This article is a revised edition of a former publication in M@n@gement. This revised edition is dated 05-02-03.

Low-cost airlines offer tickets for as less as one third to one tenth of the prices flag carriers such as Lufthansa, British Airways, KLM, and Air France charge. At first sight, this seems to result in a crash, but on further consideration it turns out to be a huge success formula. The interesting question is: how can start-ups be successful with a low-cost strategy in spite of their often significant initial losses. The aviation industry shows it can be done. Even more so, start-ups should turn to this strategy a lot more often. In this article we also highlight the possible strategies of the flag carriers to counter the attacks of newcomers.

Introduction

The liberalisation of air services provided a significant boost for the development of no-frills airlines. America's best known no-frills airline is called Southwest Airlines. Southwest Airlines was and is an American icon. The Dallas based company is one of those responsible for the fact that the American and world-wide aviation industry looks completely different now. The success of Southwest Airlines is based on a very simple principle: transporting passengers over relatively short distances at very competitive airline rates. The traditional high-cost airlines in America and Europe alike can whistle for it now. They risk losing much of the intra-American respectively intra-European connecting traffic that feeds into their lucrative long-haul networks.

The low-cost strategy of carriers such as Southwest Airlines has a solid basis. Southwest does not occupy itself with meals, 'in-flight' films, design chairs, and various classes (and the corresponding options). All frills have been removed from the value proposition. It is also striking that Southwest Airlines does not make use of the 'hub-and-spoke' system so highly praised by other airlines. Instead, Southwest uses the 'point-to-point' flight concept, offering rates that are at least 60% cheaper than those of the direct competition. Southwest uses plastic boarding passes (re-usable) and has looked ever since its foundation for secondary airports in smaller cities and less congested airports in major cities (or in the vicinity of major cities). On top of that, a Southwest Airlines plane is on average only…