CASE STUDY Why you think that the low-cost

CASE STUDY Why you think that the “low-cost” subsidiaries have failed? • • What are the challenges such a subsidiary faces? • What should be done to overcome them? Anna Bulgakova Kate Horpynchuk

Problem No new ideas? Recycle the old ones and make them sound like the best thing in the world!

Definitions A low-cost carrier or low-cost airline (also known as a no-frills, discount or budget carrier or airline or cheap flight) is an airline that generally has lower fares and fewer comforts. To make up for revenue lost in decreased ticket prices, the airline may charge for extras like food, priority boarding, seat allocating, and baggage etc.

The Low Cost Model Fares : Unrestricted and low price Network: Point to point high frequency routes Distribution: Travel agents and call centres, no tickets Fleet: High utilisation, same type of aircraft across the fleet Airport: Secondary airports with short turnaround times Sector length: Short (around 400 nm) Staff: High productivity with competitive wages and profit sharing

Network airlines respond in 2 ways 1. Create “airline within an airline” Imitate the low-cost provider by founding subsidiaries 2. Attempt to remove significant amount of cost from their operation, without changing their business model

Objectives of setting offshoots Spin off profitable businesses See off low cost competition in key markets Establish a test-bed for adapting low cost business processes to their main operations

CALite, Shuttle by United, Metrojet, Delta Express, Song, and Ted

Reasons for failure 1. “Airlines set up specifically as low cost carriers have the business in their DNA” 2. People have higher expectations for a legacy carrier than for a low cost carrier in general (E. g. Lufthansa) 3. Decrease the costs by cutting the salaries of the employees – strikes

Success Delta – “If you want to succeed you have to invest” Jet. Star that seemed to be doing pretty well

Conclusion As far as we see none of the companies could found a successful subsidiary and could not prove to be profitable. Subsidiaries were launched in order to compete with LCCs, but pure management, bad strategic choice and inability to finance brought them to failure.

References Alamdari, F. & Mason, K. J. (2007). EU Network Carriers, low cost carriers & consumer behaviour: A Delphi Study of Future Trends, Journal of Air Transport Management 13(2007) 299 -310. Flouris, T. G. & Oswald, S. L. (2006). Designing and Executing Strategy in Aviation Management, Hampshire, England: Ashgate Publishing Limited. Hunter, L. (2006). Low Cost Airlines: Business Model and Employment Relations, European Management Journal 24(5) 315 -321. Case Study Delta Air Lines (A) the Low Cost Carrier Threat https: //dspace. lib. cranfield. ac. uk/bitstream/1826/1232/3/Airlines%2520 within%2520 Airlines%2520 a nalysis%2520 US%2520 network%2520 -%25202005. pdf http: //aviationknowledge. wikidot. com/aviation: low-cost-airlines: a-brief-history-the-current-state http: //en. wikipedia. org/wiki/Low-cost_carrier 11

Thanks for Your attention