Summary LCCs focus on cost-efficient operations to maximize profitability. Strategic tactics include buying surplus aircraft, employing uniform fleets, and focusing on ancillary revenue. LCCs also save money through cabin simplicity and point-to-point route networks.
Many people believe low-cost carriers (LCCs) are named “low-cost” because of their cheap ticket prices. However, the term actually refers to the low costs on the airline’s part. This is explained to CNBC by Scott Keyes, the founder of Going (formerly Scott’s Cheap Flights): “.
..the low cost refers to low expenses on the airline’s part, that they try to really go all out to minimize their expenses so that the money that they bring in is much more profitable.
” With such low ticket prices, many travelers wonder how LCCs can generate a profit. These airlines must follow several strategies to ensure they make money, such as purchasing surplus newer aircraft in bulk from other airlines, building fleets of just one aircraft type or family, simplifying cabin amenities, offering ancillary services, using a point-to-point route network model, and operating from smaller airports. Deregulation: Paving the way for low-cost carriers In 1949, Pacific Southwest Airlines (PSA) was the first airline to implement the low-cost model .
Until its 1988 merger with US Airways, PSA operated successfully as a California intrastate airline. In 1971, Southwest Airlines followed PSA’s model to create its own network within the state of Texas. Southwest would be so successful in its endeavors that it would unofficially become known as the pioneer of the low-cost airline business model, per Berkeley Economic Review .
The Airline Deregulation Act of 1978 partially shifted the regulation of air travel from the government to the private sector. This gave the airlines much more control over pricing, routes, agreements between carriers, and mergers, paving the way for low-cost carriers to rise. In 1984, the government took another step toward enabling LCC’s success by terminating the Civil Aeronautics Board (CAB) .
Prior to this, the CAB had controlled almost all aspects of the US airline industry. Airlines were only able to compete on factors such as food quality, cabin crew, and service quality. The airline industry saw massive changes post-deregulation.
As explained by the National Air and Space Museum , the new climate gave rise to the creation of many new airlines. Established airlines hurried to obtain or retain access to the most lucrative routes. The resulting competition drove airline ticket prices to never-before-seen lows.
According to Investopedia , the number of US air passengers grew from 209 million in 1975 to a record 390 million by 2019. Additionally, airlines were filling about 54% of their seats in 1975, but in 2019, they were at an average capacity of 85%. The phenomenon spread from the US to other regions across the globe, per the Journal of Air Transport Management .
Beginning in 1990, LCCs began appearing in Europe, and by the 2000s, they emerged in Asia. Although the low-cost pioneer Southwest has since evolved its service to more of a hybrid model, somewhere between a conventional and low-cost model, it still serves as the epitome of a successful LCC. Many other low-cost carriers in the US have emerged as a result of Southwest’s initial example.
Some of the country’s most popular LCCs today include: Spirit Airlines Allegiant Air Frontier Airlines Sun Country Airlines Southwest was founded in 1971 by Herb Kelleher, with a vision to disrupt the market at the lower end. With LCCs offering tickets at seemingly unprofitable prices ( as low as US$2.25 on some occasions ), you may wonder how these airlines are sustainable.
The most simple answer, as explained in Medium , is this: “...
Budget airlines keep their operational costs to the bare minimum through all means necessary.” LCCs keep operational costs as low as possible in several different ways. Each strategy is designed to provide customers with the lowest fares while enabling the airline to still make a profit.
Aircraft choice The first way LCCs make money is through strategic choice of aircraft. LCCs must consider all aspects of costs, including purchase and maintenance costs. For this reason, these carriers often purchase aircraft considered “excess” by other airlines and are therefore sold at a discounted price.
LCCs also try to use newer aircraft when possible. Although newer aircraft must be operated more frequently to ensure profitability, the LCC model is inherently designed to maximize aircraft use. Older aircraft, while perhaps cheaper to purchase, can have higher costs in the long run due to increased maintenance and upkeep needs.
LCCs also cut costs by simplifying their fleets. Many LCCs only operate one aircraft type or one family. For example, Southwest, Sun Country, and Ryanair only operate aircraft from the Boeing 737 family, while Spirit uses aircraft from the Airbus A320 family.
Fleet simplicity reduces staff training costs and maintenance costs. Additionally, a uniform fleet can increase the flexibility of flight operations and improve efficiency. Cabin simplicity Another way LCCs make money is by simplifying aircraft interiors.
These airlines cut costs by choosing to install bare amenities in their aircraft while still ensuring passenger safety. Non-essential features, such as reclining seats, are often expensive and require additional maintenance. By excluding these unnecessary elements from their aircraft, LCCs can reduce initial costs and low-term expenses.
According to Travel Technology and Solutions , some examples of additional features many LCCs leave off of their aircraft are: Extra legroom (to minimize the passenger payload) Storage pockets (to reduce cleaning time between flights, thus reducing aircraft turn-around time) USB/charging ports Seat-back entertainment Complimentary in-flight snacks and meals Ancillary revenue A third way LCCs make money is through ancillary revenue. These “add-on” fees are optional for passengers and include things such as additional baggage, inflight snacks and amenities, and seat selection. According to OAG Aviation , ancillaries tend to have high margins and are often highly profitable for airlines.
Read here to learn more about the importance of ancillary revenue for airlines. LCCs make a significant portion of their revenue through ancillary services. According to a LinkedIn post by the Director of Product Marketing at Cognitus , 30% of Ryanair’s 2019 revenue came from ancillary services.
On average, ancillary services account for 30-50% of LCCs’ annual revenue. Strategic route networks Perhaps the most notable way LCCs make profits is through strategic route networks. Most LCCs operate with a point-to-point model instead of the traditional hub-and-spoke model used by most major airlines.
LCCs’ routes tend to connect each origin and destination via short, nonstop flights, reducing total travel time and enabling better aircraft utilization. LCCs also save money by operating out of regional or secondary city airports due to the cheaper operational fees. For cities with just one major airport, LCCs plan flights to arrive or depart in the early morning or late night, when the airport is the least busy.
Additionally, LCCs may forgo using jet bridges or other airport infrastructure to further reduce operational costs. They also tend to park aircraft at stands farthest from the terminal, which is usually much cheaper. There are bigger differences than people may realize.
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