Long Haul LCC as a Winning Business Model in the Aviation Industry

As explained by Belobaba, Odoni and Barnhart (2016) and Schlumberger and Weisskopf (2014), the type of business model chosen by an airline company greatly determines the way it intends to make money as well as its long terms business success. Currently, there are several possibilities of business models for the airline industry the major ones being Legacy airlines, Low-Cost Carriers (LCC), Charter Airlines (Holiday Carriers), Regional Airlines, Cargo Airlines, Hybrid Airline, and the Long Haul LCCs business models (Wojahn 2012; Button 2012). The interest of the current paper is on the latter model.

The LCCs business models have been used for some years, and their practical application in the aviation industry has been growing steadily over the past four decades (Taneja 2016). Some airlines from different companies such as IAG and Air France-KLM recently adopted the Long Haul LCC business model (Button 2017). A key question that the researcher is asking is whether these Long Haul LCCs will be a winning business model for the aviation industry in the long run. In essence, the dissertation was designed, using Norwegian Air Shuttle as the case study, to assess the long-term business landscape of the LCCs and determine its possibility of being a winning business model in the long term.

1.1 Definition of Terms

Business Model – a business model can be defined as a plan developed or implemented for the successful operation of the business by identifying the sources of revenue, products, financing, as well as the intended customer base (Taneja 2016). The model is useful for indicating how the organisation is going to create and deliver value (Clark 2017). For this study, the business plan identifies how the airline will be operated, its customers, ticket pricing, routes, as well as deliverables.

Long Haul LCCs – this is a special type of business model used in the aviation industry whereby the airline company, using large-capacity aircraft, targets public and holiday travellers as the primary customers and sets the lowest price possible casting trust on volume sales of the ticket (O’Connell and Williams 2016). The company targets travellers who are looking for cheap airfares as their primary customer base. With this model, the company offers varying ticket pricing whereby prices are relatively lower on weekends than on weekdays. Such business models allow several factors to determine air ticket price namely day of the week, the season of travel, the city of travel, booking time, and load factors among others (Clark 2017).

Winning Business Model – In the context of the current study, a winning business model was defined as a plan of operation that enables the airline to maintain its business profitability in the long term. This implies that the airline using the model above, the Long Haul LCC, has greater market share, some cost and competitive advantages over other carriers as well as have the potential of consistently producing higher profits. In essence, to determine whether Long Haul LCC is a winning model, the researcher analysed the market share, cost savings, competitive advantage, and profitability of Norwegian Air Shuttle, which was used as a case study.

1.2 Norwegian Air Shuttle (ASA)

The airline is trading as Norwegian and is one of the largest low-cost carriers available presently (Johansen 2018). The airline plies about 152 destinations across the globe and offers diverse economy class prices that vary depending on the itinerary or flight destination. It is the largest Long Haul LCC carrier in Norway and the third largest in entire Europe (Adler 2017). In addition, it is one of the eighth-largest Long Haul carriers in Europe in terms of passenger numbers.

The airline has been in operation since 22 January 1993 (Moen 2017); however, it started offering Long Haul LCC flights in May 2013 (Zuidberg 2017). Since then, the airline has maintained offering Long Haul flights, which are operated by its subsidiaries such as Norwegian Air UK, Norwegian Air International, and Norwegian Long Haul among others (Adler 2017; Johansen 2018). These three subsidiaries will be considered in the analysis to determine whether Long Haul LCCs is a winning business model.

The Norwegian Air Shuttle was chosen as the case study in this thesis because it is currently the only European carrier that has successfully offered Long Haul LCC for a long time, that is, forms May 2013. The study of this airline can unveil the prospect of Long Haul LCCs in the European market. Having operated Long Haul LCC flights since 2013, a study of Norwegian Air Shuttle can indicate whether the business model is a winning one by unveiling its cost savings, market share, competitive advantage, as well as profitability level.

1.3 Research Background Information

As explained by Schlumberger and Weisskopf (2014), the airline industry made tremendous changes since the deregulation of the aviation industry which started in the United States in 1978. The initiative led to new business models being implemented and tested by various players in the airline industry (Fageda, Suau-Sanchez, and Mason 2015). One of the business model being tested is the Long Haul LCC. Even some airline companies such as JetBlue Airways, British Airways, Delta Air Lines and Frontier Airlines have shown interests in the Long Haul LCCs, but little empirical evidence has been provided as to whether ultimately it will be a winning business model for airliners.

As explained by Cento (2009), before 1978, the airline business was strictly under the observance by respective government regulators. The government controlled and determined almost all the business programs of the airliners. Each country had its carrier that provided air transport services to the people, which allowed many airlines to enjoy the uncompetitive market (Button 2012; Taneja 2016). The airline industry was highly regulated by the government whereby the licensing boards in different parts of the world provided a little room for newcomers in the industry. As explained by Jorge-Calderón (2014), and Cento (2009), such regulations affected the business model that can be adopted by a given airline company. As a result, most airlines tended to choose business models favoured by their state government (Ison 2017; Button 2017). During that period, there was little interest in the Long Haul LCCs model.

As observed by Schlumberger and Weisskopf (2014), and Lawton (2007), the existence of a few carriers brought a monopolistic form of market whereby reliance to the national flag carriers generated an unreliable and inefficient way of transport with similar business models. The frequency of flights, routes, and destinations was not concurring with the customer’s taste and preferences which were a form of un-satisfaction which generated much political heat with the quest initiating deregulation policy in the airline industry (Chung and Whang 2011; Fageda, Suau-Sanchez, and Mason 2015). As explained by Wittmer, Bieger, and Müller (2011), this also contributed to the use of few tested business models.

As explained by Belobaba, Odoni and Barnhart (2016) and Lawton (2016), deregulation of the airline sector, which began in the late 1970s in the United States, opened the way for various airliners to start using a diverse range of business models. As a result, airlines started trying out different business models such as LCCs, legacy airlines, regional airlines, charter airlines (holiday carriers), cargo airlines, hybrid airline, and the Long Haul LCCs business model (Wensveen 2018; Ison 2017). It resulted in the flooding of the aviation industry with different airliners, which induced stiff competition, and use of different business models to improve their performance and profitability (Clark 2017; Lawton 2016). It is estimated that close to 88 airlines entered the airline business following the implementation of the Airline Deregulation Act of 1978 in the United States of America (Chung and Whang 2011).

According to Wittmer, Bieger, and Müller (2011), the idea of Long Haul LCCs is not a new one. As explained by Gross and Schröder (2007), there have been some unsuccessful attempts by some airliners to implement Long Haul LCC models in the market. Even today, some airlines still believe in the future success Long Haul low-cost airline business model (Jorge-Calderón 2014). As explained by Wensveen (2018), since the unsuccessful attempt of the first airline, new technologies and business processes are being developed to re-examine the economies of the Long Haul LCC airline carriers (Gross and Schröder 2007; Wensveen 2018). Some of the airlines that have attempted this business model include Laker Airways, Jetstar, AirAsia X, Scoot, and Norwegian Air among others (Gross and Schröder 2007).

Lawton (2016) considered a business model as a simplified plan that shows how the company is creating value in its networks. Presently, the airline companies are adopting a wide range of business models, the Long Haul LCCs being one of them. As explained by Gittell (2005), Long Haul LCCs use large aeroplanes and operates on large markets thereby charging relatively little fees as compared to other carriers. As explained by Wensveen (2018), Gross and Schröder (2007), some airlines have considered the Long Haul LCCs business model believing that it will be a winning business model in the long term despite past failures.

Despite the increasing interest, some of the companies that have tried the business model in the past have experienced failures. The large capital requirements, intense competition and fluctuation in demand are some of the factors that significantly have contributed to the downfall of the estimated 88 carriers during the early 1980s out of which 83 failed (Gittell 2005; Jorge-Calderón 2014). This happened at the beginning when there was a high expectation of the Long Haul LCCs models generating huge profits (Wittmer, Bieger, and Müller 2011). Although entering the business called for massive investments, it was not an issue of concern to the Long Haul LCCs. Unfortunately, due to the increased competition and the fluctuating markets, many entrants in the aviation sector could not stand the waves and Long Haul LCCs such as Laker Venture and People Express subsequently collapsed (Jorge-Calderón 2014; Ison 2017).

1.4 Problem Statement

The airline sector is probably one of the fastest growing business ventures on the planet, and a diverse range of business models are being tested (Adler and Gellman 2012). The competition in the industry has led to the development of several different business models such as the Long Haul LCCs (Adler and Gellman 2012). As explained by O’Connell and Williams (2016), the main problem is that the profitability and long-term sustainability of the Long Haul LCC have not been proven its history of past failures. In particular, some airlines such as Laker Airways which was the first to implement the Long Haul LCC eventually collapsed thereby raising more doubt about its long term success (Schlumberger and Weisskopf 2014; Whyte and Lohmann 2015).

Today’s Long Haul LCCs are facing diverse challenges such as safety, fuel utilisation, costs, rivalry, economic emergency, and operational issues, which directly affect the ability of Long Haul LCCs to be winning business models in the long term (Sarker, Hossan, and Zaman 2012; Adler and Gellman 2012). Little has been known concerning how Long Haul LCCs can be used to overcome such challenges. As explained by Whyte and Lohmann (2015), still many airlines are languishing to implement the low-cost Long Haul business, which is one of the biggest problem being faced in the sector. Researcher Button (2017) indicated that some airlines are still unable to adopt the Long Haul LCC business model.

Button (2012) added that tremendous changes provided the impetus for several new business models being tested by the industry. The tremendous changes have escalated the desire for the low-cost Long Haul airlines. However, the future profitability and sustainability of such business models have not been proven given past failures. The problem the industry is currently facing is how to ensure that the low-cost Long Haul airline is profitable and sustainable in the long run. Previously, some governments used to structure fares and routes were determined by the same government (Curtis and Rhoades, 2015; Fageda, Suau-Sanchez, and Mason 2015).

According to Sarker, Hossan, and Zaman (2012), some airlines that have tried the Long Haul flights have undergone periods of financial underperformance when compared to others raising doubt about the future performance of such models. According to Adler and Gellman (2012) and Wojahn (2012), such underperformance have been greatly attributed to the business model being used. Sarker, Hossan, and Zaman (2012) and pointed out that there is a high level of concern over the possibility of the Long Haul LCC to be a successful winning business model for the airline industry. The future and the possibility of Long Haul LCC business model to be successful in the long run has been in doubt by some industry stakeholder mainly investors. Thus, another problem is that some stakeholders doubt the potential of the Long Haul LCCs to be successful in the long run.

1.5 Aim of the Study

This dissertation aimed to set up an understanding as to whether Long Haul LCC will be a winning business model for airliners in the end. In essence, the researcher was interested in determining whether the Long Haul LCC business model can be profitable, competitive as well as enjoy cost savings and achieve a strong market share in the long run.

1.6 Objectives of the study

1. To determine whether the Long Haul LCCs has achieved a high market share.

2. To determine whether the Long Haul LCCs has achieved a high level of profitability.

3. To determine whether the Long Haul LCCs has achieved high competitive advantage.

4. To determine whether the Long Haul LCCs experiences reducing costs

5. To determine the effects of Long Haul LCCs in the aviation industry

6. To determine if the introduction of Long Haul LCCs has increased airline traffic

7. To determine factors contributing to the growth of Long Haul LCCs

The significance of the research study

The greatest significance of the current study is that it provides empirical evidence of the future of the Long Haul LCCs business model, which is useful for investors who are interested in the aviation industry. In essence, the result will provide evidence as to whether Long Haul LCCs will be a winning business model in the future. If so, investors and developers will have stronger faith and confidence in the business model as they plan to invest. If not, they will seek for avenues of improving Long Haul low-cost carriers to ensure that it is winning business model.

Secondly, the study will highlight some of the challenges associated with the Long Haul LCCs business model as well as how they can be addressed thereby helping improve the investment outcome in the aviation industry. As pointed out in the literature review (next chapter), several airlines who have tried the Long Haul LCCs have failed due to the numerous challenges associated with the business model. Understanding such challenges is essential for drafting a way forward to improve the business outcome and profitability. Presently, several airlines are interested in the business model but do not have a clear understanding of how to overcome challenges associated with it.

Another significance of the current study is that it will help determine the ability of the Long Haul lost carriers to deliver quality services, which is essential for both customers and investors. Investors should invest in business models that deliver quality services. Consumers are also interested in airlines that offer quality services. The empirical evidence has not greatly tested the ability of Long Haul LCCs to deliver quality airline services.

1.7 Focus and Scope of the Study

The study is focused on determining the ability of the Long Haul LCCs to become a profitable business model in the future. This was motivated by the fact that many airlines who have tested the business model has experienced several challenges and failed ultimately. As a result, the scope of the current investigation will be limited to determining the impact of the Long Haul LCCs as well as discovering factors that might lead to their growth in the aviation industry. In essence, the current dissertation is limited by scope to only factors related to the Long Haul LCCs, which will be discussed using Norwegian Air Shuttle as the case study organisation.

1.8 Limitations of the Research Study

The current research faced some limitations most of which have been recognised by the researcher. First, since both secondary and primary data were used, some factors could have directly influenced the respondent’s opinions and answers, thereby leading to biased responses. Such factors affected the causality, and the relationship between variables is thereby affecting the outcome of data analysis and research findings. Since the questionnaire was self-administered, the researcher had no control of such factors hence the potential of biased responses.

In addition, since the samples were selected using probability-sampling techniques (stratified sampling), there is the potential for choosing samples that do not have appropriate information about the phenomenon being investigated. In such a case, the sample respondent could give wrong or irrelevant information, and their selection in the sample are not useful. Such information also affects the outcome of data analysis and research findings.

Another limitation is that the sample respondents could choose to give biased information in the questionnaire thereby distorting the result of the empirical analysis. Furthermore, some respondents could choose to conceal some useful pieces of information. In addition, the result of the empirical analysis may diverge because of different underlying factors of the data used, and sampling technique as well as methods of data analysis among others.

1.9 Research Roadmap

The roadmap provided here gives a clear picture of steps that will be followed from the start until the dissertation is fully completed. The first step was to select an appropriate research topic, which is the low-cost Long Haul airline. Once the topic was chosen, the researcher met with the supervisor for further discussion and guidance on how the research should be completed. The next step was to look for resources and then write the introduction, literature review and methodology chapters, which were then presented to the supervisor for approval. The next step involved data collection followed by analysis to complete the dissertation. The figure below summarises the research roadmap that was adopted.

Figure 1—1: Research roadmap

Source: Author’s Illustrations

1.10 Dissertation Structure

The dissertation is organised into six main chapters; the introduction, literature review, methodology, results, discussion and analysis, and conclusion and recommendations. The figure below illustrates the structure that was adopted for the current dissertation in terms of main chapters discussed.

Figure 1—2: The organisation of the paper

Source: Author’s Illustrations

Chapter 2: Literature Review

The current chapter reviews the existing literature on the airline industry to various aspects of low-cost carriers as well as Long Haul LCCs. The main purpose of the review is to unveil the practice in the current, past and current trends as well as what has been done by other airlines using a similar business model. The review considered various aspects such as (1) the Long Haul LCC business model, (2) past attempts, failures and successes, (3) the potential of Long Haul LCC in aviation industry, (4) potential cost saving, competition, demand, & service quality, (5) quick turn around, and (6) the utilisation of secondary airports. They were considered in the literature review because they indicate the ability of Long Haul LCCs to be winning business model.

2.1 The Long Haul LCC Business Model

As explained by Acar and Karabulak (2015), in this type of business model, airline companies set the lowest price possible and trust on the willingness of the public to travel using their arrangements due to low travel prices. Thus, the future of the Long Haul LCC business model lies in the willingness of the public to use their services. According to Clark (2017), Long Haul LCCs are not designed for business travellers but rather the public and holiday travellers who are looking forward to cheap air travel fare. In addition, Long Haul LCCs offer low prices only for the weekend return flight, which is typically adapted for leisure itinerary. For example, the Norwegian Airline, which offers the Long Haul LCC services, charges $2,000 for the weekday travel while a weekend direct ticket it charges only $800 (Acar and Karabulak 2015).

Researcher Ison (2017) indicated that the Long Haul LCC models are based on the assumption that there is a major upward demand for leisure travel as well as adaptable business travel which can be captured once the air travel prices are reduced to less than 50% of normal fares. Apart from the leisure weekend travels, the LCCs also intend to capture the adaptable business travels especially those seeking low-cost fares (Clark 2017). For the LCCs model to succeed there should a sustainable demand that can fill at least 80% of the airline’s routes. Another condition for success is that the average traveller must spend beyond the lowest price set by the airline (Taneja 2016). As explained by Zuidberg (2017), with the Long Haul LCC model, the airline sells seats in the cabin at different prices.

With Long Haul LCCs, the seat prices are not fixed but very significant depending on a combination of several factors (Whyte and Lohmann 2015). As highlighted by researcher Button (2012), a number of factors determine the price that travellers pay while travelling on Long Haul LCC carriers. One of the determining factors of seat price is the season of travel. As explained by Taneja (2016), with Long Haul LCCs, the low season prices are often lower as compared to the high season prices. Another determining factor of seat price is the city; Long Haul LCCs flights leaving unattractive cities set low seat price unlike when leaving attractive cities (Materna and Tomova 2016). For instance, it would be cheaper to fly from Stanstead to London than from London to Stanstead.

Another characteristic of Long Haul LCCs models is that it charges low prices for early bookers (Button 2017). Thus, booking time is another essential factor determining death prices when using this airline business model. With such an arrangement, early ticket bookers pay lower seat price as compared to later bookers (Clark 2017). As explained by Lawton (2007), the seat price often goes up once the flight has been booked over given load factors. The load factor may vary significantly from one flight to another (Whyte and Lohmann 2015). Another characteristic of the Long Haul LCCs is that the flight often decide to offer last minute deals especially when it is filling up badly (Materna and Tomova 2016), which is done to enable the aircraft to fill to the maximum because the cost of flying it to the new destination would relatively remain the same (Zuidberg 2017).

With the Long Haul LCCs, the booking costs vary with the passenger (Button 2012). Even though the introduction of internet booking has significantly reduced the variation in booking costs, it is still a significant factor determining the seat charges when using Long Haul LCCs (Wittmer, Bieger, and Mu¨ller 2011). To cater for the low seat prices, Long Haul LCCs works harder sell extras, which are often provided expensively; these include checked bag, seat assignment, and meals and so on. As explained by Lawton (2007), seat prices do not include a checked bag, seat assignment, and meals among other services. Thus, the traveller is forced to pay separately for these services if needed; they are often charged expensively which essentially increases the costs of travel on Long Haul LCCs (Zuidberg 2017). The airline does this in order to generate enough revenues on the flight to help maintain their business operation.

2.2 Past Attempts, Failures and Successes

Some airlines have tried the Long Haul low-cost carrier model. As explained by Borenstein (2017), Laker Airways was the first airline to offer the Long Haul LCC flight. The airline started offering the Long Haul LCC flights in 1977 thereby transforming UK charter operations. To experiment with the Long Haul LCC model, Laker Airways first offered the ‘SkyTrain’ flight to operate between London and New York. They subsequently added other routes namely Miami and Los Angeles, but unfortunately, their business model failed in 1982 (Fageda, Suau-Sanchez, and Mason 2015).

Other airlines such as Oasis Hong Kong have also tried the Long Haul LCC model. They started by offering Long Haul LCC flights operated between London and Hong Kong (Sarker, Hossan, and Zaman 2012). The carriers, in particular, made available the two-class B747-400, which lasted for only 18 months before the business model failed to continue in operation (Wojahn 2012). In addition, the airline offered high-density seating aircraft for its Long Haul LCC flights, but it never picked up well.

The US-based LCC airline known as People Express also experimented with the Long Haul LCCs by introducing a flight for the business model. As explained by Francis, Fidato and Humphreys (2003), People Express started by offering a flight to ply the routes to London, Montreal and Brussels. It also offered a single aircraft but later failed in 1987. Since then, other flights that have been offered for the Long Haul low-cost carriers include Civair, FlyAZUL, Ryanair, Air Asia X, LCC Air Berlin, Canadian LCC, and Zoom Airlines among others (Adler and Gellman 2012).

Despite the above past failures, other airlines have succeeded with the Long Haul LCCs. As explained by researcher Borenstein (2017), the liberalisation of the aviation industry in the United States in the early 1980s opened more opportunities for the Long Haul LCCs and marked the beginning of new successful airliners using this business model. As a result, the Long Haul LCCs business model started picking up worldwide. By maximising their efficiency and using ultra-competitive ticket prices, the model now attracts many customers.

Today, airlines such as EasyJet, Air Asia X, Gatwick Connects, and Ryanair have become more successful with the Long Haul LCC business model thereby increasing their passenger numbers as well as profitability (Borenstein 2017). Notably, more success with the above airliners has been achieved since the start of the 2000s. As explained by Wilken, Berster and Gelhausen (2016), since 2013, Gatwick Connects has been making several Long Haul LCCs flights using independent airlines that enable them to assess passengers when