Case Studies in Business and Management
Analyzing the Impact of Sunk Cost effect on Low-Cost Carriers in the GCC: A case of Wizz Air
Abstract
This study investigates the operational strategies of low-cost carriers (LCCs) in the Gulf Cooperation Council (GCC) region, focusing on Wizz Air’s market entry and subsequent exit in the UAE. Utilizing the framework established by Schlumberger and Weisskopf (2014), the implications of sunk costs are explored, particularly in regulated environments characterized by unique economic factors. The aviation market in the UAE presents a unique landscape influenced by a range of rentier economics and competitive dynamics. Wizz Air’s entry into this market marked a notable deployment of a purist lean business model, distinct from legacy of the hub-and-spoke systems. This study seeks to analyze whether the decision-making processes of Wizz Air are affected by sunk costs and how these factors interact with LCC operations in the region. This study employs comparative analysis, benchmarking Wizz Air against peer European no-frills airlines, including Ryanair. Data was collected from industry reports, research publications, and financial statements, to assess the effectiveness of Wizz Air’s operational strategies and decision-making processes regarding its investment in the UAE. Evidence suggests a reverse sunk cost effect in Wizz Air's case; a behavioral phenomenon where the company’s initial substantial investments reduced the likelihood of continued financial commitment. This behaviour contradicts most behavioral economics literature on sunk cost fallacy, where escalation of commitment typically increases with sunk costs. The results indicate that Wizz Air’s reluctance to invest further in the UAE can be attributed to a calculated response to perceived risks and operational challenges unique to the Gulf market. This study concludes that Wizz Air’s exit from the UAE; displayed a behaviour based on rational disengagement arising from loss aversion, deeply rooted in the managerial decision-making processes.
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DOI: https://doi.org/10.5296/csbm.v11i1.23215
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