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Profitability Of Low Cost Airline

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Recently, hotly debated topics surrounding the U. S. airlines industry are frequently delaying due to severe weather, notable customer service failures, rising energy prices… Major traditional airlines were overwhelming by negative news and growing costs problems. Travelers have already been looking for a new substitution. The entry of low-cost airlines in the U. S. market has significantly influenced fare pricing and passenger traffic. According to the new research by Routesonline, four of the top six fastest-growing major airlines in the world over the past year were low-cost carriers.

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The profitability seems will continue to grow since U. S. low-cost airlines have been making efforts to expand business and reduce operation cost. This research will discuss several determinations that will affect their profit in positive and negative ways and use financial ratios related to revenue and cost to analyze their operating model. This research project uses Spirit airline as the sample of U. S. low-cost carrier. Spirit Airlines, Inc., with a no-frills ultra-low-cost carrier business model, provides low fares with friendly and reliable service to its customers. In recent years, Spirit have been experiencing increasing success due to a growing number of price sensitive customers. And Spirit is the lowest cost producer in its primary markets (per the data provided on the Spirit website).

The company achieves low unit costs by maintaining high utilization, using a high-density seating configuration in its aircraft and operating a single fleet type of aircraft. It also has minimal ground time in between flights and thinks its company-wide culture focuses on driving costs lower. Other than flight ticket sales, Spirit has highly profitable revenue from ancillary services of seat assignments, carry-on/checked baggage fees, Internet, food and drinks. This study is based on CFRA Airline Industry Surveys Nov. 2017 and the historical data from Spirit’s past five years 10-K reports Review of the Literature U. S. Low-cost airlines have become a favorite substitution to traditional airlines by providing low fares and making flight travel affordable. They increase revenues by reducing airline costs, such as charging for optional services, reducing frills fees and using secondary airports with lower taxes. Recently, some low-cost carriers have provided long-haul routes due to high demand. Summarized in November 2017 CFRA Equity Research of airlines Industry Surveys, major U. S. airlines competed with low-cost carriers by lowering price.

They have charged passengers for some services that were included in the fares before, like using overhead bins. This report provides detailed methods to analyze a company in this industry. factors related to profits includes traffic level, yield (a measure of unit revenues), labor, fuel, and maintenance cost. I’ll use this analysis method to examine Spirit Airlines’ profitability structure and revenue-relate financial variance. An evaluative research by American Journal of Business and Management predicts the future growth of international low cost airlines. It analyzes low-cost airlines’ revenue composition and marketing strategy. Mainly focus on customer service analysis by conducting a survey from low cost carrier’s passengers at London Stansted and Gatwick airports.

The conclusion is the cheap fares are the primary reasons for low-cost airlines’ success and survival. However, this research also admitted that it failed to get a deeper insight in the US market due to US market’s maturity stage. In the U. S. market, low-cost carriers are fast growing and have won a significant proportion of traditional airlines’ passengers. Based on information from customer surveys conducted in Asia and Europe, John F. O’Connell and George William addressed that there is a difference in passengers’ perceptions between low-cost airlines and traditional carriers in a mature European market and in a rapidly developing Asian market. In Europe, many airports only have a dominant single low-cost airline.

In David Gillen and Ashish Lall’s research paper, competitive advantages of U. S. low-cost carriers are identified. But they argued the U. S. low-cost airlines’ operating model is not operationally efficient and impossible to duplicate European models. Because there will be more risk and low bargaining power. Most researches are about how global low-cost airlines have cut market shares from traditional airlines and airports transform their operation models to benefit from the increasing demand for low-cost airlines. However, in the U. S. market, low-cost airlines are facing unprecedented competition because tradition airlines have changed their operation strategies. And the shapely raised fuel cost negatively impacts their revenue.

Overall, the critical success factors of U. S. low-cost carriers are: marketing, cost control, promotion, strategic alliances, load factor, financial management, rout system, customer retention, and on-time performance. With its unique operation strategy and solid customers group, however, the threat of substitution is still high. Currently, major traditional airlines, such as Delta, American Airlines, United, and JetBlue Airways, have offered a new class called “Basic Economy” with competitive low fares. Airlines are energy-intensive operations. Such as the fuel costs account for main portion of all operating expenses and are 10% of revenues averagely. However, last year, the rising fuel price has hit all airlines.

The price of jet fuel has risen 50 percent in 2017 and continues to rise this year. All airlines have cut their profit forecast and announced that they may raise fares and cut capacity. Demand for air travel to remain strong in the future. Since the U. S. low-cost airlines industry is at developing stage while traditional airlines have much longer history, there are insufficient studies about how U. S. low-cost airlines keep increasing profits under competition and fuel crisis. The difference from most of other studies is the influence of traditional airlines’ reformation and the revenue strategy changes due to the recent energy crisis. Research Objective The objective of this research paper is to analyze determinations of U. S. low-cost airlines’ profitability. And analyze several spirit’s financial ratio to find out how low-cost airline reform capital structure to growing revenue. Earnings before interest, taxes, depreciation, and amortization (EBITDA), return on equity (ROE), and profit margin are a good way to measure the profitability of the airline industry.

Low-cost airlines’ profits rely on ancillary fees. They have highly profitable revenue from ancillary services of seat assignments, carry-on/checked baggage fees, Internet, food and drinks. An improved revenue environment, along with good cost discipline and capacity controls, have led to strong profitability for airlines, although the recent increase in oil prices threatens profit growth. Higher fuel prices won’t stop customers choose low-cost airlines. It unsteadily increases the attraction of low-cost airlines’ guaranteed lowest fares and switch away from high fare traditional airlines.

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