Low cost airline carriers opening new markets

Low cost airline carriers opening new markets

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Holidays, who doesn’t like them? Preferably you would like to get at your destination as fast and as cheap as possible. For that specific desire budget airlines are the solution. Currently the demand for these Low Cost Carriers (LCC) is extremely high. So high, that for example Ryanair, the Irish budget airline, will become Europe’s biggest airline in a few years.

Back in the days, with the introduction of LCC’s, consumers needed to get used to a different logistical process. Before, consumers went to a big hub were every airline was stationed, but with the rise of LCC’s local and military airports were being used. These so called tertiary airports are mainly placed far from the consumers’ destination city. The benefit for LCC’s using these tertiary airports is that they have relatively low airport charges and fast turnaround times such that in turn LCC’s could offer lower airfares and transport more consumers. This principle was invented in 1993 by the American budget airliner Southwest. At every airport where Southwest airlines were stationed air travel increased and airfares decreased. Aviation insiders called this the “Southwest Effect”.

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American low cost airline carrier Southwest

The Southwest Effect is not only beneficial for the airlines’ consumers but also comes with an economic development at the local airports were the LCC’s are stationed. At every airport were budget airlines start operating, new companies settle down and make use of the industries’ attractiveness. An example is the airport near Weeze in Germany just across the border of the Netherlands. Previously, the military terrain was not open for civil airlines. Since Ryanair opened a base at Weeze airport, the military terrain transformed to a totally customer orientated airport with Shops, Hotels, shuttle buses and restaurants. Another example is the airport in Richmond, Virginia. The airport is located a hundred kilometers from Washington and is being used by Southwest Airlines. As a result Richmond became interesting for tourists and businesses travelling to Washington via Richmond. This lead to an expansion of companies offering services in and around Richmond airport. Furthermore the majority of the local airports were previously under public control because the problem is that airports have significant levels of fixed costs, and in these airports the revenues (both from aeronautical charges, retail and other sources) are not enough to cover these costs. Studies demonstrate however that the unit costs of these (smaller) airports reduce significantly as traffic reaches the threshold of 1.5 million work load units per year, and this effect continues to an upper limit of 3 millions per year. As a result, many of them have been attempting to attract LCC’s, aiming to increase revenues. With the attraction of the LCC’s local airports started to became profitable such that private investors were attracted. As a result many local airports are being privatized and started competing with the dominant airports.

We have seen that the shake up in the aviation industry caused by the introduction of the LCC’s is not only beneficial for airline consumers but also for the amount of the investment on and around the local airports. So, next time you are flying with an LCC to your holiday destination sit back, relax and think of your good investment the local economy.

 

 

Further academic reading:

Campisi, D., Costa, R., & Manscuso, P. The Effects of Low Cost Airlines Growth in Italy. Modern Economy, 2010, 1, 59-67. Department of Business Engineering, University of Rome Tor Vergata, Via del Politecnico, Rome, Italy

Olipra, L., The impact of low-cost carriers on tourism development in less famous destinations

Macário, R., Viegas, J. M., & Reis, V., Impact of low cost operation in the development of airports and local economies, CESUR, Instituto Superior Técnico, Universidade Técnica de Lisboa, Portugal

Barrett, S. D., Airport competition in the deregulated European aviation market., Journal of Air Transport Management, 2000., Elsevier

The board of Asset | IB&M

The board of Asset | IB&M

Asset | International Business & Management is a study organisation of the economic faculty at Tilburg University. The board of Asset | International Business & Management is responsible for the daily functioning of the organization.
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