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How low-fare airlines undercut the major players

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If the airline business is so financially tight, ever wonder how budget, low-fare airlines manage to conduct a profitable business? Here's how.

If the airline business is so financially tight, ever wonder how budget, low-fare airlines manage to conduct a profitable business?

An infographic from information and design firm 5W Infographics España, is making its rounds on the Web today, and it's an interesting comparison on where the bargain carriers cut costs to compete. Though the infographic was originally published in May 2009 (and based on data in 2005), it's still a valid reference, since airline coffers have only drawn tighter.

In fact, the economic downturn has put such pressure on major airline players that low-fare airlines are scrambling to take advantage of consumers' penny-pinching.

Ryanair CEO Michael O'Leary was recently described in a New York Times article as "alternately charming and offending" for, among other ruses, seriously floating the idea to charge passengers to use the lavatory and require them to carry their bags on board themselves.

Harvard Business Review blogger Bill Taylor says the idea isn't half bad, really:

You can't be "pretty good" at everything anymore. You have to be the most of something — the most affordable, the most specialized, the most elegant, the most colorful, the most transparent, the most friendly. Everybody used to want to be in the middle of the road — that's where all the customers were. Today, the middle of the road is the road to ruin. Love 'em or hate 'em, Michael O'Leary and Ryanair know what they're the most of — a winning combination of insanely low costs and a colorfully high profile that allows them to carry more passengers than any other airline in Europe.

But the price divide between the budget carriers and the majors may not be sustainable. back in 2006, Salon's "Ask the Pilot" author Patrick Smith wrote that "rapacious" low-cost carriers couldn't keep the sleight-of-hand up for much longer:

Here in the United States, travel won't be free anytime soon. In this column on Feb. 24, while lamenting the state of affairs at America's airlines, I prescribed an across-the-board rationalization of ticket prices as an essential step toward industry stabilization. No sooner had I spoken when, late last week, the nation's two biggest LCCs announced fare hikes. That Southwest and JetBlue are upping the cost of travel, however slightly, allows their competitors to do the same, easing the pressure on embattled majors like Delta and Northwest.

Smith's February 24 column, in fact, is where the above infographic is dissected, albeit indirectly:

["Legacy," or major, airline] expenses per passenger lurk around 30 percent higher than at the LCCs.

To cover those costs, the legacies can raise fares, at which point the LCCs would need to start ordering 747s and A380s to pick up the overflow of defections coming their way. Or, they can match them, absorb the loss, and continue hatcheting their unions for concessions (and continue subsidizing your chance to travel on the cheap).

Operational simplicity and lower wages are obviously a large part of keeping [Cost per Available Seat Mile] down. Another important tool is aircraft productivity. At Southwest, planes make half-hour turnarounds in order to remain airborne as much as possible. Compare that to a Delta 767 that flies the red-eye from Atlanta to Santiago, Chile, then sits on the ground for 13 hours until the overnight return. Routes like this are profitable, sure, but fares are high and the effects of such limited use ripple through an airline's entire operational matrix. Aircraft leases can run millions of dollars per month, and downtime is murder.

The wild card is fuel. Subtract the bill for kerosene from CASMs and the gap between the LCCs and legacies gets tighter. Fuel is a more critical factor for the latter because they tend to fly older, thirstier aircraft.

Meanwhile, airlines have effectively bullied themselves into a corner on price. According to a 2005 study by MIT's Shiro Yamanaka and Joakim Karlsson of Daniel Webster College:

"The airlines have lost the ability to raise airfares, even to just keep pace with inflation. The average round-trip ticket has dropped 40 percent in real terms since 1993. Meanwhile, average ticket taxes and fees have stayed relatively constant. With the total cost of taxes changing only slightly, the relative share of each ticket that goes to taxes and fees has been steadily increasing."

Where does that leave us? The glory days of transatlantic, Pan Am-style jet-set travel are gone, but so are the days of extremely poor service and expense thanks to post-Sept. 11 calamity in the U.S.

So take a good look at the above infographic, because low-fare carriers, it seems, will be around for quite some time. Perhaps just not quite as "low."

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Andrew Nusca

Editor Emeritus

Andrew Nusca is editor of SmartPlanet and an associate editor for ZDNet. Previously, he worked at Money, Men's Vogue and Popular Mechanics magazines. He holds degrees from the Columbia University Graduate School of Journalism and New York University. He is based in New York but resides in Philadelphia. Follow him on Twitter. Disclosure