Long-Haul Low-Cost Carrier (LHLCC) Business Models for Low-Cost Carriers
The airline industry has undergone several transformations and adopted a variety of new business models with the aim of accommodating dynamic customer demands and satisfying their needs. In order to differentiate airlines from its competition, various business concepts must be implemented. As a result of a cost leadership strategy, the long-haul low-cost carrier (LHLCC) was born. This business model (LHLCC) has evolved from the LCC (Low-Cost Carrier) business model and has a more complex structure. Under contrast to LCCs, long-haul flights need a higher quality service to be successful in this business model (Bakır, Akan & Atalik 231). Since trips may last up to six hours, the aircraft usage rate is quite high. Despite the fact that LHLCCs have a single fleet type, they are not averse to using a variety of aircraft to meet their specific requirements. Instead of operating out of a secondary airport, airlines using this business model prefer to operate in a hub airport. This business model relies heavily on frequent flyer programs, such as those given by full-service carriers (FSCs). Long-haul flights necessitate the need for food services, hence carriers that are using the LHLCC model pay special attention to this aspect. Additionally, cargo is becoming another fundamental aspect of the LHLCC business model. This report will critically analyze several aspects of the LHLCC business model adopted by LCCs.
Evolution of the LHLCC Business Model in the Aviation Industry
In a liberalized and deregulated market, airline strategy is largely dictated by customer demand. Changes in passenger preferences and lifestyles are influencing airline business models. The proliferation of information and the shifting of power to customers has resulted in less homogenous customer categories as a result of technology. Suppliers in all sectors have been able to satisfy the demands of individual consumers more efficiently and cost-effectively as a result of this technology. A more ‘rational’ product is now expected by airline passengers, while new technology and ideas have allowed airlines to alter their business models to satisfy customer demands. Network carriers have been slowly losing market share to a range of more creative business models as a result of shifting customer habits (Zuidberg & de Wit 103). There were low-cost airlines before the market liberalization of air transportation. Since its founding in the 1970s, Southwest Airlines has been regarded as the ancestor of the model. Commuter airlines have always operated at a lower cost than the national carriers, even before Southwest Airlines came into the limelight in the industry. There was no low-cost, low-fare model until airlines such as Pacific Southwest Airlines (PSA) began to offer fares lower than those of its competitors.
Following in the footsteps of low-cost carriers, JetBlue added facilities that were far superior to those of the network carriers yet at a relatively cheaper price. Its plush interiors and in-seat satellite screens quickly established itself as a distinguishing feature of the airline’s service. By 2005, 30% to 40% of the market share in the United States and the United Kingdom were controlled by LCCs (Renehan & Efthymiou 4). NetJets and ExpressJet are examples of fractional ownership and corporate jet operations that are threatening the airlines’ premium market by attracting corporate, high-yield business travel. High-yield business markets may be threatened even more by the recent appearance of VLJs (Very Light Jets). Network carriers have long relied on high-earning first and corporate customers. Although these clients formerly provided a steady source of money, this is no longer the case today. Outside of long-haul flights, premium cabins have mostly become a loyalty benefit and have attracted a considerable number of customers. Some of the world’s largest airlines have moved a major portion of their capacity out of domestic markets and spent heavily in making their premium cabins more competitive. Low-cost long-haul flights were born as a result of these industry shifts.
Product/Operation Features in the LHLCC Business Model
Generally, carriers that have implemented the LHLCC model have adopted some of the characteristics of the legacy carriers, such as ancillary ground services and portions of the on-board merchandise and products. The LHLCC cannot be considered a ‘pure’ LCC organization since the business approach taken is slightly altered. A premium seat is offered by nearly all LHLCCs, unlike regular LCCs, which only offer a single-class service. Most of the LHLCCs adhere to the same approach when it comes to purchasing food, beverages, and entertainment.
Pricing and Fares
Almost all low-cost carriers have a straightforward pricing structure; ‘point to point’, one-way and directional are the only options for fares. The LHLCCs, like the original LCC concept, have also adopted this structure. LHLCCs do away with the limits of traditional tariffs, such as the need to book in advance and the necessity for a minimum length of stay. Even if the yield management technique is still used by successful LCCs in order to optimize their income, it is used in a different way than the heritage when it comes to the LHLCC business model. A fundamental determinant of the LCC’s prosperity and viability has heavily depended on this tactic. Legacy airlines such as QANTAS and British Airways in Australia, for example, have implemented this notion of simplicity and abolition of minimum stay conditions throughout their whole offering of international and domestic tickets and are now completely one-way module based (Ismail & Jiang 649). Consumers benefit from greater price flexibility owing to fare type combinability. Additionally, fare simplicity makes it easier to provide various fare types on online reservation systems, as indicated by the LHLCC profiles, which demonstrate that fare types are widely distributed.
The effectiveness of an LHLCC strategy is largely dependent on the type of aircraft used. When it comes to planes, airlines are sometimes unable to choose between older aircraft models that use more gasoline but are cheaper and newer aircraft models that have a higher price tag but save more money on fuel. All of the LHLCCs examined use a single, streamlined aircraft family. As a result of the disparities in aircraft utilization, this does not always correspond to the cost reductions realized by the short-haul LCC (Soyk, Ringbeck & Spinler 15). The ability of airlines to maximize the use of their planes is critical to their business. High utilization rates for low-cost carriers (LCCs) can be achieved by flying to less crowded airports and booking just “point-to-point” traffic on their planes.
The LHLCC business model, like LCCs, places emphasis on auxiliary revenue. Newer and more inventive on-board digital marketing solutions are integrated into this paradigm together with traditional ancillary services like luggage, food, and Wi-Fi. Air Asia’s “Mega App,” which combines travel and other services into a new lifestyle, is an intriguing prospect in the near future for airlines that want to adopt this business model. A successful long-haul, low-cost carrier must be competitive and defend itself against network carriers cross-subsidizing cheap fares in order to succeed. Feeding passengers at both ends of a journey is critical for LHLCC airlines in order to maximize the number of passengers on board and boost load factors. LHLCC airlines need to raise Revenue Passenger Kilometers (RPKs) to remain competitive and profitable, even when cost is a major factor (Bakır, Akan & Atalik 249). They may do this by offering luxury cabins or by finding alternative revenue streams. LHLCC & LCC models must preserve their “startup attitude,” which is an important aspect that is sometimes disregarded. The major competitive advantage of low-cost models over network carriers is their capacity to alter tactics, be adaptable, and conform to changing market and customer realities.
The LHLCC business model necessitates the use of partnerships and integrated networks to compete with the major three alliances and conventional network providers in the aviation sector. When developing demand for certain specialty flows, LHLCC carriers must have a strong base of flows with beyond and behind connections that operate as cash cows (Renehan & Efthymiou 6). In the post-Covid future, niche international routes would be the last to recover from the pandemic’s impact on the aviation sector. Having seasonal patterns and being able to adjust is an important distinguishing feature. It has been established that long-haul LCCs operate a point-to-point network, as opposed to hub and spoke, as do hub carriers like United Airlines and British Airways. Previous studies on long-haul LCCs concurred on this point. In contrast to hub carriers, point-to-point airlines have a more decentralized network and focus on fundamental operations. Most passengers on hub carriers’ long-haul flights are connecting travelers, not those traveling from one end of the long-haul route to the other (Renehan & Efthymiou 6). As such, forming profitable networks is a very critical factor for airlines that are adopting this business model.
Another important element that most airlines that adopt the LHLCC business model tend to consider is the route choice of operation. Selecting the appropriate route of operation is a key success determinant for LCC that have implemented the LHLCC business model. These airlines have to operate in routes that have high traffic of passengers for them to maximize their profitability and revenue generation (De Poret, O’Connell & Warnock-Smith 273). When choosing a route, LCC airlines need to consider airport selection along those routes. Typically, airlines that pursue the LHLCC business model tend to select airports that have potential to grow their revenue and income. Usually, primary airports boast a large traffic of passengers which can be a good starting point for LHLCC airlines. However, secondary airports have been characterized with significantly lower passenger charges as well as landing rates. This leaves airlines in a dilemma since they have to choose between the two types of airports for their operations. Although evidence show that primary airports are beneficial in terms of suitable facilities, there is a drawback linked to the number of hours of operation that is allocated for airlines in such airports (De Poret, O’Connell & Warnock-Smith 273). Additionally, primary airports have slot constraints which limit the number of aircrafts that airlines can operate from the airports at a single given time. Yet, considering the customer niche that LHLCC airlines serve, it is critical to satisfy their need for cheaper flights. As such, secondary airports facilitate the selection of routes of operation for airlines that have adopted the LHLCC business model.
Cost Advantages of the LHLCC Model Adopted by LCCs
Previous literature has shown that the LHLCC business model has several cost advantages over the models implemented by conventional carriers. One of the cost advantages related to this business model originates from the operation of a homogenous fleet. Operating a single type of aircraft fleet is beneficial since it is associated with lower maintenance costs as well as training costs for the crews. This in return provides costs efficiencies since the airlines spend relatively lower on their expenditures which impacts the profit margins (Soyk, Ringbeck & Spinler 27). Consequently, the LHLCC business model is characterized by high fleet utilization since the airlines spent less time on turnarounds, hence, maximizing the time spent in the air. Unlike conventional national carriers which might spend a lot of time on turnarounds, LCCs adopting this model enjoy the benefit of efficiency. High efficiency means that LCCs get a chance to optimize their services and enjoy a good traffic of customers which directly translates to high revenue and profit margins. This is a cost advantage when compared to traditional business models that emphasize on short-hauls with more turnarounds.
Another aspect of the LHLCC business model that gives LCCs cost advantages relates to overhead and labor cost advantages. LCCs that implement this business model tend to have a better staff management approach and organizational structure that is characterized with relative youthful staff. The implication of this approach is that such airlines are not limited by the constraints stipulated by labor agreements, allowing them to keep their labor cost lower than that of legacy carriers. Also, since the business model does not inherit rigid and sophisticated business models, management becomes easy which positively impacts the productivity of the crew, hence improving performance. Lastly, contemporary LCCs that use the LHLCC business model benefit from the distribution network that they employ, mainly through the aid of global distribution systems. This helps them to sell out their capacities and incur a relatively lower distribution cost when compared to that of legacy airlines.
In summary, the concept of LHLCC business model is highly being embraces by LCCs due to the significant advantages that come along with this business model. The evolution of this business model was initiated by Southwest Airlines in the 1970s when it started offering comfortable long-haul trips to its customers at a relatively lower prices than that of national carriers. Some of the basic features associated with this type of business model include fare and pricing, fleet type, ancillary services, networks, and route selection. Collectively, these features necessitate the need for maximizing on profit considering that LCCs that use this model target customers that have a preference for comfort that is relatively cheap. Often, LCCs that operate using this business model will integrate all these aspects to generate superior competitive advantages over conventional carriers. Also, some of the elements that gives LCCs carriers embracing the LHLCC business model advantage include operation of homogenous fleets, distribution networks, labor cost advantages, and fleet utilization.
Bakır, Mahmut, Sahap Akan, and Ozlem Atalik. “An Evaluation for Long-Haul Low-Cost Carriers Using User-Generated Content: The Impact of Perceived Service Quality on Value for Money.” Handbook of Research on Social Media Applications for the Tourism and Hospitality Sector. IGI Global, 2020. 231-251.
De Poret, M., John Frankie O’Connell, and David Warnock-Smith. “The economic viability of long-haul low-cost operations: Evidence from the transatlantic market.” Journal of Air Transport Management 42 (2015): 272-281.
Ismail, Adam Bin, and Hongwei Jiang. “Comparing service quality for Long-Haul low-cost carriers–Case for Asia and Australia Routes.” Journal of Quality Assurance in Hospitality & Tourism 20.6 (2019): 647-680.
Renehan, Damian, and Marina Efthymiou. “Transatlantic Market Competition Between Hybrid Carrier and Long-Haul Low-Cost Carrier Business Models.” Journal of Aerospace Technology and Management 12 (2020).
Soyk, Christian, Jürgen Ringbeck, and Stefan Spinler. “Long-haul low-cost airlines: A new business model across the transatlantic and its cost characteristics.” Transportation Research Part A: Policy and Practice 106.C (2017).
Soyk, Christian, Jürgen Ringbeck, and Stefan Spinler. “Long-haul low-cost airlines: Characteristics of the business model and sustainability of its cost advantages.” Transportation Research Part A: Policy and Practice 106 (2017): 215-234.
Zuidberg, Joost, and Jaap G. de Wit. “The development of long-haul low-cost networks in the North Atlantic airline market: An exploratory data approach.” Transport Policy 95 (2020): 103-113.