Low Cost Carriers: An Insight into the Most Profitable Airline Business Model

Flying in the 1950’s was a vastly disparate experience compared to today: fancy seats with decorated curtains hanging on the windows, expensive liquor being served by posh air hostesses - this was something only affluent businessmen and the upper classes could afford. As air travel grew in popularity during the 1990’s, demand for flights skyrocketed and thus began the rise of Low Cost Carriers (LCC’s). In today’s world, travelers across the globe have a multitude of flying options to choose from. People want to get from A to B as quickly and as cheaply as possible, but can that be profitable for airlines? 

Full service airlines (Emirates, Qatar Airways, British Airways, etc) provide travellers with a complete experience; whereas Low Cost Carriers (Ryanair, Southwest, Wizzair, etc) are no-frills. The product is stripped to a bare minimum – customers pay for a seat on the airplane, and any extras are tagged with a premium price which often exceeds the cost of the seat itself! Narrow body aircraft, such as the Airbus A320 and Boeing 737, allow LCC’s to save on vocational costs as pilots and crew all require the same training for their fleet. Standard economy seats fill the cabin which allow tons more people to fit in the same area, compared to the plane having a separate business/first class section. 

This practice, called ‘unbundling’, is ubiquitous amongst all low cost airlines allowing them to dramatically lower their airfares while still being able to make a profit on each flight. The most famous example by far is Ryanair: an average flight costs €26 per person and customers who pay for any additional services pay 2-3x more. Furthermore, Ryanair’s annual revenue for 2023-24 was €13.4 billion, and their net profit was up 46% from the last fiscal year at €1.9 billion. Covid-19 was a game-changer for many low cost carriers as it demonstrated why unbundling works. 

Many legacy carriers struggled to bounce back after the worst of the pandemic had passed, since most people wanted to fly low cost and airfares had risen incredibly high, partially due to the Russia-Ukraine conflict which surged up oil prices. In 2023, LCC’s accounted for 35% of the world’s seat capacity and had a 38% market share. Full service carriers struggled to compete effectively, leading to fewer flights and closure of routes where LCC’s dominated by offering the best flight times at the lowest cost possible. 

Moreover, transporting luggage incurs costs for all airlines; labor costs, insurance, and fuel, as well as any lost baggage compensation. While checked bags are included in the ticket price, they are never truly ‘free’ – the expense was simply built into the overall fare. This means that passengers who take carry-on luggage are effectively subsidizing those who check-in their bags. By separating these costs (unbundling), LCC’s allow travelers to benefit from lower base fares, while those who check-in baggage can cover the associated expenses.

However, it is important to realize that a lot of LCC’s are moving towards a more ‘hybrid’ model - somewhere between a true ‘low-cost’ business model and a legacy carrier. In a similar fashion, many Full Service Carriers are adopting LCC practices. Traditionally, LCC’s operated out of smaller airports in order to save costs on parking spaces, maintenance fees, as well as rent costs for spare fleet which is stored in hangars at the airport. 

Ryanair’s major hubs are London Stansted, Manchester Airport and Dublin Airport – these are not major airports but allow the airline to fly to most European cities where passenger demand is highest. However they do not operate Long haul/transatlantic flights. Other LCC’s like Scoot or Wizzair compete with major Full Service Carriers on long-haul routes, based out of major hubs like Singapore Changi. 

Additionally, Ryanair is also offering business travel services for companies to transport their employees throughout Europe. This further bridges the gap between operating as a low-cost airline or a full-service airline, in terms of broadening the target audience to a more business oriented market. The expansion of services also offers customers a more luxurious experience, with private lounge access, better seats (offering a separate cabin on board rather than just a standard economy class) as well as loyalty/membership programs.

The future looks bright for the Low Cost Aviation industry; new airlines are emerging every year and competition after the pandemic has become as fierce as ever, benefiting customers with lower costs and a better overall travel experience.