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How Budget Airlines Return Higher Profit Margins Than Legacy Carriers

by Staff

Summary

  • Ultra-low-cost carriers generate revenue through ancillary fees, maximizing profits from each passenger.
  • Budget airlines cut costs by purchasing aircraft in bulk, negotiating labor contracts, and operating from smaller airports.
  • The combination of revenue generation and cost reduction allows budget airlines to maintain high operating margins.



As recently analyzed by Simple Flying, the airline industry is notorious for razor-thin profit margins, with the industry as a whole only netting a margin of just 2.6% last year amid impressive performance and skyrocketing travel demand. Nonetheless, there are certain airlines that are able to beat the industry average, and overwhelmingly, some of the most successful are ultra-low-cost carriers.


Last year, Ryanair returned an impressive profit margin of nearly 16%, far beyond most traditional legacy carriers, according to Macrotrends. The Irish-based airline was not alone, as across the Atlantic, Spirit Airlines reported an equally high 15% margin in the third quarter of 2023.


There is an immense array of reasons why low-cost carriers are able to outperform full-service equivalents, most of which relate to the carriers’ robust business models, aggressive negotiation, and rampant cost-cutting. In this article, we will take a deeper look at how ultra-low-cost carriers are able to return such consistently high profit margins.


Revenue generation

As half of the profitability equation, ultra-low-cost carriers’ ability to generate as much revenue as possible from each passenger is critical to ensuring high margins. While it may seem counterintuitive as these airlines sell tickets at rock-bottom prices, the ticket price is far less than what an airline actually makes off of each passenger, according to an analysis of the low-cost airline industry from Investopedia.


Photo: Jason Wells | Shutterstock


These carriers have mastered the art of ancillary revenue generation, which is the industry’s terminology for the incredible array of fees levied on everything from failing to print one’s boarding pass online to seat selection to checking a bag. Onboard service, which is almost never free on budget airlines, is also a key source of revenue for carriers like Spirit Airlines. Some budget carriers take this even a step further, and Ryanair even sells lottery tickets onboard most of its European flights.

Cost reduction

Likely, the more important reason budget airlines are able to return higher margins relates to their impressive ability to cut costs. The extent to which budget airlines are able to lower costs is genuinely impressive and begins with the jets themselves.


Spirit Airlines Airbus A321 landing at Fort Lauderdale runway 10R September 12th 2023.

Photo: Journeys Uncharted | Shutterstock


When purchasing aircraft, budget airlines often place large orders in bulk, allowing them to receive bulk discounts. Furthermore, these carriers tend to purchase the newest aircraft, which, while more expensive, are also the most efficient, allowing them to reduce their fuel costs in the long run. Typically, low-cost carriers will also maintain single-family aircraft fleets, reducing maintenance and training costs for pilots, according to OAG.

Related

Boeing In The Red Despite Positive Operating Margins in Q4 2023

Boeing and Boeing Commercial Airplanes (BCA) returned to positive margins in the last quarter of the year, allowing the latter to become profitable.

Labor, another one of airlines’ largest expenses, is also ruthlessly negotiated. Most budget airlines prevent their cabin crew and cockpit staff from being unionized, allowing them to prevent large-scale non-negotiable contracts. While budget airline flight attendants will undoubtedly receive the mandated safety training, their hospitality training is often far more limited.


Frontier Airlines Airbus A320neo with the CFM International LEAP-1A engines

Photo: Robin Guess | Shutterstock


Furthermore, these airlines will often operate out of smaller airports, where the sheer scale of their operations will allow them to negotiate lower landing and takeoff fees. In New Jersey, for example, Spirit Airlines flies out of Atlantic City International Airport (ACY), and Frontier Airlines flies out of Trenton-Mercer Airport (TTN), at both of which the airline is the only carrier to operate services.


By finding ways to increase revenue generation while simultaneously reducing costs, budget airlines are able to maintain extremely high operating margins. However, not all budget airlines succeed in achieving sustained profitability, and, as with every other kind of airline, mastering the low-cost business model can prove a challenging art.

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