Low-Cost Airlines Get Their Cost Advantage From Simplicity

United CEO Scott Kirby has said that the recent increase in pilot pay is causing a “cost convergence” between low-cost airlines and big, legacy airlines. It’s certainly true that if every airline is paying more for pilots, costs for all will rise. As a percentage of total costs, pilot pay may rise more at low-cost airlines, creating the idea that this will start to close the cost advantage that these carriers have enjoyed.

But believing that low-cost growth is dead, or that the ultra-low cost carrier business model is in trouble, is far over-stretching the point. Low-cost airlines get their cost advantage not only from labor costs. The labor cost advantage they have is not so much related to pay rate as it is to seniority. The low-cost business models are built to require fewer costs, and the endless chase for corporate business travelers significantly burdens the legacy airline cost structures. Keeping things simple is the main way low-cost airlines keep their costs low.

Common Fleets

Different sizes, or different manufacturers, make airline fleet costs quite expensive. This comes in two important ways. One is in maintenance. Different plane types need different parts, and different plane types require mechanics trained to fix each type. This can create difficult scheduling issues to isolate some planes from a station, or to have parts from multiple airplanes in the same station. One airplane type means one set of parts for the full fleet, and one initial training for the mechanics.

The more expensive issue is pilots. In addition to having an Air Transport Pilot (ATP) license, pilots must be type-rated for the specific planes they will fly. Having different airplanes in the fleet often generates more training for each pilot to be type-rated in different equipment. Plus, each new pilot position opened generates a chain of training since pilots bid by seniority. Airlines with one fleet type train the pilots once, recurrent training is simpler because everyone flies the same plane, and no training cycles are generated because pilots are switch fleet types.

Manufacturers have recognized these realities and tried to address it with “families” of airplanes. The Airbus A320 family consists of the smaller A319, the standard A320, and the largest A321. These are almost the same plane except for the length of the fuselage, with one section taken out for the A319 and one added on for the A321. This causes other needed changes, but there is a single pilot type-rating for the family and maintenance parts and training are highly common. This approach allows an airline to fly different size planes but still have the benefits of a single fleet type. Boeing has done similar with the 737 models, though the newest MAX models are quite different than the original 737s.

Treating Customers The Same

Let’s say one airline charges a checked bag fee for every customer. Another airline charges checked bag fees to some customers, but offers the bag free to certain customers who may use their credit card, buy a certain fare type, or have reached a certain level of the loyalty program. That second airline, by adding this modest and rational complication, also has added costs in both training and IT.

Training, because now the agent must recognize who gets the bag for free and who must pay. They then must confirm the form of the exemption and perhaps take time to do this. They also now need a more advanced IT solution for bag tags. This solution must be able to print a bag tag with no confirmation of payment for some customers, yet require payment for others.

This simple example just shows how even small ways to differentiate customers brings in costs that become part of the infrastructure. This is where the incessant search for higher-paying business travelers increases costs in almost everything the airline does. This has nothing to do with pilot costs.

Ancillary Fees As Incentives

Most people think that ancillary fees, like baggage fees or seat assignment fees, are all about raising new revenue for airlines. This is partially true. Ancillary fees also act as incentives to motivate customers to act in ways that save the company money or improve the operations. Spirit Airline’s carry-on bag fee was designed as a way to reduce gate delays caused by gate-checking bags that wouldn’t fit onboard. RyanAir has almost no agents checking in people since they charge for that but bringing your boarding pass on a phone is free.

Fees used as incentives can change the flow at airports, reduce handling costs because people bring less, reduce selling costs, and more. Low-cost airlines have learned this through trial and error, but now can start to anticipate how financial incentives may modify behavior. This can add to the simplicity of an operation and therefore reduce costs.

Policies Grow But Rarely Shrink

Airline policies are another way airlines can be simplified. Airline policies are like government regulations — new ones get added, but few ever get removed. Over time, this creates sets of policies that sometimes contradict, or even when they don’t they have to be maintained and trained. When Avianca was going through their bankruptcy, they learned that they had over 300 pricing policies. This compared with only 50 or so at most low-cost airlines. Again, complication creates cost.

The way for an airline to address this is to be aware that it is an issue. When airlines go through every pricing, HR, and operational policy in every manual they are often shocked at how many exist, but also how they built up over time. Doing a regular clean up makes like simpler for everyone, makes manuals easier to maintain, and training easier. Low cost airlines know this and take advantage of it.

High Utilization And Productivity

The final way low cost airlines really get their cost advantage as opposed to labor rates, is to focus on high utilization and productivity everywhere possible. This does not mean the narrow definition of aircraft utilization, meaning the number of hours an aircraft flies in a day. This is important, as more flights grow the unit cost divisor — Available Seat Miles (ASMs) — and thus can lower the unit the unit cost rate. But high utilization at a low cost airline means much more than this.

When Spirit Airlines started its transformation to a low-cost airline, it was flying 11 flights a day to New York’s LaGuardia airport. These flights operated over two gates. Gates, like everything at New York airports, are expensive, so Spirit rescheduled to operate all 11 flights from a single gate. This move cut their gate costs in half and made them the lowest-cost operator at the airport. When you are not chasing business travelers, planes can fly efficiently and don’t have meet specific time channels. It’s worse when an airline operates a hub. Hubs are great at creating a lot of options for connections, but at a huge efficiency loss. Planes sit on the ground for long times and large staffs work hard then have little to do until the next wave arrives.

Thinking about how get more from less is a key way the low-cost airlines keep their costs low. Whether it is seats per airplane, planes per gate, employees per aircraft, or more, utilization and productivity can come in many ways.

Low cost airlines have lower costs than large, global airlines because they keep things simple. Higher pilot costs will affect every airline, but thinking that higher pilot costs will somehow close the cost gap between high-cost and low-cost airlines suggest shockingly little understanding of how low-cost airlines really work. The models are far from dead; they will continue to be the growth engine of the industry and keep fares disciplined for consumers.