1.

Product Life Cycle (8 marks)

We can consider that LCC is a product being sold by these airlines. There has been no basic R&D on this product by any of these airlines. What they have done is to do applied research on the basic model of airline travel, to bring out LCC. Southwest Airlines pioneered this in the USA followed by different versions of this by other airlines in other geographies. The trend in the figure demonstrates the growth of LCC through different phases of the growth cycle, with the corresponding time taken by them and how the efficiency has changed. Now the LCC carriers are facing competition from the full service airlines. LCC carriers are now competing for a certain % of seats of these full service play airlines, which are being sold at low prices. Hence the efficiency of the LCC product sale for these airlines has reached a plateau. Now the time has come for the LCC carriers to apply development R&D to give an S curve to this trend to modify the product LCC. Different airlines are doing this in different ways, e.g., Ryan airlines are cutting all possible cost, easyJet have targeted business passengers, Air Berlin wants to do everything possible for a good customer services, etc. We will constantly see improvisation and a constant shifting of the LCC business model on this continuum.
From the early days of travelling by air till late 1960s, travelling by air was restricted to the higher classes of the society. Only from 1960s, it percolated to the upper middle class, as costs came down and the fuel prices were low. There was a pent up demand for the huge middle class to travel by air if the same became cheaper. This underlying need was captured by the entrepreneurs in the form of Low Cost Carriers which was pioneered by South West Airlines in USA and was replicated in different ways all over the world. The momentum gathered steam with the increased globalization and integration from 1980s onward. The regulatory regime defined by bilateral between countries or regional groupings became more liberal and the frequencies increased bringing the overall cost platform down. Further, the cost of the aircrafts came down due to technological improvements and in order to expand the market, the aircraft manufacturers and the airlines reduced the cost of travel to increase the market. The technological strides in the Global Distribution System (Reservation System) brought the booking system of the airlines at the doorstep of the passenger and he could sitting in his environment, book a ticket, print a boarding card and choose his own seat. This reduction in costs due to technological innovations opened up an opportunity for LCC to establish its foothold. The LCC industry demonstrates execution of two business entry strategies. First, the strategy to develop a better product or service which is appropriate because of unsatisfied demand in terms of cheap flights providing no frills. The established competitors on the carrier market such as British Airways, KLM, Lufthansa etc. did react against these new entrants but more or less very late. Hence some LCC airlines already established their own operations. Second, the strategy to

meet supply shortages. Particularly on the short-haul market there was a market parallel to the railway industry. Meanwhile demand and supply are in balance but some LCC airlines keep their competitive advantages. LCC's and associated entrepreneurs Low Cost Carrier Ryanair South West Airlines Air Asia Easy Jet Air Berlin Ireland USA Malaysia UK Germany Home Market Entrepreneur Michael OLeary Herb Kelleher Tony Fernandes Stelios Haji-Ioannou Joachim Hunold

Considering the business growth and its single stages it obvious that there is no consistency in the way of idea generation. In three of the airlines it was the individual promoters idea to start the airline while the other two it was a group idea. Two of the promoters at Air Berlin and Air Asia were forced to go in for entrepreneurship due to circumstances. There has been a considerable variance in the duration of the inception phase. For example this phase in the case of Air Asia lasted for a year but for Air Berlin it took about ten years. But generally the other airlines exhibited a period of around five years. All organizations were run by the promoters except Ryan Air which had Michael Leary come in due to losses at Ryan Air. Financials were pooled by the promoters themselves but there was a variance in the financial capability deep pockets to just make it. Two of the entrepreneurs had strong financial backing. Due to the dismantling of the Berlin wall, airlines had a new segment opening up which was tapped by Air Berlin (political). Low fares attract more customers; try to wean away customers from other modes of transport tapped by Southwest and Easy jet (economic). The target consumer base for budget airlines was enormous: 500m people live within three hours of Air Asias hubs in Kuala Lumpur and Bangkok, more than Western Europe's entire population (social). For example Ryan Air started when there was a partial de-regulation and changed the way the airlines flew (regulation). For all the airlines the survival and growth stage has been a pretty long time except for Air Asia which has achieved tremendous growth in the few years it has operated. In this stage the LCC airlines demonstrated some small distinct behavior. The delegation level increased during this phase of the business except in the case of Air Berlin which followed the model of low delegation. Coordination was medium to high and the control provided a range from very high in Air Berlin to high in three other airlines and medium in one.

Clear patterns of consistency can be seen that all the airlines went for IPO in this phase, thus showing the willingness of entrepreneurs to share the growth of the firm. Furthermore all LCC airlines took equity stakes and formed alliances with other airlines. The reasons were two fold one to take care of certain regulatory issues in their markets and secondly to help grow faster. In addition all airlines initiated cost cutting techniques to take on the competition. In the maturity stage the delegation level decreased for two of the airlines in view of the precarious business model while continues low for Air Berlin. For Easy Jet and Air Asia the delegation level remains high. On the other hand coordination and control are on high level in all airlines. The external environment factors like the financial crisis, high oil prices have had the effect on the structure of the organisation for majority of the airlines. There also have been roll backs on the investment plans. Diversified equity base, further additional finances raised through debt. We see clear distinction in terms of strategy and business models. Except for Air Berlin and Air Asia which have a hub and spoke model all the airlines offer a point to point service. All LCC carriers have the same configuration of aircraft but Air Berlin differs on this aspect too. We can summarize all the above LCCs on a continuum which depicts a pure LCC on the left sid e and a Full Service Carrier on the extreme right. Continuum of LCC Airlines

LCC life cycle

We can consider that LCC is a product being sold by these airlines. There has been no basic R&D on this product by any of these airlines. What they have done is to do applied research on the basic model of airline travel, to bring out LCC. Southwest Airlines pioneered this in the USA followed by different versions of this by other airlines in other geographies. The trend in the figure demonstrates the growth of LCC through different phases of the growth cycle, with the corresponding time taken by them and how the efficiency has changed . Now the LCC carriers are facing competition from the full service airlines. LCC carriers are now competing for a certain % of seats of these full service play airlines, which are being sold at low prices. Hence the efficiency of the LCC product sale for these airlines has reached a plateau. Now the time has come for the LCC carriers to apply development R&D to give an S curve to this trend to modify the product LCC. Different airlines are doing this in different ways, e.g., Ryan airlines are cutting all possible cost, easyJet have targeted business passengers, Air Berlin wants to do everything possible for a good customer services, etc. We will constantly see improvisation and a constant shifting of the LCC business model on this continuum.

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