In the US airline industry, there's a new kid on the block. Starting May 22, 2007, start-up budget carrier "Skybus Airlines" will commence service, carrying passengers from Columbus, OH, to a handful of cities such as Burbank, CA; Richmond, VA; and Kansas City, MO [1].
Skybus plans to offer at least ten seats on every flight for $10 until December 15. Low-cost carriers, as the designation suggests, can offer rock-bottom fares by keeping their operating costs low. For Skybus, this includes eliminating the option of booking tickets through a call-center, and thus the expenditures associated with paying call-center employees. Tickets must be booked through the Internet instead.
Skybus isn't the first airline to conceive of a low-cost business model. In fact, the concept has been around since the early 1970s when Southwest Airlines developed the first blueprint in the airline industry for cutting costs. Since then, start-up carriers that dream of soaring to profitability in an industry where competition is fierce still refer to many of the model's original pillars.
Following are the components that Southwest Airlines devised to keep costs low:
• Short-haul routes
• No-frills service (e.g., meals, in-flight entertainment, seat assignments)
• Standardized fleet (Boeing 737)
• Use of secondary airports
• Steady growth and expansion
• Ticket-less reservation system and simple fare structure
• High aircraft utilization
• Higher seating density
• Attempt to attract price-conscious consumers (not business travelers)
One of the reasons that low-cost carriers (LCCs) operate short-haul flights is that it enables these airlines to offer a no-frills service, which customers can tolerate for an hour or two, but not much longer. Also, by eliminating some of the services typically found on full-fare carriers, such as hot meals and entertainment, LCCs can save a tremendous amount of money.
Using a standardized fleet helps to keep maintenance and crew training costs low--so does flying into secondary airports such as Frankfurt-Hahn (as opposed to Frankfurt Airport), where fees for gates and landing slots are generally lower than at large, congested airports.
Steady growth and expansion is another key factor in reducing costs. If an airline expands its operations too quickly, it will face increased depreciation costs in the future. Depreciation refers to the drop in value of physical capital (e.g., the airplanes) as the physical capital ages. Rapid growth also lends itself to more competition over routes and landing slots, which hampers LCCs chances of profitability in certain markets [2].
Airlines can increase their revenue by keeping their planes in the air. LCCs like Southwest Airlines maximize aircraft utilization by decreasing total turn-around time or the time it takes an airplane to land, reload passengers, and take off for the next flight. The use of secondary airports and the elimination of seat assignments (to save time during boarding) are a few of the strategies employed to optimize turn-around time.
Finally, LCCs can keep costs low by increasing density in comparison to full-fare airlines. LCCs do this by offering a one-class cabin (i.e., removing first and/or business class), which allows a 737 to hold 20 or more additional passengers. LCCs typically rely on revenue generation that results from capacity-the number of passengers-rather than yield-the amount of money earned per passenger-which is considered to be a "revolutionary" approach in the airline industry [3].
References:
[1] http://money.cnn.com/2007/04/25/news/companies/skybus.reut/index.htm
[2] Doganis, Rigas. The Airline Business in the Twenty-First Century.
[3] Lawton, Thomas. Cleared for Take-Off.
