Financial Performance of Low-Cost and Full-Service Airlines in Times of Crisis, The

Canadian Journal of Administrative Sciences, Mar 2005 by Flouris, Triant, Walker, Thomas John

Low-cost carriers are also called "no frills" airlines. This is because they have eliminated most complimentary services. For example, airport lounges are either non-existent or charge a fee. Moreover, LCCs tend to have a higher seat density in the aircraft. For example, an easyJet Boeing 737-300 contains 149 seats, whereas legacy carriers have approximately 128 seats on average (Geest, 2003).

A major point of departure vis-à-vis route structure between Continental and Northwest on one hand and Southwest on the other is that the former two have an extensive international route network. For example, Continental serves 74 destinations in North America, 18 in Europe, 43 in Central and South America, 2 in Asia, and 1 in the Pacific.10 In contrast, Southwest focuses exclusive on a domestic network, having 60 destinations across the United States." This fact may explain the higher vulnerability of Continental and Northwest to the immediate effects of 9/11 as international traffic was affected more severely than domestic traffic as a result of the attacks.

Distribution

LCCs save millions each year by making advanced use of e-business. LCCs foster direct sales as customers book tickets online via the airline's Web site, the cheapest way of selling seats. Call-centres, which give passengers the option to book flights by phone, are the second preferred distribution channel. Call-centres are quite personnel-intensive, as every call must be individually answered. Therefore, this channel is more expensive than a Web site. Some LCCs charge a fee for call-centre bookings or have a discount price for Internet booking. Nevertheless, some LCCs still sell their tickets through travel agents and pay a commission in order to maintain an additional sale channel. Traveling with LCCs is typically ticketless. Passengers do not receive a printed ticket, but rather a code that authorizes them to fly with the airline. Hence, printing costs are avoided and administration becomes leaner.

Productivity

The productivity of staff is very high for LCCs. Pilots fly more annual hours at LCCs than at legacy airlines and cabin crewmembers have longer working times. A study by EUROPAIRS (ECA, 2002) suggests that a pilot at an average LCC flies approximately 25.1% more block hours and has 12.5% more duty days than a pilot at an average legacy carrier.12

The study further points out that the remuneration of LCCs is competitive because of a low base salary and more productivity-related compensation. On average, LCC pilots have a 60% salary base and receive the remaining 40% according to their performance. LCC staff is younger on average and motivated through stock option plans. Southwest's employees have been benefiting from the company's success since 1973 through a profit-sharing program. Despite the longer working hours of Southwest's personnel, Southwest was named "best company to work for in America" by Fortune magazine13 which provides evidence of the comparative advantage the company derives from its human resource capital.