The end of low cost air fares?
Over the years, I have used lose cost airlines as examples in several of my blog posts. Carriers like Ryanair have always interested me – whether you love them or hate them they are successful.
A recent article on RTE’s business section gives a good summary of the low cost sector, but also considers how costs have and will increase, leaving no option but to increase fares. You can read the article here.
Some insights from IAG
IAG, or the International Airlines Group, is the the parent of Aer Lingus, British Airways and Iberia. In my university, we were lucky enough to have their CEO, Willie Walsh, speak to us before Christmas.
Some things he mentioned are relevant to this blog, and of course interesting. One thing Mr Walsh noted was how only in recent years has the airline sector actually made a return on capital. This must be attributable in some way to a focus on cost by the sector in recent years. The chart below from IATA shows what I mean. As you can see, the cost of capital was higher than the return until 2014.
As my last post indicated, a focus on cost and efficiency has been a feature of the airline sector in recent years. To give another example, Mr Walsh cited an example of using two larger aircraft on a route without a loss in passenger capacity. So fuel, crew and capital cost all decrease in such a scenario. In addition, it freed up a slot at London’s Heathrow airport, which can then be used to generate more revenues.
Unbundling costs at low cost airlines
A few weeks ago, I read a nice article in The Telegraph by David Millward on one of my favourite topics, airlines and 
all things to do with airports – I was born close to Dublin Airport and it was a big part of my growing up.
Anyway, many of us have witnessed the phenomena of low-cost airlines emerge of the last 20-30 years, and as an accountant it’s the constant actions to reduce costs that amaze me. As Millward said in his article, one of the things that airlines have done is unbundle. This means you get the basic fare from origin to destination for as low as possible. If you want more you pay more. This is fine by me, on a shorter flight, but now as longer-haul low-cost carriers appear I am not sure – I have no experience yet, so I dare not say. The low-costs have of course eaten into some of the legacy carrier market, but they have also expanded the market by making flying more accessible. Millward suggests that the low-costs have by now probably stripped out all they can to reduce costs, but the legacy carriers can do more – if they wish. I read another article recently which mentioned how WestJet, a low-cost transatlantic carrier remove the in-flight screens to save 500 kg in weight and thus save fuel. They replaced the screens with a wi-fi system and the BYOD idea – most people have their own device on-board anyway. Surely such simple steps could be taken by any carrier.
The cost you add to a flight – yes, you.
The April 2015 edition of National Geographic includes a very nice short article which draws on the work of two MIT aeronautical engineers. The article to me is a very nice mix of explaining why airlines charge more for more weight (of bags usually, but some airlines are considering weight of passengers too), and how we as passengers can reduce CO2 emissions as we fly.
For many years now, low-cost carriers in particular have charged more for checked in bags. They also step-up the charges as bags get heavier. The key reason for this is to reduce ground-handling time – less checked bags, less baggage handling, faster turnaround, all of which reduce cost or increase revenue. But, as the National Geographic article also points out, more weight equals more fuel consumption and higher fuel cost. The MIT engineers used a Boeing 737-800 (as used by Ryanair) at 75% capacity as a model to calculate how much extra fuel cost various passenger items incur over a year. A 25kg suitcase increases costs by $3,267 per annum, a 1okg carry on $980, a laptop $291 and a full-bladder $29 – among other examples. Ryanair currently have 303 aircraft (per their website), so taking just the costs I quote, this is $4,567 per passenger per year x 190 seats x 303 aircraft, this equate to $262,922,190 – and that’s a big potential cost saving. I can already see Ryanair’s next advert 🙂
There are two points to take from the above. It is obvious that airlines may charge more for weighty items as these drive fuel costs up. The second point is look how much cost we could save the environment by taking even small steps like taking a pee before boarding – $29 x 190 seats x 303 = $1,669,530 worth of fuel. This is just one airline, and I have no idea how much CO2 emissions are reduced by, but as Tesco say “every little counts”.
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