Assessing the Impact of Low Cost Carriers

Assessing the Impact of Low Cost Carriers On the Legacy Carriers in the United States

Abstract

On October 24, 1978, the Airline Deregulation Act was signed into law, and the airline industry changed forever. Airlines were now free to fly to any city, and charge any fare. As fare increases occurred after the deregulation act, low-cost carriers such as Southwest grew. In recent research, low-cost carriers impacted fares on routes from $21 to $154 in 2015, when compared to that of legacy carriers. Southwest and JetBlue introduced an employee, customer service centered culture, that many carriers followed. Southwest, and other low-cost carriers were first to install cost saving winglets to improve aircraft range and performance, while reducing fuel costs. The impact of the low-cost carrier on the legacy carriers can be summarized by one word: change. This paper is a research project showing the impact that low-cost carriers have had on legacy carriers in the United States.

Assessing the Impact of Low Cost Carriers on the

Legacy Carriers in the United States

Prior to 1978, the U.S. airline industry was regulated by the Civil Aeronautics Act. The Civil Aeronautics Act created the Civil Aeronautics Board (CAB) which controlled the entry and exit of air carriers, regulated fares, and controlled mergers. After World War II, economic and political consensus emerged that regulation was inefficient, and restricted the airline industry (Wang, 2005, p. 4).

Many remember the era of the airline industry prior to deregulation in 1978 as the “golden age of aviation,” when airlines used to carve chateaubriand on rolling carts, and piano lounges on upper decks of the Boeing 747s. Passengers dressed up to fly, and flying was glamorous and exciting (Unnikrishnan, 2015).  However, flying prior to deregulation was known to be “for the rich.”

Deregulation

On October 24, 1978, President Jimmy Carter signed the Airline Deregulation Act, and the airline industry was changed forever (Unnikrishnan, 2015). The U.S. Domestic Airline Industry was deregulated as part of a reform movement that transformed not only the airline industry, but the banking, telecommunication, and energy industries. Deregulation was premised on the idea that an unregulated airline market would generally perform well in a perfectly competitive industry (Wang, 2005, pp. 4-5).

However, without the protection of the CAB’s guaranteed rate of return, airlines such as Pan Am, Eastern, and Braniff could not compete in the new open markets, and were eventually forced into liquidation (Unnikrishnan, 2015). Between 1983 and 1988, the airline industry experienced a massive wave of bankruptcies, mergers, and acquisitions. Over 200 carriers left the market, leaving nine airlines to share 92 percent of domestic revenue. Contrary to the belief of the initial intent of the deregulation act, deregulation led to a decrease in competition (Wang, 2005, p. 5).

Deregulation created a more concentrated airline market, it also lowered the average airfare and increased competition on many city-pair routes (Wang, 2005, p. 5). From 1978 to 1993, the number of passenger levels drastically increased. Domestic passengers grew from 256 million to 478 million, an 87 percent increase, and flight frequency increased from 5 million flight departures in 1978, to 7.2 million in 1993 (Wang, 2005, p. 5; Goetz & Sutton, 1997, p. 240).

The U.S. Department of Transportation published a report in 1997 on the ‘low cost airline service revolution.’ The report identified not only a growing group of passengers that are benefiting from low cost carriers, but that the low cost carrier niche is having a “profound effect on efficiency, competition, consumers, and industry structure” (U.S. Department of Transportation, 1997). The low cost carrier service reflected an increase in the domestic passenger market share from 13 percent in 1997 to about 28 percent in 2009, however this has also led to a rise in competition between the network carriers and low cost carriers (Huschelrath & Muller, 2011, p. 1).

Deregulation in the U.S. domestic airline industry has had mixed results. While people are flying more, average airfares are lower, and the number of flights has increased, the profits of the industry have declined, and the industry has become more concentrated. One or two carriers dominate specific airports, demonstrating a bias towards the larger carriers. Overall, deregulation has seemed to benefit only certain groups: the consumers, and large airlines. It does however, hurt small airlines and industry profitability as a whole (Wang, 2005, p. 6).

The Deregulation Act did not open competition to all markets. The Wright Amendment was a 1979 federal law that limited long-haul flights out of Dallas Love Field in Dallas to protect the much larger, newly constructed Dallas-Fort Worth International Airport (DFW). Love Field is the home of Southwest Airlines, the only airline that stayed at Dallas Love Field after DFW opened (Gulliver, 2014).

Herb Kelleher, one of the founders of Southwest Airlines, stated in regards to the Wright Amendment: “The Wright Amendment is an unjustified pain in the neck, but not every legislative pain in the neck amounts to a constitutional infringement.” (Freiberg, 1998, p. 26).

The Wright Amendment limited airlines serving Dallas Love Field to only serving the four states that immediately bordering Texas: Arkansas, Louisiana, New Mexico, and Oklahoma. Southwest was also prohibited from publishing schedules, checking baggage, or publishing fares with respect to Love Field outside the immediate four state area (Freiberg, 1998, p. 26).

After the passage, and subsequent implementation of the Wright Amendment, Southwest turned an obstacle into an opportunity. Southwest Airlines established a corporate identity which is tied to the airport. Southwest stuck with Love Field, built a stable, low-cost business model. In 2004 Southwest was big enough at Love Field and important enough to Dallas’s economy to go to war over the law (Gulliver, 2014). Even after the Deregulation Act, the author believes that the Wright Amendment was anti-competitive, one of the main reasons for the Deregulation Act.

Southwest Airlines challenge was successful. In 2006, a deal was reached. The Wright Amendment’s restrictions would be repealed, in 2014. There were two conditions that both the airport, and airlines had to agree to: reduce the number of gates at Love Field from 32 to 20, and the embargo on long-distance, nonstop flights would only be lifted for domestic flights (Gulliver, 2014).

On October 13, 2014, the Wright Amendment was successfully repealed and Southwest, as well as other carriers, were free to schedule non-stop flights from Love Field to any domestic destination (Gulliver, 2014).

However low-cost carriers have had a difficult time accessing larger airports that are “slot controlled.” A slot is a reservation for a takeoff or landing at congested airports, and in the United States, three major airports are slot controlled: New York-Kennedy Airport, New York-LaGuardia Airport, and Washington Ronald Reagan Airport (Jansen, 2015).

Allegiant Air made an unsuccessful bid on LaGuardia slots that opened from the merger of American and US Airways. Allegiant’s government-affairs director, Keith Hansen stated that “the current rules, even with the changes the FAA is considering, create an insurmountable hurdle for low-cost carriers to gain access” (Jansen, 2015).

This is not the first time this remark has been made. A representative for Virgin America stated “that all airports need to have fair ways for smaller, newer entrants to gain access to gates, and increased competition is good for the industry and ultimately good for the consumer” (Jansen, 2015). While the argument can be made by the author about Dallas Love and the control that Southwest Airlines has over that airport, legacy airlines in control of a majority of slots at three of the major airports in the United States, the author believes hinders the competition.

American objected to the slot regulation changes to cause changes in competition among the carriers. American was also joined by United Airlines in their argument for not changing the slot regulation. The new regulation states that airlines holding the slots must use the slots at least 80 percent of the time, or risk losing them (Jansen, 2015).

Delta uses 94 percent of their slots at LaGuardia, and 90 percent at JFK. The unused slots account for seasonal reductions, and day-of-week changes rather than waste (Jensen, 2015). While Delta uses a majority of their slots, the author believes that there is still some room for the low-cost carrier to gain some traction in these markets.

At LaGuardia Airport in 2015, Southwest, JetBlue, Virgin America, Spirit, and WestJet had a combined total of 75 departures, compared to 47 departures in 2005. At JFK airport, JetBlue, Virgin America, Sun Country, and Hawaiian airlines had 163 combined departures during that same period, compared to 94 in 2005 (Jansen, 2015).

To effectively bring new competition to these airports, the FAA must do for low-cost carriers what it has done for the legacy carriers that want to bring new service to these airports, award slots to new entrant or limited incumbent low-cost airlines. It has been stated the “Southwest Effect” reduced fares at LaGuardia airport, as well as other legacy carrier dominant airports it serves. When Southwest started service to LaGuardia in 2009, it reduced fares 17 percent and increased passengers in 32 percent of the markets it serves, saving travelers $100 million a year. Southwest now controls 61 of the 1,142 slots at LaGuardia, and growing (Jansen, 2015).

As a result of deregulation, competition in the airline industry is allowed to act as it would in a free-market world. The presence of competitors lowers the price of a particular good, however, in the case of airlines tickets, the concept of competition is unclear since there are different types of “competition” (Wang, 2005, p. 7).

To establish the differences between the two types of carriers, they first must be classified:

Full Service Carrier (Legacy Carriers): While business models of full service carriers (FSCs) have been changing, the traditional full-service carrier is one that provides service to a wide-variety of destinations, and provides a number of ancillary services, including complementary beverages, in-flight entertainment, airport lounges, and assigned seating (Bitzan & Peoples, 2016, p. 26).

Low-cost carriers (LCCs): the low-cost carrier model is one that focuses on no-frills, point-to-point service. No-frills is the removal of the ancillary services, such as: in-flight entertainment, airport lounges, and assigned seating. Many low-cost carriers provide complimentary beverages.

Prior to deregulation, two low-cost carriers, Western Pacific and Southwest operated point-to-point services in the intrastate markets of California and Texas. Western Pacific and Southwest had fares that were 50 percent lower than those set by the Civil Aeronautics Board (CAB), and they were profitable (Bitzan & Peoples, 2016, pp. 26-27).

Many new entrants attempted to use the low-cost strategy, some were successful, and some were not. Like the FSCs, not all LCCs are alike. Several common cost-saving strategies have been employed by the most successful LCCs (Bitzan & Peoples, 2016, p. 27). However, many features of the FSCs have been adopted by the LCCs to remain competitive, such as: Frequent Flyer programs, hub and spoke system, inflight entertainment, and multiple aircraft type (Chowdhury, 2007, p. 9).

With the adaptation of the low-cost carrier model, low-cost carriers are able to realize lower costs in comparison to the legacy carriers. These include:

1. Operating a point-to-point network, which allows the airline to realize cost savings in ground crew, maintenance, gates, and airport expenses.
2. Uniform fleet type which allows the airline to realize cost savings in maintenance and in training costs.
3. Smaller secondary markets where airport charges are many times lower than those of the larger, congested airports.
4. Unbundling or no-frills services.
5. Additional seats added per airplane, and non-reclining seats, which allow the airlines to carry more passengers, resulting in cost savings.
6. Simplified fare and yield structure.
7. Utilizing fewer employees per aircraft.
8. Non-union employees

In the past 30 years, many legacy carriers have adopted features of the LCC business model. Many legacy carriers have removed hot meals for flights within the continental United States, implemented a profit sharing plan for their employees, and simplified their fare structure to closely match the low-cost carriers’ model (Chowdhury, 2007, pp. 8-9).

Airline within the Airline, the Legacy Carriers Respond

The “airline within an airline” concept was designed from the legacy carriers as a response to the low-cost carrier effect. In the mid-1990s the airlines entered a period of profitability, and this made it difficult for the airlines to give the unions any wage concessions. To cut their overall cost structure, the legacy carriers responded by starting their own low-cost subsidiaries (Chowdhury, 2007, p. 20).

In October 1994, United Airlines was the first airline to attempt this strategy with United Shuttle. United Shuttle was launched to compete with Southwest Airlines in California, and provide connecting traffic to the airlines’ three west coast hubs: Denver, San Francisco, and Los Angeles (Chowdhury, 2007, p. 20).

In October 1996, Delta established Delta Express. Delta Express’ focus was to provide point to point service between Florida and the Northeast, bypassing the airlines’ Atlanta hub, and was launched to counter ValuJet/AirTran Airways (Chowdhury, 2007, p. 21). In 1998, US Airways established MetroJet. MetroJet’s focus was to compete with Southwest on many markets, including the east coast, and central US (Chowdhury, 2007, p. 21).

In April 2003, Delta launched Song. Many of the concepts of Song were taken from JetBlue, and was launched in response to JetBlue. Song operated a single fleet type, the Boeing 757, equipped with leather seats and in-flight entertainment system, including television at every seat. Song competed with JetBlue on specific routes on the east coast (Wynbrandt, 2004, pp. 225-227).

In February 2004, United launched Ted. Ted was launched to compete with Frontier Airlines in Denver, and operated to 23 destinations in the US, including Puerto Rico and Mexico. The only difference with Ted, compared to the other carriers, is that Ted operated to the airlines hubs in Chicago, Denver, San Francisco, and Washington-Dulles International Airport. Ted also operated with a single fleet type, but provided no individual in-flight entertainment (Wynbrandt, 2004, pp. 227-228).

These low-cost subsidiaries reduced the market penetration and profit potential for low-cost, low-fare, new-entrant airlines. By avoiding service to the dominant hubs (except for Ted), the subsidiaries could contain the threat while having minimal effect of the legacy carriers’ market power (Chowdhury, 2007, p. 21).

The low-cost subsidiaries had major limitations. Union contract limited their growth, and even though the cost base of the subsidiary was lower than the legacy carrier, they were higher than the traditional low-cost carriers they were founded to compete against. MetroJet and United Shuttle ceased operation soon after September 11^th, Delta Express was replaced by Song in 2003, Ted ceased operation in 2009, and Song was folded into Delta in 2006 (Chowdhury, 2007, pp. 21-22). The author believes that Song’s absorption into Delta was the key to Delta’s recent success in enhancing their product, and making their exit from bankruptcy more successful in 2007.

Specialty Carriers

Two airlines that have difficulty being classified are: Alaska Airlines and Hawaiian Airlines. Both airlines serve a targeted area of the United States that remains unserved by other carriers. Alaska and Hawaiian provide a mix of short-haul linking smaller communities and long-haul service connecting the United States to the airlines’ hubs in Seattle and Honolulu (Wittman & Swelbar, 2013, p. 15).

Alaska however, has started to change their network in the past six years. Alaska’s average itinerary distance increased by 29% from 2007-2012, indicating an increase in long-haul service. With the purchase of Virgin America, it is expected that the airline will continue to see a steady increase in this market (Wittman & Swelbar, 2013, p. 15).

The result of the longer itinerary distances, Alaska’s one-way fares have increased by 15%. Hawaiian’s fares have risen by 12%, however Hawaiian’s average itinerary distance has fallen by 7%, as the airline has eliminated unprofitable long-haul service (Wittman & Swelbar, 2013, p. 15).

The Ultra-Low Cost Carrier

In the late half of 2000, the airline industry saw the emergence of a new breed of low-cost airlines with a very different business model than the traditional low-cost carriers. Carriers such as Allegiant Air, Spirit Airlines, and Sun Country focus on providing infrequent service to smaller airports in multi-airport regions. These airlines also provide service to airports that had no existing commercial air service, to which they serve only a few times a week (Wittman & Swelbar, 2013, p. 16).

The “ultra-low-cost” carriers stepped in to the smaller airports to provide service to vacation destinations, such as: Orlando, Phoenix, Las Vegas, Atlantic City, and Honolulu. These carriers provide heavily discounted base fares, often packaging a flight with hotels, car rental, or vacation packages (Wittman & Swelbar, 2013, p. 16).

Ultra-low-cost carriers rely more on ancillary revenue as a significant portion of the full travel price. While the fare of a ultra-low-cost carrier is often very low, passengers may pay additional fees to check-in, check bags, speak to a customer service representative, or for a carry-on bag on some airlines (Wittman & Swelbar, 2013, p. 16). As a result of these extra fees, the author would like to caution that looking at the base fare of the ultra-low-cost carriers, may present a skewed picture of the total passenger cost if ancillary fees are not taken into account.

Ancillary revenue is inconsistent and not tied to specific, individual itineraries. There is currently no known data as to how much an average ultra-low-cost passenger pays in ancillary services. Adding the ancillary fees to average fares would assist in making a comparison to the total passenger itinerary cost between the ultra-low-cost carriers and other carriers, however, without that data, comparisons can only be made on base fares (Wittman & Swelbar, 2013, p. 16).

The ultra-low-cost carriers pricing strategies and competitive advantages are diminished some due to consumer advocates being successful in passing legislation which require airlines to display the full cost of travel, both base fares and ancillary fees combined on all airline distribution systems, and travel booking websites (Wittman & Swelbar, 2013, p. 16).

Impact of September 11 on the Industry

The events of September 11, 2001 forced the United States airline industry into a deep recession. Legacy carriers threw in the towel on fighting the competition of the low-cost carrier and instead focused on aggressively cutting their domestic operations in order to cut losses and reduce costs. In this process, the legacy carriers made strategic errors that low-cost carriers used to their advantage (Chowdhury, 2007, p. 24).

Low-cost carriers emerged from September 11^th strong and resilient, where most of the legacy carriers emerged weak and many had to declare bankruptcy. Domestic carriers reduced flights by 20 percent and laid off an average of 16 percent of their workforce in the weeks following the attack. Layoffs can have a negative impact for organization performance. Organizations experience the effects of deteriorating profitability, innovation, product quality, after downsizing, however in this instance, this was not the case (Chowdhury, 2007, p. 24).

Continental and American Airlines had the least amount of layoffs of the legacy carriers. US Airways laid off 20 percent of its workforce, which was the highest in the industry (Chowdhury, 2007, p. 24). The correlation between layoffs and performance is clear in the airline industry, post September 11^th.

Continental and American Airlines were the only two legacy carriers that did not have to go through bankruptcy proceedings during this period. US Airways went through bankruptcy, twice, before being purchased by America West in 2006. Southwest Airlines was the only airline that made an operating profit during 2001 (Chowdhury, 2007, pp. 24-25).

Legacy carriers were forced to withdraw aircraft from their fleet and place them into temporary storage, as well as defer delivery of new aircraft. The cost of owning or leasing aircraft was reduced substantially, and low-cost carriers such as: AirTran, JetBlue, and Southwest took advantage of these price reductions of new aircraft, and placed massive orders for new aircraft (Chowdhury, 2007, p. 25).

As the legacy carriers reduced capacity to cut costs during this period, the low-cost carriers moved quickly into large airports (Denver, San Francisco) and took over various airport assets (terminals, gates, and hangars) to break the monopoly of the dominant legacy carriers at these various hub airports (Chowdhury, 2007, p. 25).

During this period, the cost of aviation fuel increased two and a half times from 77 cents a gallon to $1.93 a gallon between 2001 and 2006. Airlines, not only in the United States, but around the world introduced fuel surcharges to cover the extra cost of fuel. In order to reduce the volatility of the fuel price fluctuations, airlines began to start hedging fuel prices, which resulted in lower ticket prices for passengers (Chowdhury, 2007, pp. 25-26).

However, due to the reduction in ticket prices because of hedging, many carriers in the United States had operating losses which included several low-cost carriers, such as: Frontier and JetBlue. This enhanced the difficult recovery process for the legacy carriers, and made the legacy carriers weak in their balance sheets (Chowdhury, 2007, p. 27).

In the years following September 11^th, the low-cost carriers have increased their market share, and the legacy carriers have made little progress in reducing the cost gap with the low-cost carriers, despite wage concessions and cost saving measures.

Winglets

Airlines looking to save money on fuel expenses, while improving range and performance of existing older and newer aircraft looked to Aviation Partners Boeing for their new design, the winglet. More than an aesthetically pleasing design feature, this design feature is among aviation’s most visible fuel-saving performance-enhancing technologies (“Winglets Save Billions of Dollars in Fuel Costs”, 2017).

In 1999, Aviation Partners Boeing (APB) was formed, which was a partnership with Seattle based Aviation Partners Inc., and the Boeing Company. The goal of the combined company, to equip Boeing Business Jets, a 737 derivative, with Aviation Partners’ take on the NASA-proven winglet technology: Blended Winglet. In 2000, the blended winglets were certified for use on the Boeing 737-700, and the Boeing 737-800, in 2001 (“Winglets Save Billions of Dollars in Fuel Costs”, 2017).

The motivation behind all wingtip devices is to reduce induced drag, which saves on fuel costs. Induced drag is due to the effects of generating lift, and in general, wings will produce air motion as a result of generating lift. The motion is characterized by downward flow between the wingtips, and the upward flow outboard of the wingtips. The wing, in turn, flies in a downdraft of its own making, and thereby the lift vector is tilted slightly backward. Blended winglets are upward-swept extensions to the airplane wings (Freitag & Schulze, 2009).

Blended winglets are not cheap. The blended winglet set cost more than $1 million per aircraft to install, and add several hundred pounds an aircraft (Karp, 2014). Many scholars and industry experts say that the winglets pay for themselves in a few years with fuel savings (Karp, 2014).

Blended winglets save the airlines about 4 percent in fuel per leg (Karp, 2014). This has led to savings of 92,000 gallons of fuel per airplane, per year, and the winglet has led to improved performance which has led to increased payload capacity at smaller airports that are “takeoff-limited” (Freitag & Schulze, 2009). The 8-foot high winglet adds about 5 feet to the airplane’s wingspan, and allows the 737-700 to fly up to 115 nautical miles farther, and reduce fuel burn (“Southwest Airlines Boeing 737-700 Fleet Takes Wing with Sleek New Look – Aviation Partners Boeing to Provide 169 Blended Winglets Shipsets”, 2003).

In November 2003, Southwest Airlines took delivery of their first Boeing 737-700 with the blended winglet technology installed, in 2001, American Trans Air took delivery of the first Boeing 737-800 with blended winglet technology (“Southwest Airlines Boeing 737-700 Fleet Takes Wing with Sleek New Look – Aviation Partners Boeing to Provide 169 Blended Winglets Shipsets”, 2003).

Since the first installation of the blended winglet by Southwest Airlines in 2003, and American Trans Air (later purchased by Southwest Airlines), it has been estimated that airlines have saved more than 2 billion gallons of fuel in 2010, and in 2014 it is estimated that blended winglets could save 5 billion gallons of fuel, which will also lead to a reduction in carbon emissions. The airlines have also seen an increase in range of 5-7% due to the overall reduction in drag (Rajendran, 2012, p. 6). To install the winglets, Southwest Airlines planned for a 7-day out-of-service time for each aircraft, however Southwest was able to reduce that time frame to 3 or 4 days. Southwest also benefited from increased stage lengths due to the increase in takeoff gross weight (TOGW) (Assessment of wingtip modifications to increase the fuel efficiency of Air Force aircraft, 2007, pp. 60-65).

The success of the 737-700 modification motivated Southwest to initiate a proposal for older 737-300 aircraft. The consequence of this modification was that the 737-300 lacked a suitable wing structure. This would cause an increase in weight to the aircraft, and thus decreased the projected fuel saving to 2.6 percent for 500 nm. stage and 4.4 percent for a 2,000 nm. stage, and could save up to 100,000 gallons of fuel per year, and the legacy carriers started to notice these improvements (Assessment of wingtip modifications to increase the fuel efficiency of Air Force aircraft, 2007, pp. 60-65).

American Airlines decided in 2004 to add winglets to its long-range fleet of 757-200 aircraft. To study the impact, American installed one set of winglets a single 737-800 aircraft. Prior to the installation, American’s 737-800 was operating at a +2.2 percent fuel burn over the specification set by Boeing. This was worse than the design fuel burn from Boeing. In October 2005, American began operating their 737-800 with blended winglets, and in December 2005, they released their only 757-200 with blended winglets into service (Assessment of wingtip modifications to increase the fuel efficiency of Air Force aircraft, 2007, pp. 60-65).

American saw immediate results with the two aircraft that they released into service with the blended winglet. The fuel savings realized on the 737-800 aircraft was 3.2 percent, when compared to a non-winglet 737-800, and a savings of 3.3 percent on a 757-200 aircraft. In addition, American noted no changes in the flying qualities, and no changes were needed to flight training devices, only updated technical manuals (Assessment of wingtip modifications to increase the fuel efficiency of Air Force aircraft, 2007, pp. 60-65).

Other legacy carriers noticed this improvement in performance, and cost savings. Ron Baur, fleet vice president at United Airlines stated “We have the philosophy: Put them on everything that we can” (Karp, 2014). Delta airlines began installing winglets on their fleet in 2008, which allowed Delta to “examine new market possibilities for our customers, and add to our long list of environmental initiatives, which include a focus on fuel savings” (“Delta Air Lines to Install Winglets on Three Aircraft Types”, 2007).

Sharklets are Airbus’ response to the blended winglets, and the low-cost carriers wanted to have the same cost savings as the legacy carriers with Boeing aircraft. Airbus claimed that the sharklet would reduce fuel burn up to 3.4 percent, which would equate to a fuel savings of 1.3 million gallons a year (Rajendran, 2012, p. 6). The sharklet is an option for current retrofit option on certain Airbus A319, 320, 321 customers, and are a standard feature on the Airbus New Engine Option (NEO) (Karp, 2014). JetBlue Airways, was the first U.S. operator to retrofit sharklets on the Airbus A320 aircraft in 2013 (Unveiling the First A320 Sharklets in the U.S., 2013). Since then, carriers such as Spirit and Virgin America have retrofitted some of their Airbus aircraft with sharklets, and come as standard delivery of current engine option (CEO) A319, A320, A321 aircraft.

Maintenance Outsourcing as a Cost Saving

Thousands of mechanics from all over the world work on U.S. commercial aircraft. Foreign repair stations are located in Canada, Mexico, Central America, and Asia, as well as several maintenance repair stations in the United States (Mathieu, 2010).

Many reasons exist as to why an airline contracts with independent facilities to perform maintenance. Airlines may not have the personnel or equipment to complete projects or heavy modifications, and newer airlines may not have the capital to setup a maintenance operation, whereas independent facilities may be able to perform the same service at a lower cost. Deregulation, recessions, lower fares, and higher costs have forced carriers to keep their maintenance capabilities on the lean side, and rely on independent facilities (Wensveen, p. 249). While air carriers outsourced maintenance in one way or another after deregulation, the concerns of the quality of the work being performed became evident in June 1995.

In June 1995, ValuJet flight 597 suffered from an engine failure as the plane was rolling down the runway in Atlanta. The shrapnel from the engine ripped a fuel line and the engine, as well as the cabin caught on fire. One crewmember and five passengers suffered minor injuries. The engine was recently overhauled in 1991 by a Turkish repair shop, which missed a crack in the engine (Mathieu, 2010).

The National Transportation Safety Board (NTSB) investigation of the accident concluded that the crack probably would have been discovered and repaired if the Turkish repair shop had required the same rigorous record-keeping as U.S. maintenance facilities (Mathieu, 2010).

In May 1996, ValuJet flight 592 crashed in the Florida Everglades due to a fire onboard the aircraft caused by 100 expired chemical oxygen concentrators being improperly loaded in the cargo bin by ValuJet outsourced company, SabreTech, which violated FAA regulations regarding hazardous material transportation in the cargo bin (Langewiesche, 1998). Instead of properly securing the firing pins, SabreTech employees duct-taped the safety cords around the canister, and indicated on the cargo manifest that the canisters were empty (Langewiesche). All 110 passengers and 5 crew were killed in the crash.

In January 2003, Air Midwest flight 5481 crashed in Charlotte, North Carolina killing all 19 passengers and 2 crew onboard. Independent contract mechanics, certified by the Federal Aviation Administration (FAA), and working for a non-certificated company, completed maintenance on the aircraft the day before the accident. Mechanics incorrectly adjusted a flight control system that was determined to be a contributing factor in the cause of the crash. The NTSB determined that also contributing to the accident was the lack of oversight of the work performed by the non-certificated maintenance facility (DOT, 2007).

Many airlines in the United States have faced financial issues over the past decade, including bankruptcies. Airlines, even with the accidents mentioned above continue to outsource maintenance and material movement for one reason: cost. In 2003, airlines outsourced 34 percent of heavy maintenance, which includes heavy maintenance, a process which could take weeks. In 2007, that rose to 71 percent. These numbers could be higher because the FAA only requires airlines to identify the top 10 stations they use most often for major repairs, and due to financial constraints airlines could, and do change vendors for a small difference in price, which puts more pressure on these vendors (Mathieu, 2010).

The concern in the industry is that maintenance shops located outside the United States are difficult to monitor. There are 700 FAA approved foreign repair shops in 70 countries. The FAA is required to monitor and inspect all these facilities on a regular basis (Hedlund, 2008). Airlines can, however, use non-certificated repair stations that are only inspected by the airlines that use them and not the FAA. Mechanics at these stations must follow the airline’s manuals and guidelines (Mathieu, 2010).

The industry’s focus on cutting costs has eclipsed its commitment to safety. Airlines are outsourcing maintenance more now than ever before, however the FAA’s oversight of certificated repair stations is inadequate, at best. In the case of non-certificated repair stations, there is no oversight (Kendal Van, 2007, pp. 657-658).

While this section does not distinguish a difference between the low-cost carriers and the legacy carriers, the author would like to note that both sets of airlines participate in this practice. Maintenance outsourcing is a common practice in the airline industry to reduce costs, which are in turn, passed on to consumers.

Impact of the Low-Cost Carriers on Ticket Prices

To counter the threat of low-cost carriers, the legacy carriers designed sophisticated revenue management software to separate the leisure passenger from the business passenger. This allowed the legacy carriers to optimize revenue from every passenger.

American Airlines was the first legacy carrier to implement revenue management software, and this was soon replicated by all the other legacy carriers’. The strategy of price discrimination became a very effective tool in the legacy carriers’ fight over the low-cost carriers (Chowhdury, pp. 17-18).

Airport Fare Impact

The low-cost carriers had a statistically significant impact on airport average prices in 2012. Vacation destinations had a significant negative impact on fares. Spirit’s low fares modeled on a zero-frills model, like that of Allegiant, exerted a price reduction of $31 on the fares of a given airport in 2012 (Field, 2016, p. 14).

In 2007, both Southwest and JetBlue had a strong negative impact on average prices with Southwest averaging a $63 reduction in airport specific fares, and JetBlue had a reduction of $45. It is worth noting that this was prior to the wave of industry-wide consolidation. During this period, the legacy carriers were weak, and trying to cut costs that allowed the low-cost carriers to attain substantial pricing advantages over the earlier part of that decade (Field, 216, p. 13).

As reported by Sidney Field’s 2016 regression on airport ticket prices from 2007 to the third quarter of 2015, both JetBlue and Southwest had a significant impact on ticket prices. JetBlue had a reduction of $38 to be surpassed by Southwest’s $43. Allegiant had the greatest impact on airport fares by $51, however the author would like to caution that Allegiant does not serve some of the major airports that the traditional low-cost carriers serve (Field, 2016, pp. 14-15).

Route Fare Impact

While fare impacts on airports have been explored and researched, head-to-head competition occurs on certain flights between common origins and end points.

In Field’s research of fare impacts by routes in 2016, the dependent variable was the mean fare on an itinerary over two unique endpoint airports. Field removed average fares that were less than $20 to eliminate flash fare sales and super-low marketing deals. Vacation destinations do not have a material impact on the carriers’ differences in fares (Field, 216, pp. 14-18).

Results from the third quarter 2007 indicate that the low-cost carrier effect of reducing fares on airport pair routes was healthy and included a strong impact from Southwest Airlines. Southwest’s presence on a route was associated with a $34 reduction in mean route fares, where JetBlue was associated with only a $24 reduction. When Frontier Airlines is taken into account, the airline was associated with a fare increase of $29, while Allegiant was associated with a $99 reduction in fares on comparable routes or same route pairs that it operates. Spirit Airlines was associated with a fare decrease of $17, and Alaska Airlines caused a fare increase of $36 (Field, 216, pp. 14-15).

With third quarter 2012 data, there was still a solid fare reduction where low-cost carriers were present. Southwest was associated with an $8 fare reduction, JetBlue with a $31 fare reduction, Spirit with a $34 fare reduction, and Allegiant with the largest impact of a $135 reduction in fares. Frontier had a $3 increase in fares, and Alaska with a $44 increase in fares on routes. The addition of an extra major carrier on a route, according to Field’s research, was associated with a $28 fare decrease. Field’s research shows that in 2012, the impacts were significant, with the exception of the impact of Frontier (Field, 216, pp. 14-17).

In 2015, the presence of JetBlue on a route was associated with a $34 reduction in fares, where Spirit and Allegiant had a reduction of $46 and $158 respectively. The Southwest effect on route fares returned to 2007 levels with a reduction in route fares of $24. Frontier, two years after the airline completed its restructuring of a ultra-low-cost carrier, shows an increase of route fares by $21, and Virgin America, now a significant competitor on certain routes, added a $41 increase on route fares. Field’s research shows that in 2015, the impact of adding an extra major carrier on to the route, reduced fares by $19 on average (Field, 216, pp. 16-17).

The airport specific route-fare results indicate that the presence of JetBlue, or the other three ultra-low-cost carrier’s (Allegiant, Frontier, and Spirit) are associated with a larger route-fare reduction than Southwest’s presence on the same routes. Allegiant’s large value is likely related to the fact that it directly competes with few other carriers on routes, and exclusively oriented to the leisure markets of rural areas and vacation destinations such as Florida and Las Vegas. Allegiant also realizes significant income from ancillary fees (Field, 216, pp. 16-17).

A significant external factor on airfares on both airport specific and route specific fares has been the 2014-2016 fall in oil prices if compared to the same period of 2010-2012. This fall in oil prices have saved the airline industry large amounts of costs, which has resulted in exceptionally high profits and reinvigorated pricing competition in pursuit of market share (Field, 216, p. 17). The author believe that the data supports this statement by the decrease in fares evidenced from the third quarter 2007, to year end 2015.

While data from 2016 still outstanding, the data contained in this section show that low-cost carriers have an effect on prices that is significant. While the domestic airline industry changed by the close of 2013 with the merger of American Airlines and US Airways forming the world’s largest airline, this merger on its own would not cause the reduction in fares that was evident by the close of 2015. The reappearance of the Southwest effect is noteworthy. The return of the Southwest effect is most likely tied to a major part of the industries return to profitability.

The reduction in fuel prices have given the low-cost carriers an opportunity to compete on price, and higher profits, while the legacy carriers try to maintain “capacity discipline.” Many more consumers can afford to fly today because of the business model of the low-cost carriers. While the industry is heavily consolidated, the impact on its pricing has been affected by a drop in input prices, which resulted in stronger financial performance. This, the author believes, resulted in a renewed competitive nature of the industry.

The Southwest Effect

With deregulation, Southwest Airlines is the fastest growing, most profitable airline in the United States. In the top 100 domestic markets, which involve over a third of the total number of domestic travelers, Southwest is the dominant airline, and carries more passengers than American, Delta, and United in the same markets. Southwest is known for its high level of customer service, low fares, and high level of on-time arrivals (Wang, 2005, p. 15).

The “Southwest Effect” is a term that was coined by the United States Department of Transportation in 1993 (Bennett & Craun, 1993, p. 2). The Southwest effect is based around three principles a) passenger counts in a particular market should increase with Southwest’s presence; b) when Southwest enters a market with multiple airports, the number of passengers that fly into the competing airport should decrease; c) Southwest’s presence in a market should lower the fares for their competitors to remain in competition (Wang, 2005, p. 16).

One major difference in the operation and structure of Southwest is that while other major carriers operate on a hub and spoke system, Southwest operates “in short haul markets where it can provide frequent service” (Bennett & Craun, 1993, p. 3). Compared to other major carriers, Southwest’s operating costs are about 50 to 70 percent lower, and these lower costs make it very difficult for other competitors to remain in the markets served by Southwest (Wang, 2005, p. 16).

Herb Kelleher and Rollin King distinctively copied Pacific Southwest Airlines (PSA) model of investing in a positive, helpful, and happy corporate culture, which drives customer loyalty. Southwest was founded with the philosophy of investing in their employees’ well-being, to build a positive rapport with their passengers and keep labor productivity high (Field, 2016, p. 5).

Paying their employees industry competitive wages and cultivating a strong team effort is one of the many philosophies that Southwest established as a core value. Creating a positive travel culture was essential in creating a different travel product. While PSA already demonstrated that happy employees will lead to happy customers, the goal was to gain repeat customers. Positive corporate culture was hard to replicate by the legacy carriers, which had their own long developed corporate culture which was not based on friendly, personality based service, which lead to the Southwest establishing a no-frills service model (Field, 2016, p. 5).

Southwest was also the pioneer of more efficient fleet planning and aircraft utilization. Southwest utilized a standardized type of aircraft, and minimum turn times. The benefit of using a common fleet type are lower maintenance costs, as they do not need any different parts than for the type, lower network costs because any aircraft in the Southwest fleet can fly a Southwest route, and lower crew costs as every pilot and flight attendants can fly on every Southwest aircraft. This allows for a unified, flexible operation across the Southwest airlines’ network (Field, 2016, p. 6).

The “20-minute turn” was a development by Southwest, which allowed the airline higher aircraft utilization. Sitting on the ground, an aircraft is not earning money. Southwest created a scripted turnaround procedure to minimize ground time, thus allowing the airline to operate at a higher utilization rate than the legacy carriers. The airline relied on open seating for faster boarding and deplaning, and not carrying cargo, aside from checked bags (Field, 2016, p. 6).

The JetBlue Effect

JetBlue, the second-largest low-cost carrier in the United States, operates predominantly longer-haul, coast-to-coast, and leisure routes, with a significantly smaller presence in the center of the United States compared to Southwest. JetBlue however, operates significant hubs in New York-JFK Airport, Boston, and Fort Lauderdale (Field, 2016, p. 7). JetBlue offers free live-tv entertainment, free wifi, and free unlimited snacks and non-alcoholic drinks on all flights.

The “JetBlue Effect” was recently summarized in 2014 a) on average, prices in a domestic market drop 50 percent when JetBlue enters, which is significantly more than any other airline; b) on some routes, fares have dropped by as much as 67 percent; c) JetBlue has the highest impact on specific international markets lowering fares by about 26 percent (Surry, 2014).

The JetBlue effect does not only reach to fares, it reaches to how the airlines corporate culture has also changed the legacy carriers. David Neeleman, founder of JetBlue developed five core values at JetBlue: Safety, Caring, Integrity, Fun, and Passion (Wynbrandt, 2004, pp. 213-215). These founding values, as well as the crewmembers are the core of the “JetBlue Experience.”

JetBlue teaches leadership principles to all crewmembers, explaining that they define how leaders are supposed to act. JetBlue’s leadership inspired five-golden rules 1) do the right thing; 2) communicate with your team; 3) inspire initiative; 4) inspire innovation; 5) inspire greatness. If a crewmember does not feel that their leadership is living up to the values, they can escalate their concerns up the chain of command until all parties are satisfied that the issue has been resolved (Wynbrandt, 2004, pp. 218-219).

JetBlue has been very big in Social Responsibility, giving back to the community it serves. Community efforts encourage crewmembers to volunteer, and in 2012, the top five volunteers at JetBlue gave 4,500 hours of volunteer time (Kanani, 2012). JetBlue participates in playground building, education outreach, Autism awareness, and carbon offset purchasing of trees for New York, JetBlue is one of the airlines that has “changed the thinking of social responsibility at a corporate level” (Kanani, 2012).

Consumer Perception

It can be said that low-cost carrier passengers have lower expectations for the service quality they receive because they have paid less for their ticket. This theory has shown that passengers that pay higher fares for their tickets may have higher standards for service on legacy carriers. Customers that pay more for their tickets may have a higher probability to complain than low-cost carrier passengers (Wittman, 2014, p. 70).

Legacy carrier’s and low-cost carriers’ have fundamentally different products. Legacy carriers have premium cabins and more connecting options to flights to other cities, where low-cost carriers generally have no premium cabin, and less connecting options. Business passengers may be more likely to complain than leisure passengers because of the price of their tickets, and their higher quality of service expectation (Wittman, 2014, p. 70). The author reviewed the data from the 2016 Air Travel Consumer Report, published by the Department of Transportation for this paper, and complaints between business travelers and leisure travelers are not separated in the data of the report, thus adding to the differences between the two carriers.

It is possible that the differences between complaint rates are not due to characteristics of their passengers, but are due to the differences between the carriers themselves. Southwest Airlines is famous for implementing a “corporate culture that emphasizes service and employee teamwork” (Wittman, 2017, p.70). A sympathetic reaction, or even a friendly smile at the point of service failure, can go a long way towards mitigating complaint rates (Wittman). The author believes that more research is needed to differentiate the customer service levels, and styles between the legacy carriers and the low-cost carriers, however airlines that spend both time and money towards improving customer service, and reducing the number of complaints they receive tend to fare better than the carriers that do not.

Conclusion

The United States airline industry is ever evolving. With the recent merger of US Airways and American Airlines, the industry has become more consolidated and competition has increased on fares, amenities, and performance. The author recently reviewed an article for this paper that stated American Airlines was introducing “basic fares,” a model of the no-frills fares the ultra-low cost carriers provide, the last of the legacy carriers to add this option, after United and Delta Airlines. This is one, in many steps that the author of this paper believes the legacy carriers are attempting to match the low-cost carriers basic ticket option to entice the customers that want low ticket prices with no frills to help reduce their costs, increase revenue, and remain competitive.

Since the deregulation act, the airline industry in the United States has taken many twists and turns, as evidenced in this paper. The low-cost carriers, such as Southwest, made a very noisy entrance into the industry, and turning heads in the process, whereas PSA operated mostly in California during the Civil Aeronautics Board era, providing low fares and rarely operating outside the state. The liquidation of several other legacy carriers, such as Pan Am, Eastern, PeoplExpress, have left voids in the United States that were looking for air service, and opened the door for other low-cost carriers, such as: JetBlue, Frontier, Virgin America, AirTran Airways, and Spirit.

Southwest and PSA were pioneers that caused the legacy carriers to change their ways. Southwest and JetBlue were the first to introduce a corporate culture, empowering their employees to do what is best for the customer, and showing that this method works by reduced complaint levels compared to their legacy carrier counterparts. As the popularity in the low-cost carriers rose, fares began to drop, and in 2015, fares dropped on average ranging from $21 to $154, and legacy carriers have had no choice to respond.

With the effects of September 11^th still fresh in the minds of the airline industry, and rising costs and a decline in travel due to fear, the airlines were looking for a way to reduce costs and improve performance, getting the most out of their aircraft. Southwest Airlines and the now defunct American Trans Air (ATA) turned to Aviation Partners Boeing for their winglet development. Southwest and ATA were the first carriers in the United States to install winglets on their Boeing aircraft, and were quick to prove to the industry their savings. Soon the legacy carriers noticed this savings and were quick to implement them on their own aircraft. JetBlue was the first to adapt and retrofit the Airbus A320 with their version of winglets, sharklets. Quickly not only did other low-cost carriers retrofit their aircraft with these, but the legacy carriers started to retrofit as well.

The impact of the low-cost carrier in the United States can be summarized by one word: change. The legacy carriers have already began to respond to the low-cost carriers by operating more point to point flights in their network, however the author believes that if the legacy carriers can continue on this trek, they can reclaim a share of the low-cost carrier’s market share on the popular point-to-point route network.

The second recommendation that the author would like to make for legacy carriers is one they have already implemented, the “basic fares” concept. As the revenue data in this paper pointed out, lower fares help drive down airport fares, and the low-cost carriers are the most successful. While legacy carriers are new to this concept, if they continue on this concept the legacy carriers can be successful in a once low-cost carrier market.

It is difficult to evaluate where the airline industry in the United States will be in five years, however, the future of the airline industry in the United States, and how the low-cost carriers will continue to force the legacy carriers to change their business practices will be exciting to see.

References

Assessment of wingtip modifications to increase the fuel efficiency of Air Force aircraft. (2007). Washington, D.C.: National Academies Press.

Bellamy, W., III. (2016, August). Early Adopters of ADS-B: UPS and JetBlue. Retrieved March 01, 2017, from http://interactive.aviationtoday.com/avionicsmagazine/october-november-2016/early-adopters-of-ads-b-ups-and-jetblue/

Bennett, R. & Craun, J. (1993). The Airline Deregulation Evolution Continues, The Southwest Effect. Retrieved: March 25, 2017, from http://www.dtic.mil/get-tr-doc/pdf?AD=ADA299083

Chowdhury, E. (2007). Low Cost Carriers: How Are They Changing the Market Dynamics of the U.S. Airline Industry (Unpublished master’s thesis). Department of Economics / Carleton University. (2007). Retrieved February 10, 2017, from https://carleton.ca/economics/wp-content/uploads/he-chowdhury-erfan.pdf.

Delta Air Lines to Install Winglets on Three Aircraft Types. (2007, June 19). Retrieved March 25, 2017, from http://news.delta.com/delta-air-lines-install-winglets-three-aircraft-types

Field, S. (2016). Southwest Airlines and the Impact of Low-Cost Carriers on Airline Ticket Prices. Retrieved March 26, 2017, from https://www.bentley.edu/files/2016/10/26/Final%20Fall%202016%20Journal%20Field.pdf

Freiberg, K., & Freiberg, J. (1998). Nuts!: Southwest Airlines’ crazy recipe for business and personal success. New York: Broadway Books.

Freitag, W., & Schulze, E. (2009, March). AERO – Blended Winglets Improve Performance. Retrieved March 01, 2017, from http://www.boeing.com/commercial/aeromagazine/articles/qtr_03_09/article_03_1.html

Gittell, J. H. (2005). The Southwest Airlines way: using the power of relationships to achieve high performance. Retrieved March 25, 2017, from https://www.theclci.com/resources/thesouthwestairlinesway.pdf.

Goetz, A. R. and Sutton, C. J. (1997), The Geography of Deregulation in the U.S. Airline Industry. Annals of the Association of American Geographers, 87: 238–263. doi:10.1111/0004-5608.872052

Hedlund, P. (2008, September 30). Airplane Maintenance Outsourcing Tests Bounds of Safety. Retrieved March 03, 2017, from https://www.hg.org/article.asp?id=18872

Langewiesche, W. (1998, March 01). The Lessons of ValuJet 592. Retrieved March 08, 2017, from https://www.theatlantic.com/magazine/archive/1998/03/the-lessons-of-valujet-592/306534/

Pels, E. (2008). Airline network competition: Full-service airlines, low-cost airlines and long-haul markets. Research in Transportation Economics, 24(1), 68-74. doi:10.1016/j.retrec.2009.01.009

Rajendran, S. (2012). Design of Parametric Winglets and Wing tip devices – A Conceptual Design Approach. Retrieved March 25, 2017, from https://www.diva-portal.org/smash/get/diva2:547954/FULLTEXT01.pdf

“Southwest Airlines Boeing 737-700 Fleet Takes Wing with Sleek New Look – Aviation Partners Boeing to Provide 169 Blended Winglets Shipsets.” Advanced Materials & Composites News 7 July 2003. Business Insights: Essentials. Web. 28 Feb. 2017, from http://bi.galegroup.com.ezproxy.libproxy.db.erau.edu/essentials/article/GALE%7CA105189996?u=embry

Stalnaker, T., Usman, K., & Taylor, A. (2016). Airline Economic Analysis, For the Raymond James Global Airline Book. Retrieved March 25, 2017, from http://www.oliverwyman.com/content/dam/oliver-wyman/global/en/2016/jan/oliver-wyman-airline-economic-analysis-2015-2016.pdf.

Surry, P. (2014, April 22). JetBlue Has Biggest Competitive Impact on Airfare: Lowers Prices Up To 67% in Domestic Markets – Hopper Research. Retrieved March 31, 2017, from https://www.hopper.com/research/jetblue-biggest-competitive-impact-airfare-lowers-prices-67-domestic-markets/

U.S. Department of Transportation (1997), The Low Cost Airline Service Revolution, Washington D.C.

Unveiling the First A320 Sharklets in the U.S.! (2013, February 21). Retrieved March 25, 2017, from http://blog.jetblue.com/unveiling-the-first-a320-sharklets-in-the-u-s/

Wang, C. (2015, June 06). The Effect of a Low Cost Carrier in the Airline Industry. Retrieved March 25, 2017, from http://mmss.wcas.northwestern.edu/thesis/articles/get/548/Wang2005.pdf

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Winglets Save Billions of Dollars in Fuel Costs. (n.d.). Retrieved March 25, 2017, from https://spinoff.nasa.gov/Spinoff2010/t_5.html

Wittman, M. D. (2014). Are low-cost carrier passengers less likely to complain about service quality? Journal of Air Transport Management,35, 64-71. doi:10.1016/j.jairtraman.2013.11.008

APPENDIX A

COPY OF THE APPROVED RESEARCH PROPOSAL

Assessing the Impact of Low Cost Carriers

On the Legacy Carriers in the United States

by

Nathan J. Jablonski

A Research Project Proposal

Submitted to the Worldwide Campus

In Partial Fulfillment of the Requirements

of Course ASCI 490, The Aeronautical Science Capstone Course,

for the Bachelor of Science in Aeronautics Degree

Embry-Riddle Aeronautical University

February 2017

Abstract

The author is proposing an individual project which will evaluate the effect of low-cost carriers on the legacy carriers in the United States. The low-cost carrier grew from the Deregulation Act of 1978 in which airlines were free to compete on all aspects, including fares and service, and challenged the dominance of legacy carriers in innovation, and short haul markets. The author will demonstrate his knowledge in all program outcomes including and emphasis in: aeronautical science, aviation law and legislation, aviation safety, and aviation management and operations. The author will analyze the effect the low-cost carrier has had on legacy carriers, and provide a recommendation on how the legacy carriers can effectively compete with the low-cost carriers in the United States airline market.

 

Assessing the Impact of Low Cost Carriers

On the Legacy Carriers in the United States

Statement of the Project

 

The fundamental purpose of this project is to demonstrate understanding of the eleven program outcomes, and demonstrating how each one will fit into the final paper. This project is an individual capstone paper which is the final project for the Bachelor of Science in Aeronautics degree program.

Introduction

 

The United States airline industry was regulated by the Civil Aeronautics Board (CAB) until 1978, when President Jimmy Carter signed the “Airline Deregulation Act” which ultimately opened up the United States airline industry to competition. Airlines prior to deregulation, could only compete on inflight service and amenities, and not on fares, as fares were regulated by the CAB. With deregulation, the airlines were free to compete on all aspects, including fares and service, and ultimately gave birth to the Low-Cost Carrier (LCC) (Chowdhury, 2007, pp.1).

Low-Cost Carriers’ started to challenge the dominance of full service carriers in the short haul market. The LCC did this by providing low fares on short haul routes, as well as offered no frills such as inflight entertainment, meals, and in some cases, advanced seat assignments (Chowdhury, 2007, pp.1).

Legacy carriers have different management styles as compared to their LCC counterparts. The differences between the LCC and the legacy carriers will be explored in the first part of this paper. This includes the operating philosophies, employee engagement, safety views and operating costs, and fares. The second part of this paper will be examining the impact the LCC has had on the legacy carriers with regards to aeronautical enhancement and development (winglets), technology enhancements (ADS-B, e-Ticketing), what impact LCC’s have had on communities and how the legacy carriers have responded to the change, and how the LCC’s leadership structure has changed the airline industry.

 

Program Outcomes to be Addressed

Critical Thinking

“The student will show evidence of knowledge at a synthesis level to define and solve problems within professional and personal environments” (ERAU, 2017, pp. 12)

Critical thinking is identifying a problem and solving it in any environment. The author will demonstrate critical thinking through this paper by identifying what the environment of the United States airline industry before the dominance of low cost carriers, and what effect the low-cost carriers have had in changing the legacy carriers. The author will accomplish this through research of fare trends, labor costs, aircraft development and enhancement, maintenance costs and process development, routes, and market shares. The author expects to obtain the necessary information to meet this objective from scholarly articles, case studies, data published by the Bureau of Transportation Statistics, and several books written about the subject of low-cost carrier, airline management and legacy carrier performance: Nuts!, From Worst to First, and Flying High.

 

 

 

 

Quantitative Reasoning

“The student will show evidence of the use of digitally-enabled technology & analysis techniques to interpret data for the purpose of drawing valid conclusions and solving associated problems” (ERAU, 2017, pp. 14).

Quantitative reasoning is the application of quantitative concepts and methods to solve real world problems. To demonstrate this objective, the author will analyze costs basis’ between the low-cost carriers and legacy carriers before and after the entry, and expansion of the low-cost carrier model, as well as the pay differences between the low-cost carrier, and the legacy carrier.  Low Cost Carriers’ pay less than their legacy counterparts, but when profit sharing, stock options are added to this, the Low Cost Carriers’ pays more than the legacy carriers, which in turn, has caused the legacy carriers to examine this type of compensation (Airline Pilot Central, 2017). To accomplish this objective, the author will use data from the Bureau of Transportation Statistics, Airline Financial data, as well as various other media articles and websites to obtain the necessary data. To research and evaluate this data, the author will use data obtained from the Bureau of Transportation statistics website, reports such as: Price rivalry in airline markets: a study of a successful strategy of a network carrier against a low-cost carrier, Evolving Trends of U.S. Domestic Airfares: The Impacts of Competition, Consolidation, and Low-Cost Carriers, and airline financial data to research the objective as it relates to the topic.

Information Literacy

“The student will show evidence of meaningful research, including gathering information from primary and secondary sources and incorporating and documenting source material in their writing” (ERAU, 2017, pp. 15).

Information literacy objective is conducting meaningful research, and reporting, that specifically supports the purpose of this project. The author will utilize the Hunt Library research tools available to him, as well as case law from law libraries to examine past legal precedence, journal articles, scholarly websites, print media, and printed material to satisfy the information literacy requirement. This will be demonstrated through thorough research, using only quality, credible materials to help draw the conclusions in the final paper.

Communication

“The student will show evidence of communicating concepts in written, digital, and oral forms to present technical and non-technical information” (ERAU, 2017, pp. 16).

The communication objective is the effective and efficient communication of the capstone, and the subsequent presentation that supports the position on this project. The author will utilize Microsoft Word for the written portion of the capstone, and for the presentation, the author will utilize Microsoft PowerPoint. The author will further utilize the American Psychological Association (APA) format, and utilize the resources of the Capstone policy guide, to convey the final paper in the correct third person format. The final paper will have correct in-text citations, and properly referenced.

Scientific Literacy

“The student will show evidence of analyzing scientific evidence as it relates to the physical world and its interrelationship with human values and interests” (ERAU, 2017, pp. 18).

Scientific literacy is the application of critical thinking to the general scientific evidence that is used to support this research topic. The author will demonstrate scientific literacy by researching the operating characteristics of legacy and low-cost carriers, both at a technical level, as well as at a scientific leadership level. The author will need to research and examine the various operating philosophies, leadership structure, business model, and what operating model the respective groups see going forward. The author will examine various academic articles, such as: Airlines within airlines: An analysis of US network airlines responses to Low Cost Carriers, and print media such as: From worst to First, the turnaround of Continental Airlines to accomplish this objective. The author will also utilize airlines’ standard operating procedures (SOP), and information in textbooks from previous courses.

Cultural Literacy

“The student will show evidence of the analysis of historic events, cultural artifacts and philosophical concepts” (ERAU, 2017, pp. 19).

Cultural literacy is the knowledge and understanding, and application of history and the impact it has had on different cultural groups not only in aeronautics, but also the world. The author will demonstrate cultural literacy by researching and defining what impact the low-cost carrier has had on social change, market service (introducing or discontinuing), safety cultures, and business organizational cultures, and what impact this has made to the legacy carriers. The information that the author will need to research is the changes in business culture from before the dominance of the low-cost carrier, to today. Herb Kelleher, cofounder of Southwest, engaged in several culture waves that not only empowered employees, but made significant impact in the communities as well (Freiberg, 1998, pp. 102). The author will further need to research the changes in localities after the legacy carrier closed smaller cities, and what impact that decision had on the community. To research and evaluate the objective, the author will use printed media, and various reports from scholarly sources, such as: Low Cost Carriers: How are they changing the market dynamics of the U.S. Airline Industry, Evolving Trends of U.S. Domestic Airfares: The Impacts of Competition, Consolidation, and Low-Cost Carriers, and various books written about employee and community engagement with airlines, such as: Nuts!, From Worst to First, and Flying High, asit relates to the effect that carriers withdrawing and reintroducing service to markets has had on jobs, airport infrastructure, social and community change, as well as airport and community funding.

Lifelong Personal Growth

“The student will show evidence of the skills needed to enrich the quality of life through activities which enhance and promote lifelong learning” (ERAU, 2017, pp. 20).

The lifelong personal growth objective is about a compilation of knowledge, skills, and actions taken by individuals in the aviation industry overtime to advance one self’s position, and use it to their benefit. The author will identify operational differences between low cost carriers and major carriers, their operating philosophy, market share, community impact, and what economic impact these carriers have had on not only the community, but the country as well. The development of the person through this paper and subsequent research, and determining the impact that low cost carriers have had on the major carriers, and subsequent forecasted future of low cost carriers, will make the author a stronger contender for future leadership positions, not only within an airline, but also at aviation consulting firms. To correctly research and evaluate the objective, the author will use peer-reviewed and scholarly articles and journals.

Aviation/Aerospace/Aeronautical Science

“The student will show evidence of advanced concepts of aviation, aerospace, and aeronautics to solve problems commonly found in their respective industries” (ERAU, 2017, pp. 22).

The aeronautical science objective is an application of critical thinking to the specific aeronautical scientific evidence, such as: flight operations, human factors, flight operations, and flight physiology, that will be used to support this topic. The author will demonstrate the aeronautical science objective by researching the development, design, and impact the winglet has had on fuel savings, aircraft performance, and implementation costs as it relates to the low-cost and legacy carrier business model. Blended winglets offer operational and economic benefits. Block fuel savings has improved by 4 percent, and range has increased by 130nm on Boeing 737-800 aircraft. The increased performance allows increased payload capacity, especially at smaller airports that are “takeoff-limited” (Freitag & Schulze, 2009).  The information and data the author will need to obtain is: research on the design and development of the winglet, the cost of the design and implementation and what effect it has had on the business model, what performance impact the winglet has had on the aircraft, what implementation steps were taken for winglets and adding them to aircraft, and the future of the winglet. To correctly research and evaluate the objective, the author will obtain aeronautical science data and information as it pertains to winglet development from articles such as:AERO – Blended Winglets Improve Performance which evaluates the: cost, performance impact or enhancement, effect on the airlines, and the future of the program.

Aviation Legislation and Law

“The student will show evidence of basic concepts in national and international legislation and law as they pertain to the aviation, aerospace and aeronautics industries” (ERAU, 2017, pp. 23).

The aviation legislation and law objective is the application of critical thinking to the past, present and future local, state, federal, and international laws and regulations as it relates to aviation. To satisfy this objective the author will research and examine several pieces of legislation and laws that pertain to the effect of the low-cost carrier and legacy carriers. The Deregulation Act of 1978, slot control and perimeter rules will be many of the items the author will use to satisfy this objective, as well as the Wright Amendment and what effect the repeal had on the airline industry. In 2006, a deal was reached to repeal the Wright Amendment, however only 8 years later in 2014. During this time from repeal to enactment several conditions had to be met, including reduction of gates, and limits on long distance flying (Gulliver, 2014). To correctly research and evaluate the objective, and recommend any changes to existing laws or legislation that the author feels would benefit both groups, the author will use past course material, scholarly journal articles such as: Airline Network Competition: Full-service airlines, low-cost airlines and long-haul markets, and Competitive Responses of an established airline to the entry of a low-cost carrier into its hub airports, as well as past course textbooks, analyze the effect of the Deregulation Act, as well as the Wright Amendment, and policies on airport slots and perimeter rules.

Aviation Safety

“The student will show evidence of basic concepts in aviation safety as they pertain to the aviation, aerospace, aeronautics industry” (ERAU, 2017, pp. 24).

Aviation safety is the application of critical thinking as it relates to aviation safety and security, which includes an analysis and evaluation of any and all safety and security topics that is used to support this project. The author will demonstrate this objective by researching safety related incidents as it relates to the growth of the low-cost carrier and the impact safety related, as well as security incidents have had on the legacy carriers. The author will research key aviation incidents that have changed not only the legacy carrier’s, but the worldwide aviation industry. What effect maintenance outsourcing has had on the industry will be explored in this paper, and what was the impact on the outsourcing of maintenance had on Air Midwest 5481 crash (Mathieu, 2010). Incidents to be explored are: Air Midwest flight 5481, Colgan flight 3407, and PSA flight 1771, and ValuJet flight 592. The author will research the aviation accident reports such as: Aviation Safety: FAA’s Oversight of Outsourced Maintenance Facilities, scholarly articles, and media articles, such as: Outsourcing Safety: Airplane repairs move to unregulated foreign shops to see what the impact of these incidents were on aviation as it relates to the objective.

Aviation Management and Operations

“The student will show evidence of sound, ethical management principles within standard aviation, aerospace, and aeronautics operations” (ERAU, 2015, pp. 25).

Aviation management and operations objective is the critical thinking to specific topics of management of aviation operations, management techniques, concepts and procedures, that will be used to support this project. The airline industry can be a tough place: many competitors, price-sensitive customers, boom or bust cycle, unions, and powerful suppliers (Lucier, 2004). Herb Kelleher, the cofounder of Southwest Airlines, many would believe was the founder of “epithetical leadership” in the airline industry (Lucier). Herb Kelleher empowered his employees by trusting them. Trust the employees to inspire ownership, was one management style that Kelleher used to empower employees (Freiberg, 1998, pp. 107). The author will compare and contrast the management styles of both low-cost carriers and legacy carriers and what impact different leadership styles have had on the industry. The author will also examine the operating philosophies of both carriers and how development in technology and pricing have affected both types of carriers. The author expects that the information that will be required are: what was the leadership structure before the dominance of the low-cost carrier as it relates to the legacy carriers. Also, what innovation to the airline industry the low-cost carrier has brought or developed in the airline industry to help it succeed. The author will use several books written on the subject of airline leadership and development to assist in researching and evaluating the effect. The author will also use scholarly journal articles, such as: High-Level Employee Involvement at Delta Airlines, past course textbooks, airline standard operating procedure, and various printed books written on the subject of airline leadership and operations, such as:  Nuts!, From Worst to First, and Flying High to assist in determining what leadership and operating philosophies have helped in the growth of the low-cost carrier.

References

AIRLINE PILOT CENTRAL. (n.d.). Retrieved February 22, 2017, from http://www.airlinepilotcentral.com/

Chowdhury, E. (2007). Low Cost Carriers: How Are They Changing the Market Dynamics of the U.S. Airline Industry (Unpublished master’s thesis). Department of Economics / Carleton University. (2007). Retrieved February 10, 2017, from https://carleton.ca/economics/wp-content/uploads/he-chowdhury-erfan.pdf.

Embry-Riddle Aeronautical University. (2017). College of aeronautics: Undergraduate capstone policy guide. Retrieved from https://erau.instructure.com/courses/6179/pages/coa-undergraduate- capstone-policy-guide?module_item_id=17735

Freiberg, K., & Freiberg, J. (1998). Nuts!: Southwest Airlines’ crazy recipe for business and personal success. New York: Broadway Books.

Freitag, W., & Schulze, E. (2009, March). AERO – Blended Winglets Improve Performance. Retrieved March 01, 2017, from http://www.boeing.com/commercial/aeromagazine/articles/qtr_03_09/article_03_1.html

Pels, E. (2008). Airline network competition: Full-service airlines, low-cost airlines and long-haul markets. Research in Transportation Economics, 24(1), 68-74. doi:10.1016/j.retrec.2009.01.009