Can Low-Cost Carriers Help Developing Countries Take Off?

February 24, 2015


Story Highlights
  • While the low-cost carrier (LCC) model has been successful in Europe and the United States, uptake has been slower in some developing countries
  • A new book explores the prerequisites, challenges and opportunities for adoption of LCC business models
  • In Mexico, LCCs claimed almost 60 percent of the domestic air transport market in 2012; LCCs also helped South Africa increase air traffic by 52 percent

Low-cost carriers, such as the United States’ Southwest Airlines and Ireland’s Ryanair, have transformed the airline industry over the last decade. According to a new World Bank Group book, this business model could also help catalyze air transport in the world’s less-developed countries, especially in Sub-Saharan Africa.

“This book strives to discover and communicate the premises and prerequisites of the low-cost carrier model, and help countries assess whether this business model could be successful in their particular contexts,” said Dr. Charles Schlumberger, co-author of the book.

The book, titled “Ready for Takeoff? The Potential for Low-Cost Carriers in Developing Countries,” strives to offer standard definitions to describe low-cost carriers (LCCs), while also exploring key characteristics and advantages, which include:

  • Simple service offerings, or a “no frills” approach that eliminates free baggage, onboard meals or assigned seating
  • Short-haul, point-to-point routes that forgo traditional “hubs” in favor of more direct transit
  • Usage of secondary airports that reduce gate charges and can often avoid air traffic congestion
  • Standardized fleet and high aircraft utilization through longer operating hours, shorter turnaround times and dense, one-class configuration.

A team of World Bank experts, including Dr. Schlumberger and Senior Director Pierre Guislain, is presenting the book at this week's Airport Economics and Finance Conference and Exhibition in London.

While the LCC model has made a substantial impact on the aviation industry in Europe, Asia and the United States, uptake has been slower in some developing countries, which could benefit from the resulting economic boost. Studies show that LCCs not only stimulate the aviation market, but also have broad positive effects on employment, gross domestic product (GDP), tourism, productivity and trade.

While the entry of LCCs into developing countries is more recent and substantive data is still emerging, the book analyzes the impact of reduced fares and increased air traffic in Mexico and South Africa.

  • In Mexico, LCCs claimed almost 60 percent of the domestic market in 2012. This has led to a surge in first-time flyers (an estimated 25 percent of passengers) and an expansion of the country’s very limited domestic routes. In addition, travelers who once endured long journeys on Mexico’s crumbling roads are now opting instead for air travel, providing a critical market segment.
  • After the introduction of LCCs to popular domestic air routes, South Africa enjoyed an air traffic increase of 52 percent between 2004 and 2006. This has been a boon for tourism to some of the country’s poorest regions, where GDP is below US$1,400 per capita. More specifically, the 52 percent increase equates to more than 62,000 additional tourists per year, which equates to millions of dollars in tourism expenditures.

The impact on LCCs on developing countries certainly depends on a variety of market conditions. However, the “Ready for Takeoff?” book identifies several key factors – gleaned from research and stakeholder interviews – for success:

  • A significant middle class to drive demand and growth
  • Air transport liberalization and privatization of monopolistic state-owned carriers
  • Low-cost transport infrastructure
  • Qualified workers
  • Appropriate safety and security regulations
  • Cost-effective financing
  • Fuel availability and cost
  • Good governance

“Just as they have revolutionized travel in many of the world’s developed countries, we believe in the potential of LCCs for developing nations given that certain conditions are in place,” said Nora Weisskopf, co-author of the book. “To that end, this book isn’t meant to provide a complete picture, but rather serve as a launch point for additional research and analysis in countries that could benefit.”

Through the fostering of competitive market environments, targeted infrastructure investments, and capacity building that addresses safety and security challenges, the book highlights significant opportunities for developing countries to harness the power of LCCs. In regions such as East Africa, for example, projected traffic forecasts and a growing tourism industry could result in soaring economic development, but a number of obstacles will have to be overcome for LCCs to be financially sustainable.