The truth about low cost

It all starts by totally mistaking the "label" given to these companies: Ryan Air and Easy Jet par excellence and even earlier South West in the USA, the progenitor of this organizational model, are not airlines that base their business on low corporate costs (even but not only and not primarily).

This misleading name that was given to them, who knows by whom, has created a false myth.



Low cost: perhaps the intention was to indicate the low cost of tickets (therefore low cost for users and not for companies) but many times it is misunderstood with the fact that it is the companies that have low costs, in a negative, speculative sense and distorted.

The main issues that are debated without in-depth analysis are:

  • speculation on personnel (and here we do not want to go into complicated union reasoning or management philosophies),
  • tax evasion (if so, maybe they wouldn't have been on the market for so long),
  • unpaid suppliers (and here perhaps there is something true and we will see it),
  • the most false thing is the belief that they generate considerable savings by skimping on maintenance. You may have heard your neighbor say: "with what I paid for the ticket, I hope they have the money to pay for the maintenance!"


Reiterating that there is more than one system for cross-checking the airworthiness of aircraft and therefore it would be a speculation of the entire sector on people's lives, we do not think this is really the link to the economic sustainability of these companies.

Let's go back to the name: low cost



“Low-cost” should be changed to “low-price” because for the airline it is the selling price that is low and not the operating costs, which are optimized and we will see it shortly.

In reality, to be technically precise, more than "low-price" it is "dynamic-price" as hoteliers and tour operators know, knowing the "revenue management". In fact, thinking about the quote on the maintenance of your seat neighbor, you might also think of the one sitting on the opposite side saying "other than low-cost, I paid for this ticket as a business flight!".

Here is the logical sense: first of all between the passenger who paid 1 Euro on your left and the one who paid 300 Euro on your right, there are you who paid 150 Euro which is a good price, not too much. low, nor too high, following the principle that everything must be sold at the maximum price at which the market is willing to buy it and the dynamization of prices allows you to do just that: it sells it for one euro to the one who has taken flight for fun , 300 Euros for what absolutely needs it and 150 Euros for someone like you who was just looking for a good price.

The mechanism (or algorithm) works to understand in real time how much demand there is on that flight and based on this, adjust the price: with a high demand the price will rise until it stabilizes, with a low demand, it will decrease. up to a single euro the ticket price.

Yes, because scheduled flights must always be guaranteed by the companies that grab the slots and therefore: whether the plane is full or empty you have to take off but the costs are almost the same (except for the taxes per passenger which are actually paid separately) . So being able to add a passenger who pays even just one euro, will still be one euro more in revenues (or one euro less on the total costs that have to be covered), in jargon an extra euro therefore in throughput ... but here we go towards the complicated.


Now imagine having the amount of passengers carried by Ryan Air, for example, and earning 1 Euro for each additional passenger you carry on your planes on each route, every day ... at the end of the day it's good money (imagine that it is not always such one euro the cheapest ticket, usually 20 or 30 euros. Here: multiply!). Also keep in mind that then there are flights that have no seats sold at low prices, indeed maybe they all pay 300 Euros instead, like the passenger on your right, because it can be periods concomitant with important events or subject to seasonality and the company keeps high prices right away. This is another element of the revenue management that applies to the world of tourism in general.

These are the strategies to sell at the maximum salable price on the market and even if this price is sometimes very low, we guarantee you that it is always more of the place that the flag companies leave empty for not having lowered prices (actually all companies now adopt these systems but the forerunners were the low-cost ones for sure!).

The principle is this: if I cannot lower costs beyond a certain limit (with the optimizations that we will see in a moment) I can always increase revenues, managing prices, even by just one euro at a time.

The costs of the airlines


Now we come to the costs we mentioned earlier: do you have any idea of ​​the face of the Boeing CEO when O'Leary went to place an order for 30 planes worth $ 100,000,000 each (dollar more, dollar less)? Maybe he managed to get a little discount.


And when did he go to buy fuel for the entire fleet? Who do you think was holding the deal?

These are simple market laws between supply and demand, customer and supplier, but then O'Leary, Tony Ryan before him and South West even before, made two epochal arguments upstream: the first, which seems the most obvious, is to have only one type of aircraft.

In aviation, the companies carry out market research, verify the routes they have to travel, how many passengers they could board, check the performance of the aircraft on the market and then buy planes a little here, a little there. True low-cost companies choose a type of aircraft and build all their operations on that performance. A single type of aircraft means a single supplier (speech made above on the quantities and the face of the CEO), the same training for everyone (pilots and technicians), simplicity of forecasting, cost of spare parts warehouse (for those who are in the sector, perhaps they know what does it mean), and so the cost of the machines (the total cost that does not only concern depreciation but the entire management of the operational life) is halved!

Now the second topic, very interesting: the planes of the companies, from the smallest to the largest, from the line to the air taxi and arriving at the proprietary pilots and the aeroclubs, when they land at an airport they pay ground service and state taxes based on tonnage, passengers, goods, etc ... the low-cost ones have instead revolutionized the system and go to the airports being able to say (we trivialize it a lot ... don't read us literally) : "what do you give me if I take flights to your airport? 

Have you seen what Bergamo airport was like 20 years ago and what it is like now? How many shops can you rent? How much is the space at the airport worth when my low-cost car arrives, how much do the parking attendants earn, what is the total induced amount? "


Well, we don't know how to answer all these questions, but obviously the answer lies in the economic sustainability of these companies.


In the face of all these arguments, some see low cost as the devil and others venerate them but it is not our habit to give judgments other than "modest opinions"… so we can only say that the economic model works, that it has revolutionized the world of aviation and travel in general, that it has opened up the possibility of moving to many more people and created thousands of jobs…

but pollution, speculation, exploitation are not part of our assessment. On the other hand, even Amazon is an economic model on the one hand winning and on the other questionable ... but that's another story.



In conclusion, as a mere accountant, I can only say that the "low-cost" model is fascinating and Copernican both from the point of view of aviation and the economic world in general.