Two Ways to Fly South: Lan Airlines and Southwest Airlines

1. How does LAN Airlines' business model create and capture value?

As a full-service carrier company, LAN Airlines had a great success in introducing no-frills offerings to compete with low-cost carrier companies and in its international cargo business by successfully operating three business models at once: No Frills Domestic – Air Cargo- Full Service International. Among those three, what made the company distinctive is its cargo business. Revenue from Cargo service made up 31% of LAN’s revenue in 2011. (less than 5% in American, Delta, and United) Although other airlines such as Korean Air achieve about a third of its revenue from cargo, LAN is distinct in that it transports fully 35% of its shipments in the belly of wide-body passenger aircraft. In order to make it possible, LAN sought to integrate the planning and scheduling of the cargo business with passenger routes. However, when the company initiated its domestic business in 2007, it decided not to combine cargo and passengers in the same route because the company had to compete efficiently with its domestic competitors, and because the demand for the air cargo service was far lower in domestic markets since there were other transportation such as truck and train. Also, LAN Airline decided to lower the price of its domestic tickets by offering only a basic level of service to its domestic customers since they knew that passenger demand for LAN’s domestic air travel is highly elastic. As lower prices have led to dramatic increases in demand, the company now holds the largest market share of passenger traffic in Chile and Peru and is increasing its market share in other South American countries. Also, LAN has not only the largest market share of international passenger within South American countries, but also approximately a third of Latin American air-cargo market, as its supplementary full-service international career and international cargo service have produced many mutually reinforcing advantages....