The airline industry is notorious for its slim profit margins, with the overall industry netting a margin of just 2.6% last year despite impressive performance and soaring travel demand. However, certain airlines manage to surpass this industry average, and notably, many of the most successful ones fall under the category of ultra-low-cost carriers.
In the previous year, Ryanair stood out by achieving an impressive profit margin of nearly 16%, well beyond the performance of most traditional legacy carriers, according to data from Macrotrends. This success was not unique to Ryanair, as Spirit Airlines, operating across the Atlantic, reported an equally high 15% margin in the third quarter of 2023.
Various factors contribute to the ability of low-cost carriers to outperform their full-service counterparts, most of which revolve around their robust business models, aggressive negotiation strategies, and rigorous cost-cutting measures. This article aims to delve deeper into the mechanisms that enable ultra-low-cost carriers to consistently achieve high profit margins.
Revenue Generation
One crucial aspect of profitability for ultra-low-cost carriers is their ability to maximize revenue from each passenger. While these airlines are known for selling tickets at rock-bottom prices, the actual ticket price constitutes only a fraction of what an airline can make from each passenger, as revealed by an analysis of the low-cost airline industry from Investopedia.
These carriers excel at generating ancillary revenue, a term used in the industry to describe the extensive array of fees imposed on various services, such as failing to print a boarding pass online, seat selection, or checking a bag. Onboard services, which are rarely complimentary on budget airlines, also contribute significantly to revenue. For instance, Ryanair takes it a step further by selling lottery tickets on most of its European flights.
Cost Reduction
A pivotal reason why budget airlines can achieve higher profit margins lies in their remarkable ability to reduce costs. This cost-cutting prowess begins with the aircraft themselves. Budget airlines often place large bulk orders when purchasing aircraft, enabling them to secure substantial discounts. Additionally, these carriers typically invest in the latest, albeit more expensive, aircraft models, known for their efficiency in reducing fuel costs over the long term. Maintaining a fleet of single-family aircraft further aids in minimizing maintenance and pilot training expenses, according to insights from OAG.
Labor costs, another significant expense for airlines, are subjected to ruthless negotiation by most budget carriers. These airlines often prevent their cabin crew and cockpit staff from unionizing, providing them with the flexibility to avoid large-scale, non-negotiable contracts. While safety training is a standard for budget airline flight attendants, their hospitality training is often more limited compared to their counterparts at full-service carriers.
Furthermore, budget airlines strategically choose to operate from smaller airports where their scale allows them to negotiate lower landing and takeoff fees. For example, in New Jersey, Spirit Airlines operates from Atlantic City International Airport (ACY), and Frontier Airlines operates from Trenton-Mercer Airport (TTN), where they are the sole carrier. This positioning allows them to secure favorable terms for their operations.
By finding innovative ways to increase revenue while simultaneously implementing rigorous cost-cutting measures, budget airlines can maintain exceptionally high operating margins. However, it's important to note that not all budget airlines achieve sustained profitability, and mastering the low-cost business model remains a challenging endeavor, as is the case with any type of airline.