Friday, April 21, 2017

Budget Airlines - how they achieve cost advantage over other airlines ..

Last time I caught an early morning 5.30 am flight from Bangalore to Mumbai, I had to leave home by 3.30 AM to reach Devanahalli airport at 4.30 AM. Why so early in the morning ? Since Bangalore does not have a secondary airport, I had to board flights departing the airport at odd times to avail of low airline fares. It was okay considering that I was paying just a third of what I would have paid had I boarded an 8.00 AM flight to Mumbai.

What is this big noise about Budget Airlines and how are they able to offer low fares to the public ?

Airlines operation is an interesting and exciting area of study for an Operations Manager. The airlines recover the initial high capital by carrying out very smart focused manoeuvres. South West Airlines in US was the first airlines in the world to start the concept of Budget Airlines. They started the field of demand management or Yield Management as an area of study where the ticket prices on a route depend on the customer demand for flights in that route. The main objective of yield management is to boost demand by offering tickets at different rates (in different slabs) depending on the demand distribution to optimise the final returns or yields.

Airlines have also looked at other minor yet important and interesting cost cutting aspects. As Sarah Coles (3) says, it is about concentrating in 4 main areas of operations,
  • first using the same type of aircraft
  • secondly, a constant drive to push costs down
  • thirdly, ensuring a faster turnaround time at the airports and 
  • fourthly not selling anything other than seats ..
We shall present them in detail here (1,2) ..

Identifying the cost pain points and addressing them to reduce the costs is the first step. US and India based budget airlines offer tickets that are 20-30% less than traditional airlines, while Budget airlines in Europe offer tickets at 50% of traditional airlines. an 800 km journey could be completed by air in under 10 euro. It is interesting to find how European budget airlines succeed where US and Indian airlines have only partly succeeded.

This video is a great example of how budget airlines constantly innovate to keep their operating costs low. Click for the video ..

There are different aspects we need to look at and they are listed here.

Physical Infrastructure - The planes are mostly of one type. RyanAir has only Boeing 737 and EasyJet only Airbus A320 aircrafts. GoAir and Indigo in India work mostly with Airbus A320 in their fleet. This helps the airlines to reduce their maintenance expenses, keep low inventory stock of spare parts and less training for the staff.
Additionally, the fleet is relatively new, with an average age of less than 5 years. They are more efficient incurring less running expenses, partly offsetting their higher purchase costs. These young planes incur less maintenance costs and are up in the air almost 24x7, giving better returns to the airlines. Most of these planes do not have expensive and luxurious reclining seats reducing costs and maintenance expenses. No back pockets for these seats reduce the cleaning needed reducing the turnaround time after each flight.The gap between the seats is limited, enabling accomodation of more seats in the economy class. (click here for pictures of future seating configurations in budget airlines..)

Airports proximity to city centre and landing fees - Landing fees at airports are a major source of expense for airlines as they have to part with higher airport landing fees when they land at major city airports. To keep the costs low, budget airlines land in slightly distant secondary airports which charge low landing fees, away from the cities with good connectivity to the city centre. The budget airlines use major airports at odd times when landing fees are very low like early morning or late night flights.

Training for Employees - training is imparted to the employees on multiple tasks like ticket checking, cleaning, luggage checking etc. . Fewer employees carrying out multiple tasks eliminates need for excess staff, reducing costs. The duration of training is less with more emphasis on safety than on hospitality. Being a very young workforce, there is no unionisation resulting in employees ready to shift to distant airports at short notice.

Catering facility - the budget airlines do not offer any complementary food or drinks during the flight and these are chargeable. The main advantage of this is that it saves inflight time for attendants who can attend to more important tasks of the passengers. Wastage of food is avoided on the flight.

Passenger loading schedules - The turnaround time at the airports are generally less than 45 minutes as earlier routine tasks like loading food trays, cleaning of planes between stops etc are avoided. As passengers are given seating on First Come First Served basis, passengers generally tend to come early to get window seats, eliminating delay in flights. The self check-ins through automated machines or internet check-ins have accelerated the check-ins.

Flying route schedules - Most of the budget airlines take only direct booking, eliminating middle men and commissions.
In addition most of the conventional established airlines operate on a hub-spoke arrangement, where they tend to touch at their hub or base very often, increasing the flying times and expenses for the airlines. Budget airlines on the other hand, have a point-to-point model of operations wherein they do not return to their main hub on every leg of the flight and instead touch base at different cities as per schedule and demand before reaching base. They also do not book connection flights as this leads to unnecessary extra expenses to the airline if the flight is delayed or connecting flights are missed.

Profit margins - Budget airlines have been observed to have healthy profit margins often running to an average of about 14-15 % while traditional airlines have low profit margins of about 4 - 5 %, besides being burdened with aging planes and heavy maintenance expenses.

What is the future of budget airlines ?

As economies keep growing, there will be increased demand for airline traveling. Hence the demand for budget airlines is only going to increase in the coming days, along  with a healthy demand for conventional long distance airlines. Short haul flights can experience a pull towards lower costs. An innovative technology like Hyperloop can bring great disruption if proved to be successful. 

The Govt of India's UDAN, the Low Cost Regional Connectivity scheme to get the distant parts of the country reachable by air is taking off today 28 April from Delhi to Shimla. Under this scheme, initially 43 cities to increase to 72 cities with 128 routes across the country. These cities will be connected whereby the flying fare for a 500 km distance and a one hour flying time will be capped at Rs 2500.00. Viability Gap Funding (VGF) upto Rs 3000 per seat will be provided by the GoI to the airlines selected under this scheme. The airlines are Alliance Air, SpiceJet, Turbo Megha, Air Odisha and Air Deccan. They were awarded 128 routes under the scheme after a bidding process. With this scheme, more cities in India will be reachable by air promoting the industrial growth of these cities.

The UDAN Low cost flying model of GoI, though not driven by actual demand and cost cutting innovative measures will help spur demand and help India go ahead. 

References :

1. Nils Pratley, Anatomy of a flight, www.Guardian.com, 2003. Accessed April 2017
2. Wendover Productions, How budget Airlines work, www.youtube.com, 2016, Last accessed April 2017.
3. Sarah Coles, Low cost Airlines - How they cut costs, www.aol.co.uk, 2015, Last accessed  April 2017.
4. http://www.thehindu.com/news/national/all-you-need-to-know-about-the-udan-scheme-for-low-cost-regional-connectivity/article18251599.ece

Compiled and written by George Easaw for classwork in Alliance University, Bangalore, India. Unauthorised use prohibited. Contact geasaw@gmail.com for permission.

No comments:

Post a Comment

An IAF Officer's passion for agriculture ..

S. Parameshwaran was my  classmate at the College of Engineering, Trivandrum during Mechanical Engineering under-graduation days. He al...

My popular posts over the last month ..