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There are various full service carriers (FSCs) who have a separate low-cost carrier (LCC) subsidiary. For example:

Why do the FSCs prefer to launch a separate LCC, rather than providing seats at a cheaper rate with reduced comforts within their existing structure?

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    $\begingroup$ It may be of interest that not only airlines use this tactic. Companies like Unliever or Procter&Gamble try hard for their brands (ranging from washing powder to Pringles) not to be percieved as connected to one another or to the parent company. $\endgroup$ – Pavel Jul 29 '15 at 14:41
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    $\begingroup$ @PavelPetrman: Also brands can be sold by Unilever to P&G, or Sara Lee, and vice-versa. $\endgroup$ – mins Jul 29 '15 at 20:47
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  • They still want to get into the low cost segment but want to market themselves differently for better penetration. You can only present so many images of a brand to customers: You can't show both the super-cheap prices with happy youth on them and posh first class at the same time.

  • They do not want to tarnish a nice brand by mixing it with a low cost carrier and what that is perceived to entail. For instance, Germanwings got a somewhat infamous reputation recently, and Lufthansa is probably happy their name was not more frequently used in media. Low cost is also associated with less good customer service and hidden fees.

  • Crew are often less well paid, and they are sometimes put under a separate working agreement and company to try to prevent conflicts. Some legacy carriers have very good pay which is difficult to reduce. Management does not want to be bound by these when expanding or adjusting their business.

Each case is pretty specific depending on exactly they are trying to do and achieve. For many American Carriers and Lufthansa, the last one is probably the principle reason.

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    $\begingroup$ "For instance, Germanwings got a somewhat infamous reputation recently, and Lufthansa is probably happy their name was not more frequently used in media." - if you are referring to flight 4U9525, as far as I remember, about every single news article that I happened to read about the incident said something like "Lufthansa subsidiary GermanWings". In fact, the tragedy was how I first learned that GermanWings has any connection to Lufthansa at all. $\endgroup$ – O. R. Mapper Jul 29 '15 at 12:24
  • $\begingroup$ @O.R.Mapper indeed, but it's still more abstract than the main brand itself. It's generally now pretty consistently referred to by the Germanwings name. Take Colgan Air Flight 3407 that was actually Continental Connection flight for instance. $\endgroup$ – Thunderstrike Jul 29 '15 at 14:54
  • $\begingroup$ Despite having read reports of the incident, I learned just now (as far as I can recall) that Germanwings was a subsidiary of Lufthansa. If I did not have a particular interest in aviation I still would not know this, so apparently the parent company can avoid some unwanted "name recognition." $\endgroup$ – David K Jul 30 '15 at 12:53
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As mentioned there are lots of branding issues around this but there are also lots of corporate and legal reasons to do so.

  • Business Isolation: If you want to start out a bunch of new routes and you are not sure how well they are going to do a large airline my not want to book that kind of loss or risk having to cover it. Thus they can incorporate a "new" airline and protect their existing and profitable business interests should the "new" airline go under. Likewise it also makes it easier, should it be very profitable, to potentially sell it off (or absorb it as well).

  • Taxes/Fees: Tax law changes from place to place so this may differ depending on where they are based but if there are different taxes as a result of company size or specific aviation taxes they may be able to take advantage of them by splitting up.

  • Legal Isolation: I am no lawyer but I am sure that how ever they set these up it isolates the parent airline should anything happen to the other carrier.

  • Image/Branding: this has been touched on already but as mentioned you may not want the image that comes with running a low cost brand associated with your luxury brand.

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I would imagine this has to do with branding. Kind of like how some car companies have both "regular" and "premium" brands. Eg., Chevy v. Cadillac or VW v. Audi, etc etc. It allows for companies to have a more exclusive version of their product for people who are just the premium, exclusive sorts...

Granted there are other cost considerations, and other branding considerations, and I could probably sit here and go on for hours with that but I think it would be a little bit outside of scope.

So, to just give a basic explanation: Different brands have different associations with them. Some are seen as premium, exclusive, indulgent. Others are seen as just hitting the basics. And some companies will avoid mixing the two just for the sake of brand identity in marketing.

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As mentioned in earlier answers, branding and management (pay, collective bargaining agreements, etc.) are certainly two major factors. And legacy airlines are mindful of the risk to see their profit cannibalised by the new cheap fares so they need to maintain as much segmentation/price discrimination as possible.

Interestingly, the two strategies are not exclusive. Air France/KLM has several low-cost subsidiaries (Transavia, Transavia-France and HOP!) but also introduced many low-costs tactics (no meal, surcharge for hold luggage…) on short-haul European routes on both legacy airlines.

The thing is that some elements of the low-cost model (paid refreshments, quick turnaround, routes to cheap airports or use low-cost terminals at major airports, single-class cabin with as many seats as possible, identical aircrafts…) can only be introduced for the whole airplane or even the whole fleet. And for a highly price-sensitive market segment, merely using some elements of the model to offer lower prices is not enough, you need to go all in to ensure your fares are as low as those of your direct competitors (say Easyjet, not necessarily Ryanair).

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    $\begingroup$ This is the idea (rather than the brand segmentation for marketing purpose). But probably the compelling reason is to have a different cost structure, starting with radically different policies: wages and advantages for the employees (not only the crews), suppliers and contractors T&Cs, premises, management staff, etc. In short they run a different company with no constraint related to the main brand. Ther new company may even make comparable or better profits, but in case of losses, then the main brand profits won't be hurt. $\endgroup$ – mins Jul 29 '15 at 20:27
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    $\begingroup$ Actually they have 2 low cost: Hop ! and Transavia $\endgroup$ – Antzi Jul 29 '15 at 22:02
  • $\begingroup$ @Antzi I added that to the answer, thanks! $\endgroup$ – Relaxed Jul 29 '15 at 22:05
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A business reason no-one has mentioned yet is the original reason the big names started:

Because low cost airlines began flying routes cheaply and created a market

If the big names hadn't joined in, all that revenue would have gone to the low cost airlines, who would have grown to the point they could potentially compete in the existing markets, so it was essential that the big players joined in.

It is not possible to run a low cost airline in the structures of a major airline (the cost model is entirely different - passenger demographics, services on board, pre-flight hospitality, additional benefits etc.) so the only way to do it that makes financial sense is to run it as a separate logical entity.

It has proven to be a difficult change for some of those big airlines, with various attempts at creating budget versions failing, but some have managed to compete successfully.

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protected by Farhan Jul 30 '15 at 14:16

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