The economic viability of long-haul point-to-point airline business models and their competition to full-service network carriers

  • This dissertation assesses the characteristics and viability of the emerging longhaul Low Cost Carriers (LCCs). In particular, the aim is to understand their business model, evaluate the cost and revenue performance, and investigate its impact on other carriers. Existing academic literature is inconclusive about characteristics and viability of the business model. To validate its defining characteristics, 37 airlines flying on North Atlantic routes are clustered using Principal Component Analysis (PCA) and Hierarchical Cluster Analysis (HCA) along a newly constructed long-haul airline business model framework. To contribute to the evaluation of business model viability, cost differences between clusters are uncovered followed by a discussion of their sustainability. Key findings include the characterization of the emerging long-haul LCC business model and its significant differences from Full-Service Network Carrier (FSNC) and leisure carrier models. On a cluster average, 33% lower unit costs compared to FSNCs are identified, of which 24 percentage points are evaluated as sustainable. As these cost advantages over FSNCs are smaller compared to the original savings of short-/medium-haul LCCs, revenue competitiveness on the longhaul becomes more critical. To assess long-haul revenue performance, a new metric for benchmarking the revenue per equivalent flight capacity is defined. Subsequently, a revenue model combining traffic, fare, load factor, and seat data from the North Atlantic is developed to determine the revenue per flight capacity across a sample of city-pairs. The results show that LCCs earn revenue per flight capacity comparable to FSNCs on shorter long-haul routes. Key factors to compensate lower direct yields are fewer low-yield connecting passengers, sales of ancillary services, higher load factors, and significantly more passengers per aircraft. Long-haul LCC market impact, and in particular their impact on incumbents’ fare levels, has not yet been assessed and short-/medium-haul LCC-related findings cannot be readily applied. To evaluate the impact of long-haul LCC presence on the incumbents’ pricing, a stylized analytical model is proposed for hypotheses development. Subsequently, Two-Steps Least Squares (2SLS) regressions with Instrumental Variables (IVs) are performed, distinguishing between economy, premium economy, and business classes, based on a sample of North Atlantic routes. Confirming the first hypothesis, LCC presence reduces incumbents’ long-haul economy and premium economy fares by -10% and -13%, respectively, ceteris paribus. LCC presence, however, does not significantly impact long-haul business class fare levels, confirming the second hypothesis. These findings are particularly relevant as the North Atlantic market represents to date one of the remaining profit pools for North American and European legacy carriers. The findings of this research implicate that the long-haul LCC model is economically viable, at least on trunk routes with high demand. FSNC management should be aware of the rising competition and fare impact on North Atlantic routes. Potential reactions could include the de-bundling of entry fares with the option of ancillary sales even on long-haul routes, a re-evaluation of the revenue impact of low-yield connecting passengers, a focus on premium passengers, and a continuous reduction of operating costs.

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Author:Christian M. Soyk
Publisher:WHU / Chair of Logistics Management
Place of publication:Vallendar
Referee:Stefan Spinler, Arnd Huchzermeier, Jürgen Ringbeck
Document Type:Doctoral Thesis
Date of Publication (online):2021/01/11
Date of first Publication:2021/01/11
Publishing Institution:WHU - Otto Beisheim School of Management
Granting Institution:WHU - Otto Beisheim School of Management
Date of final exam:2018/11/12
Release Date:2021/01/11
Tag:Geschäftsmodell; Luftverkehr; Vergleich
Air transport; Business plan; Comparison
Page Number:111
Institutes:WHU Supply Chain Management Group / Kühne Foundation Endowed Chair of Logistics Management
Licence (German):Copyright this PhD thesis