ABSTRACT
This chapter tries to answer the questions why low cost airlines arise and why they have been more successful than low cost carriers of established airlines. It presents answer to these questions in a theoretical framework and analyses an annibal model which tries to capture some main aspects of the airline market. Since the established airlines have operated in the market for a long time, they have already chosen the market segment which is most profitable. This segment consists of the business travellers. To avoid fierce competition a new entrant has to choose another segment, the leisure travellers, from whom he could demand only lower prices but could offer lower quality which results in lower costs. The chapter sets out the model, provides a discussion of the assumptions and analyses the equilibrium of the model. It considers the predation strategy of building an own low cost carrier and presents several possible extensions of the model and its policy implications.
