The effect of LCC market entry on dominant FSC's price into long haul sector: A case of Norwegian competition on British Airways' prices on selected transatlantic routes

Abstract

The concept of long-haul low-cost operations has become somewhat appealing in the airline industry in recent years. In Europe, the rapid expansion of low-cost carrier Norwegian that entered the long-haul markets from several large metropolises (London, Paris, Barcelona, etc.) imposed a burden of challenges to full-service carriers (FSCs). However, Norwegian operates a large portion of its long-haul service from London Gatwick by offering flights mainly on high-density routes. Although Norwegian’s capacity and market shares on these routes are still at a low level mainly due to the carrier’s “puppy-dog” strategy, it seems that its effect on British Airways, the dominant carrier on these markets, cannot be ignored. The purpose of the research is to examine the extent to which the presence of Norwegian affects the prices charged by British Airways on three selected high-density transatlantic routes performed from London area. The model applies simultaneous equation systems to determine how the emergence of Norwegian affects the price and the passenger volume of British Airways, as a traditionally dominant carrier, at the city-pair markets. The findings are consistent with the well-established view held in the literature, that a LCC’s presence at a specific market would generally affect the incumbents to reduce their prices. Indeed, British Airways announced the capacity expansion as a counter-strategy to mitigate the competitive pressure induced by Norwegian and its affordable service.