Over the past few decades, low-cost carriers (LCCs) have revolutionized the airline industry, democratizing air travel and enabling millions of passengers to fly at affordable prices. However, recent trends indicate a troubling downturn for these budget airlines, raising questions about the sustainability of their business model. Low-cost carriers emerged in the 1970s, with Southwest Airlines in the United States pioneering the model. LCCs disrupted traditional airlines by offering no-frills services, maximizing aircraft utilization, and maintaining stringent cost controls and capturing significant market share. The model spread globally, with Ryanair and easyJet dominating Europe, and AirAsia making inroads in Asia.
The success of LCCs was fueled by some key factors such as:
- Deregulation of the airline industry, which allows for more competition and the entry of new players into the market.
- Technological Advancements that allow for lower fuel costs and the rise of online booking systems that further reduce operational costs.
- Increasing demand for Air Travel: There is a growing number of passengers in emerging markets who don’t afford expensive tickets. Moreover, there is a rising appetite for travel boosted by the end of pandemic.
- Uniform fleet: Usually LCCs opt for a uniform fleet with similar models from the same manufacturers: Ryanair opted for Boeing’s 737 while Wizz Air went for Airbus A320 models, thus reducing operating costs.
What went wrong then?
Despite their initial success, several challenges have emerged, threatening the viability of the low-cost carrier model:
- Rising fuel costs
Fuel is a major expense for any airline, and recent significant price hikes have hit LCCs particularly hard. Unlike their legacy counterparts with more flexibility in pricing, LCCs struggle to pass on these additional costs to passengers without compromising their core value proposition of affordability. This squeeze on margins makes it difficult for them to stay profitable.
- Operational Challenges
Operational efficiency is another pillar of the LCC model and turnaround times for these kinds of flights are optimized so that multiple things happen simultaneously. Ryanair even has its own stairs mounted under the main cabin floor to save time and cut some costs with the airport service providers. Additionally, unpredictable weather patterns, manufacturer groundings (such as 737 Max and the Pratt & Whitney contaminated engines that resulted in the grounding of several A320) and understaffing with both pilots and ATC. Short turnarounds also mean less margin of error and the fact that a delay on one of the flights disrupts the whole schedule. Moreover, during the day, LCCs usually don’t fly just between hubs and might come back to another hub as the final destination of the aircraft. This means that such companies can’t just assign a standby aircraft if something goes wrong with the one flying.
- Intense Competition
The success of the low-cost model led to market saturation, with numerous LCCs competing on the same routes. This fierce competition has driven down ticket prices to unsustainable levels. Several high-profile LCCs have faced significant challenges in recent years such as: Norwegian Air Shuttle, Jet Airways or WOW Air, with the last one ceasing operations in 2019 due to financial difficulties, leaving thousands of passengers stranded.
- Shifts in Consumer Preferences
Post-pandemic, travelers are prioritizing health and safety, flexibility, and customer service over low prices. This shift has disadvantaged LCCs, which often lack the resources to enhance service quality. Business travel, a historically lucrative market segment for legacy carriers, has not fully rebounded from the pandemic. This has led legacy carriers to focus more on attracting leisure travelers, a market traditionally dominated by LCCs. This increased competition could further strain LCCs’ profitability. Scott Kirby, the CEO of United, emphasizes that offering customers real choices is crucial for profitability. This strategy includes providing basic economy tickets, enabling United to compete effectively in the budget segment of the market. Kirby also contends that customers are willing to spend more for an enhanced experience and better value.
The rise and fall of low-cost carriers underscore the dynamic nature of the airline industry. While LCCs have democratized air travel and forced legacy airlines to adapt, their future hinges on the ability to innovate and respond to a rapidly changing landscape. As the industry grapples with economic, environmental, and social challenges, the fate of low-cost carriers will serve as a bellwether for the broader direction of global aviation.