Economics of Low Cost Airlines

Airlines are a tough cut-throat business. A large number of airlines across the world are making losses, and others are barely profitable. The business becomes even more challenging when it comes to low-cost airlines. There is very little margin for error. Only airlines which are extremely efficient in their operations can turn around a profit.

Big airline companies have failed to launch successful budget airlines. It seems to be a niche that only a handful of enterprises have mastered. Although there are a few successful low-cost airlines in Asia and America as well, for the most part, Europe is their home. Ryan Air and Easy Jet from Europe are the top low-cost airlines in the world. They sell tickets for less than 100 euros on almost all their flights and still manage to make a decent profit. In this article, we will have a closer look at the economics of low-cost airlines.

Standardization

Low-cost airlines follow a high degree of uniformity. For instance, all the planes in Ryan Air’s fleet are Boeing 737. They are almost the same model. This is in contrast to larger airlines like KLM and Lufthansa which have different types of planes in their fleet. The advantage of having a single type of jet is that it is easier to train people how to use it. Right from pilots to cleaning staff, everyone in Ryan Air is used to working on the same type of planes. Hence, their training is easy. The employees can be used interchangeably across locations since they do not have different skills.

Standardization helps employees move faster up the learning curve. With the passage of time, the crew becomes increasingly efficient. Companies like Ryan Air prefer to have their jets always in the air. They do not halt at all for anything except cleaning and servicing. Faster cleaning and servicing means the jet stays in the air for longer and makes more money for the company

These planes also tend to have the same type of seats with minimum space. This allows the airlines to sell maximum tickets. There are no business class or first class seats available in low cost airlines. Some seats like aisle seats tend to have more leg room than the others. Low cost airlines sell these seats for a slight premium.

The extent of standardization is such that budget airlines do not take connecting flights. This is because connecting flights require a different process for ticketing and baggage transfers. Since this would interfere with the airline's regular operations, such processes are simply avoided.

Younger Fleet and Crew

The common perception about low-cost airlines is that they use planes which are older and outdated to lower costs. That does not seem to be the case. All major low-cost carriers have younger fleets when compared to full-service airlines. This is because younger planes are technologically more advanced and therefore offer better fuel efficiency and other economic advantages.

The cabin staff of the low-cost airlines also tends to be young and inexperienced. Budget airlines often train complete newcomers to perform the tasks. This allows them to employ people for a fraction of the cost that other airlines would. The staff is provided minimum safety training, and within a few weeks, they are ready to learn by experience while performing on the job!

Cheaper Airports

Budget airlines almost never fly out of the main airports. Airports like Heathrow and Charles De Gaul in Paris are expensive since they have a large number of flights coming in each day. Instead, these airlines have developed airports in nearby towns to these mega cities. Most of these airports are 80 to 100-minute bus ride away from the main city. However, since they are out of the city, they only receive traffic from budget airlines like Ryan Air and Easy Jet. As a result, these airlines have tremendous bargaining power over these airport authorities and personnel. They negotiate the cheapest possible rates and pass on the benefits to their consumers. Even if these airlines fly to the main airports in bigger cities, they tend to fly at unusual times. This allows them to minimize their costs under all circumstances.

Automation

Low-cost airlines rely heavily on automation to bring down the cost. They never provide physical ticket printouts to their customer. In fact, they charge the customers heavily in case such printouts are required. Also, the check in almost always done by machines. There is little to no ground staff that these airlines employ. Similarly, the baggage operations are simple and often mostly mechanized with the need for fewer workers. The rising minimum wage laws in Europe make automation an extremely viable option allowing airlines to heavily cut costs.

Economies of Scale

Budget airlines have to operate on a large scale. A successful budget airline by definition cannot run a smaller fleet. This is because to gain the lowest cost from suppliers, they need to have vast operations. A small airline has little to no bargaining power and is more likely to lose money than to make some.

To sum it up, budget airlines have a very different business model. This model requires a high degree of efficiency and precision to make money and cannot be easily emulated.


❮   Previous  Article Next  Article   ❯


Authorship/Referencing - About the Author(s)

MSG team comprises experienced faculty and professionals who develop the content for the portal. We collectively refer to our team as - “MSG Experts”. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.

Managerial Economics