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Industry Analysis Case Study

Case Title:

Low Cost Airlines: Trends and Survival Strategies in US

Publication Year : 2006

Authors: Saravanan I B

Industry: Transportation


Case Code: INA0116C

Teaching Note: Available

Structured Assignment: Not Available

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US aviation has been reporting losses from 2000. Low cost airlines, in particular have been severely hit because of various challenges they face in US context. The challenges are the rise in ATF cost, price war, internal competition, inadequate infrastructure in secondary airports and US economic recession etc. As a result, the whole US aviation continued suffering losses and bankruptcies. In 2005, the airlines in US reported a net loss of $ 11.8 billion. From 2000 to 2005, they have reported losses of $ 37 billion. Yields were declining and in spite of governmental aid, subsidy and tax holiday, fresh bankruptcy filings happened.

To counter this drop in yields and revenues, various strategies were implemented by low cost airlines. They tried to improve their costing structure by lessening the ticketing and distribution expenses, labor costs per aircraft, improve load factor and aggressive marketing against regional or network carriers. They also started offering frills onboard flight like full service airlines thereby attracting regular business travelers. Developing hub and spoke model like FSAs is the next strategy which improved their presence in leading airports.

Entering the long haul market like FSAs was another strategy because longer seat miles were available in that segment, which the LCAs felt, could be tapped. Increasing the productivity of aircraft by lengthening the flying hours and minimising ground time, increasing the labor productivity by manning an aircraft and ground support with minimal staff was also their priority. Installing newer revenue management software which could fill seats as per the demand and duration of booking gave them an impetus towards improving operating revenues. By participating in Low Cost Terminal Development in US, the low cost airlines felt that they will save hard earned revenue on unduly high airport charges which favor the full service airlines.

The trend projection and economic forecast presented by US Federal Aviation Administration for the years 2006 to 2017 suggested that gradually the US aviation and low cost airlines in particular, will revive and will generate enough revenues and profits from 2007. Although the growth rate may slow down, the revenues will improve, it said. With all the government support and survival strategies put in place by the low cost airlines, the revenues have started looking up in Q1 2006.

Pedagogical Objectives:

  • The low cost airlines industry in US
  • Challenges faced by the low cost airlines in US
  • Survival strategies employed by them, specifically on cost cutting
  • Trend projection and Economic forecast for 2006-2017 for US aviation
  • Analyzing the future of the low cost airlines.

Keywords : Low-cost airlines in US; Load factor; Restructuring / Turnaround Strategies Case Study; Cost cutting in low-cost airlines; Bankruptcy in US aviation; Rise in ATF cost; Jet fuel tax holiday - ATA; SouthWest Airlines; AirTran; Trend projection and economic forecast for US aviation; Survival strategies of low-cost airlines in US; Hub and spoke model; Short and long haul market; Revenue management systems; JetBlue; Biofuel for jetliners

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