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The empirical valuation of the potential success in low cost business model in Asian aviation market Taweelertkunthon, Natthida

Abstract

The first low cost carrier phenomenon was observed in the US in the early 1970s even prior to deregulation in its domestic aviation in 1978. In the 1990s, this low cost evolution came across the Atlantic and it has been repeated in Europe. In Asia, the low cost challenge is a more recent phenomenon, but it is growing rapidly particularly in Southeast Asia, a unique region where economics and the aviation environment are unlike that of either the US or EU. This thesis thus asks a fundamental question of whether low cost carriers (LCCs) will enter and gain market share in Southeast Asia, in a similar fashion to what has happened in the US and EU. This thesis investigates two principal questions: (1) how serious a threat do Asian budget carriers pose to traditional state-owned carrier’s core business; we do this by examining what is the degree of demand substitutability among carriers?, (2) is there any risk of cannibalization in the ’airline within an airline model’ in this region, implying the major carrier’s launch of a low cost offshoot may not be a sustainable strategy to respond to low cost competition. Discrete choice models, multinomial logit (MNL) and nested logit (NL) models have been applied to estimate the factors affecting carrier choices based on data obtained from a passenger survey conducted at Bangkok International Airport in November 2005. The demand substitutability analysis reveals that for short haul leisure market, low cost carriers can easily penetrate this market with low fare no frills offerings. Short haul leisure passengers do not value differences in product offerings between network carrier and low cost carrier, and among the low cost carriers. Unlike leisure passengers, business passengers do value the competitive distance between the two different types of products offered by legacy carriers and low cost carriers. Market share simulations have provide some evidence of cannibalization in airline within an airline between Thai Airways and its low cost subsidiary Nok Air. The cause of their inadvertent self-cannibalization comes from the incompatibility and inadequate level of uniqueness and distinction between the mainline parent and its low cost offshoot.

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