How do budget airlines make money?

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How do budget airlines make money?

One way that these airlines keep costs down is by limiting their amenities to the bare minimum. Think of no internet or seatback entertainment. They tend to entice travellers with low base fares and then charge for add-ons such as seat selection, food and luggage, all of which will frequently add up to more than the fare itself.

Let’s find out more about how budget airlines work and why airlines in Europe are able to offer even cheaper fares than their U.S. counterparts.

If there's one thing that's been constant in the airline industry, it's the jokes and criticisms thrown towards budget airlines. But there are some companies that have learned to play this game well and turn things around in their favour. Ryanair, the Irish low-cost airline, is a prime example of how humour can be used as a unique brand.

But let's not forget that the business of these no-frills airlines is no laughing matter. In fact, low-cost carriers now make up almost a third of all global airline capacity! It's amazing to see how the airline industry has evolved over the years, isn't it?

In the last 25 years, budget airlines like Southwest, Spirit, and Frontier have gained about 1% of market share almost every year. This model has become popular worldwide, not only in Europe and the US but also in Latin America and Asia. These low-cost airlines aim to stimulate a market of people who haven't flown before.

The Business Model

Many people believe that low-cost airlines offer cheap fares. However, the term "low cost" refers more to how the airline is managed and its focus on minimizing expenses. Such airlines pay special attention to reducing costs.

The low-cost business model was first implemented by Pacific Southwest Airlines in 1949 and perfected by Southwest Airlines in the early 1970s. At that time, Southwest offered frequent cheap trips between several cities in Texas.

Over time, Southwest's services have developed into a hybrid of traditional and budget airlines. In the United States, Spirit Airlines, Allegiant, and Frontier are among the popular low-cost carriers, while in Europe, budget airlines such as Easyjet, Ryanair, and Wizz Air are popular. AirAsia and Indigo are some of the low-budget airlines that serve Asia, whereas Jetsmart, GOL, and Wingo are some of South America's low-budget airlines.

One cost-cutting strategy adopted by many airlines is to offer only the most essential amenities and no internet or seatback entertainment. They attract passengers with low initial fares, but then charge extra for add-ons like seat selection, food, and baggage, which can often end up costing more than the original ticket price.

It's a practice known in the business as 'unbundling.' In the US, this comes with some tax benefits for the airlines. There is a federal excise tax of 7.5% that airlines have to pay on all flights. That 7.5% excise tax does not apply to any optional add-on fees.

So when you purchase a $100 flight and that includes checked bags, it includes seat selection and whatnot, the airline still has to pay $7.50 in tax on that $100. Instead, if you purchase a $50 ticket and then have to pay $50 to check a bag to pick your seats to buy a drink, the airline only has to pay that excise tax on the $50 ticket that you purchased, not the $50 in add-on fees.

In recent years, full-service airlines have started to compete directly with low-budget airlines. The concept is that you can purchase a cheaper ticket on airlines such as Delta, United or American, but it comes with fewer privileges. For instance, you cannot change the ticket, select your seat, or check in a bag. This idea of basic economy is only about ten years old, but it is how the full-service airlines have decided to compete with budget airlines.

Key to a budget airline's success is keeping a close eye on its operational costs by maximizing time spent in the air and passenger volume.

• Many US airlines, particularly ultra-low-cost carriers, charge more for a carry-on bag than for checked luggage. This is because carrying a bag on board can take longer to turn a plane around, resulting in higher costs. So, airlines offer cost savings to passengers who check their luggage rather than carrying it on board.

• Load factor is another measure i.e., getting as many people on those planes as possible. Hence, single-class planes are packed with seats to maximize load factor.

• Along with having a single class on board, most low-budget airlines operate fleets with just one model of aeroplane, which streamlines pilot training and plane maintenance.

• Budget airlines also tend to fly out of smaller airports with less traffic, where they can negotiate better rates for using the airport.

Flying Ryanair

Budget airlines have a significant competitive advantage on short flights, particularly in Europe where cities are densely packed together. This creates a favourable environment for budget airlines to operate and thrive.

When comparing average fare prices per mile, Ryanair consistently offers cheaper tickets compared to US budget airlines Frontier, Allegiant, and Spirit.

Here are the two most prominent reasons for the same.

In Europe, there are a lot more secondary airports than in the US. While these airports may not be as convenient for travellers, they are much cheaper for airlines to fly into or take off from. This allows airlines to pass on the savings to travellers, making flights more affordable even if they are a bit further out.

There are more airlines operating within the European region as compared to the United States. This is because the aviation industry in the US has been considerably reduced in the past few decades due to several airlines merging or going bankrupt. On the other hand, the competition among European airlines is more diverse and intense, and they also compete with train services.

But all this makes us wonder…

While Ryanair and other airlines have an edge today, in the future, will every new airline follow the budget airline model? Will the trend in the industry continue to cater to thrifty and budget-conscious travellers? Will people always expect cheaper tickets, even if it means accepting add-on fees?

As the travel industry evolves, it remains to be seen how air travel will adapt to new technologies, changing consumer preferences, and market demands.

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