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Reality Strikes Discount Air Carriers

After thirty years of unmitigated success in the airline industry, the smaller discount airlines are starting to fall by the wayside. Aloha, ATA and Skybus recently shut down. Others are likely to follow. Even Southwest is feeling the pressure. None of these discounters is able to fully recover the burgeoning cost of fuel.

What does this really mean? It means that the legacy carriers have finally reached the point where their cost structure is low enough that the prices they charge are very difficult for the discounters to get a substantial discount against. Typically a discounter needs to offer a price 25% or so below that of the standard leaders in an industry. That level of discount is getting increasingly difficult for low-end airlines to achieve in today’s airline industry. The balance of power is beginning to shift back to the legacy carriers.

There is more about industry leaders confronting low-end competition in our Perspective, “Turmoil Below: Confronting Low-End Competition” on our StrategyStreet web site in the Tools section, or from MIT’s Sloan Management Review.

Posted 4/10/08

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