Game Changer

CHAPTER 18Scale: Achieving the Ultimate Cost Advantage

With contributions from Ipshita Bhattacharya and Lionnel Bourgouin

Airlines once enjoyed monopolistic pricing power due to government regulations on fares, routes, and market entry of new airlines. As we explained in Chapter 13, deregulation starting in the late 1970s eventually led to a dynamic pricing methodology known as yield management.

However, some airlines took a radically different approach. Instead of managing yield to optimize prices for each customer, they reimagined costs as a way to drive down prices and pricing as a way to create cost efficiencies. They built their businesses around a tight alignment between prices and costs, the key success factor in the Cost Game. Airlines such as Southwest in the United States, Ryanair in Europe, and AirAsia in Asia focused on improving efficiency to lower costs and prices, accelerate their growth, improve profitability, and generate the funds to invest in innovation or further cost advantages.

Unlike legacy airlines, these low‐cost carriers (LCCs) viewed air travel as a commoditized service to move passengers from point A to point B. As a result, they seized an opportunity to expand the market for air travel by capturing consumers who were priced out by legacy carriers. An executive from Southwest once said, “We're not competing with other carriers. We want to pull people ...