The Ultra-Low-Cost Model Will Emerge Stronger Post-Pandemic: Here’s Why.

A parked Ryanair aircraft.
Photo Credit: Ryanair

MILAN – The pandemic hasn’t yet exhausted its charge and the European skies are sinking into permanent twilight. The strategy of the large airline groups, all founded by aggregation and not incorporation, has proved to be unsuccessful in the face of a global crisis and is leading to massive economic losses.

The only two truly competitive airlines in the European landscape are Wizz Air and Ryanair, despite not being able to escape debts.

Their merit is popularly attributed to their ultra-low-cost (ULCC) model and the fleet homogeneity, two essential but not the only components for the triumph of the carriers.

Of course, the fleet is the core of any LCC model. A single-type (or family type) fleet reduces the costs of aircraft maintenance and flight crew training. However, there are two other aspects of the fleet that contribute to shaping a sustainable model: capacity and efficiency.

Photo: Forbes

Outlining the state of play, low-cost carriers first expanded the number of passengers. They reached people far from the idea of ​​flying, then started stealing part of the FSC (Full-Service Carriers) segmentation, that is the business (Prasannan & Das, 2018).

In a fast-paced world where cost-cutting policies are underway, in any industry, companies are no longer providing stellar travel reimbursements or not at all. This picture leads to an economic choice, not a comfortable one.

It should also be added that the FSCs are struggling to differentiate their product, because a slightly wider seat, especially for short flights (which are ULLC’s strength), doesn’t always justify the higher cost of the ticket.

Photo: The Guardian

Capacity can be summarized with a high-density cabin and a steady high load factor (over 90%). Last month Ryanair took delivery of the Boeing 737 MAX-8-200 configured with 197 seats versus 189 in a typical configuration (Boeing, 2019).

Wizz flies Airbus A321neo configured with 239 seats (exit limits 244!) (EASA, 2021). The high capacity is combined with the efficiency of higher bypass-ratio engines and therefore with lower consumption than previous versions (Hensey & Magdalina, 2018).

Moving on, the cost of employees is another selling point of Wizz Air and Ryanair. The pandemic has reinforced the conditions of gambling, to phrase it differently it’s a “take or leave” game.

In a Europe incinerated by flames, ravaged by COVID-19 and now by rising fuel costs, flight crews are forced to choose between unemployment or a job with a low salary. There’s no longer a choice, determined by one’s own skills, between full service and low-cost carriers.

Alessandro Ambrosetti from Rome, CC BY 2.0 https://creativecommons.org/licenses/by/2.0, via Wikimedia Commons

Today the flight crew career begins at the only airlines that are hiring people on which Ryanair retains the first position (Dempsey, 2021).

However, the two ULCCs didn’t follow the HPWS (High-Performance Working System) implemented by Southwest in the United States (Palladino, 2004), creating the perfect storm between unions and companies on working conditions (Davies, 2019).

Here a premise is necessary. Southwest is a low-cost airline, not ultra, and therefore doesn’t apply extensive cost-cutting policies. Nonetheless, quality management should be the soul of any carrier that translates employees into brand promoters and therefore into potential economic gain.

The strength of the Dallas-based airline is indeed the relationship between employees, perpetual communication, and information, like a large open space where people can share their ideas.

But let’s see how well the two European airlines are doing in a pre-pandemic and post-pandemic comparison.

Eric Salard, CC BY-SA 2.0 https://creativecommons.org/licenses/by-sa/2.0, via Wikimedia Commons

In the case of Ryanair, the load factor dropped from 95.6% in 2019 to 73% in Q1 2021, but the airline “expects to recover load factors in FY22,” CEO Michael O’Leary said (Ryanair, 2021).

Operating costs increased by +116% (June 2020 vs June 2021) due to the sharp rise in jet fuel prices (US$80/bbl) (IATA, 2021). However, according to HSBC, Ryanair preserves a strong position with a positive operating cash inflow of € 594 million, against outflows of € 450 million in Q1 2020 (Cirium, 2021).

Wizz’s current losses are €114.4 with a load factor decreasing from 93.9% in 2019 to 63.6% in June 2021. “In July and August 2021, we expect to operate around 90% and 100% of our 2019 capacity,” stated Wizz CEO József Váradi. “While we remain cautious with making predictions for the winter period amid unpredictable government decisions” (Wizz, 2021).

Finally, international flights are still at an all-time low and the business will probably enter a hybrid bubble: the direction is to limit unnecessary travel by converting them into videoconferences, which previously were limited to quick calls.

While the demand for leisure and VFR (Visiting Friends and Relatives) is growing again (Pearce, 2021). Despite low-cost airlines making a profit even for a narrow percentage of business passengers, they thrive on leisure at a domestic level and are projected to grow far more than traditional carriers.

References:

About the author

Alessio Olivetti

UK-based journalist, analyst, private pilot.

Add Comment

Click here to post a comment