3. Low cost airlines:
fundamentals of the business model

If the Wright brothers were alive today Wilbur
would have to fire Orville to reduce costs.
(Herb Kelleher)

When it comes to explaining and analyzing the fundamentals of the low cost airline business model, we are inevitably faced with a major stumbling block, which is the large number of myths and preconceived ideas surrounding it. It must be recognized that this is partly due to the popularity that this model has achieved: around 40% of airline seats in Europe are flown by airlines that follow this model with varying degrees of adherence, with that share even exceeding 50% in some countries such as Spain or Italy, amongst others. And, although one might expect that this would mean a deeper understanding of the low cost business model, this is not the case and, what is more, even the media have contributed to the creation of certain urban myths, which do not correspond entirely to reality.

This is so for a number of reasons; the first is due to the relatively recent phenomenon of cheap fares, especially in Europe, where, as we have seen in the previous chapter, until the end of the 1990s flying was extremely expensive, only accessible to a minority of privileged people. And in some markets, the boom of cheap fares is even more recent, having begun less than ten years ago. Therefore, it is natural that there is a certain initial mistrust, and consumers ask themselves the following question: “... but let’s see, how can it be that a flight costs less than the taxi from the airport to the destination city? There’s got to be something wrong here...” These suspicions are usually assuaged in most cases as soon as consumers try the product, but in any case they pave the way for stereotypes and clichés as soon as the slightest opportunity arises.

Secondly, the “low cost airline” label, far from defining a single homogeneous model, contains many different ways of achieving its primary objective, which is to offer low fares to consumers. But in many cases this heterogeneity is not easily identifiable by them, and there is always the risk that they observe the sometimes controversial practices of the most fundamentalist operators, and extrapolate them to any airline with this label, committing an error of assessment. In this chapter we will study the characteristics of the business model that we are going to define as “pure”, in spite of the fact that it is likely that there is not a single company left that follows it one hundred percent, as each one has been adapting its strategy, and deviating to a greater or lesser extent from it. In fact, as we will see in Chapter 5, the trend, at least in the short and medium haul, is towards a hybrid model, since not only have low cost airlines been forced to sacrifice some characteristics of the “pure” model, but also traditional airlines have had to reinvent themselves in order to remain competitive, adopting some of them, something that until recently was unimaginable.

Finally, even the name can be misleading because, by referring to low costs in defining the model, we can run the risk of identifying the focus on costs as the cornerstone of the model, when it is only one of its fundamental pillars. As we will see throughout this book, operational efficiency is a necessary condition for success, since it enables the existence of cheap fares, but it is not sufficient if it is not accompanied by a comparable commercial excellence, which makes it possible to generate the necessary revenue to obtain a sustained profit. In fact, shortly we will be able to see how, in addition to the cost advantages that the model undoubtedly generates, there is a series of revenue advantages that, in many cases, become even more important than the former in terms of the keys to the success of the model. On the other hand, the search for a cost structure as efficient as possible is not exclusive to this model, as we will see below.

3.1.  What is low cost?

In order to try to explain the importance of having the lowest possible costs and, especially, the different ways this can be delivered, regardless of the business model, this author usually uses an analysis carried out in 2014 by the CAPA Centre for Aviation, which compares the unit costs of three traditional airlines (the term used in the study is legacy carriers) such as Emirates, Virgin Atlantic and IAG – the latter being considered the combination of British Airways and Iberia for these purposes.

But first, readers are invited to look at Figure 3.1, which shows three photos of the service on board each of the airlines mentioned, and to try to identify each of them with its corresponding picture. Subsequently, they are asked to mentally classify them from the highest to the lowest unit cost.

After having carried out this exercise many times with different groups of students, this author has invariably found that the identification test has a success level of almost 100% and, except for a few absent-minded people, all correctly recognize each photo with its corresponding airline. The interesting thing begins when you start to answer the second question about unit costs: here too there is a majority response in favour of Emirates allegedly having the highest unit cost, with somewhat more disparity of opinion about how the other two compare. This assumption is normal, given that Emirates is often identified as an airline with an excellent and luxurious service and, consequently, it follows that this can only be achieved at higher costs – the photo used with one of its suites on board an Airbus A380 reinforces that perception, and hence its choice (a bit opportunistic, no question) to achieve the desired effect.

The surprise appears when it is unveiled, following the referred CAPA study, that reality is completely the opposite of what is perceived: as can be seen in Figure 3.2 (CAPA, 2014), Emirates is the one with unit costs, measured in US dollar cents per available ton-kilometer (ATK), lower than either of the other two airlines.

In fact, due to the correlation between unit costs and average stage length (flight duration) which, as we will see later in this chapter, causes the former to decrease as the latter increases, the comparison shown may be misleading, since Virgin Atlantic’s average stage length is considerably larger than that of the Emirates, and this is bigger to that of IAG. Therefore, in order to ensure that we are comparing apples with apples, it is necessary to standardize the data by adjusting them according to the stage length, as otherwise erroneous conclusions could be inferred from the analysis, assuming as relative cost advantages what would be no more than a consequence of a different network design. In the study cited, they took advantage of the fact that the average stage length of the combination of IAG plus Virgin Atlantic is very similar to that of the Emirates, reaching the comparison shown in Figure 3.3 (CAPA, 2014) of the unit costs of the latter compared to the average of the other two.

We observe then that the unit cost of Emirates is about 26% lower than the average of IAG and Virgin Atlantic, which is somewhat, at least, counter-intuitive, as shown by the number of students who continually say the exact opposite. When trying to explain the reasons for this, the conversation immediately comes to the alleged subsidies that the former would receive, in the form of advantages in airport charges at its Dubai hub, as well as lower labour costs due to the absence of income tax or trade unions. What should be noted, however, is that the CAPA study makes an adjustment to both items and determines that, even normalizing its effect, the Emirates unit cost advantage is still greater than 20%, which shows that there must be another explanation for this enigma.

And the explanation is none other than the operational efficiency of its business model, based on the geostrategic location of its hub which, unlike other network airlines that need a short-haul, narrow-body fleet to feed it, allows Emirates to do it exclusively with wide-body aircraft, driving a much lower unit cost. Indeed, in contrast to the short/long haul model of most of its competitors, which requires smaller aircraft for its effective feeding, the Emirates model could be classified as long/long haul, thus being much more efficient. Returning to the comparison of the study, this implicit circumstance in the business model means that the number of seats offered per movement by Emirates is 27% higher than the average for IAG and Virgin Atlantic, and this manifests itself in a unit cost advantage manifested in almost all cost lines.

In short, we have seen how a luxurious proposition can be made compatible with the operational efficiency necessary to have a low unit cost structure, which shows that the latter is not an exclusive feature of low cost airlines. In fact, in an industry as competitive as commercial aviation, the search for as low a cost structure as possible is a given in any airline seeking to achieve sustained profitability, regardless of the business model. Therefore, answering the question titled in this section, low cost is not only a label that defines a particular model, but is a necessary condition of survival, although, as we will see throughout the book, not sufficient. The key to success is knowing how to combine a cost structure that is as competitive as possible, within the strategic direction chosen in each case. For example, the cost advantage that Emirates enjoys because of its larger average aircraft size would be of no use if they were then unable to sell a large share of that additional seating capacity at an appropriate price, meaning the cost advantage would be diluted by not obtaining the revenue. In fact, fortunately for this airline, it manages to carry around 40% more passengers per day than the average of IAG and Virgin Atlantic, which is proof of the robust nature of its strategy.

Once we have understood the paramount importance of making sure that having as competitive a cost structure as possible is aligned with the chosen revenue model, we come to the point of explaining how one is intimately related to the other. In fact, balancing revenue and cost is without a doubt the big headache of any airline executive. And to understand this I’m afraid we have no choice but to dust off some of the old math books.

3.2.  A little bit of math (but just a little!)

Starting from the premise that the objective of any for-profit company is to maximize its profit, and this is equal to the difference between revenue and expenses, in Figure 3.4 we see how each of the components of the formula are usually broken down in this industry.

On the demand side, we see that revenue is obtained as the product of traffic, measured in revenue passenger-kilometers (RPK), by unit revenue or yield, which is nothing more than the result of dividing revenue by RPK. The use of RPK to measure traffic is due to the fact that, if we only used the number of passengers transported, we would be adding very heterogeneous elements, since a passenger who flies, for example, 1,000 kilometers, is not the same thing as another passenger who flies 7,000 kilometers, and hence the fact that the distance flown is usually used as weighting factor to homogenize the result. This circumstance, which is especially important for airlines flying both short and long-haul, is less critical for those only flying short and medium-haul, as is the case with most low cost airlines, and hence it is quite frequent in the latter to simply use passenger numbers as a measure of traffic, rather than RPK, as we shall see later.

On the supply side, the expenses result from the multiplication of the volume of production, measured in available seat-kilometers (ASK), by the unit cost, which is the expenses divided by the ASK. The level of production, also known as offered capacity, is an essential element, since, of the four parameters into which we have seen the profit formula is broken down, it is the only one that the airline’s management team has the possibility of setting at the level they deem appropriate. Indeed, we can verify that there are two “volume” elements (traffic and production), and two “price” elements (yield and unit cost), where there is a greater or lesser control by the airline over three of them, through different levers, but, unlike the capacity, its value cannot be fixed a priori. Hence, decisions about capacity, both medium and long-term, are amongst the most important ones any airline’s management team faces.

For the time being, even the least versed reader in mathematical knowledge will agree that the level of sophistication has been minimal, as we have limited ourselves to multiply and divide income by RPK, and expenses by ASK. We will go one step further, proceeding to divide all the elements of the benefit formula by ASK, as shown in Figure 3.5, in order to obtain the unit profit or profit by ASK.

We then see that the unit profit, or profit obtained per ASK, is equal to the difference between the product of load factor and the yield, minus the unit cost. In this way, once capacity has been established, profit maximization depends on maximizing the first two parameters (LF, YIELD) and minimizing the third (C_UNIT). The problem arises when it is ascertained that, far from being independent of each other, they are related between them, usually in an inverse way. Thus, the relationship between the first two is well known: the lower the fares and, consequently, the yield, the greater the demand and, with it, load factor, and vice versa. Also, if an airline decides to make an improvement in cabin configuration, or to increase the number of crew on board to provide a better service, so as to be able to increase unit revenue by attracting customers who are willing to pay a bit more for it, these measures will invariably lead to an increase in unit cost. Finally, costs also increase with load factor, because certain costs, such as airport charges, have a component that is paid per embarked passenger, hence, the higher the load factor, the higher the cost.

Having reached this point, a reassuring message for any reader who is not mathematically minded, having seen the formula obtained in Figure 3.5 no more complicated computations are required to be able to understand the rest of the chapter and the book. Indeed, the unit profit formula helps to understand the fundamentals of the low cost business model, based on obtaining the lowest possible unit cost – we will soon see how –, which allows the existence of very low fares. This in turn helps to generate additional demand that leads to nearly full aircraft. The key is to make sure that the combination of the two favourable factors (high LF/low C_UNIT) compensates the unfavourable (low YIELD), so that a positive unit profit is achieved. This unit profit, however small, is multiplied by a very large production volume, becoming a significant amount that characterizes the successful examples of companies that follow this model.

Using this formula, we can also understand the differences between this business model and the one followed by traditional or network airlines, successors to those formerly known as “flag carriers”, which we have summarized in Table 3.6.

Table 3.6: comparison between the low cost and the network carriers model

In this table we can see that, while the low cost model has two of the three factors in its favour, the network carrier model has only one, which is yield. This fact gives us some indication about what is behind the differences in profitability between the two models seen in Chapter 1. Of course this is a generalization that simplifies what is actually a very heterogeneous set of companies and approaches, so it is important to understand it as such. In fact, we started this chapter by talking about a network carrier, such as Emirates, that diverges from this categorization. What’s more, the case of Emirates can be defined as paradigmatic, having all three factors in its favour, which is an exception and explains to a large extent the reasons for its sustained profitability over the years.

Returning to the low cost business model, and having understood that one of its fundamental pillars is to achieve the lowest possible unit cost, it would now be time to begin to understand how this is done. But to do so it is necessary to first understand the main characteristics that determine an airline cost structure, which is precisely what we will see in the next section.

3.3.  Structure and determinants of airline costs

When it comes to breaking down and categorizing airline costs, we find that there is a diversity of criteria used, depending on the purpose for which the exercise is carried out, the accounting practices of the country where the head office is located, as well as other considerations. Despite this, there is a standard classification and consequent structure created by ICAO, under which all member airlines are obliged to report their financial data on an annual basis. The main consequence of this is that, except for small discrepancies of criteria in the classification of certain items, there is considerable uniformity in the cost structure used, largely following what is prescribed by ICAO. Given that it is thought to cover any type of airline, independently of the business model, we will make some minimal modifications, so that it properly adapts to the structure used by the low cost model, main subject of this book.

First, costs are broken down into non-operating and operating costs. Non-operating costs are mainly the result of financial transactions, such as interest payments, losses on dealings with assets or subsidiary companies, or losses linked to foreign currency transactions, amongst others. Due to the fact that all these transactions are very much company-specific, non-operating costs are usually of little use when comparing one airline with another, and even to analyze the evolution of the same airline over time, given the ad hoc nature of many of them.

This is not the case for operating costs, which relate to the main activity carried out by airlines, which is the transport of passengers and/or cargo from one location to another. Operating costs are usually further subdivided into two:

So far we are basically following a functional classification, something that will become more obvious once we break down each of the two categories into its corresponding components, but to complete the analysis we would have to include a time dimension, depending on the degree of variability of the different costs in the short term. According to this new subdivision, the costs would be classified between fixed and variable costs:

Although a priori in the ICAO standard classification both direct and indirect operating costs may have a fixed and a variable component, the norm for low cost airlines is that indirect costs have a minimal variable element, so in order to simplify the structure we will assume that only direct operating costs have it. As for this variable component, its relevance is due to the fact that it provides the degree of “avoidability” of the different items: by this we mean that variable costs are those that can be avoided by reducing the level of activity; for example, when cancelling a flight, you save the cost of fuel, airport and navigation charges, or flight crew per diems, amongst others.

After this introduction, we show in Figure 3.7 the cost structure most commonly used by low cost airlines, including the most relevant items in each of the categories, which we will briefly define in order to better understand the main determinants of costs. In order to be able to give an order of magnitude of what each of them represents in an airline, we will use the example of easyJet, which in its Capital Markets Day held in September 2017 gave details of its cost breakdown for the year 2016 (easyJet, 2017).

3.3.1.  Variable DOC (depend on the level of activity):

3.3.2.  Fixed DOC (depend on the size and composition of the fleet):

3.3.3.  IOC (depend on the business model):

In Figure 3.8 we can see a summary of the cost structure of easyJet in 2016, where it can be seen that about 70% of these are variable, a figure that varies from airline to airline, and above all between the different business models, with the variable component generally being greater in low cost versus network carriers.

If we add this analysis to what has been explained in the first chapter, within Porter’s model, about the bargaining power of suppliers, we can sympathize – though not necessarily share – with the long-standing complaint of many airline executives about the limited influence they have historically had over a large part of their costs. Indeed, in items such as fuel, airport and navigation charges, or even ground handling, the unit price to be paid for them has largely been an input over which the management team has virtually had very little leverage. Faced with this circumstance, within a non-liberalized – thus absent of competition – environment, the usual reaction was to adopt rather an attitude of resignation: since nothing can be done about it, there is no choice other than offering very high fares to cover all those costs. The consequence, already explained, was making air transport only accessible to a privileged minority. An alternative approach, certainly facilitated by liberalization, was to refuse to accept this economic determinism, looking for new ways to reduce the unit prices of those basic inputs. But, above all, acting on a critical lever that is the efficiency and productivity of resources, as we will see in the next section. But before doing that we must analyze two elements over which airline executives have enough influence, and that do have a significant impact on unit cost, which are aircraft size and average stage length.

Firstly, the larger the aircraft, the lower the unit cost per ASK. This is so because for a large part of the operational costs, although they increase with the size of the aircraft – usually defined by its maximum take-off weight (MTOW) –, they do it on a less than proportional way, resulting in a decrease in the cost per ASK. This is the case with navigation charges, for example, because of the formula which is typically used. This is also the case for ground handling, crew and maintenance costs, which does not increase proportionally with MTOW. In addition, the increase in available seating capacity due to a larger aircraft size is often greater than the corresponding increase in MTOW, which positively impacts almost every line of cost. This size effect is key to the operational efficiency of Emirates as mentioned at the beginning of this chapter.

Secondly, the average stage length is also a determining factor, since, for a given aircraft, the longer the sector length the lower the cost per ASK will be. The main reason for this is that aircraft are only productive when they are in the air, and within the different phases of flight the most efficient by far is at cruising altitude, as not only the speed is higher, but fuel consumption is lower. Therefore, the longer the stage length, the cruise phase will represent a greater proportion of the total block-to-block time, and consequently fuel unit cost will be lower. Furthermore, given that in subsonic aviation the maximum speed is limited by the sound barrier, the longer the sector, the greater the average speed, since the taxiing, take-off, ascent, descent, approach and landing phases, where the speed is significantly lower, will represent a smaller part of the total flight time, resulting in an increase in the productivity of the aircraft. Also, airport or ground handling charges do not increase proportionally to the distance flown, but are usually constant, or almost constant, for a certain type of aircraft, so their impact is distributed over a larger volume of production, in a similar way to what happens with fixed costs.

Finally, and given that it is common for longer flights to be operated with larger aircraft, there is a multiplying effect between them, making the relationship between the cost per ASK and sector length to be an exponentially decreasing curve, as can be seen in Figure 3.9, also taken from the CAPA report mentioned at the beginning of the chapter. Here we can see the so-called adjustment curve, which would determine for each stage length the average unit cost, so that if you are above that curve you would have higher unit costs than the average, and vice versa. This adjustment has been referenced in the comparison between the unit costs of Emirates, IAG and Virgin Atlantic.

Figure 3.9 shows that instead of a single adjustment curve, there are two: the first, higher, would be the one corresponding to network or traditional airlines; while the second, lower, would correspond to the low cost business model. Here the doubt may arise as to why, on the one hand, there are two different curves. And, above all, given that the average aircraft size is larger for network airlines than for low cost carriers, which according to what we have just seen should a priori imply for the former to have lower unit costs, why the figure is showing exactly the opposite. The answer to this supposed paradox comes from the fact that we are comparing two different realities, both in terms of the product and the corresponding operations. The low cost model, by placing a special emphasis on the efficiency and productivity of resources, obtains a structural cost advantage compared to the network model, as reflected in the graph. In the following section we will elaborate on the rational behind this apparent paradox.

3.4.  The “pure” low cost business model

As we have seen in Chapter 2, despite the fact that the precursor of the low cost model was the Californian PSA, the pioneer in developing it in a sustained way after the US deregulation was Southwest. This airline has achieved uninterrupted profitability since 1973, something certainly unique in an industry characterized precisely by the opposite, as we have seen in detail in the first chapter. This is why the Southwest model has been extensively studied ever since, to the point that both easyJet and Ryanair have acknowledged publicly that they simply copied it, adapting it to their particular business circumstances and realities. In this section we will look further into the detail of what characterizes the so-called “pure” low cost business model. This sets the basic reference on which all low cost airlines have been based on, adopting many of those characteristics, but also giving up on others, depending on the strategic direction chosen by each company. In fact, not even Southwest has faithfully followed this “pure” model, consciously deviating from it in matters such as selling through travel agencies, offering a small free snack on board, or providing free baggage check-in, to give just a few examples.

The philosophy of the model is based on simplicity, in terms of both the product and operations; below we will see how this simplicity is key to achieving optimal operational efficiency. And it is this efficiency that makes it possible to obtain lower unit costs, which in turn make it possible to offer consumers significantly lower prices than those offered before the existence of the low cost model. What makes these low fares unique is that, in addition to enabling the capture of demand that previously flew with the incumbent airlines, they have fundamentally generated a new demand on their own that did not exist before. This new demand generation is one of the main pillars of the model, as it provides the additional volume that contributes to further improving operational efficiency, which creates a sort of virtuous circle that feeds the entire system back.

Of course this virtuous circle of simplicity → operational efficiency → low costs → low fares generation of additional demand → greater operational efficiency → even lower costs → ... comes with its challenges, which low cost carriers are not strangers to. On one hand, the scale itself makes it very difficult as the company grows to maintain some of the operational parameters on which the model is based. But, above all, the evolution of market and consumer expectations has meant that there has been no choice but to complicate the model in order to adapt to these. This market-forced adjustment has obliged low cost airlines to partially give up on the aforementioned simplicity, virtually evolving towards a hybrid model which we has been previously mentioned, and which we will deal with in more detail in Chapter 5.

Let us then see what the characteristics of the “pure” model are, distinguishing between those that refer to the simplicity of the product, and those that allude to that of the operations. A clarification as to the aforementioned simplicity, and that is that this must be understood in relation to the practices that were customary on the part of traditional airlines when the model was created, some of which have been abandoned today, as these companies have also evolved into a hybrid model. In this way, younger readers run the risk of underestimating the degree of radical innovation that some of the features we are going to explain below introduced, as they are common practice nowadays. To prevent this from happening, we will describe within each what the prevailing industry practices were, to which the model offered an innovative alternative.

3.4.1.  Simple product

3.4.2.  Simple operations

The description of the fundamentals of the model is completed when we add an essential element to this philosophy of simplicity, both of the product and of operations. This key element is the relentless focus on optimizing the efficiency and productivity of resources, the true bedrock on which the model is based, as its virtue lies in its ability to reinforce most of the features seen so far.

3.4.3.  Efficiency and productivity of resources

In Table 3.10 we can see a summary of the different characteristics here exposed of the “pure” low cost model, as opposed to that of traditional airlines. At this point we need to remind again that both cases are generalizations done for didactic reasons, since nowadays it is habitual for airlines to have adopted characteristics of the alternative model, evolving towards the previously mentioned hybrid model. What is most relevant is that these characteristics have allowed low cost carriers to achieve a very significant structural cost advantage over traditional airlines, which is what explains the existence of two differentiated unit cost curves in Figure 3.9. We will attempt to quantify the degree of this advantage in the next section.

Table 3.10: characteristics of the “pure” business model versus traditional model

3.5.  Cost advantages

There are several studies seeking to quantify the structural cost advantage obtained by the “pure” low cost model over the traditional carriers, a task that brings a few challenges with it. The first is that, in order to make a proper comparison, traditional airlines cost structure should be broken down between long-haul on the one hand, and short- and medium-haul on the other. Obtaining details of this segregation, which would allow us to focus just on the latter, is not always easy. Secondly, the heterogeneity existing among low cost carriers when it comes to the different degree of fidelity in following the “pure” model, is an even bigger problem for traditional airlines. Here there is still a much bigger disparity in criteria, approaches and models, making the comparison harder. Because of all this, more than a specific number, we will just be looking for orders of magnitude in the form of ranges, as we will see below.

Beyond the methodological challenges outlined above, there is considerable consensus about the order of magnitude of the unit cost difference between the two models being around 50% to 60%. This is very significant and explains the reason for the two differentiated curves in Figure 3.9. When trying to understand the foundations on which this difference is based, new challenges arise due to the different accounting criteria existing between companies, as well as the difficulty of referencing the cost accounting elements of these with the fundamentals of the model we have just studied. Some authors (Doganis, 2006 / Lobbenberg, 2003 / Bouwer et al., 2017) have used a cascade model, such as the one shown in Figure 3.11, in which we can visualize the contribution that each of the characteristics included in Table 3.10 brings to this structural cost advantage.

In order to try to better understand the fundamentals of the model that enable this cost advantage to happen, we will again use the structure described in the previous section, based on the simplicity both of the product and of the operations, underpinned by the foundations formed by the efficiency and productivity of resources. A quick glance at Figure 3.11 already shows that the latter represents more than half of the structural cost advantage, which contrasts with the preconceived idea that it is the elements of simplicity that contribute the most to the unit cost reduction, giving rise to an infinite number of clichés. On the other hand, the more observant reader will have realized that not all the characteristics exposed in the previous section are in this figure. This is because some of them, instead of directly contributing to the reduction in costs, have a catalyst role that contributes to reinforcing and enabling the rest of the characteristics that are included, as we will see at the end of this section.

The following is a brief description of how each of the three categories into which the model’s fundamentals have been structured contributes to the cost advantage. We will reverse its order over that shown above, in order to start with the one that have the biggest impact over that advantage in the first place.

Although we are running ahead of what we will cover in more detail in Chapter 5, when we will explain in detail how both extremes are trending towards a hybrid model, let’s do now at least a small review of the aforementioned structural advantage sustainability over time. Indeed, today it can be seen that many traditional airlines have fully or partially adopted several of the features of the low cost model, managing to reduce this advantage – we will see later by how much. This is so because some of those features, especially those which refer to product simplicity, are easier to replicate without giving up the fundamentals of the model. Hence, quite a few traditional airlines have adopted characteristics such as charging for on board catering – at least for the cheapest fares –, electronic ticketing, or the increase in direct distribution, amongst others. When we will come to this chapter it will be time to verify that, even within the framework of the homogenization brought forward by the hybrid model, one of the fundamental characteristics that still differentiates both models is the focus on point-to-point flights, as opposed to connecting flights. This will make us propose the terms point-to-point airline versus network airline, instead of the hitherto used low cost versus traditional.

Returning to the cost advantages, we would need to analyze now the rest of the characteristics that play an enabling role on these advantages, instead of having a direct contribution, which we will do next.

Finally, the aforementioned observant reader will have noticed that we have not yet covered all of the characteristics listed in Table 3.10, which might give rise to the impression that the remaining ones do not fulfill any main function in defining the fundamentals of the model, and have been included just for the fun of it. Nothing could be further from the truth: the reason they have not been covered so far is that their role is not to create or reinforce the structural cost advantage, but to play a key role in creating another advantage, often overlooked, even though in many cases it is even more important than the former. This is none other than the revenue advantage that the low cost model has achieved over the traditional one, with whose analysis we will close this chapter.

3.6.  Revenue advantages

Although Chapter 5 is where we will develop the question of the key role that sound commercial management plays in the success of the low cost business model, in order to close this analysis of its fundamentals we need to briefly talk about the revenue advantages enabled by some of its characteristics in contrast with the traditional one. These are the following, allowing us to, at last, fully complete all those listed in Table 3.10:

At first glance it can be seen that, with the exception of the last feature, the other three are all part of the product simplicity category, and they reinforce each other, so that they enable the following revenue advantages compared to the traditional model:

We have completed the description and analysis of the fundamentals of the low cost business model, and having come this far, it would not be strange for any reader familiar with the history of commercial aviation to think that many of the features and benefits discussed throughout this chapter are not new, or even exclusive to this model. Indeed, the charter or non-scheduled model successfully developed quite a few of these elements during the 1960s and 1970s, especially in Europe, to the point that some speak of the charter as the true precursor of the low cost model. This circumstance justifies the fact that we dedicate the following chapter to study this model, and to be able to verify that this has “almost” been the case, although not completely.