The Optimal Market Entry Strategies of Low-cost Carriers: the Case of Russian Passenger Airlines

This paper aims to identify the optimal market entry strategies of Russian airlines and especially, low cost carriers (LCCs). The study focuses on how a carrier with cost advantage selects a model detecting the most profitable route for entry and analyses what it implies for consumers’ utility. Our theoretical model shows that the most profitable route for a company with a LCC is the route where the only one incumbent carrier operates. To match theoretical results with the data, we sample air fares for the period of September 25, 2018 to January 25, 2019 and estimate how they depend on the presence of an LCC on the route. The results demonstrate that for such routes, the average price declines by 35% that may involve passengers from a lower price segment. However, the only Russian carrier with cost advantage mostly operates in European part of the country that signals the government should enforce the LCC to be present at routes in Central and Asian parts or incentivize the establishment of new LCCs.