Low-Cost Airlines: Impact on Global Airline Market Growth - Essay Sample

Introduction

In recent decades, airlines around the world have faced constant market growth (Lordan, Sallan, Escorihuela & Gonzalez-Prieto, 2016). These have made significant modifications both in their operations as in their costs, which has allowed them to respond effectively to these changes, developing a new business model called "low-cost carriers" (Fu, Oum & Zhang, 2010). According to Doganis, (2009). Low-cost airlines (LCC) have been increasing their market share and are positioning themselves as a notable alternative for the traveler, both tourist and business worldwide. LCC is currently considered as airlines that offer a non-service traditional since the new business management and development model incurs a lower cost for the passenger (Detzen, Jain, Likitapiwat & Rubin, 2012). Currently, the competition of low-cost airlines has benefited the passenger, providing cheaper opportunities to access air travel (Lordan et al., 2016). Competition within the LCC business varies from one geographical region or market to the other.

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This paper evaluates the impact of some markets or geographic regions on the LCC competition. The paper has six paragraphs covering physical and market constraints for air transport competition. The first paragraph covers the constraints of market regulations to the economic competition regarding the allocation of the time zones of landings and take-offs (slots). The second paragraph covers limitations on foreign companies' investment of international mergers between air transport companies. The third paragraph covers the differences in availability of infrastructure from one geographical area to the other. The dominating company may end up monopolizing companies. The fourth paragraph covers the presence of companies offering predatory prices for their services leading to unhealthy competition for the new entry companies. The last two paragraphs are a conclusion and recommendations respectively.

The legal scaffolding was introduced to improve economic competition within the air transport industry (Fuet al., 2010). Over the years there have been some deficiencies in the operational application or restrictions imposed on current regulations that result in less competition in the industry that in turn become inefficiencies and a loss of social welfare (Forsyth, 2003). The allocation of slots at airports is carried out based on the recommendations issued by an Operation Committee, in which representatives of the airlines that provide services in these infrastructures participate (Gillen, 2006). This way of distributing the slots can create an environment of unequal competition within the airports, since the incoming companies, having no representation within the Committee, may be subject to not being designated time slots to serve on a new route or receive itineraries in which the demand is low or not very competitive. Likewise, in the distribution of slots preference is given to airlines with greater seniority under an acquired law criterion which can lead to older companies requesting the allocation of certain slots to prevent the entry or growth of other players (Detzen et al., 2012). This problem is even more serious in airports with a high saturation of airflows, where in addition to limiting the entry of additional players it could lead to inefficiencies in the price of the service. International markets have strict guidelines that prevent LCC companies to engage in international flights (Graham, 2013). The passenger air transport market is subject to a set of special regulations, which limit the free operations of airlines in Aerial spaces. The regulations of the airline industry mainly affect the entry of new airlines on the routes, weakening the disciplinary role of this element in the Market performance. The effects of the restrictions will be felt mainly on international routes and to a lesser extent on the routes that make up the markets domestic (Moeckel, Fussell, & Donnelly, 2015). The reasons why countries give a less open treatment to their market air, concerning trade in other goods, are diverse: airspace security continuity of service on routes and protection of national companies (Hofer, Windle & Dresner, 2008). The balance of the regulations applied by the states has led to a regional space with a high degree of restrictions. Access to slots at attractive times is the main difficulty perceived when entering a new route. Airports under slot control, with long-term lease contracts of boarding points and with restriction of boarding points, have a positive effect on the yields of the airlines that operate in them (Hofer et al., 2008).

Some countries or regions establish foreign investment limitations for companies that perform air transport services in their respective domestic markets. Restrictions on cabotage and foreign ownership have led to large regional airlines to establish companies in different countries as a means to enter domestic markets (Nordas & Rouzet, 2017). This dominance is a big blow to the LCC companies. Avianca through the acquisition of the company OceanAir local entered Brazil. Currently, the airline is called Avianca-Brazil. In Ecuador, the entry of the Avianca-Taca group was made through the acquisition of Aerogal. The competitive risks of a merger can be classified into simple dominance, coordinated effect, and weakening of competition (Williams & Balaz, 2009). In the first case, there is fear that as a result of the merger, a stronger company will be generated that puts the risk of competition in the market. That is, the success the company achieved exert competitive pressure to the rivals because the latter does not have the attributes like access to inputs, assets, or frequent customers. The coordinated effect or joint dominance refers to the greater the probability that the remaining companies in the market, as a result of the merger, are tacitly coordinated to raise prices to increase profits (AlderighiCento, Nijkamp & Rietveld, 2004).

Airports are an essential element for passenger air transport. These infrastructures provide a series of services to passengers and airlines which include and not limited to aeronautical services proper such as traffic control and assistance in landing and takeoff maneuvers and infrastructure for aircraft maneuvers which covers landing and transit tracks, sleeves and boarding gates, maintenance areas and parking. Some long-term contracts between both activities may have similar effects on vertical integration (Fuhr, & Beckers, 2006). This is the case of investment in terminals, where airlines finance part of the infrastructure in exchange for exclusive or preferential use by a period. From competition, the risk of vertical integration is that a potentially competitive market like that of the airlines is monopolized by who controls the upstream market or airport (Serebrisky, 2003). This phenomenon is known as market closing or foreclosure. Airports are considered essential facilities as it is very unlikely that, for in a certain destination, it is feasible to replicate an airport in case of an airline. Access to such infrastructure is denied. For the demand levels of a city, most of the time, airports are natural monopolies (Homsombat, Lei, & Fu, 2014). While there are destinations that have more than one airport, in general, there is a specialization in the use rather than a competition between them. For example, the division between international flights is common and domestic or between passenger and cargo transport (Cheng & Yuen, 2016).

Predation is a practice whereby a company significantly reduces its prices, even setting them low cost, with the aim of expelling, weakening or intimidating a competitor and in that way, strengthen its market dominance position (Alderighi, Cento, Nijkamp & Rietveld, 2012). The rationality of predation, by the company that applies it, is that charge a monopoly price, after the rival has left the market or has been disciplined. Predatory prices are considered an exclusive and harmful practice for a competition and therefore they are sanctioned if their occurrence is proven. They are classified as shares monopolists in the United States and Abuse of Dominant Position in Europe (Alderighi et al., 2012). Predatory price accusations are frequent in the air transport industry. Predatory pricing is when the applying company sacrifices its current benefits and achieves benefits later in the future through kicking the opponent out of the market.

Conclusion

Regional markets with barring restrictions on slot allocation discourage LCC from operating in the regions (AlderighiCento et al., 2004). Companies with influence over the others on the authority of Operation Committee in this case unequal competition within the airports emerge (Gillen & Morrison, 2003). The incoming companies who have insufficient or no representation within the Committee may be subject to not being designated time slots or end up receiving itineraries in which the demand is low or not very competitive.

There are markets or regions which establish limitations on foreign investment for air transport services companies. These restrictions on foreign ownership have led large regional airlines to establish companies various domestic markets. The dominance of the already established airline companies is a threat to the LCC companies (Lian, & Ronnevik, 2011).

At the terminals, some airlines finance part of the infrastructure in exchange for some air transport-related services. This trend may lead to vertical integration where many airlines end up being monopolized by companies that control the airline market (Homsombatet al., 2014).

Uncontrolled markets lead to price predation. A company with abundant running capital significantly reduces the prices of its services, to scare away the companies from joining the market. In this case, they strengthen their market dominance position. Predatory prices are considered an exclusive and harmful practice for a competition and therefore they are sanctioned if their occurrence is proven (Edlin & Farrell, 2002).

Recommendations

Strict and abusive regulations barring LCC from joining the market needs to be lifted. For the free competition, the existing restrictions must be included in the competitive analysis of air markets and practices commonly examined in antitrust.

Countries with limited access to resources should be allowed to allow foreign investors in developing the airline industry.

Companies forming mergers or investing in developing countries needs to be regulated so that they do not end up dominating and exploiting the partner company.

The prices of services offered under the air transport industry need to be regulated to prevent the issue of price predation. Proper regulations should be put in place to ensure equal opportunities or airline companies irrespective of the difference in resource allocation.

References

Alderighi, M., Cento, A., Nijkamp, P., & Rietveld, P. (2004). The entry of low-cost airlines. Tinbergen Institute. Retrieved from https://www.sciencedirect.com/science/article/abs/pii/S0966692315000915

Alderighi, M., Cento, A., Nijkamp, P., & Rietveld, P. (2012). Competition in the European aviation market: the entry of low-cost airlines. Journal of Transport Geography, 24, 223-233.

Brueckner, J. K., Lee, D., & Singer, E. S. (2013). Airline competition and domestic US airfares: A comprehensive reappraisal. Economics of Transportation, 2(1), 1-17.

Cheng, T. C., & Yuen, A. (2016). Exploring the Potential of Asian Low Cost Carriers Forming Strategic Alliances. Retrieved from https://tichung.com/static/Yr4_DSME4080__final_essay_1155043421.pdf

Detzen, D., Jain, P. K., Likitapiwat, T., & Ru...