Behind the low ticket prices at low-cost airlines lies an ingenious system to cut costs in order to attract customers.
Low-cost airlines have seen a spectacular rise in the last few decades. Traditional players such as Air India have struggled to compete against upcoming airlines such as IndiGo, who offered lower fares and smooth flights. Infamous U.S. low-cost airline Spirit has reinvented itself, becoming a strong contender in the competitive U.S. aviation market where several large players dominate the skies. Behind the rapid rise of these price fighters is an ingenious pricing strategy that allows companies like IndiGo, Ryanair and Spirit among others, to develop a competitive offer that gives flag carrier airlines a run for their money.
Airline costs
Flying passengers from A to B is a complex endeavor, but behind the challenging flights lies a web of operations that each add costs to operating a commercial airline. A 2022 report published by World Air Transport Statistics (WATS), cited by the International Air Transport Association (IATA), detailed the largest costs involved when running an airline, running from fuel to aircraft depreciation. The largest expense by far is aircraft fuel and oil, which accounted for 28.7 percent of all costs. This was followed by depreciation and amortization, representing 9.1 percent and flight crew and salaries, accounting for 8.6 percent of airline expenses.
Revenue generation activities have their own share of expenses, exerting on the fragile business balance sheet. Providing services for passengers make up for 6.4 percent of costs at airlines and tickets, sales and promotion cost 4.7 take up 4.7 percent of all expenses. The IATA noted that certain costs aren’t distributed equally per region, airlines operating flights across and to Latin America and the Caribbean are confronted with much higher fuel costs, than those with flights to and in the Middle East and North America. In Latin America, fuel costs account for 36.3 percent of total airline costs compared to airlines operating in North America where fuel takes up 25.5 percent of all expenses.
Ryanair cost cutting
All these costs are levers that airlines can pull on to curate a balance sheet that turns a profit. Airlines can opt for a homogeneous fleet which requires far less maintenance, where pilots can be easily moved across routes. We’ve seen this strategy at Indian airline IndiGo, who invested heavily into creating an Airbus A320 fleet for short to medium haul flights across India. Newer type aircraft are also far more fuel efficient than older generations, something legacy airlines such as Air India are struggling with. Alternatively, airlines can revamp the passenger and pilot experience.
Low-cost airline. Ryanair has been one of the most aggressive in cutting costs, drastically reshaping the airline industry. Ryanair has been notorious for many of its cost cutting efforts and catching headlines with outlandish proposals. In July 2010, the European low-cost airline unveiled a package of cost cutting measures to increase revenue and drive ticket fares down. While the plans never came to fruition, they exemplified how far the airline was willing to reduce costs. In an interview with ITV, cited by The Guardian, CEO at Ryanair, Michael O’Leary, speculated that the company wanted to remove 10 rows of seats, creating a standing area for short haul flights. Due to safety standards, rows were never removed. Furthermore the airline hinted at charging a fee for using the on-board bathroom.
A few months later, in September 2010, in what was perhaps one of Ryanair’s more controversial takes, O’Leary expressed the desire to scrap the role of co-pilot for its flights. The announcement was yet another measure to cut costs at the airline, with O’Leary believing that the role of co-pilot is unnecessary, with modern aircraft being reliable enough to have only one pilot on board. O’Leary compared airplanes to trains, which also saw one operator, despite having the same probably to cause serious accidents in case of a medical emergency. The cost cutting measure raised eyebrows with industry experts, with the British Airline Pilots Association commenting it was a mere publicity stunt.
In November 2011, Stuart Jeffries spoke with the infamous airline director at Ryanair and his plan to reshape the European aviation market and get as many people as possible traveling by plane across the continent. The operations from the low-cost airline were already controversial for its time. Promoting more and more air travel would only lead to more carbon emissions. However, Ryanair’s stance toward climate change has been riddled with greenwashing, led by O’Leary who viewed the airline’s role quite differently. He believed not that airlines were not to be limited by government forces, instead they were a force that connected the peoples of Europe.
Airline McDonaldization
The rigorous cost cutting and the offering an a la carte style ticket fare system introduced by low-cost airlines is better known as McDonaldization. The business model has been developed by American sociologist George Ritzer, who saw fast-food chains drastically alter their operations compared to traditional restaurants in order to cut costs and serve as many customers as possible. McDonaldization is characterized by a relentless pursuit of efficiency, calculability, predictability and standardization. Over the years, the operational model has found its way into other facets of daily life.
The concept of McDonaldization, Ashley Crossman at ThoughtCo noted, isn’t a novel concept and it builds on a theory introduced by classical socialist Max Weber, who argued that scientific rationality was the driving force for bureaucracy. Weber observed that society over the course of the twentieth century started compartmentalizing knowledge and roles, overseeing it through a merit-based system of employment. A rule of law was developed that would oversee the different mechanisms within such a system. Ritzer found that this model was expanded into society, following the principle of fast food restaurants such as McDonalds.
McDonaldization is built on four components, namely efficiency, where managers focus on reducing time spent on task completion and optimizing the value chain. Calculabilty introduced quantifiable objectives and offered opportunities to evaluate quality. Through standardization operations become predictable. Repetitive tasks allow for identical consumer experiences and can be tweaked to either be optimized or run more efficiently. Managers can exert control over these systems and use new technologies to streamline operations or replace humans with robots, in turn cutting costs.
We could see efficiency improvements at Ryanair when it displayed interest in a 2012 Chinese aircraft prototype with wider doors, allowing for faster boarding, in turn leading to reduced turnaround times for its airplanes. Deputy chief executive at Ryanair, Howard Millar said that the airline could slice minutes off of its turnaround. Having shorter turnaround times allows airplanes to return faster to profit generating activities, namely transporting more passengers. This economic theory at face value looks straight forward, but for complex organizations such as airlines, who operate across multiple contents and regulations, introducing McDonaldization was extraordinarily complex.
In 2010, researchers Maik Huettinger at ESSCA School of Management (France) and Vincentas Giedraitis, Vilnius University (Lithuania) examined the commercial airline industry, which was undergoing a transformation that allowed low-cost airlines to carve a niche in an otherwise highly fragmented market. Both noted that airlines operated in a globalized environment with border crossing operations, whilst ownership of said airlines remained rooted in one territory.This made standardization notoriously complex. Huettinger and Giedraitis noted that this fragmented, yet interconnected industry, was unable to copy and implement best practices by competitors or associated airlines.
Furthermore, needs from customers are fairly homogeneous, demanding transportation from point to another. Hence airlines aren’t forced to drastically change their service offering or cater to specific niches, apart from the apparent classes available on an airplane. The researchers said that in the past airlines modeled their operations based on their domestic culture. The rates of economic liberalization, free market conditions and levels of privatization were key factors that dictated how airlines were structured. The European aviation market was the first to spawn a deregulated market, allowing for airlines to offer new pricing options, resulting in the creation and rise of low-cost airlines.
Additional fees
This doesn’t mean that other markets were wholly devoid of airlines who were trying to revamp the pricing structure. Over the course of the 1970s, Huettinger and Giedraitis pointed out, SouthWest Airlines introduced the low-cost fare model, allowing it to compete with established players by drastically undercutting ticket prices. In order to achieve lower ticket prices, SouthWest chose secondary airports that charged lower landing fees, adding short distance routes to its network, decreasing passenger services and operating a limited number of aircraft types, which will be discussed later.
In Europe, Ryanair was the first to introduce this operational model, with some minor adjustments, the researchers found. Low-cost airlines reduce service standards, offering only the necessities to its customers. Passengers are far more willing to accept lower service offerings on shorter routes. Amenities in turn are offered for additional fees. The planes low-cost airlines have available are flying more frequently, allowing to carry and transport more passengers across its network. In comparison, traditional airlines have airplanes sit idle for longer, missing revenue generation opportunities.
It’s important to point out that lower fares in favor of less passenger services, look like a good deal for passengers. However, low-cost airlines aren’t a philanthropic enterprise and all their decisions are geared toward profit generation. Despite reducing tickets to a one-way transportation affair, adding fees for other services, quickly totals the price of a ticket rivaling that of traditional airlines. U.S.-based Spirit Airlines is notorious for its fees and Ryanair among others is no exception. Not only do fees increase the average order value per customer, they also disincentivize passengers to make use of otherwise readily available services. This results in less administrative tasks, in turn requiring less employees. The skyrocketing fees could be witnessed in luggage charges.
In August 2010, The Guardian reported that high luggage fees caught many low-cost airline travelers off guard. Baggage fees during the summer holidays averaged $30, forcing passengers to travel lighter than initially anticipated. The Guardian, citing a survey conducted by Last Minute, found that 40 percent of travelers found the new service charges confusing, with 10 percent paying an additional $60 for not complying with new luggage policies. Ryanair was particularly notorious, charging customers an eye watering fee ranging from $38 to $50 per bag. BMI Baby charged similar rates with low-cost airline Aer Lingus having the cheapest fee averaging $10. By surprising customers or forcing additional services during checkout, low-cost airlines drastically increase the average ticket price.
Low-cost airline fleets
In the opening sections of this piece, we noticed that fuel is one of the highest cost burdens for airlines. Ensuring that fuel usage remains to a minimum is a surefire way to optimize profit margins. Low-cost airlines have been especially aggressive in modernizing their fleets to newer generation aircrafts to reduce costs. A December 2005 statistical review performed by researchers at the Royal Netherlands Aerospace Centre (NLR) found that newer generation aircraft, those coming onto the market over the course of the 1990s, achieved far greater fuel efficiency than their counterparts introduced in the 1960s and 70s.
Analysis on fuel consumption across these multiple generations of aircrafts found that fuel efficiency had improved by around 67 to 70 percent between 1960 and 2000. However, it must be noted that fuel efficiency has been decreasing in recent decades, with figures slowing down between 1980 and 2000, damping the impact of efficiency gains. Over this period, fuel efficiency rates reached an upward of 20 to 26 percent. These values differ per calculation. The researchers found that IPCC calculations were more optimistic. Nonetheless, fuel gains were significant and calculations expected another 20 to 26 percent efficiency improvement in decades to come.
Researchers at the NLR noted that performance can differ per airline, as some might opt for more comfort, extended range or manufacturers that develop less efficient airplanes. But, in this article, we can assume that low-cost airlines will choose cost efficiency over comfort to reduce costs. Interestingly enough, the NLR commented that fuel efficiency hasn’t been an objective for airline manufacturers, whilst manufacturers themselves advertise reduced fuel consumption aggressively. This has become especially relevant as fuel prices start to soar and consumers demand more sustainable flights.
As a critical side note we must add that fuel efficiency for airplanes measured in a controlled environment might show positive improvements, the operations at airlines themselves can change fuel consumption. The Belgian Aircraft Refueller Company pointed out that the cruising altitude, weather conditions and aircraft can alter the fuel consumption. Heavier aircraft, for example, require more fuel to lift and maintain altitude. Despite these variables, new generation aircraft achieve far greater efficiency, offering a lucrative deal for low-cost airlines to modernize their fleets.
On average the average fleet age of low-cost airlines is far lower than of traditional and flag carrier airlines. In 2022, the European Organisation for the Safety of Air Navigation (Eurocontrol) published the average aircraft age of airlines within the Eurocontrol market. The authority found that low-cost carriers had the youngest fleet, with aircraft having an average of 9 years, in contrast to charter and all-cargo airlines, where the average aircraft age sat between 15 and 22 years old. Many airlines extended their leases or canceled orders over the COVID-pandemic, resulting in the average fleet age overall increasing from 11.1 years in 2019 to 11.6 years in 2022.
In August 2024, CNBC reported that in an effort to cut costs, low-cost airlines opted to purchase new planes. Airlines such as JetBlue, Spirit and Frontier, who saw their earnings evaporate due to increased competition, were looking for novel ways to cut costs. Fuel efficient new generation airplanes from Boeing and Airbus were in short supply thanks to their high demand. Smaller variants such as the Airbus A320 and A321 and Boeing’s 737 Max, with the latter despite a tainted track record, remaining popular among U.S airlines for their domestic routes.
The short supply of fuel efficient planes meanwhile result in price increases. Some airlines were extending leases to cut costs, delaying the purchase of newer models, whilst the high demand for new planes, makes leasing prices soar. CEO at JetBlue, Joanna Geraghty, said that the company needs planes to grow, but having planes sitting idle on the runway cuts into revenue generation. Spirit Airlines meanwhile had to defer Airbus orders as it saw revenue plummet by 11 percent, generating a loss of $192 million.
Basic business principles
In many regards the economics behind low-cost airlines are widely recognized and familiar business principles. Many business leaders will have explored avenues for cost reduction and revenue generation, may it decrease administrative load to keep staff numbers at a minimum or add new products to increase the average order value. Low-cost airlines have perfected this model, taking inspiration from fast-food restaurants, who compartmentalized each section of the business to exert control through standardization which could be tracked through quantifiable metrics. Every employee who has ever worked in a medium to large enterprise will be familiar with this hierarchical structure.
Low-cost airlines achieve their impressive results by stripping services to the bare minimum, standardizing their fleets and offering passenger services for a premium. Airlines such as Ryanair, SouthWest and EasyJet among others are able to attract millions of travelers to their services thanks to their low ticket fares. However, many passengers will find themselves in a jungle of additional fees that inflate the ticket price, equating that of traditional airlines where all services are included. What can we learn from this as marketers and business leaders?
For marketing professionals in particular there is a lot to be learned in terms of advertising spend. Many will inherit a marketing and advertising portfolio that has become bloated over the years or has been created and left to its own devices. This is especially true in the digital realm where always-on campaigns are easy to set up, but require regular oversight if results aren’t meeting expectations. Taking a close and critical look at existing campaigns can result in enormous cost savings without impacting business results.
In certain scenarios a 90 percent cost reduction across existing campaigns, won’t affect the overall business performance. This is an eye opening revelation and will position marketing professionals not as relentless spenders, but as conscious penny pinchers in the organization. A valuable trait and crucial when formulating marketing strategies. Marketing plans can be executed with far greater efficiency than in years prior. Business leaders can adopt a similar mindset. Which parts of the company have become bloated over time and can be scaled down to either optimize profit margins or allocated elsewhere to increase revenue generation. Can relentless cost cutting result in undesired consequences? The short answer is yes.
Within the aviation industry we’ve seen how Boeing, once an icon of American engineering, started to adopt a strategy that satisfied shareholders over safety and customer demand. As time progressed, the cutting-edge airplanes operated by countless airlines were bound for renewal. Boeing found itself in a world where its planes had become relics of the past, offering subpar fuel efficiency and an outdated catalog. To make matters worse, its 737 Max aircraft that had to save the company from losing more market share to its main competitor Airbus, experienced multiple crashes, resulting in hundreds of passengers losing their lives. Companies therefore will have to strike a balance between cost cutting and safeguarding their main assets.
We must also note that while rigorous cost cutting looks good on paper and during annual reviews, the practice can go too far at times. Ryanair was labeled the worst airline by the U.K consumer website Which? in 2013, where readers voted Ryanair to be the worst brand for customer service. The low-cost airline transported a record breaking number of passengers, but simultaneously garnered an infamous reputation. Ryanair had to acknowledge it could no longer continue operating in this fashion, being forced to reduce charges, ease booking conditions and introduce allocated seating among other policies.
By the end of 2014, the changes seemed to pay off, as profits jumped by 32 percent for the low-cost airline. After a year of restructuring its policies and improving its customer service, who became solution oriented instead of pushing customers away when problems arose. O’Leary commented that after having won the war on fares, offering the best deal, it was time for the company to compete in the arena for customer service. The company still had a long way to go, but the aggressive policies of the past showed that cost cutting can backfire.
