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Membership in Oneworld, SkyTeam, or Star Alliance, have resulted in full-service carriers dominating the Trans-Atlantic market for decades, and experts believe that international fares remained high due to limited low-cost competition (Mouawad, 2016, para. 8). Yet, in the domestic market, low-cost short-haul carriers (LCSH) entered service with shorter routes, offering cheaper fares than legacy carriers offered. However, the trend has been for these low-cost carriers to diversify and expand operations into long-haul routes (De Wit & Zuidberg, 2012). Multiple factors have spurred interest in low-cost long-haul carriers (LCLH)—liberalization of air markets, decline in jet fuel prices, and technology that improved aircraft efficiency with lower operating costs (De Poret, O’Connell, & Warnock-Smith, 2015). As a result, low-cost carriers, Norwegian Air, AirAsia X, WestJet, and Cebu Pacific have added widebody fleets to operate in the long-haul Trans-Atlantic and Asia-Pacific markets. In order to be competitive, full-service carriers have established LCLH airline-within-airline operations, by creating subsidiaries—Air Canada with Rouge, Singapore Airlines with Scoot, Qantas with Jetstar, and Lufthansa with Eurowings.
In the Asia-Pacific market, Malaysian LCLH carrier AirAsia X began long-haul operations with the A330 in 2007 (CAPA, 2013). AirAsia Group has the lowest unit costs of any airline in the world (CAPA, 2013). Since 2013, Cebu Pacific, a Philippine carrier, has catered to price sensitive migrant customers, willing to sacrifice comfort for a cheap fare on long-haul routes. Cebu Pacific’s A330-300 aircraft, The Flying Bus, has the highest seating density of any airline or fleet type, packing in 436 travelers featuring nine seats across (Philippine Flight Network, 2013). Norwegian Air is the third largest low-cost carrier in Europe, and operates the B737 on European short-haul routes. In 2013, Norwegian Air acquired the B787 Dreamliner, and established Trans-Atlantic operations with a two-class, moderate-density configuration. In 2015 an Icelandic carrier, WOW air, commenced Trans-Atlantic service with A320s between the US and Europe, and in response to WOW air moving into the Canadian market, WestJet initiated service with B767s late in 2015, with service between Canada and Europe.
Asia-Pacific carriers AirAsia X and Cebu Pacific are successful LCLH carriers, in part, due to their advantage of being able to globally outsource low-cost labor and utilize flexible labor rules to minimize crew expenses (Bachman & Matlack 2015). Norwegian Air, a Trans-Atlantic carrier, has been able to enjoy labor cost advantages by hiring contract pilots and cabin crew, and taking advantage of favorable tax and labor laws (Bachman & Matlack, 2015). However, Norwegian Air’s labor cost advantages are less than its Asia-Pacific counterparts, as its cabin crews are now European and American, rather than Thai, to appease US government officials in an attempt to acquire a foreign carrier operating certificate (Bachman & Matlack, 2015).
The continuous growth of LCLH carriers in Trans-Atlantic and Asia-Pacific markets drives the competition among airlines. The cost structure of LCLH carriers raises questions about the efficiency of an airline in comparison with other airlines in the same markets. Extant literature has not examined relative efficiency or inefficiency of LCLH carriers in terms of cost structure or what inputs or outputs an inefficient carrier could improve upon. For LCLH carriers to be competitive in the world market this research is essential. This raises an important research question: To what extent do AirAsia X, Cebu Pacific, JetBlue, Norwegian Air, and WestJet make efficient use of inputs and outputs relative to peer group airlines?
The purpose of this paper is to determine the best practice or efficient frontier for the noted peer group of airlines using the Data Envelopment Analysis (DEA) method, and to identify inefficient airlines. As a result, the viability of LCLH for carriers in different geographic regions including Asia, Europe, and North America could be evaluated, with recommendations for improvements to address slack regarding inputs and outputs.