Sustainability of Low Cost Carriers Term Paper

Excerpt from Term Paper :

" (Traventec, Ltd., 2005) Market saturation is possible according to Traventec, Ltd., due to the constant "influx of new entrants into the low cost carrier and regional space and continued expansion of existing players. When and whether market saturation is actually reached in specific regions of the world depends on how mature regional and low cost air transport is in the first place and the size of the yet under-served demographic area." (Traventec, Ltd., 2005) There is stated to be a potentially huge regional aviation market in South East Asia yet untapped with more than half of the population of the entire world within six hours flying radiuses from "Kuala Lumpur and a five hour flying radius from Bangkok." (Traventec, Ltd., 2005) the airports in this area have only recently been liberalized with the "international bilateral agreements and vested in the development of airport capacity." (Traventec, Ltd., 2005) When this is added to the low per capita levels of GDP of these countries in this radius to the "unleashed demand for low cost regional air transportation" (Traventec, Ltd., 2005) may be clearly understood.

Technology solutions are cited by Traventec research to include 25 various Internet booking engine solutions in deployment at regional and low cost carriers around the global, with 5 or 6 or these dominating the market. One of the cornerstones of the low cost model is to keep the cost of distribution as low as possible. This is achieved by aiming to sell a large proportion of flights directly to customers online..." And the merits of third party channels are also said to acknowledge by the low cost carriers as well. However as of this 2005 report only fifty percent of low cost carriers have online booking functionality even though "there are plenty of opportunities for solution providers, albeit concentrated in specific geographic sectors rather than others." (Traventec, Ltd., 2005)

Barrett (2004) writes in the work entitled: "The Sustainability of the Ryanair Model" that Ryanair is "Europe's largest new entrant airline since deregulation." Barrett examines Ryanair's product in the areas of "...acceptability to passengers, the use of secondary airports, labor productivity and use of outsourcing, corporate culture, policy environment and legal and policy obstacles." (Barrett, 2004) Barrett states the belief following the analysis of Ryanair's sustainability that Ryanair is expected to experience continued growth "...because of the popularity of low fares, the willingness of passengers to forego traditional airline services in order to avail of low fares and the ability of Ryanair to control and reduce costs." (2004)

The work of Market Research group Mintel International Group Ltd. Reports in a February 1, 2006 report entitled: "Europe's Airports" that: "Small European airports (serving less than 5 million passengers per annum) are experiencing the fastest growth rates, due to free capacity, easy accessibility and lower fees. In spite of a projected 60% increase in European airport capacity over the next 20 years, the capacity problems at the large hubs are set to worsen as European air traffic is projected to increase by a factor of 2.5 times from current levels by 2025. However, the introduction of larger aircraft, such as the Airbus 380, the shift of short-haul air travel to rail and the growth of low-cost carriers, which favor secondary airports, will relieve some of the pressure on major hubs. Most European airports are owned and managed by limited companies, with revenues currently split - about 60:40 on average - between aeronautical and non-aeronautical (retailing, property etc.) revenues. Airport fees are becoming a contentious issue in Europe, due to the disappearance of public subsidies, and the rise of low-cost airlines, for whom airport fees represent a higher percentage of total costs than for traditional carriers." (Mintel, Ltd., 2006)

The work of Fabio Domanico entitled: "The European Airline Industry: Law and Economics of Low Cost Carriers" (2007) published in the European Journal of Law and Economics states in relation to the European low cost carrier industry: "The liberalization process did not lead the entrance of competitors similar to incumbents, but a new organizational model has been developed, the one of low cost carriers. The incumbents' reaction to the liberalization process coupled with the entrance of low cost companies into the sector are hence considered. Two theories are analyzed: the contestable markets theory, to understand the theoretical vision that has influenced the liberalization process, and the core theory, a modern approach to the concept of destructive competition that, according to some authors, is a recurring problem in the sector." (Domanico, 2007) Domanico notes how there are still a plethora of barriers to entry into this market however notes the fact that this organizational model developed by the low cost carriers has assisted new entrants in overtaking these obstacles. Domanico states: "By the same token, the application of the core theory does not seem to justify strategic alliances taking place in these years. The competitive framework is definitely clearer if we analyze sector changes in a different way, from the point-of-view of low cost companies considered as new market actors." (Domanico, 2007)

The work of Whitelegg and Cambridge entitled: "Aviation and Sustainability" published in 2006 by the Stockholm Environment Institute states: "In Europe, there has been a considerable increase in scheduled no-frills airlines which operate from secondary airports such as Stanstead (UK) or Bergamo (Italy) as opposed to international hubs such as Heathrow (UK) or Malpensa (Italy). The destinations, routes and prices on offer are attractive to the individual tourist traveler and increasingly the business passenger. Whilst fewer ASK are needed per trip, the greater frequency and shorter duration of flights means that more planes with fewer seats are required. Hence, forecasts by airline manufacturers for orders for single-aisle aircraft predict future growth in all global regional markets. To increase capacity, expansion of existing airports with new terminals and runways, and the construction of new airports altogether is required." (Whitelegg and Cambridge, 2006 it is noted in this report that aviation fuel will play a key role in sustainability of all aviation carriers. The following figure shows the regional growth in market 2003 for aircraft carriers.

Regional Growth in Market

Source: Whitelegg and Cambridge (2006)

Impacts from the aviation industry in terms of aircraft emissions are shown in the following chart labeled Figure 2.

Impacts from Aircraft Emissions by Stakeholders

Source: Whitelegg and Cambridge (2006)

The work of Pieter Klaas Jagersma and Desiree van Gorp entitled: "Competing With Pirates" states that in the beginning "the low cost companies did not compete with the traditional airlines. They restricted their efforts only to creating a demand where it did not exist yet: market development instead of market penetration. This is an important recommendation for low-cost start-ups: competing with low costs is not 'suicide' provided you expand ('develop') the market as a start-up. Direct competition with existing parties for existing customers ('market penetration') with a low-cost strategy is generally doomed to fail. The triangle 'market penetration - low costs - start-up' rarely results in success. Mid-2000, the low-cost airlines in Europe had a market share of about 7 per cent, but their market share has been growing fast since then (by way of comparison: the low-cost companies had a market share of about 20 per cent in the United States mid-2001)" (2003) These authors question how long the low cost airlines can keep continually growing "without this growth being at the expense of their relatively high profitability? They also ask "What is the optimum number of low cost players and what is the size necessary for those players to maximize profitability? How much room is left on the aviation market to allow the low cost companies further growth?" (Jagersma and Gorp, 2003) the answer given is that this industry can grow a great deal more "because the low cost airlines seem to be sailing for the wind without a worry and it will still take a long time before the end of their growth comes in sight." (Jagersma and Gorp, 2003) Jagersma and Gorp additionally relate the fact that the low cost carriers hold several cost advantages over the major airline carriers in that the "business model is cheaper. The value proposition is geared towards offering one core product: offering punctual flights from a to B. without transfer. All frills have been removed from flying in their concept. Such a philosophy simplifies process management. Internal business processes are a lot simpler and therefore easier to manage. In addition, it takes less hands to bring simpler processes to…

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