The other week, I was tasked with completing an analysis essay analysing some implications of Porters Generic Strategies model for low cost airlines, in comparison to traditional carriers. Some may be familiar with the business theorist, Porter and some of his theories.
One implication of a cost leadership business strategy I highlighted, was one which is very relevant and appears to be causing concern for traditional airlines.
With the rapid success of budget airlines such as Ryanair with a hardline Cost Leadership position, focusing more on competitive pricing and cost reduction, essentially stripping air travel to its frame and aiming just to get the customer from A to B, it seems that traditional airlines are soon going to find it impossible to make operating on fiercely competitive routes profitable at all. With the inflated cost of extra staff training and improved service, their margins will seemingly soon disappear. Although illegal, it could be perceived that lower cost airlines are nowadays adopting a predatory pricing strategy, taking advantage of their lower total costs, to drop prices and generate profit through low margins and sheer quantity of customers generating sales revenue. Sadly, there do not seem to be many purchasing economies of scale in the aviation industry - the only one seems to be from buying aircraft or expensive equipment on bulk, even these are marginal gains, this means that for larger airlines with larger outflows on supplies, repairs etc as their purchase quantities increase, so will their costs, with a direct proportion, as a result, this will make it extremely difficult for the low prices of the budget airlines to be matched as larger airlines simply cannot risk reducing their profit margins so drastically.
It is an issue which I thought would be very apt and interesting to the community and I hope it has the potential to spark some decent discussions. Will we see a withdrawal of traditional airlines from short-haul routes, as prices continue to fall incrementally with budget airlines looking to cut more and more costs, to the point that traditional airlines can no longer compete effectively? Will the larger airlines we all know and return to their roots of a market position with focused differentiation, their service becomes more geared towards those travelling a long distance in market not sensitive to price and with a very high perceived value of air travel? It would be great to hear what the community has to say on this.