Competition between network carriers and low-cost carriers - retreat battle or breakthrough to a new level of efficiency?

The severe crisis of the global aviation industry has primarily struck the "classical" Network Carriers (NCs) with their complex hub&spoke operation platforms. The crisis was deepened, but by no means caused, by the terrorist attacks on September 11, 2001. The root cause was the end of a temporary revenue "bubble" after the first Iraq war, leading to historically high airline profits and major capacity expansions. After the end of the "golden" 90 s, an economic downturn and a fear of terrorism resulted in massive overcapacities, with yields showing a return to continued long-term decline. Surprisingly at first glance, low-cost carriers (LCCs) were not only spared, but boosted by this massive downturn. Their lean business model offered a compelling alternative at a time when passengers began looking for ways to avoid paying the high prices NCs demanded in order to maintain their complex hub&spoke systems. On continental travel routes, LCCs are able to deliver 80% of the service quality at less than 50% of the cost of NCs. Consequently, LCCs can-at least in theory-tackle more than 70% of continental O&Ds (in the US as well as in Europe), taking them far from their origins as niche businesses. However, for most intercontinental routes (as well as some continental ones) bundling demand in a hub remains an indispensable requirement. The challenge for NCs is now to reinvent their own business model. If they succeed in providing almost the same service level at drastically reduced cost, they would not only stabilize their position, but also lead the industry as a whole to the next level of efficiency. This article analyzes the key drivers of the current transition phase and outlines the vision of advanced airline business models that potentially lead to a new era of equilibrium. (C) 2003 Elsevier Ltd. All rights reserved.