3 - Commoditization and segmentation of aviation markets

Abstract

This chapter explores the evolution of the low-cost carrier (LCC) model which grew highly successfully in the 1990s after deregulation of aviation in the United States. Legacy carriers had significant legacy costs, and new carriers were able to enter the markets with a new business model, lower costs, and a competitive advantage. LCCs were able to charge lower fares and democratize air travel. The result was a rapid expansion in the US market and in any market where LCCs entered. This chapter reviews some of the changes that have taken place in the industry over the last decade and a half. In particular, it focuses on the competitive impacts of these developments as well as the changes in strategic responses and the evolution of business models. The first issue we examine is the price response by incumbents when LCCs enter as a competitor. The price response is both an initial reaction and the move to a long-term equilibrium. The second issue is the evolution of airline business models, in particular, the LCC model. We find a convergence of business models between legacy and LCC carriers but distinct business models for ultra-low-cost carriers. These differing business models seek to explore and exploit profitable opportunities by segmenting a commoditized air travel market.