Over the past few years the major airlines have suffered a decline in profitability and some have even filed for bankruptcy. At the same time, some budget airlines have shown considerable success offering a "no frills service" to an increasing number of passengers at heavily discounted fares.

The traditional airlines have, in the main, a vertically integrated service with many activities such as baggage handling, ticketing and maintenance delivered by their own subsidiari es. Additionally, they have continued to offer a variety of classes ranging from luxury to economy thus catering for all segments of the travelling market from business to tourist. These airlines compete fiercely for landing rights at city centre airports and have formed into two main alliances to share routes giving them global coverage. The traditional airlines tend to purchase their aircraft directly from the manufacturers whereas budget airlines tend to use leasing to source their fleet.

By contrast, the budget airlines have concentrated on the short-haul market and have heavily promoted low-cost flights to secondary airports with no service other than the flight. These low costs have been partially supported by subsidies provided by the secondary airports. An additional advantage of these airports is the rapid turnaround of aircraft on the ground since they are handling fewer flights. Aircrew, at minimum permitted staffing levels, are responsible for aircraft cleaning. The budget price includes only the flight; passengers have no in-flight services and book their tickets directly via the Internet. The budget airlines spend heavily on advertising in all popular media.

Required:

(a) Using an appropriate model of the competitive environment, discuss the difference in performance between the traditional airlines and the budget airlines and the business models they are operating.

(b) Evaluate the business model operated by the budget airlines as a source of sustainable competitive advantage.