Air travel was once restricted to only the very wealthy but deregulation in the 1970s led to the creation of the budget airline. This cheap flight revolution was initiated by Southwest airlines in 1971 and flew to Europe with Ryanair by 1990. Now standardised flying is the norm, classes on these aeroplanes have been abolished and flights can have an an average price of £26. But how can budget airlines afford to be so budget?
If you were to book a flight for early April from Manchester to Warsaw it would cost £33 with Ryanair but with British Airways it would cost £140 – on exactly the same day. The reason that such a price differential can exist is that budget airlines are extremely effective at massively cutting down costs. They’ve ditched expensive overheads like free food and drink. They’ve made it an extra you pay for to have luggage in the hold. Tickets are predominantly purchased through direct booking, cutting out commissions charged by travel agents.
They’ve also saved (and sometimes lost) money through fuel hedging; bidding against future prices by buying oil at a fixed rate. As fuel accounts for a significant proportion of all airlines’ operating costs – 46% of Ryanair’s – this can be at times an extremely cost effective measure. Whilst all airlines do this what sets budget airlines apart is that they are particularly good at it. Between 1991 and 2008 Southwest Airlines paid an astronomical $3.5 billion below industry average for jet fuel using this tactic, which to put into perspective is more than Liberia’s nominal GDP last year.
Where they fly to is also interesting. Ryanair doesn’t fly from Heathrow but will from Bournemouth. From Bournemouth you can’t fly to Germany, France or Italy but can to Malta. However, the reasons for targeting seemingly obscure but predominantly smaller, less in demand airports are economically sound. Planes do not make money sitting on tarmac, so it makes sense to fly to airports with faster turnarounds due to less traffic. These airports are also cheaper to land in as there is a greater opportunity for negotiation over the cost of transporting passengers in and out of them. However, even this Ryanair is trying to cut down on by opening up its own terminals like Terminal E in Bremen (again obscure), as its second highest expense is airport and handling charges. Again, this makes sense, budget airlines have budget terminals.
The planes that they would use to fly to their budget terminals are also all identical. The aircraft industry can benefit from huge economies of scale, and low cost airlines are more than aware of this. They operate a standardised fleet, using only one type of plane, which in Southwest and Ryanair’s case is the Boeing 737. This relatively small passenger jet costs $50 million or more to produce but a significant amount of money is saved on maintenance as all the planes are the same. A Boeing 737 flown by these two airlines also carries around 20 more passengers than one flown by Lufthansa, for example. Even though airlines have high fixed costs the marginal cost of a passenger verges on zero, making this a very advantageous approach.
So this all means cheaper flights for customers, so is this really a bad thing? There is the argument that the mark-up on in flight snacks is ridiculous – a study of 6 major airlines showed this could be up to as much as 2600%. There is also speculation that being cost-effective may be at the expense of safety, a claim that low-cost airlines adamantly deny. In fact, Southwest airlines has never had a crash and Ryanair has had only one but with no fatalities - they may cut corners with costs but not on safety.
And where do they go from here? Well, Ryanair somewhat controversially suggested standing space on its fleets, Airbus is looking at replacing single seats with rows to operate a higher seat density. There is also an opportunity to expand into long-haul flights which generate 90% of mainline network carriers’ operating profits. However, with prices still falling and Ryanair’s ‘madness sale’ earlier this month which saw plane tickets being sold for as little as a pound its unlikely that any of these strategies will need to take off any time soon.
Image from:
http://www.airmalaga.com/blog/the-low-cost-airlines-transported-almost-13-more-passengers-in-2011/
