Critical success factors of Low-Cost Carriers: a research article

At VTM, we are committed to exploring the dynamics that drive success in today’s ever-evolving business landscape. Our latest research article delves into the Economic Viability of Low-Cost Carriers (LCCs) and identifies the critical success factors that have enabled these airlines to thrive in an increasingly competitive market.

In this publication, we offer a glimpse into the key insights and findings of the study, providing a comprehensive look at the core factors influencing the success and sustainability of LCCs. Due to its depth, only a partial version of the article is available here.

For a more detailed discussion or access to the full research, we invite you to contact VTM or reach out directly to João Couto. We look forward to engaging with you on this topic and sharing more about how these findings can drive strategic decisions in the industry.

Abstract | This research article analyzes the economic viability of low-cost carriers (LCC), based on a literature review and three case studies: Southwest and Ryanair as successful case studies, and, on the other hand, Flyr as a case of failure. This research concluded that there is no single answer for the success of LCCs, as the case studies demonstrate that more than one strategy can be implemented to ensure the survival and prosperity of an LCC in the market. However, the results of this research also showed that there are some factors that are transversal to any low-cost airline, identifying eight critical success factors for the economic viability of LCCs: availability of capital, market analysis, diversification of revenue sources, process simplification, adjusted marketing strategy, fleet selection, bargaining power, and flexibility and adaptation.

Keywords | Aviation, Low-Cost Carriers, Critical Success Factors, Air Transport.

1. Introduction

The liberalization of the market had a profound impact on the development of the air transport sector worldwide. For example, the number of passengers in this mode of transport more than quadrupled in the United States, increasing from 209 million in 1975 to 930 million in 2019 (Picardo, 2023). Moreover, according to Picardo (2023), the effects of liberalization were also felt in terms of load factor, with airlines increasing their capacity utilization from around 54% in 1975 to 85% of aircraft seats in 2019. It was precisely in this context that the proliferation of low-cost carriers (LCCs, as commonly mentioned in the literature) began, culminating in a boom in the growth of this type of airline over the past 30 years (Picardo, 2023).

Low-cost carriers (LCCs) have been making remarkable progress for several years, demonstrating strong market performance, providing crucial value to the aviation sector, and meeting passenger preferences (Statista Research Department, 2023). Consequently, the global market share of LCCs has increased significantly, with the Statista Research Department (2021) noting that in 2006, their market share was around only 15%, whereas since 2017, these airlines have represented more than one-third of the air transport sector (Statista Research Department, 2023).

The success and extremely positive evolution of LCCs to this day can be attributed to various factors, including some developments dating back to the origins of these airlines in the 1970s (Picardo, 2023). Among the many possible factors, the business innovation capacity of LCCs is often highlighted, as it is essential for achieving high operational efficiency, with high load factors, a reduced cost structure, and an organizational framework that meets demand needs (Statista Research Department, 2023). In a very simplified way, it is by following these principles that many airlines of this type have managed to ensure their survival and prosperity in today’s aviation market.

When discussing success stories, regardless of the metric used to measure performance, it becomes relatively easy to highlight a few examples that stand out from the competition. For instance, in Europe, the most notable success cases are the three largest LCCs: Ryanair, EasyJet, and Wizz Air (Rowland, 2022). On the other hand, when analyzing the Skytrax ranking, which lists the best low-cost airlines based on passenger satisfaction indices, the standout success stories are the Asian carriers AirAsia, Scoot, and IndiGo. Interestingly, the first European LCCs to appear in this ranking are not the three mentioned above but rather Volotea and Transavia (Skytrax, 2024).

However, the LCC industry is not only characterized by success stories, and the economic viability of these airlines is not always easy to ensure. In this context, there are also numerous examples of failures, such as Roots, CanJet, Swoop, and more recently, Lynx Air (Reynolds, 2024). It is worth noting that all these examples pertain to the Canadian market, which could suggest a specific issue in this region. However, similar failures can be found in other markets as well, such as the Colombian airlines Viva Air and Ultra Air, which both went bankrupt in 2023 despite having a market share exceeding 20% in some Colombian airports (Figueroa Alcázar, 2024).

Thus, the aim of this scientific article is to analyze the LCC market, with a particular focus on its economic viability, and to identify the factors that differentiate success from failure. In other words, this research is dedicated to studying and identifying the critical success factors for an LCC to ensure its survival and economic viability. To achieve this goal, two successful case studies will be analyzed: Southwest Airlines and Ryanair—the two LCCs with the highest net income in 2019 (before the COVID-19 pandemic). Additionally, a case study of failure will also be examined, specifically focusing on the low-cost airline Flyr, which ceased operations in 2023.

2. Theoretical Context

To frame the topics investigated in this article, this chapter is dedicated to theoretical contextualization. First, the concept of critical success factors is addressed, defining what they consist of, methodologies for identification, and some practical cases where this concept has previously been applied in the scientific community.

Subsequently, a subchapter is presented, introducing the low-cost carrier market and its economic viability. This section analyzes the competitive market in which low-cost airlines operate, addressing how they have survived and prospered, and identifying the most successful airlines in the market that have served as the basis for case studies in this work.

2.1. Critical Success Factors

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2.2. Economic Viability of Low-Cost Airlines

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3. Methodology

This research adopts a predominantly qualitative approach, primarily focused on literature review and case studies analysis. The literature review and qualitative analysis of case studies, complemented by some numerical analysis, provided an in-depth understanding of the factors associated with the economic viability and prosperity of low-cost airlines. As previously mentioned, the case studies were selected based on their relevance to the topics discussed, allowing for an analysis that incorporated a slightly more practical perspective on the applicability of these factors.

The development of this methodology provided the necessary foundation for the subsequent analysis of results and the identification of Critical Success Factors in the LCC market.

3.1. Literature Review

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3.2. Case Study: Southwest

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3.3. Case Study: Ryanair

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3.4. Case Study: Flyr

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4. Results

This study focused on analyzing the economic viability of low-cost airlines, based on a literature review and the analysis of three case studies: Southwest and Ryanair as success cases, and Flyr as a failure case. The results obtained provide important insights into the critical success factors that enable a low-cost airline to survive and prosper in the highly competitive aviation market.

4.1. Southwest

Southwest Airlines stands out as one of the greatest success stories in the LCC sector, adopting a unique approach focused on organizational culture and customer service. To implement its strategy, the airline prioritized employee satisfaction, recognizing that happy employees are key to ensuring better service for customers. Furthermore, Southwest invested in a standardized fleet of Boeing 737 aircraft, which simplified maintenance and training tasks, as well as streamlining other processes through technological innovations, thereby significantly reducing its cost structure.

Overall, Southwest’s success stems from its ability to keep operating costs low and offer affordable fares, allowing it to gain and maintain a strong position in the U.S. market. Summarizing this case study in terms of critical success factors, the following stand out:

• Strong organizational culture – prioritizing employee satisfaction.
• Process simplification – essential for cost reduction.
• Innovative marketing approach – using creative and effective marketing strategies to attract and retain customers.
• Emphasis on service quality – also crucial for passenger loyalty.
• Low, yet competitive fares – effective Revenue Management or similar techniques to ensure revenue optimization and its coverage of costs.

4.2. Ryanair

Ryanair, on the other hand, is recognized as the largest low-cost airline in Europe, achieving its success through the implementation of a cost leadership strategy. This airline focuses its greatest efforts on reducing operational costs across all areas, from its fleet of aircraft to onboard services. Additionally, Ryanair has promoted an aggressive expansion of its destination network, coupled with the optimization of secondary and regional airport usage, which has allowed it to achieve a dominant position in the European market. Complementarily, the airline also stands out for its strong focus on diversifying revenue sources, with ancillary sales well above average, which now significantly contribute to its economic viability.

Logically, Ryanair shares with Southwest the fact that its success is primarily based on maintaining low operational costs and offering equally low fares, which allowed both airlines to gain and secure a strong position in their respective markets. However, in this Ryanair case study, the following critical success factors stand out:

• Aggressive cost leadership strategy – outsourcing expensive operations, negotiating airport fees, and controlling staff and advertising expenses to minimize costs and ensure leadership with the lowest fares in the market.
• Expansion of the destination network – constant and flexible growth of the destination network, which helps diversify risk and provides the airline with bargaining power.
• Use of secondary airports – increases Ryanair’s bargaining power and simultaneously contributes to aggressive cost reduction.
• Operational efficiency – the use of younger and more fuel-efficient aircraft, complemented by a focus on punctuality and route flexibility.
• Ancillary revenue – strong focus on exploiting additional revenue sources.
• Minimalist marketing approach – specific marketing strategies to maximize visibility while minimizing advertising costs, concentrating efforts on the company website.

4.3. Flyr

In contrast to the previous two cases, Flyr was a low-cost airline that faced a series of challenges leading to its bankruptcy. Despite adopting an employee-centered model similar to Southwest’s, Flyr was unable to overcome several factors that contributed to its financial difficulties, such as the aggressive competitiveness of the Scandinavian market and travel restrictions associated with the pandemic. Moreover, the rapid fleet expansion and the growth of its destination network were promoted in an unsustainable manner, coupled with the use of more expensive aircraft, which contributed to its economic insolvency and prevented the airline from surviving for long.

Like all other LCCs, Flyr attempted to base its success on offering low fares but failed to achieve the necessary cost structure reduction seen in the Ryanair and Southwest cases. Thus, in this case study, the following critical factors of (in)success stand out:

• Proper market entry timing – not always easy to time, but entering the market during the pandemic was one of the key factors that contributed to Flyr’s failure.
• Market conditions – thoroughly analyzing the market before entry, as aggressive competition in the Norwegian market was another crucial factor in Flyr’s failure.
• Rapid and unsustainable operational expansion – getting the timing right for expansions is essential, and these should be carried out with stable and healthy operational and financial indicators.
• Fleet selection – ensuring that aircraft choices impose the least financial stress possible on the airline’s management.
• Availability of capital – it is important to remember that the aviation industry is capital-intensive, and difficulties in raising funds were another relevant factor in Flyr’s bankruptcy.
• Business model – adopting an employee-centered model cannot be the only focus of an airline, and it must be properly complemented with other strategies, particularly cost-reduction strategies in the case of LCCs.

4.4. Critical Success Factors for the Economic Viability of LCCs

In conclusion, the results of this study show that the success of low-cost airlines is intrinsically linked to their ability to control costs, diversify revenue sources, and adapt to market conditions, among other factors. When attempting to define a set of critical success factors, logically, there is no one-size-fits-all answer. Certain factors may be more significant for one airline and less relevant for another operating in a different context. Additionally, through the analysis of the case studies, it became clear that there is more than one possible strategy that can be implemented by a low-cost airline to ensure its survival in the market and drive it to success.

However, the results of this research allow us to conclude that, regardless of the airline or its market, there are certain factors that are transversal to any low-cost carrier. Thus, through this study, eight critical success factors for the economic viability of LCCs were identified, as shown in the figure below.

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5. Conclusions

This research provides a comprehensive overview followed by a detailed study of the economic viability of low-cost airlines, through a literature review on the topic and subsequent analysis of three distinct case studies: Southwest and Ryanair as success examples, and Flyr as an example of failure. The results obtained reveal key elements regarding the critical success factors for LCCs to survive and thrive in a highly competitive air travel market.

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The results of this research allowed us to conclude that, regardless of the airline and its market, there are certain factors that are transversal to any low-cost airline. Thus, eight critical success factors for the economic viability of LCCs were identified:

• Availability of capital.
• Market analysis.
• Diversifying revenue sources.
• Process simplification.
• Adjusted marketing strategy.
• Fleet selection.
• Bargaining power.
• Flexibility and adaptation.

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