How Budget Airlines Make Their Money

Photo by Omar Prestwich on Unsplash

Budget airlines are ‘no-frills experience’, often serving short distances and providing customers with the basic experience, and where add-ons are sold separately. Accounting for one third of the global air travel industry, and with the market size forecasted to exceed $254 Billion in five years time, budget airlines’ (also known as low-cost carriers LCC) popularity is on the rise.

  Pictured above: projected size of the low-cost carrier market worldwide from 2020-2027, $Bns

Ryanair, Europe’s largest low-cost carrier is a great example of the low-cost carrier business model, with yearly profits of 875 million euros. Ryanair’s business model was taken from the US airline ‘Southwest’, but ended up simplifying it further. This model allows Ryanair to minimise costs and maximise revenue. 

Ryanair’s Business Model:

• Airports: Ryanair flies to secondary airports only, which are further away from cities than primary airports. This reduces airport taxes and enables Ryanair to receive subsidies from local councils who want to attract Ryanair’s tourists. As these airports are generally smaller, there is a shorter turnaround time, increasing Ryanair’s utilisation. 
• Majority of Ryanair’s flights are direct, which reduces transfer costs for customers, increasing it’s appeal.
• No long-duration flights over water: Ryanair doesn’t have to pay for ETOPS certification - a certification that permits aircrafts to fly routes which may be 1 hour + away from the nearest airport suitable for an emergency landing.
• Ryanair tickets are bought through online direct sale, and not using travel agencies, which keeps prices for customers as travel agencies up the price in order to make money for themselves.
• In order to keep low labour costs, Ryanair hires third party contractors instead of salaried employees as pilots, and so they are paid solely when they’re being utilised.
•  As Ryanair is an Irish airline, they use Irish labour contracts to avoid wage and social benefits that some European countries require. 
• Ryanair only uses one type of jet for it’s entire fleet, the Boeing 737. This reaps it’s benefits through reduced maintenance and repair costs, reduced staff training and increased flexibility in staff allocation. 

Ryanair’s Business model is clever and well thought through; low prices generate high volumes, enabling them to gain bargaining power with suppliers and allow for high fleet utilisation, which in turn lowers costs, prices and increases competitiveness. 

In addition, low prices breeds low expectations, and so Ryanair does not offer free checked-in baggage, meals or priority boarding, in turn lowering costs and simplifying operations. The cycle continues, generating millions of euros in revenue. 

These ideas are used by multiple different LCCs, including Vueling, AirAsia, Easyjet and Norwegian, with the underlying concept of increasing utilisation as much as possible through maximised basic short haul flights. 

For example, British Airways specialise in long-haul, luxury flights which decrease fleet utilisation, and as they have a range of different types of planes within their fleet, this will increase repair costs and perhaps require different training for employees. In addition, they fly to airports closer to the city centre, which is more expensive, but as British Airways know their customers, they know they are willing to pay that price. 

It’s all about targeting the right customers, and understanding what they are willing to pay for.