How are budget airlines such as Easyjet able to offer such cheap prices? Use economic analysis to explain your answer. Before 1987, European air travel was strictly controlled. Everything from flying schedules to the amount of passengers each national airline could carry was negotiated between governments. This has now changed, and today any airline holding a valid Air Operators Certificate in the EU cannot be prevented from operating on any route within the EU. This development of ‘open skies’ in Europe led to the development of budget airlines.
Before this liberalization of civil aviation, it was extremely difficult to travel from London to Nice for less than 200, whereas now you can get to Nice for no more than 20 with Easyjet, one of the leading budget airlines that are around. Easyjet is named the ‘webs favourite airline’ and Ryanair, another leading budget airline, is the only European carrier to make profits in each of the last 13 years. So, how do they keep their fares so low and still do better than the traditional charter airlines like British Airways? They all follow the Southwest philosophy.
Southwest airlines of Texas are the world’s first budget airline and still the biggest. Herb Kelleher, founder of Southwest airlines, set up 30 years ago and follows only four rules: Only fly one type of plane, drive down costs every year, turn around your aircraft as quickly as possible and operate a no frills flight selling only seats. Stelios Haji-Ioannou, founder of Easyjet, studied the southwest business model and follows the same rules. Easyjet keeps costs low by eliminating unnecessary costs and ‘frills’ which characterise traditional airlines.
It has a low average fixed cost. This is done in a number of ways. Easyjet has eliminated some fixed costs that other traditional charter airlines have to consider in their overall costs. Easyjet does not issue tickets. Instead all you need to fly is your passport (or suitable ID on domestic flights) and your confirmation number. This is less hassle for the customer and cost effective for Easyjet who doesn’t have to process and distribute millions of tickets each year. As well as tickets, Easyjet is a completely paperless operation.
The management and administration of the company is done entirely on IT systems, which can be accessed from anywhere in the world. Easyjet operates a no frills service, which means you are only paying for your seat. No onboard catering is provided; instead drinks and snacks are available for the customer to buy from the in-flight kiosk. This reduces cost and unnecessary management. Customers prefer to pay less for a flight and have a choice to purchase snacks on board, and Easyjet have even won awards for their catering service!
Easyjet also doesn’t offer anything like travel insurance, air miles or anything else that would take money to organise. The fixed costs that Easyjet does have are kept to a minimum. The airline is based at Easyland, a bright orange building adjacent to the main taxiway at Luton Airport. There are no offices inside; everyone shares one big office with cubicle type walls to separate each department. Even Stelios does not have his own office. This is the very embodiment of the Easyjet low-cost ethos.
Easyjet favours an informal company culture with a very flat management structure, eliminating unnecessary layers of management. All office based employees are encouraged to dress casually, which also saves money on uniforms, and ties are banned except for pilots. Another fixed cost Easyjet try to keep to a minimum is their aircraft. Up until now, Easyjet followed the Southwest philosophy and flew one type of aircraft, the Boeing 737 series. This is because having one fleet of aircraft saves money on training, maintenance and operating.
The Easyjet fleet currently consists of 72 aircraft: 67 Boeing 737 series and 5 Airbus A319s. However, Easyjet announced its intention to have Airbus as its aircraft supplier in October 2002, and has placed an order for 120 Airbus A319 aircraft for delivery in September 2003 over five years. This goes against the Southwest philosophy but the cost for operating another brand of aircraft is outweighed by the financial benefits of the deal for Easyjet. The Airbus A319 and the Boeing 737 have similar characteristics but the Airbus A319 is cheaper due to a year long competition between the two aircraft manufacturers.
There is also one extra seat on the A319. The most important thing is that the A319 will lower costs by about 10%, which is good news for customers and will help Easyjet to drive down their costs. Another reason why budget airlines can offer low prices is their efficient use of airports. All budget airlines have rapid turnaround times, which means they can maximise the utilisation of the aircraft and make more journeys. Easyjet try to reduce turnarounds by 30 minutes or under. Other charter airlines have slow turnaround times therefore will make less journeys, resulting in less income.
Budget airlines also have higher load factors, which means they do not waste seats. Easyjet’s passenger statistics have grown dramatically from just 30,000 in 1995 to 20,300,000 in 2003. Even recently there has been a significant increase from 11,400,000 travellers with Easyjet in 2002 to 20,300,000 travellers in 2003, making Easyjet i?? 52 million in profit in 2003. (Easyjet. com) A vital part of any budget airline is the Internet. The Internet is the most cost-effective distribution channel so budget airlines try to encourage their customers to use that channel to book.
Easyjet started using the Internet to sell seats in 1998 and has had dramatic growth in online sales ever since. It reached the one million seat mark in 1999, the two million seat mark in March 2000, and the three million seat mark just three months after that. Easyjet now sells around 90% of seats online and is called the ‘webs favourite airline’. Other budget airlines such as Ryanair have also benefited from the Internet. As well as keeping fixed costs low and eliminating some fixed costs, Easyjet operates a very simple price structure.
Their fares are based on supply and demand, so fares go up as seats are sold. The earlier you book, the less you pay which is different to traditional charter airlines who lower their costs when seats are left over, like last minute deals. This is because traditional charter airlines cannot afford to have empty seats. Easyjet also sells one-way fares and doesn’t have a minimum stay for you to qualify for the lowest fare so you can go and come back whenever you like. They also offer flexibility on all fares, unlike many other airlines. For an administrative fee of no more than i??
15 per leg of the journey, you can change your flight. This helps Easyjet to attract more customers. It is also important to note that Easyjet, along with many other budget airlines, operates a non-refund airline unless in exceptional circumstances. This means they do not lose money on the seats they have sold. There is a cancellation fee of 15 if you wish to cancel within 24 hours of making the booking and you will get a full refund. This is good for budget airlines as they still make money off cancellations and can still sell the seat.
Easyjet also completed the merger deal with Go in August 2002, thus creating Europe’s number one low-cost airline. In June 2002, the combined airline carried 14 million people. In December 2002, both airlines inventories were fully integrated into the Easyjet booking system. At the last count, there were 56 no-frills airlines flying within Europe, and so far their failure rate has been low. Part of this reason is because budget airlines have taken a big chunk of market share from traditional charter airlines.
The holiday industry has already been given warning that the number of package tours sold in the coming year will fall because of the growth of budget airlines. This has led to a number of charter airlines relaunching themselves as low-cost operators. These airlines don’t pose a real threat to the big budget airlines like Ryanair and Easyjet as the charter airlines would have to take on the Southwest philosophy and eliminate certain fixed costs to gain a profit anywhere near Ryanair’s or Easyjet’s.
In simple terms, budget airlines are able to offer such cheap prices by keeping fixed costs to a minimum and eliminating fixed costs that are not necessary so they can afford a bit of leeway if variable costs such as fuel increase, therefore resulting in a low average fixed cost. They also use time efficiently so they fit in as many flights as possible, therefore maximising profit.