Learning Center
Plans & pricing Sign in
Sign Out

The Low Cost Airlines _LCAs_ and


									                                                    Wordcount: 6379

                        Tr 530

                      Umar Burki

                   Student # 010569

The Low Cost Airlines (LCAs) and their impact on Society

         The Low Cost Airlines (LCAs) and their impact on Society
Deregulated aviation market has lead to the emergence of LCAs. They offer very low prices
on high traffic routes causing huge problem for FSAs and bringing traditional Hub-Spoke
network under scrutiny as rising cost hampers FSAs operations and profitability. The
emergence of LCAs on the other hand, has helped saved the declining airline industry and
provided an alternate mode of air travel. LCAs have played a vital role in saving major and
secondary airports from financial problems after 11th September incident. Inconveniences and
uncertainties are the major drawbacks of LCAs along with some concerns about safety
measures. Society has a tough choice to make; Go for FSAs or fly cheap and pay opportunity
costs for it.

1.        Introduction

Airline industry has changed noticeably since the late 70s and one of the unexpected features
of “market liberalisation” and “deregulated aviation markets” in US and especially in the
European Aviation industry has been the emergence of Low Cost Airlines (LCAs) - airline
with no regulation on fare, entry and exit. The globalisation of the airline industry,
accompanied by the market deregulation in Europe and in parts of Asia, encouraged a
newfound vigour in a relative staid industry. These dynamics prompted the emergence of a
large number of price-based competitors, together with a fundamental restructuring of the
most exciting airlines companies and a consolidation of the airline industry. However, there is
one fundamental difference between the airline market of today and that of Europe in the
1980s or the US in the 1970s: alongside the larger traditional airlines and their strategic
partners, exist well-established low price alternatives (Lawton, 2002). These low price
alternatives are known as Low Cost Airlines. LCAs and their operational strategy have
attracted considerable attention since early 90s as leading world airlines, and especially major
US carriers faced declining growth with mounting financial losses. It might even become a
significant factor for the future of airline industry. While it is easy to identify the core features
of LCA business model, variations do exist.
The Southwest Airlines, USA is pioneer in introducing short-haul, point-to point low fare air
service in TX., USA. The Southwest Airline model-low cost/ low fare model (Lawton, 2002)
is widely accepted as the prototype model for any low cost airline. Major European LCAs i.e.
Ryanair, EasyJet, etc. follow this model. The model is based on:

         Short-haul routes
         Point-to point air route
         No frill services (no meals, no in flight entertainment, no advance seat selection, no
          frequent flyer points)
         Minimal debt servicing costs
         Standardised fleet (Boeing 737) with higher plane utilisation rate
         Use of cheap and secondary airports
         Cautious route expansion
         Ticket less reservation system (not in original Southwest model)

LCAs are predominantly point-to-point operators but use traditional HS network of air
transport (see,, websites of Ryanair,
EasyJet). Ticket less reservation is another feature which has emerged slowly but surely as

another permanent feature of LCA business model. Companies like Southwest Airline and
JetBlue in the US and Ryanair and easyJet in Europe offer a clear and proven cheap
alternative model of air transport. Their profit margins and return on assets are among the
highest in the industry and their cost structures and fare prices are forcing larger airlines to
restructure and rethink their value proposition.

Full Fare Carriers (FFCs) model (Lawton, 2002) is based on:

      Different prices for same route- based on class/services chosen
      Traditional base their strategy on hub-and-spoke system for filling their aircrafts
      Use primary airports
      Lower utilisation of aircrafts on shorter routes
      Mixed fleet (B-737, DC-10, Concordes, AB 310, etc.)
      Complex integrated service products (business lounges, frequent flyer programme, etc)
      FSCs have complex networks along with Union Baggage and entrenched working
      Booking through travel agents

LCAs and FFCs or Full Cost Airlines (FSAs) are in continues process of changing their
operating model in accordance with emerging market realities. LCAs are growing and their
combine capacity has nearly increased by 50% since year 2000 and continues to grow with 2-
digit growth rate. But this does not mean that LCAs have a major share in the European
market. Although LCAs have been able to grow 20% per year however, their combine market
share is not more than 7% of the total European market (Sparaco, 2002). But at the same time,
fierce market battle reign within LCAs and between LCAs and FSAs. Today, LCAs have
grown into a notable part of world aviation industry. Offering a quick ride with lowest
possible fare to desire destination are the key factor in their success. Being more cost-efficient,
better passenger load factor and low fares for the passengers, LCAs have helped in increasing
welfare gains as airlines become cost efficient due to competition. Research concerning
deregulation of US aviation market gives us a more comprehensive account in this area.
According to the studies conducted to study the effects of deregulation (Pindyck and
Rubinfeld, 1998) quote that as fares went down, consumers clearly benefited. With more cost
efficiency, producer surplus may have increased. The overall effect from deregulation has
been positive. Likewise, the gains to passenger in terms of reduced fares and service has been
large and at the same time, leads to an increase in traffic and market share of secondary
airports (Borenstein, 1989). LCAs new emerging market seems chaotic at times, but works in
the best economic sense; low cost and high profitability along with growing market share.
This new no frill market is centred on price sensitive business executives along with
passengers who are no more willing to pay the conventional fares. Every day new entrants
enter this market and bring a new dimension in this ever changing market. Analysts find it
difficult to make any precise predictions about this market. Some analysts consider it a
transitionary phase after deregulation of European aviation industry, while some consider it a
sudden enthusiasm of Europeans to fly low cost which might end up in uncontrolled capacity
leading to financial collapse (Sparaco, 2002). Easy accesses to cheap travel, growth in air
traffic, time saving factor, profitable airports and more jobs for the community are one of the
factors which supplement the phenomenal growth of LCAs. Some analyst calls it overhauling
of airline industry through market. Certainly, any industry that earns a mere 2.9%net margin
on sales in the best of times (as airlines did during booming 1997), it is long overdue for an
overhaul (Lawton, 2002). But at the same time implementation of tighter security at airports
after 11th September tragedy, aggressive marketing from the Full Price Airlines (FPAs)/FSAs

and French high speed TGV trains do not give LCAs a free access to the travel market. In
addition, the use of technological alternatives (web conferencing, teleconferencing) to flying
point towards a lower business volume in future (Sparaco, 2002).

But factors like pollution, number of inconveniences and high level of uncertainty (travel time)
i.e. delays, missing connecting flights, etc. which a passenger faces while flying a low cost
airline, could change total welfare effect. Such impact is essential to be quantified in order to
see and determine a different dimension for LCAs development and growth in coming years
in Europe.

This paper is an effort to outline possible impacts of LCAs operations on a society.
Introduction gives a general idea about LCAs. Relevant literature survey is conducted to get
familiar with diverse and important concepts regarding LCAs. The literature survey indicates
areas fundamental for airline industry especially between LCAs and FSCs. The case studies of
Bergen-Trondheim and Bergen-Tromsø routes are made in order to quantify the impact of
LCA operation in comparison to a traditional major airline and other modes of transportation.
A simple methodology of comparison is used. Fare prices, travel time cost, waiting time
during a transit and environmental externalities costs are taken into account. To analyse
impact assessment, the study has limitations in several areas. The results are analysed in light
of the conducted literature survey. Costs and fare prices are calculated to quantify the
comparison. In conclusion, impact possibilities generated by a low-cost airline are

2.     Literature Survey

In this section relevant literature is reviewed to become familiar with the concept of LCAs
and FSAs and the kind of parameters that affect airline market.

 Jan K. Brueckner and Yimin Zhang (2000) show airlines have biasness towards choosing
hub-and-spoke (HS) network. Finding of this research are sub categorised as follows:
1. Network, Lower Passenger Cost and Utility:
 Airlines choose HS network as it gives them lower cost per passenger due to economics of
density and higher flight frequency and at the same time more monopoly power. By using HS
network, airlines acquire economies of scale and control large share of market leading to
lower cost per passenger. The study uses a utility function that depends negatively on schedule
delay (the difference between desired and actual arrival time). An important assumption
about airlines cost is that each flight has a fixed cost but has no passenger related variable
costs. The monopoly airline set a price according to this utility function knowing that higher
fares or inconvenient flight departures would result in loss of traffic leading to lower revenues
and profit.
2. Flight frequency and Fare:
The study confirms the conventional wisdom: Flight frequency is higher under HS network
than FC network. Another outcome of the study shows that despite lower cost per passenger
attained by airline under HS network, greater flight frequency allows airline to charge a
higher fare from local passengers (passengers who usually terminate or originate at the hub of
airline). This increase in flight frequency means shrinking the potential market area of each
flight, allowing airline to increase fares without losing traffic plus enhance revenues.

Enhanced revenues mean more profit for airline but in cost benefit analysis it is just a transfer
of higher fare revenues from passenger to airline.
3. Network choice and Impact on Welfare:
To analyse the welfare impact on society under HS and FC (Fully Connected) networks,
authors chose this society welfare function. Society welfare is equal to:
Gross trip benefits Minus Passenger time cost
The cost incurred by the airline (total cost of travel is equal to Airline cost plus Passenger time cost).

In order to keep the analysis manageable, the “c- cost per flight” is constrained or restricted
so the planner or airline takes same type of action under each network. This analysis shows
that when society under some conditions, choosing frequency optimally, would select FC
network while airline would chooses HS network. Airline choice for a network will be HS
network. Airline has a bias towards HS network because operating 2 routes instead of 3 under
FC network; the airline is able to reduce the total number of flights, thus reducing costs.
Similarly, the HS network is favoured when the cost per flight is larger. In HS network, the
airline is able to economise due to economies of scale (economics of density). But if total
disutility from time travel is large, then FC network would be favoured because non stop
travel under the FC network minimises travel time. In addition the density level of passengers
makes HS network less valuable and thus favouring the FC network. If assumption of “zero
variable cost per passenger” is dropped and the flight frequency and pricing decisions are
made by the airline, network choice is same as before i.e. in some circumstances the airline
would chose HS network instead of FC network as it would yield higher welfare, given the
profit maximization choice of flight frequency reflecting an inefficient bias towards HS net
work. What about the Passengers Utility under HS and FC networks? The passengers are
worst off under HS network on average. In this situation the airline profitability is offset by
the reduction in passenger utility.
Borenstein (1989) estimates the importance of route and airport dominance in determining the
degree of market power exercised by an airline. Research is sub categorised as follows:
1. Operation size and Umbrella Effect:
He empirically estimated that an airline‟s share of passengers on a route and at the endpoint
airports significantly influence its ability to mark up prices above costs. The high mark-ups of
dominant airline, however, don‟t create an “Umbrella Effect” from which other carriers with
smaller operations in the same markets can benefit. Empirical findings presented here indicate
that the correlation between route concentration and high prices cannot be adequately
explained by traditional theories in which high concentration facilitates tacit or explicit
collusion. First, the high average prices that some airlines are able to sustain in concentrated
markets do not permit all participants in the market to charge similar prices i.e. “Umbrella
Effect”. Second, one source of market power on a city pair route seems to be the size of a
carrier‟s operations at the end points of the routes. When a carrier serves a large share of the
passengers who travel to or from endpoints of a route, its attractiveness to passenger who
travels on the route is enhanced. This tends to increase the airline‟s share on the route and its
average price.
2. Efficiency, airport dominance and Hub-and-spoke system:
The empirical studies also draw conclusions that government should try not to deter airlines
from forming hubs. There is substantial evidence that hub and spoke air transport system
allows more efficient use of aircraft and others inputs than the point-to-point system
developed under government regulation. Still, dominance of major airports by one or two
carriers, in many cases results in hub formation, appears to result in higher fares for
consumers who want to fly-return from these airports. Such strongholds seem to insulate the

dominant carrier from competition and dominant airline does not allow spill over effect to
other airlines serving the same airport or routes.
Barrett (2000) investigates airport competition that emerged after deregulation of European
aviation in early 80s. The article research covers the following areas:
1. Impact and Outcomes:
The article examines the impact on the demand side for airports after airlines deregulation and
the emergence of LCAs while supply side sees the impact of privatization, commercialization,
and market entry of new airports as civilian and military demand has reduced and the
availability of the airports seeking to play a vital role in local and regional development. Case
studies of 17 secondary European airports are presented based on the experience of Ryanair,
the longest established LCA in Europe and most experienced in developing passenger
volumes at airports competing with the main hub airports. The case studies covered airports in
UK, France, Spain, Ireland, Italy, Sweden, Norway, Belgium and Germany. The case studies
include both mature and recent cases of airport competition. Airport competition was essential
both to start and sustain Europe‟s most dramatic deregulation on the continent‟s busiest
international route, Dublin-London. The gains to passengers in terms of reduced fares and
service from five instead of one London airport have been large.
2. Traffic increase and LCAs:
The results also show a spectacular increase in traffic at lesser-used airports served by LCAs.
The study also shows that total traffic and market share increased dramatically for the
secondary airports when LCAs started using them instead of main airports with high airport
costs. Usually the market share for a secondary airport being used by LCAs increased from
0% to 50 %-60% with a year and continues to grow. and Global Agenda (2002) indicate that it would have been tougher for
European airports if low-cost carriers had not been growing strongly. Fraport, the company
which owns airport in Frankfurt and BAA, owner of 7 airports in Britain including Heathrow
would have performed even more disappointingly if the low-cost carriers had not been their
and made up their short falls after September 11th.
Sparaco (AW & ST, 2002) indicate that since 2001 the European airline industry has changed
to an unprecedented level, leading to a new emerging industry restructuring.
1. Recent Development and Growth:
Phenomenal growth and strategy of Ryanair and EasyJet is leading to a dramatic
transformation of European airline industry. It puts into question the future viability of full-
service carriers. Low-fare operators‟ combine capacity has increased nearly by 50% between
mid-2001 and mid-2002. According to Ryanair, even the global economics slow down has not
effected their growth and LCAs continue to grow by two-digit traffic. According to Credit
Suisse First Boston analysis, the European air traffic on its routes would increase to 600
million passengers facilitating the growth and stronger market share of Low-cost carriers.
Although a market analysis shows that LCAs combine capacity on European routes is
growing at an impressive rate of 20% per year, but, the combine market share of LCAs is less
than 7%, up from 3.7% in mid-2001.
2. Impacts on industry:
The LCAs are also expected to have an impact on charter operators who traditionally play a
major role in European leisure market. LCAs will continue to grow as Ryanair and EasyJet
have recently concluded deals for more than 200 planes with Boeing and Airbus, worth
million of dollars. Deliveries are expected to be completed by the end of 2010. LCAs quest
for low-cost operations have lead to a significant strengthening of secondary airports located
only some miles away from nearest city or major airport. In addition they have also received
funding from local chamber of commerce which has been criticized by FSCs.

3. FSCs counter-offensive:
FSCs (Full-Service Carriers) are not so much concerned about the LCAs threat. They have
changed their strategy and revise their fares to counter attack their threat. Seeing the
experience of AirLib, they are convinced that a traditional major airline cannot be a
successfully transformed into low-cost carrier. They believe that in order to be a successful
low cost carrier, one has to be born low-cost.
Velocci Jr. (2002) hints that the business model employed for the last 20 years by the
traditional FSCs i.e. the use of fortress hubs to control largest possible share of the market has
been broken and need modification. Emerging slowly but surely the domestic airline industry
would be eventually dominated by low-cost carriers like Southwest Airlines instead of
traditional Hub-and-Spoke airlines such as Delta and United. FSCs have no choice but to
improve their productivity through cost cutting and changing inflexible working environment
and rules. Author designates the workability of hub-and-spoke network system as the major
concern of full service airlines. Zellner and Arndt (2002) point that a harsh question facing a
major hub-and-spoke airline is if their core business model is broken? And many fear that
rising costs and expansion of low-fare carriers put the wisdom of hub-and-spoke operating
system in question.
Economist (2002) outlines the inconveniences faced by the passengers of LCAs. Although
Ryanair carry more than a million passengers per month, it customers are advice not to book a
connecting flight. LCAs are certainly cheap, but what about passengers‟ inconveniences and
safety. In their ever expanding competitive market, LCAs are compromising safety. No free
food or drink, no compensation for lost baggage or delays, staff and equipment shortages
leading to delays and cancellation, poor punctuality record, over worked staff especially the
pilots and a fleet of old aircrafts is another side to be considered when evaluating low-cost
carriers. Similarly, Rogers (2002) points out that in difficult economic times, low-cost carries
are breath of fresh air, both for industry and passengers but at the same time it raises questing
regarding customer service and safety of low budget airline model. LCAs point out that is a
commodity business and people response best to price. Ryanair was named as giving worst
customer service in a report from the Air Transport User Council. Ryanair boss defends his
company and says,” Our strategy is like Wal-Mart: We pile it high and sell it cheap”
(Business Week, 2003).
Flottau (2002) examines aggressive campaign initiated by FSCs against LCAs. Several FSCs
have reduced their prices. SAS Scandinavian Airlines has introduced a flat one-way fare and
abandoned business class services on many domestic routes. Similarly, British Airways has
dropped advance booking and mandatory Saturday and minimum stay restrictions on 42
routes between UK and France.
In case of airline profitability, Andreas (1992) indicate that factors like market contestability,
the multiple output nature of costs, the structure of networks, and airport presence play a
crucial role in the survival and profitability of relatively free and unregulated airlines. Since
most of the international airlines still operate in such a heavily regulated environment,
therefore how the airlines would improve their profitability in a liberalized environment
remains an unanswered question. This research also indicate that profitable airlines have high
passenger load factors, sustain a relatively low proportion of capacity-related costs, fly
younger and more efficient fleets, and supplement their passenger loads with freight.

Literature finding shows that for an airline, choice of network is a major factor for lower
passenger cost and that‟s why airlines are observed to have biasness towards HS network. It
gives them higher flight frequency and economics of density, thus generating economies of
scale. These outcomes make it easier for them to charge higher prices and enjoy umbrella
effect advantages through airport domination. Under certain conditions, FC network is

favoured by airlines and society. Deregulation and liberalisation lead to the emergence of
LCAs and airport competition, putting validity of HS network, operations of FSAs and
society‟s welfare in doubt. Although LCAs rely more on point-to-point operations but in
essence follow HS network as it give more operative and cost efficiency. LCAs operations
have not only reduced fares but have lead to increase in flight traffic on routes encountering
falling traffic and helped in improving financial side of major and secondary airports.
Secondary airports helped broke the scarcity of takeoff and landing slots at major airports
which, for a long time, kept FSCs secured, in the traditional market. But the FSCs have
changed their strategy and are fighting back. Flying LCAs means lot of inconveniences that
can modify society‟s welfare. But in spite of their drawbacks, LCAs continue to grow and
FSAs must change their operations strategies i.e. network set-up, costs, etc. to remain an
active partner in airline industry. Limitations exist for literature available pertaining to LCAs.
It is a recent topic and detail and comprehensive research is either in its initial phase or not

3.     Case Study: Impact of LCAs and Society
In order to see how a low-cost carrier modifies the welfare of a society, two case studies are
conducted. Fare prices, Time Travel Cost (TTC) and Value of Environment Externalities
(VEE) costs are considered. The objective is to give you an idea about possible welfare gains
and losses when we compare FSAs and LCAs. In addition a comparison is also made for
different modes of transporting. Few assumptions are made to make this study manageable.
They are:
    1. Both airlines fly same type of planes in the case study routes i.e. B-737
    2. Passengers are business travellers choosing cheapest possible fare
    3. No baggage handling and other relevant services are considered during a transit

The conclusion drawn from this study does not indicate concrete results. Lots of areas are not
included in the analysis for example, accidental costs, operating costs, etc. The routes selected
are also arbitrary in nature.

A.     Bergen-Trondheim Route

Bergen–Trondheim (Norway) air route is operated both by SAS (FSAs) and Norwegian Air
Shuttle-NAS, a low-cost airline. SAS is a major HS network airline and operates direct and in
direct flights (via Oslo) for Trondheim. At the same time, Norwegian operates an indirect
flight via Oslo, presenting a mixture of HS network and FC network. Fare prices and given
below while other relevant flight route information are given in table 1 and 2.

Airline Type:          SAS--- Full Service Airline
                       Norwegian Air Shuttle--- Low-cost Airline

Round Trip Fare:       Kr: 3440 (SAS)
                       Kr: 2196 (Norwegian Air Shuttle-NAS)

In case of fares, Norwegian emerges as a better choice. Why? Because in reality Norwegian
fly Bergen-Oslo-Trondheim route covering a distance of 680 km while SAS covers a distance
of 460 km on Bergen-Trondheim route. In addition, SAS charges almost 35% more than
Norwegian. Why? Because SAS have a higher flight frequency as compared to Norwegian.
This advantage gives SAS to charge higher prices. These higher prices are charged from a
passenger because he/she is willing to pay a higher price for reduce waiting time (schedule
delay) in order to have a higher utility level (see Jan K. Brueckner and Yimin Zhang, 2000).
SAS is also the dominant airline on this route and don‟t create the Umbrella Effect for other
carriers with smaller operations in the same market (see Borenstein, 1989). Although VEE
and time travel costs are high in Norwegian, but if we divide NAS Bergen-Oslo-Trondheim
route into two separate units, Norwegian fares gives a better choice. But this is not conclusion
just an observation for comparison.

                                                    Table 1

                                         Bergen-Trondheim Trip

Airline   Departure:            Travel      Flight            Transit Arrival at Total                Flight
          Bergen-               Time:       Frequency :       Time at Trondheim Travel                Frequency
          Oslo-                 Bergen-     Bergen-           Oslo               Time
          Trond.                Oslo        Oslo
SAS       09:10                   -----     11 Flights         ------   10:10             1 hour      11 Flights
Norwegian 07:35                 50          6 Flights         30 min. 09:55               2           6 Flights
                                minutes                                                   hours
All flights departure same day and have close time proximity for achieving better results. All flights are booked
one month in advance to get the minimum possible fares.                          Source: SAS, Norwegian web

                                                    Table 2

                                          Trondheim-Bergen Trip

Airline          Departure:      Travel            Flight        Transit       Arrival     Total      Flight
                 Trondhei        time:             Frequen       Time at       at          T.         Frequency
                 m-Oslo-         Trondheim-        cy:           Oslo          Bergen      Time
                 Bergen          Oslo              Trondhe
SAS              15:40           -------------     8 Flights     -------       16:40       1 hour 8 Flights
Norwegian        15:25           55 minutes        2 Flights     20 min.       17:40       2      2 Flights
 All flights departures same day and has close time proximity for achieving better results. All flights are booked
one month in advance to get the minimum possible fares.                 Source: SAS, Norwegian web sites

In calculating TTC (Travel Time Cost), both flying time and transit time are taken for SAS
and NAS while for bus and car only travel time is considered. The TTC for air travel is Kr:
220 / hour (average of business and leisure travel time in Norway, Bråthen and Hjelle, 1999).
TTC of air travel compared with others mode of transport i.e. car and bus, are very high. Car
and bus travel in addition to TTC also includes fuel and vehicle operating costs, toll, etc.
These costs are not considered in this case. Table 3 shows VEE, TTC and other relevant costs
for these modes.

                                                 Table 3
                         Fare, Travel Time & Environmental Externalities Costs

          Transport          Route &         Travel Fare-    Time Used      Travel Time       VEE one-way
            Mode          Distance: One-        Return       (One-way)      Cost: One-         (in Euros)
                               way            (In NOK)                          way
                             (in km)                                         (in NOK)
          Aircraft           Bergen-            3440           1 hour           220           CO2: 131.37
          (SAS)            Trondheim
                               460                                                            NOx: 63.73
                                                                                             NMVOC: 33.79
          Aircraft        Bergen-Oslo-          2196         2 hours &        513.33          CO2: 262.74
        (Norwegian)        Trondheim                         20 minutes
                              320                                                             NOx: 127.46
                                                                                             NMVOC: 67.58
             Car             Bergen-            2400*        10 hours &       974.95          CO2: 2.69325
                            Trondheim         (Approx.)      47 minutes
                               675                                                           NOx: .0163752
                                                                                             SO2: 2.88414
                                                                                            NMVOC: 4.7088
             Bus             Bergen-            3000         14 hours &       6084.65        CO2: 11.8144
          (Nor-way          Trondheim                        30 minutes
                                705                                                          NOx: 0.352641
                                                                                              SO2: 30.084
     (See Appendix 1 for calculations. Fares values for air and bus travel are taken from respective companies‟
       websites. Reference # 22)

The total emission cost or value of environmental externalities for Norwegian (one-way)
Bergen-Oslo-Trondheim flight is 457.78 euros while total emission cost or value of
environmental externalities for SAS‟s Bergen-Trondheim route (one-way) is 228.89 euros.
In case of car and bus, VEE is 44.34 euros and 10.3025 euros respectively for one-way
Bergen-Trondheim route.

                                              Table 4

                                   Cost Benefit Analysis for Case A

                          Transport          Benefits           Costs
                            SAS           Lower Flying     Higher Fare
                                          Time, Lower
                            NAS           Lower Fares      Higher Travel
                                                           Time, Higher
                             Car          Lower VEE        Higher Travel
                                                           High Price of
                             Bus          Lower VEE        Higher Travel
                                                           High Price of

In table 4, comparing different modes on the basis of VEE, bus emerges as most suitable
option (from society‟s point of view) for travel. But in terms of travel time, it has a lower
preference level (for passenger). Same is true for car. However, in order to choose between
SAS and NAS, the society choice would be SAS as it has a lower flying time along with
lower value of environmental externalities. On this particular route, SAS offer a better choice
than NAS. Simultaneously, it shows that FC network is more beneficial for society as it
reduced the travel time between two points and lowers the possibility of hazardous emission
by an airplane. But this is not an irrefutable conclusion. Norwegian Air Shuttle-NAS is unable
to offer direct flights form Bergen-Trondheim due to non-availability of planes, common
feature of LCAs which also leads to uncertainties and inconveniences in their operations. The
arguments are not conclusive as study scope is limited.

B.      Bergen-Tromsø Route
In 2nd case, the objective is to analyse the travel time cost (includes flying time and transit
time) between SAS and NAS on a route were both carriers have to go through a hub before
reaching final destination. This study offers a reasonable explanation how route and airport
dominance by a HS network airline, gives additional leverage to an airline in determining
prices on that route (see Borenstein, 1989). In addition, study also shows that a traditional
airline using HS network will have higher flight frequency, offering better flexible time for
departures on any gives route, allowing it to charge higher fare (see Jan K. Brueckner and
Yimin Zhang, 2000). So, SAS fare is high. Why? Because it has an advantage due to two
reasons, dominance at hub (Oslo) and higher flight frequency on this route. At the same time,
Norwegian flight frequency doe not offer simple return flights for Tromsø-Oslo-Bergen route.
The travel time between Bergen-Oslo-Tromsø is almost same for SAS and Norwegian.

 But the most significant result on Tromsø-Oslo-Bergen route is evident long waiting time
period during transit, encountered while flying low-cost carrier, Norwegian. It is one of the
major inconveniences passenger face while travelling LCAs (Economist, 2002).Long waiting
period during transits is the opportunity costs which passenger pays for flying a LCA. In this
case, passengers flying with Norwegian will have to wait for 8 hours in transit before
departure to Bergen. During this waiting time, cost of lost productivity is another additional
cost the society has to pay. At the same time, passengers and society pays higher fare using
The data is given in tables 5 and 6. SAS flight frequencies are evenly distributed through out
the day which is the main reason for lower transit time. Norwegian has fewer planes and can‟t
offer such evenly distributed frequencies, leading to high transit waiting time.

Airline Type:              SAS-Full Service Airline
                           Norwegian Air Shuttle-Low-cost Airline
Round Trip Fare:           Kr: 4565 (SAS)
                           Kr: 2496 (Norwegian Air Shuttle-NAS)

                                     Table 5
Airline         Departure Flight   Flight     Transit                   Departure      Flight       Flight
                Time:     Time:    Frequency: time at                   Time:          Time:        Frequency:
                Bergen-   Bergen- Bergen-     Oslo                      Oslo-          Oslo-        Oslo-
                Oslo      Oslo     Oslo                                 Tromsø         Tromsø       Tromsø
SAS             06:30     50       8 Flights  40                        08:00          1 hour       8 Flights
                          minutes             minutes                                  and 50
Norwegian 07:35                55      6 Flights             1 hour     09:20          1 hour       5 Flights
                               minutes                       and 40                    and 55
                                                             minutes                   minutes
All flight departures on same day and has close time proximity for achieving better results. All flights are booked
one month in advance to get the minimum possible fares                  Source: SAS, Norwegian web sites

                                                      Table 6

Airline         Departure      Flight       Flight     Transit           Departure      Flight       Flight
                Time:          Time:        Frequency: time at           Time:          Time:        Frequency:
                Tromsø-        Tromsø-      Tromsø-    Oslo              Oslo-          Oslo-        Oslo-
                Oslo           Oslo         Oslo                         Bergen         Bergen       Bergen
SAS             06:55          1 hour       6 Flights  30                09:35          50           6 Flights
                               50                      minutes                          minutes
Norwegian 06:55                1 hour       3 Flights        8 hours     16:50          50      2 Flights
                               55                                                       minutes
All flight departures on same day and has close time proximity for achieving better results. All flights are booked
one month in advance to get the minimum possible fares                  Source: SAS, Norwegian web sites

The total travel time for a return Bergen-Oslo-Tromsø NAS flight is 14 hours and 25 minutes,
questioning the logic and practicality for flying a low–cost carrier. In comparison, SAS has a
total travel time of 6 hours and 40 minutes, where 90% of it is utilised for flying between
destinations. Again the arguments are for comparison and not final.

4.     Conclusion:

In today‟s competitive economic world, high cost companies have to fight for their lives.
Airline industry is no exception. Airline industry is weak enough to succumb to the
unbearable winds of recession, spooked travels since 9-11 and low priced competition.
Emergence and competitiveness of LCAs has transformed the airline industry. Although
LCAs offer low prices but, lots of uncertainties and inconveniences are attached with their
flying package. These minute studies manage a small effort to show what possible impact a
society can foresee from a low-cost carrier‟s operation. The literature survey highlights the
significance of LCAs in providing a cheap alternate mode of air transportation. Network
selection is vital for any LCA success as they try to utilize advantages offered both under HS
and FC networks. In our 1st case i.e. Bergen-Trondheim route demonstrates that LCAs
operation lead to a higher environmental and travel time costs. On Bergen-Tromsø route, long
waiting time during transit is another factor created while travelling LCAs. The route brings
about the opportunity costs society and passenger has to pay for choosing a low-cost airline.
This is not a decisive conclusion, but if you want to travel cheap, someone has to pay the
price. In spite of drawbacks, LCAs do offer cheap and fast travel opportunities. To conclude
that LCAs operation would have negative/positive impacts on society is not within the scope
of this study.

Calculations of Fare, Travel Time cost Value of Environmental Externalities-VEE are made
on the basis of pre-determined data sources. The main sources are Norwegian Public Roads
Administration, NSB- Norway Railway Authorities and Nor-way Bussekspress Authorities.

For Bergen-Trondheim route the total distance covered by car and bus is 675 km and 705 km
respectively. The plane covers a distance of 680 km. Bergen-Oslo is 320 km and Oslo-
Trondheim is 360 km while Bergen-Trondheim route is 460 km.

a) Value of Environmental Externalities-VEE for 1 hour flight Bergen-Oslo
flight is as follows:
Fuel consumed: 33.1 kg/min * 60 min = 1986 kg
CO2 emission: 3.15 gm/kg fuel * 1986/ 1000 = 6255.9 kg * 0.021EUR/kg = EUR: 131.37
NOx emission: 7.36 gm/ kg fuel * 1986/1000 = 14.617 kg * 4.36 EUR/kg = EUR : 63.76
NMVOC emission: 3.9 gm/kg * 1986/1000 = 7.75 kg * 4.36 EUR/kg =        EUR : 33.79
Total emission cost for 1 hour flight is                               EUR: 228.92

b) Value of Environmental Externalities-VEE for bus on Bergen-Trondheim
705 km route is as follows:
CO2 emission: 798 gm/ km * 705/1000 = 562.59 kg * 0.021 EUR/kg = EUR: 11. 81439
SO2 emission: 0.20 gm/km * 705/ 1000 = 0,141 kg * 2.501 EUR/kg = EUR: 0.352641
NOx emission: 9.79 gm/km * 705/1000 = 6.90 kg * EUR 4.36/ kg = EUR: 30.084
NMVOC emission : 0.68 gm/kg * 705/1000 = 0.4794 kg * EUR 4.36/kg = EUR : 2.090184
Total emission cost for bus on this route is                        EUR: 44.34

c) Value of Environmental Externalities-VEE for car on Bergen-Trondheim 675
km route is as follows:
CO2 emission: 190 gm/km * 675/1000 = 128.25 kg * 0.021 EUR/kg = EUR: 2.69325
SO2 emission: 0.0097 gm/km * 675/1000 = 0.0065475 kg * 2.501EUR/kg = EUR: 0.0163752
NOx emission: 0.98 gm/km * 675/1000 = 0.6615 kg * 4.36 EUR/kg = EUR: 2.88414
NMVOC emission : 1.60gm/km * 675/1000 = 1.08 kg * 4.36 EUR/kg = EUR: 4.7088
Total emission cost for car on this route is                     EUR: 10.302565


   1. Barrett, Sean D.; Airport Competition in the Deregulated European Aviation Market,
       Journal of Air Transport Management; 2000, pp 13-27
   2. Borenstein, Severin; Hubs and high fares: Dominance and market power in the U.S.
       airline industry; RAND journal of Economics, Autumn 1989, Volume 20, No. 3, pp.
   3. Bråthen, S.; Eriksen, K. S.; Hjelle, H. M.; 1999, Economics Appraisal in Norwegian
       Aviation, Manual, Møre Research/Institute of Transport Economics, Norway
       (available in Norwegian and English summary)
   4. Bråthen, S.; Eriksen, K. S.; Hjelle, H. M.; Economics Appraisal in Norwegian
       Aviation, Journal of Air Transport Management, 2000, Volume 6, No. 3, pp. 153-166
   5. Brueckner, Jan K.; Zhang, Yimin; A Model of Scheduling in Airline Networks;
       Journal of Transport Economics and Policy, May 2001,Volume 35, part 2, pp. 195-222
   6. Business Week; MICHAEL O‟LEARY Ryanair, New York, Jan 13 ,2003
   7. Economist, The; Business: So many planes, so few passengers; Airlines, Sep 21, 2002
   8. Economist, The; London, Britain, Fly me , I „m cheap; Low-cost airlines, August
       17th ,2002
   9. Global Agenda; Low-cost carriers to the rescue; London , Nov 1,
   10. Flottau, Jens; Europe‟s Low-Costs, Major Wage Fare Wars, AW& ST; New York,
       July 8, 2002
   11. Flottau, Jens; European Regionals Fear Low-Costs Startups, AW & ST; New York,
       Oct 21, 2002
   12. For fares and route information check web sites of,
   13. Forsyth, Peter; Button, Kenneth; Nijkamp, Peter; Air Transport , Edward Elgar
       Publishing Limited, UK or individual papers of authors
   14. Hjelle, Harald M.; A Foundation of Road Use Charges, PhD Thesis, 2003
   15. Information regarding SAS and Norwegian Air Shuttle flight schedule and ticket
       prices, try the following web sites:
   16. Pindyck, Robert S.; Rubinfeld, Daniel L.; Micro Economics, Fourth Edition,1998,
       New York
   17. Rogers, Daniel; Cheap flights or decent service? , Marketing; Aug 22, 2002
   18. Rogers, Daniel; Cheap flights or decent service?, Marketing; Aug 22, 2002
   19. Sparaco, Pierre, „Low-Costs‟ Edge into Europe, Aviation Week & Space Technology
       (AW & ST June 10, 2002); New York
   20. Sparaco, Pierre; Low-Cost Carriers Steal The European Show, Aviation Week &
       Space Technology; New York Nov18, 2002
   21. Velocci Jr., Anthony L.; Can Majors Shift Focus Fast Enough To Survive? Questions
       haunt industry as low-fare carriers grab market share, and high costs, low productivity
       begin to strangle some airlines, SW &AT; New York, Nov 18, 2002
   22. Zellner, Wendy; Arndt, Michael; What Weighing Down the Big Carriers, Business
       Week, New York, April 29, 2002


To top