Employee compensation. Labor repres

Employee compensation. Labor represents one of the most important single cost items for the airline industry.
Figure 2 compares average quarterly salary and benefits per employee for the three groups of carriers. According to
this measure, the LCCs enjoyed a substantial cost advantage over their competitors in particular between 1995 and
2005. It would be wrong however to attribute the success of the LCC model entirely to the labor cost differential.
During the period under examination, labor costs incurred by Southwest Airlines, the most successful LCC, were in
fact very close to and higher than those of the FSCs. This is consistent with the efficiency wage argument according
to which high pay leads to more motivated and productive workers. At the same time, Southwest’s unionized labor
force might be driving the recent increases. Two factors can explain the overall convergence between compensation
levels: Going through bankruptcy protection allowed the FSCs to cut costs across the board and re-negotiate labor
compensation agreements. On the other hand, the LCCs have been subject to seniority related increases in labor
costs. Given this convergence, it will be interesting to observe how the pricing power of the LCCs will be affected in
the near future.
Network structure and operations
Average stage length. Average stage length for an airline is defined as the average distance flown on non-stop trips.
The core LCC model, as pioneered by Southwest, is based on short- and medium-haul flights that allow quick
turnaround times. There are however important exceptions from this pattern. For example, relatively new LCCs like
JetBlue and Virgin America flew non-stop distances longer than 1,000 miles from the very beginning. This can be
attributed in part to the increased availability of adequate aircraft and the increased presence of LCCs at
international vacation destinations. On the other hand, Southwest has been only slowly increasing the average length
of their non-stop flights and is currently at the bottom of the distribution according to this measure. Figure 3
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