Evil of "the ultra Low-Costs"

Did you ever think about why Ryanair, WizzAir or EasyJet can afford to be so cheap and still be much more profitable then any other airline in Europe? If yes, now I will give you an explanation, why,  if not, you should now, and I will give you an explanation too. And why should you? Because they are playing very dirty, and all of us should think a little bit, if we want to support these dirty-playing airlines by flying with them all the time.

I don´t want you to think, I have a problem with a low-cost business model in general. No, I think it partly could be a solution for todays crisis in European aviation, but not in the form it is done today, because in today´s form, it actually causes and increases the crisis. A low-cost airline model history started in early 70´s in parallel in UK and USA, for slightly different reasons. While in UK Sir Freddie Laker saw an opportunity to use the space in unfilled market, and actually invented the high-quality low-cost model for the future generations, in United States, Southwest airlines, stuggling with financial problems, invented a business model, that used every opportunity to save money, no matter how much it is unfair against the others. From this business model today´s Ryanair was established in UK in 1985 (originally, before the O´Leary era, as a Ryan family small regional airline), and since then even improved this dirty business model. Since then, a higher-quality low-cost model was established by Norwegian air shuttle, AirAsia, etc., but they are not that cheap as Ryanair, WizzAir, or EasyJet.

You could ask, what is so dirty about saving costs on passenger service, flying to airports further from city centre or charging passengers a fee for checking-in their luggage. Exactly about this things, nothing is dirty, but these actually aren´t the things, on which the Ultra low-cost airlines save money. The biggest savings are done somewhere else, and in a way, that has a huge negative influence on the whole aviation industry in europe and some of the most important trends in aviation.

The biggest problem with today´s European low-cost is not, what it gives us, but what does in not offer and what does it kill in European aviation. Since the low-cost airlines were lowering the prices of tickets and getting european people used to it, the product (mostly the in-flight part of it) of standard airlines keeps falling and getting closer to the low-cost ones, while they just still can´t be that cheap as the low-cost. At the end of this article, you´ll know why. It is because the normal airlines can save money only on the passenger product, and it just doesn´t cost that much. Savings on catering per passenger can be now around 3 EUR, on-line check-in instead of the one on airport can save max. around 1 EUR, charging for check-in luggage can be around 2,5 EUR/one way/passenger (counting with 25% of passengers paying for check-in luggage), savings on abscence of frequent flyer programme can be also around 2 EUR. So as you see, in case of a standard ticket price of around 100 EUR/500nm segment, these it still gives you just around 10 EUR savings per passenger, which gives you price of 90 EUR/segment, which is still not 40-50 EUR, as in case of Ryanair. The point is, these product are deleted without compensation, so people, who would like to fly on a higher level, just can´t do it. It is okay, that 80% of people just want to fly cheap, but because of the bad product all over europe, the other 20% of people don´t get the opportunity to fly in style and luxury, and that is a major problem. But there is a solution for that, partly used in Asia, just not yet discovered in Europe.

My work is based on information from Ryanair and also from meetings with people from business. The biggest paradox is, that Ryanair doesn´t hide information about its dirty playing too well. I don´t think they even want to, because they say, they play absolutely regularly, but I don´t think, you will think that after reading this article. But back to the topic. The biggest dirty tricks of Ryanair are actually written down in their own annual report, which is available to download on Ryanair´s website. There are three main dirty teritories in which Ryanair saves the most money :

1. Airport and handling charges
2. Fuel prices
3. Aircraft purchase and maintenance

Now in separate paragraphs I will show you, how these are dirty and also how are these negatively influating the fair-trade in european aviation and aviation industry trends.

1. Airport and handling charges

In case of regular airlines, prices for passenger charges, landing charges and costs for aircraft handling are making around 20% of the ticket costs. On the smaller airport, for these charges airlines should leave between 13-18 EUR per passenger. But if you divide the Ryanair annual cost for Airport and Handling charges (final annual report 2012, page 9) by the number of passengers transported in that year, you will get a number of about 5,5 EUR/passenger for Airport and Handling charges. That means they saved at least 60% of these costs compared to regular airlines, that means about 12-14% of the whole flight ticket cost! Just with Airport and Handling charges! The major problem with this amount of money is, that it just can´t be enough to run an airport. If an airport provides handling to an aicraft such as Boeing 737-800 (Ryanair uses these) or Airbus A320 (WizzAir, EasyJet), and does not have any profit margin on its price, it still costs about 600 EUR. In an 80% load factor in a 189 seater aircraft, it mean almost 4 EUR/passenger, and that is only handling. How comes that the ultra low-cost airlines can afford something like that? Let me quote a sentence from the official pdf. of Ryanair strategy : "Management believes that
Ryanair’s record of delivering a consistently high volume of passenger traffic growth at
many of these airports has allowed it to negotiate favorable contracts with such airports
for access to their facilities." Well, this a very interesting thought, but there are even 2 facts against it :

a) No airline in the world gets permanent discounts and bigger discounts from airports than any other airline, even if it really provides a permanent passenger traffic growth - even airports live from money, not from number of passengers
b) Ryanair doesn´t provide a permanent growth of passengers at most of the airports it is flying to. Look at Brno, Bratislava and more regional airports. Ryanair brought a significant growth of passenger traffic in the first two years, because there was no other airline flying there (case of Brno mostly). But since then there is a stagnation in passenger numbers, and Ryanair still doesn´t pay the full prices. Every route by any airline can bring a significant passenger traffic growth to an airport, and all the airlines can use the incentive programmes of airports, which are providing some discounts in the first 3 years.

 So why shouldn´t the rules be the same also for Ryanair? It is very simple. Ryanair sees the week point of the system of running regional airports - the local goverments. These are in the most situations owners of the local airport or at least have a huge influence on them. Local goverments usually don´t know much about the aviation problematics, that is why when Ryanair comes and offers to fly to their airport, of course if there will be some direct financial support from the city and of course if they will pay the airport in average only those around 5-6 EUR, local goverments push airports to accept these terms, even if the airport in most of the cases would do it itself. Why? Local goverment can say than, that it brought an air connenction with world to our city, even if it is not true, because compared to regular carriers, who really provide connection with world through their HUBs, the Ryanair p2p business model provides only connection with London or Brussels for example. Some people say, it is just a smart way to do the business, but if you think about it, it is a dictatorship ran through the local goverments saying "accept our terms, or we will not fly here". This is creating a big monopoly in Europe, and the biggest issue is, that the small airlines can´t do anything like this, because they just don´t have the power, which has been built by the ultra low-cost airlines in past 20-25 years. This makes every regional airline start-up very risky, and that is the biggest prove on what a monopoly ultra low-costs have built already.

2 Fuel prices

Cost of fuel makes about 40% of the whole cost of a flight ticket. And not just in case of regular airlines, but also in costs of Ryanair. But since the whole cost of flight tickets in Ryanair´s case is much lower, you can imagine how much money does Ryanair save on fuel. The average price in Ryanair per USG of fuel was 2,075 EUR (Ryanair final annual report 2012, page 41)! That means 0,55 EUR per litre, while the average price per litre in Europe in 2012 was between 0,65 and 0,79 EUR. How? It has two parts. One of them has a simillar principle, as the issue with Airport and handling charges - Ryanair, operating a huge fleet, buys an enormous amount of fuel from the fuel companies, so it gets a not small discount for it. Same thing as before, it is unfair, because the small airlines can´t afford that, means they can´t save as much money as Ryanair does. The other side is maybe not that dirty, but questionable - fuel hedging. It works very simply - Ryanair waits until the fuel prices are around the year bottom, and at that moment, they buy a huge amount of fuel for that low price (and even with further discount) needed for the next 6 months for example. Than for the next six months they have a low-cost fuel on a permanent price while the other airlines buy fuel on much higher rates. This strategy of saving money on fuel saves Ryanair ca. 10% of the the whole flight ticket price. Imagine what would it be like, if all the airlines could buy fuel on these rates, how cheap could flight tickets be!

3. Aircraft purchase and maintenance

Costs related to aircraft leasing/purchase and its maintenance make about 10% of the whole price of a flight ticket. And even here Ryanair is able to save almost 75% of these costs! How? Don´t worry, their planes are fortunately safe, it´s something else. This issue has 3 parts. The first one works exactly the same, as fuel hedging - Ryanair orders a huge number of aircraft in bad economical times, when prices go down, and because of this large number it gets even an enormous discount for it. Doing this, Ryanair saves up to 40% of the aircraft list price. In case of Boeing 737-800 aircraft, used by Ryanair, it means saving of about 35 million USD per one aircraft! Okay, so they saved about 40% of the aircrafts price up till now, but it isn´t the end yet.

The second part of saving even more is, that Ryanair sells these aircraft after 4-6 years. Why? It is very simple. In these 4-6 years, the list price of the aircraft falls by about 50%, but remember - Ryanair has bought this aircraft for only 60% of the original list price. That means that for Ryanair the price of the aircraft was 10% of the original list price, means 90% saving on the aircraft purchase cost! If you divide the cost of Aircraft rentals+Depreciation (Ryanair final annual report 2012, page 9) by 12 months of the year and the number of aircraft in fleet, you´ll get a number of 145 000 USD/month/aircraft, while a normal leasing rate of a 4-6 years old Boeing 737-800 is around 350 000 USD/month.

The third part is related to the time of selling the aicraft and its maintenance. Cost of maintenance per one aircraft in Ryanairs fleet in 2012 was about 400 000 EUR. A normal cost of maintenance of aircraft like this should be ca. 4 times higher, means between 1,5 and 1,7 million EUR/year. Ryanair can reach this low-cost partly because its fleet contains only one type of aircraft, which means a major savings for spare part reserves, maintenance staff, etc., but not this much. The main saving is caused by the fact, that after about 5 years, Ryanair sells its aicraft, and don´t have to do the D-check, which is the most complex maintenance check, performed after every 5-7 years, and costs up to 3 million USD. Without need to make maintenance reserves for this check, Ryanair can save about half a million USD per year on this.

And why is this so dirty? This early selling of an enormous amount of aicraft supports a growing trend of not using older planes for airline business. While the basic lifetime of a airliner is 25 years, nowadays even 14, 15 years old planes are hard to sell for lessors. This trend causes financial problems to lessors, who have lots of unused aircraft in their fleet, and what more, once it can cause a major increase in leasing rates, because aircrafts will have to be paid of in shorter time than today, and that will mean higher even costs of flight tickets for airlines using aircraft after the low-cost airlines.

Now when you already understand the 3 main dirty tricks done by the ultra low-cost carriers, let me show you dwo charts about the operating costs of a regular airline and operating costs of Ryanair :

As you can see, only with these three dirty tricks and the abscence of any free passenger service, Ryanair is able to save at least 32% of the costs compared to a regular airline. If we count in also the not-so-dirty ways to save money, the costs of a Ryanair flight ticket can be up to 50% lower than in case of a regular airline. These are mostly the anicillary revenues, due to transporting less check-in luggage and no cargo even lower fuel burn, and of course, the high average load-factor. But consider this - if Ryanair, WizzAir or EasyJet wouldn´t play dirty, they couldn´t be so cheap as they are today, and the airline business in Europe wouldn´t be so risky, those who want to fly in style and luxury, could do that, while even people who want to fly relatively cheap could do it, because there is a way to do it in a different way (of course not that cheap as Ryanair). There is a way to offer all this possibilities to air travellers, it was invented decades ago, it just has to be reinvented today to save the european aviation.

Jan Vojtek, 2013