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Joined: Thu Jan 20, 2005 12:32 pm

Ticket Price Of Low Cost Carriers

Thu Feb 17, 2005 6:58 am

Maybe this has been discussed before, but cant seem to find it .. so ..

I always wonder how the low cost carriers can keep a ticket price so low. I mean,landing fees for Amsterdam Schiphol are already high enough to justify for a higher ticket price then I paid, for example, to Dublin last week. With Aer Lingus, 95 Euro's for a return ticket !! That can't be profitable ??

Can anyone help me shed a light on this?

THanks !

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Joined: Fri Sep 19, 2003 3:26 pm

RE: Ticket Price Of Low Cost Carriers

Thu Feb 17, 2005 8:26 am

I just had this discussion in my economics of air transport class last night. These are generalizations and in many cases don't apply to all LCCs, but they are prevalent in the sucessful ones.

Most LCCs have lower cost structures than the more traditional carriers. On the operational side here in the US, they employ largely non-union employees and many are trained in multiple roles. They utilize common fleets of aircraft which saves costs in training for any employee that touches the aircraft from lowly fueler (I am one so don't get mad  Smile) to the pilots and mechanics. It saves money becuase they only have to stock one version of a part that is different from model to model, and you don't need many specialized service parts, such as towbars. You only need one model. Another trick they use is operating into less congested, or lower cost airfields that may be a distance away from the downtown area. Southwest is a good example of this choosing Dalas Love field over DFW and Baltimore-Washington over Dulles. They may also favor a point-to-point service structure. The hub and spoke we all know and loathe is very costly. You need more people and equipment to handle all those flights at the same time. All the planes come in, all the planes go back out. Nobody is working and the gates and equipment sit idle while those planes are flying to the next destination. All those planes bottlenecking at the runway causes delays. Delays cost money. This is a big reason that many majors are starting to "depeak" their hubs.

On an organizational level, the hiarchy of LCCs in the US is much "flatter". While you will still have a board, president or CEO, and the positions that the FAA mandates under part 121 they eliminate many of the higher managment positions. This saves a ton in salaries and bonuses. Employees may also be compensated differently. Many LCCs do not pay as well but may offer other incentives such as a strong profit sharing program, and full health benefits. The executives are traditionally not paid as well also.

All of these features add up to a different corporate culture. Many LCCs embody a team philosophy. The management often empowers their employees and looks to them for suggestions on how to make the airline more efficient. After all, the guy doing his job knows how to speed up the process a little or make it easier to do. This lends to higher morale, as the employee is seen as a vital part of the team and they fail without the job they do. It also lends itself to a more dynamic structure that allows for faster change as demands warrant action. Little things like cancelling a route that is not profitable and switching the resources that were spent to a more productive route are an example. Another would be accessing new technologies such as a new IFE system that might appeal to travelers. Perhaps it's purchasing their fuel at a predetermined cost in the hopes that they will later see a savings as the retail price goes up. There is a smaller chain of command, and decisions can be made faster.
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RE: Ticket Price Of Low Cost Carriers

Thu Feb 17, 2005 3:31 pm

I don't disagree with most of your statements, Pilotpip, but I don't think your points apply just to LCCs, or even to air transport companies alone.

A team philosophy? Asking employees for suggestions? Canceling non-profitable services? Offering less monetary compensation in exchange for greater benefits? I think any company, especially one in a highly competitive industry, tries to employ these techniques for maximizing profit.

As far as the hub and spoke system, I think a staff of a hundred employees working two shifts at a couple hubs would be more cost-effective than a few dozen employees working a couple shifts at a few dozen airports all over. Otherwise, why in the world do they do it?

IMHO, the bottom line is getting lost. Airlines are becoming so competitive about so many things, while losing sight of the fact that the goal of any business is to make money, and most of them aren't doing that. If a seat on a route costs a certain amount of money, they should charge it. Times might be rough while the industry sorted itself out, but times are rough now anyway. Any retail business operates by selling its product or service for the maximum people are willing to pay for it, but any retail business will go out of the same when they don't cover their costs. If people want to fly so badly, they'll have to pay what it costs. If fuel, labor, and insurance are so expensive, then driving won't become magically cheaper than flying, and will never take less time, even with today's lengthy security delays and hub-and-spoke-system-induced flying-the-wrong-direction-from-ones-destination delays.

I think this might be better suited in a forum such as General Aviation than Tech/Ops. However, I think anyone could lend a great deal of information, technical foundation, and credibility to the discussion if they were able to provide concrete examples and/or counterexamples of any of the situations described herein.
Position and hold
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Joined: Fri Sep 19, 2003 3:26 pm

RE: Ticket Price Of Low Cost Carriers

Fri Feb 18, 2005 12:44 pm

I totally agree with you Bri2k1, but if you look at who is making money right now, it's a handful of LCCs. The legacies have tons of issues in the labor vs. management department and they really aren't too happy with each other as one keeps asking the other for massive pay cuts.

There's nothing wrong with hub airports if you make them more efficient. Southwest doesn't serve more destinations than say, United, but there are some advantages to depeaking a hub by staggering some flights. If two aircraft come in at the same time, you need two crews to handle each plane. If those two aircraft are scheduled in a staggered way, you only need one.

Some of the LCCs are making money charging what they do. They have lower overhead. The problem is, if the legacies raise their prices, people don't fly on them. Some cash flow is better than none at all in their eyes. If the seat is going to be empty, we might as well take a loss and fill it because there is a very marginal cost to put someone in it. What I think we're seeing right now is a war of attrition. Many carriers are hurting, some worse than others. As soon as one of them dies I think we'll see fares go back to what is considered normal. Moves like the new fare structure at DL are targeted at attracting new business customers since they really only applied to walk-up fares. They are trying to get customers from carriers like US. Once they have them signed up for frequent flier programs, and get their brand loyalty, the fares will come back to a more acceptable level.

It is called Technical/Operations. How is this not a part of the second half of that? Besides, if it were in general fourm there would be 40 posts on how one carrier sucks and the other is the greatest, or how the LCCs are killing the legacy carriers.

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