Comparison Of Low-Cost Airline Models

1 Summary

Low-cost carriers have been established for many years. A model for a low-cost airline is described, derived from the operations of several such carriers. The models followed by the three main low-cost carriers in the UK, Ryanair, easyJet and Go are then outlined. The impact of the differences between these models is then assessed to see how they affect the cost base and productivity of the airlines. Finally, it is suggested that Ryanair’s model is most suited for the current conditions in the air transport industry, although easyJet’s model could be more favourable if conditions changed in the future.

2 The Low-Cost Model

Southwest Airlines is recognised as creating the model for low-cost, low-fare carriers. Its model has been adopted by several airlines hoping to emulate Southwest’s success. Some have taken the model further and adapted it to provide an even lower cost base for their operations. However, it is not clear that any single airline has identified a perfect model. Each has adapted its model to suit its operating environment and strategies. The core elements of any low-cost model are outlined below. , ,

2.1 Network structure

Ð'* network consists of point-to point, short- or medium-haul services with no interlining, connections or baggage transfers.

Ð'* use of less congested secondary airports leads to reduced taxi times, quicker turnarounds and lower airport charges.

Ð'* high frequency of service at every airport served provides a larger return on the investment necessary at that airport, whilst also providing flexibility for passengers thereby encouraging further demand.

2.2 Aircraft Fleet

Ð'* single fleet type, providing commonality and flexibility benefits.

Ð'* high aircraft utilisation means fixed costs can be spread over more flying hours and more passengers.

Ð'* newer aircraft seem to be favoured, despite the advantage of very low depreciation charges associated with older generation aircraft.

Ð'* aircraft are configured in a single class, high density layout.

2.3 Service

Ð'* emphasis on no “frills”, such as no in-flight catering and no seat allocation.

Ð'* food and goods can be bought on-board the aircraft, providing a small revenue stream.

Ð'* no cargo service provided, as this would increase turnaround times on the ground and serve to distract the airline from its focus on passengers.

2.4 Distribution

Ð'* optimum strategy is direct sales only, through the internet or the carrier's own telephone sales office. This avoids travel agents’ commissions as well as CRS payments.

Ð'* e-ticketing allows ticketless travel, with the associated cost benefits

Ð'* no revenue accounting necessary as all sales are made in advance of travel, thereby reducing administration costs and having a positive effect on cash flow.

2.5 Fares

Ð'* low, non-refundable fares offered with a simple price structure.

Ð'* sold on a single point-to-point basis with few or no conditions attached.

Ð'* simple yield management system employed whereby prices increase closer to the departure date and/or with increasing demand.

2.6 General

Ð'* simple organisational structure, with all non-core activities such as maintenance and ground handling outsourced.

Ð'* highly motivated and productive staff, usually with a charismatic, high-profile leader.

Ð'* carrier’s public profile is raised as much as possible through non-traditional means by making the most of all advertising opportunities.

Ð'* growth must be controlled and targeted at selected markets which have little competition.

The model described above is a composite one based on the activities of several successful low-cost airlines. The actual model used by the three main low-cost carriers operating in the UK market, Ryanair, easyJet and Go, shall now be outlined.

3 Ryanair Model

3.1 Network structure

Ð'* short-haul point-to-point network, with main bases at Dublin, Stansted, Brussels Charleroi and Frankfurt-Hahn.

Ð'* Strong focus on secondary airports, although Ryanair has apparently “appealed for the right to take up spare departure slots at Heathrow and Gatwick.”

Ð'* 40 aircraft, 56 destinations, 79 routes.

3.2 Aircraft Fleet

Ð'* 21 737-200s and 19 737-800s.

Ð'* Replacing 737-200s with 737-800s over the next four years and expanding fleet with an order for 100 737-800s plus 50 options, to be delivered between 2002 and 2010.

Ð'* Single cabin layout with max capacity of 189.

Ð'* Considered second hand aircraft for expansion.

3.3 Service

Ð'* No “frills” but considering pay-per-view live TV with Connexion by Boeing.

Ð'* Food sold on-board.

Ð'* No allocated seats.

Ð'* Additional revenue from duty-free.

Ð'* No cargo service.

3.4 Distribution

Ð'* Previously used travel agents. Reduced commission gradually, eventually pulled out completely, using 100% direct sales instead.

Ð'* December 2001: 91% of seat sales through the internet.

Ð'* Ticketless travel.

3.5 Fares

Ð'* One-way fares with no-refund