The emergence and growth of no frills, low-cost carriers have radically altered the nature of competition within the industry Those major LCCs have exploited different operation methods to lower their cost base and provide lower average fares In terms of strategic positioning, in order to provide low-fares the LCC business model focuses on its distinct low cost strategy However, not all LCCs carriers are profitable, only the market-leading operators are able to produce a consistent level returns above their cost of capital

The term “low-cost airline” is for the first time used in the United States in 1949 The first successful low-cost carrier was Pacific Southwest Airlines, which pioneered the concept Often, this credit has been incorrectly given to Southwest Airlines, which began service in 1971, and is the only one airline to have been consistently profitable in every year of operations since 1973 Today, Southwest Airlines operates more than 3,100 daily flights to 62 cities across the United States, and registers yearly more than 80 million passengers What began as a small Texas airline, Southwest now has grown to become one of the largest airlines in the United States

European history of low-cost airlines is much younger, but those airlines are for sure trendsetters of the 1990s The expansion of LCCs in Europe coincided with the final deregulation of the market during the 1990s Genuine low cost operations began in Great Britain in the 1990s with the Irish company Ryanair (founded in 1985 and started operating flights in 1986), which was patterned on American Southwest Airlines Following Great Britain, LCCs have successfully developed on the Continent In the year 2005, there are 60 low-cost airlines operating in Europe

Prior to 2002, there were no significant low cost scheduled carriers operating in the Asia Pacific rim The initial slow development was in part due to the perception that the low cost model adopted in the United States and Europe could not be replicated in Asia, because of the longer aircraft stage lengths, lack of secondary airports and regulatory restrictions preventing access to international markets The latter being particularly relevant given that the bulk of traffic and revenues are drawn from international markets in Asia Thus, the low cost experience is a relatively new phenomenon in the Asia Pacific rim with much of the necessary management experience brought in from outside the region, for example, from Ryanair Asian LCCs accordingly are in the initial growth phase of their development, while many of their American and European counterparts are approaching or have reached maturity

Airline business models is shown in the following diagram As this chapter aims to focus on the business model of LCCs, the origins and key features of LCCs business model are introduced in this section

According to the Statistics and Forecast (STATFOR) Service of Euro control, there is no single best definition of low-cost carrier However, it is general accepted that a low-cost airline, also known as nofrills or discount airline, is such carrier, which offers generally low fares but eliminate most traditional passenger services The “low-cost carrier” business design could be defined by the following three key elements as shown

(a)Simple Product: No frills, Catering on demand for extra payment; planes with narrow seating (but bigger capacity) and only a single class; no seat assignment; and no frequent flyer programmes. (b)Positioning. Non-business passengers, esp. leisure traffic and price- conscious business passengers; short-haul point-to-point traffic with high frequencies; aggressive marketing; secondary airports; and competition with all transport carriers. (c)Low Operating Costs. Low wages; low airport fees; low costs for maintenance, cockpit training and standby crews due to homogeneous fleet; high resource productivity: short ground waits due to simple boarding processes, no air freight, no hub services, short cleaning times; and high percentage of online sales.

There are two LCCs models: 1. Independent Airlines (e.g. Southwest, Jetblue, Ryanair, and Easyjet) 2. Subsidiary of a legacy airline (e.g. Go, Buzz, Jetstar, Jetstar Asia, Valuair, and Tiger) In summary, the LCC model comprises: Low fares High frequency flights Point-to-point service No free meals or drinks on board No seat pre-assignment Short flights Flights using secondary airports.

The first major problem that the low-cost sector had to face in the period after 2004 was the dramatic surge in new capacity which was creating substantial overcapacity in the market As mentioned earlier, There are over 30 LCCs have been launched since 2002 worldwide

The second challenge being faced by low-cost operators after 2004 was the continued decline in yield or average fare This was an inevitable consequence of over-capacity on an increasing number of routes But it was also due to the new pricing policies of most of the conventional airlines as they fought back to hold on to their market share Airlines such as British Airways introduced some very low aggressive fares in , especially on routes or markets where they competed with low- cost carriers This forced the latter to maintain lower fares than would otherwise have been the case Price competition became most acute in markets where new-entrant low cost carriers tried to compete head-on with the established low-cost operators such as Ryanair or Easyjet The result was that yields on the larger low-cost airlines declined steadily after 2000 Ryanair's average fare per passenger dropped from around €60 in that year to €46.50 in 2003, a decline of 22.5 per cent

Controlling costs is the third problem area faced by low-cost airlines Rapid growth places an airline's management and organisation under strain, and controlling costs becomes more difficult The fourth challenge, which also has cost implications, is whether and how low- cost carriers should develop their bask model While increasing competition between low-cost carriers will be creating downward pressure on costs, such competition will also push airlines to try to differentiate their product. This may well mean higher costs With so many players in the European low-cost market and with aggressive pricing strategies by conventional carriers, low fares may no longer be a sufficient differentiator Low-cost operators will increasingly try to brand themselves and differentiate their product as they have done in the United States