Business and functional level strategies have historically defined the business model for Low Cost Carriers (LCC). This basic model is now being augmented as corporate and global strategies proliferate and increase in importance. These higher level strategies which include the emergence of the Long Haul Low Cost Carriers (LHLCC) will define the future of the LCC segment and impact the wider airline industry.
Business Level Strategy
Low Cost
The standard LCC model is based mainly on the strategic use of Porters’ business level strategies of low cost leadership and differentiation. To achieve the low fare offerings the LCC model focuses on operational efficiencies (functional strategies), and cost saving efforts (business strategies) such as cheaper secondary airports and weight reductions.
Differentiation
Although the low cost strategy is a key driver, differentiation is clearly evident and its use is increasing as more LCC introduce services to enhance brand. The strategy of differentiation is considered the polar opposite of low cost but has been successfully introduced in LCC operations.
There is now a large and growing spread of LCC airlines throughout the world with variations on the original theme. In addition other models of carrier have moved to cut costs and improve efficiencies without adopting the full LCC model. It is these variations that indicate movement away from a simplified industry split between LCC and full service and towards a range of services between these two poles. It is also indicative of the fact that the LCC model although durable is not superlative. The model has been in service now for several decades and has not gained complete domination of the market.
Corporate Level Strategy
Vertical Integration
There is evidence of corporate strategies in current use with LCC airlines. LCC ownership or lease of airport terminals is an example of vertical integration as airports form part of the airline supply chain. The airline and the terminal are separate business units; meaning the company now has a portfolio to manage. This strategy could become highly competitive if secondary airports become congested in the future.
Horizontal Integration
Horizontal integration is apparent in the growing number of LCC alliances, mergers and takeovers. From these movements further alliances should be expected as strategic groups form in response to the growing competition.
Code sharing is a corporate strategy and common practice in mainstream airline operations. The original LCC model avoids coordination due to administrative costs but several LCC accommodate varying levels of cooperation with partner airlines.
From an academic perspective code sharing is more of a horizontal arrangement than integration because it doesn’t involve shared business planning or equity swap as in an alliance or merger. From the operations perspective however there is a level of coordination between partner airlines.
Global Strategy
In this context, global strategy is considered both an extension of corporate strategy and a means to international business. Corporate and global strategiedating på nett
s both relate to the structure of an organization. In particular relevance to airline operations, strategy could be international, regional or global in reach.
Alliance, Merger and Joint Venture (JV)
The LCC segment in parallel with other industries has casino gaming produced mergers and takeovers but strategic alliances have entered the scene in a demonstration of the growing complexity of the model. The model is further enhanced by the fact that several LCC airlines now in operation are JV. In a domestic setting alliance, merger and JV are termed corporate strategies but in international business terms they are considered global or international entry strategies.
The use of these strategies illustrates the level of competition that is developing. The strategies fit the defender approach to block competition and the prospector approach for regional and global reach.
Subsidiary
The wholly owned subsidiary can be employed in both the corporate and global strategy roles. Several current LCC are in fact subsidiaries of full service carriers and therefore; although their strategies can be analysed, the analysis must control for the strategic direction of the parent company. Some subsidiaries have failed but the model has proven resilient. Successful LCC subsidiaries are at an advanced stage in development due to the fact that they gain benefit from parent company services including coordinated traffic flows. Further advantage is attained if the parent enjoys membership of one of the large global alliances or mega-mergers.
Long Haul Low Cost Carrier (LHLCC)
The standard LCC business models focus on short to medium haul with one type of aircraft; either the Boeing 737 or the similar sized Airbus 320. The new paradigm in LCC operations is the LHLCC. These long haul versions currently use larger aircraft such as the A330 but their service is differentiated in contrast to full service carriers. There are reports of the possible introduction of the giant A380 to international LCC flights. This would be expected to have a major impact on the airline industry as a whole.
LHLCC is a recent arrival but is developing rapidly. As more LCC establish long haul derivatives the concept will gain the attention of the full service legacy carriers and become a target for imitation, investment, acquisition, merger and alliance. The model has already surpassed the regional sphere and achieved global reach.
Outlook
Business level strategies help a company compete within a given market. However at a higher level of analysis it can be observed that the LCC model is utilizing corporate and international strategies. The future should bring a massive increase in activity in these higher level strategies where strategic direction will be found and of course the next level of competition.
The legacy carrier with LCC and LHLCC connections or subsidiaries appears a highly appropriate model at this point as the extent and speed of LCC advancements integrate with the mainstream full service segment. The question must emerge as to whether the large global alliances will take an interest. Nevertheless it appears that mergers, alliances and JV are emerging as optimum strategies for achieving strategic objectives.
