent flyer loyalty advantages
  • Defending hub airports where they dominate
  • Creating their own low-cost subsidiaries (Eurowings, Level, etc)
  • Limiting growth of LCCs through antitrust complaints
  • Making strategic acquisitions of LCCs like Delta buying part of JetBlue
  • Improving base service quality to compete better with LCC customer experience

Which airline routes and markets are most impacted by LCCs?

The largest impacts have been on:

  • Domestic leisure routes like Los Angeles to Las Vegas
  • Intra-European leisure routes like London to Barcelona
  • Short-haul international routes like U.S. Northeast to Caribbean
  • Emerging market routes within Asia Pacific and Latin America

Business travel, long-haul intercontinental, and non-leisure routes have been less affected so far. But LCCs are starting to make inroads into these segments too.

What future challenges do low-cost carriers face?

Some challenges LCCs face are:

  • Maintaining cost advantage as labor, fuel and airport costs rise
  • Finding new untapped markets and airport bases to expand into
  • Adapting products for business travelers while avoiding complexity
  • Developing customer loyalty beyond just low fares
  • Adding capabilities for long haul flights and international service
  • Overcoming regulatory barriers in highly protected aviation markets
  • Managing a growing heterogeneity of customer needs and preferences
  • Responding to sustainability pressures to reduce environmental impacts

The low-cost model also faces inherent limitations – stripping away too many services reduces appeal. LCCs have to strike the right balance between low fares and customer experience.