Airlines within airlines: Assessing the vulnerabilities of mixing business models

Abstract

In this paper we examine two questions; what is it that makes some cases of airlines within airlines apparently successful while in many other cases it is just the opposite? And second, why would a carrier attempt such a strategy, is there a common set of circumstances or is each case unique? In the US, Canada and Europe a number of legacy carriers have sought to respond to LCC entry by creating an LCC within the legacy carriers; most have failed but some have succeeded, most notably in Australia and Germany. We first examine the evolution of the LCC business model and illustrate the different forms it takes today. Following this we provide a discussion of the underlying sources of cost advantage of the LCC and assess which sources are sustainable in the longer term. Finally we examine the conditions under which these apparent successes have occurred and look for common threads. We find market dominance, judicious network planning and co-ordination are necessary conditions for success.