Low cost carriers seek to price their fares well below those of
traditional airlines to increase demand and encourage consumers to
switch to the low cost carrier. "It is not unusual for a deep fare
cut to double the demand for airline service on a city pair." By
taking advantage of their lower average seat mile costs and using the
increased demand to fill a larger percentage of their flights, the low
cost carriers seek to maintain profitability despite offering lower
fares.
Low cost carriers achieve their lower costs in a variety of ways.
First, they seek to keep their business simple and low cost by not
providing meals, having more seats on aircraft, not having assigned
seats, and offering frequent flyer programs that require minimal
administration. Secondary airports, with less expensive landing
rights, are typically used. Routes tend to be organized around
point-to-point traffic rather than requiring passengers to change
airplanes at a hub. Finally, low cost airlines seek to keep their
costs low by using one type of aircraft, rapid turnarounds on the
ground to keep planes in service, low wages, and a high percentage of
direct sales via the Internet.
By having lower costs than traditional airlines, low cost carriers can
not only price lower than them while maintaining profitability, but
they can also seek to compete with other modes of transportation.
Fares are frequently positioned to be competitive with automobile
travel in the United States and train travel in Europe.
Low cost carriers also seek to make their service more attractive to
customers, and easier to manage, by eliminating complicated pricing
strategies that result in numerous fares for the same route and
removing many restrictions on travel, such as the typically required
Saturday night stay to receive a discounted fare.
A variety of sources exist describing low cost airlines and their
pricing strategies:
"Impact of Low Cost Airlines" Mercer Management Consulting (2002)
http://www.mercermc.com/Perspectives/Specialty/MOT_pdfs/Lowcostairlines.pdf
"Predation In the Airline Industry" by Roger W. Fones, Department of
Justice (June 12, 1997)
http://www.usdoj.gov/atr/public/speeches/1188.htm
"Low-Cost Carriers and Low Fares: Competition and Concentration in the
U.S. Airline Industry" by Charles Najda, Stanford University (May 12,
2003) http://www-econ.stanford.edu/academics/Honors_Theses/Theses_2003/Najda.pdf
"Is Delta Singing The End Of Song?" by Lisa DiCarlo, Forbes (January
4, 2005) http://www.pricingsociety.com/ppsinthenews.asp?nid=175
"Turbulent Skies" The Economist (July 8, 2004)
http://www.economist.com/business/displaystory.cfm?story_id=2897525
Sincerely,
Wonko
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