The Airline That Nosedived
Pitfalls of the low-price strategy
Have you ever flown standing up? If you think that's a typo, it's not. In 2012, Michael O'Leary, the CEO of the Irish low-cost airline Ryanair, thought this was a brilliant idea.
He said the “refitted airplane would resemble a classic London Underground train with its distinctive ball-and-strap fittings.” O'Leary thought seated passengers would be charged £25 per ticket while standing customers would pay between £1 and £5.
The regulators rejected the idea. But why did O'Leary need it at all? Because it would increase the average capacity of a flight from 189 passengers to 230.
If the idea seems too ridiculous to you, you might not have known that two years before that, he planned to charge 1 euro to use the toilet during the flight.
In my country, we pay 0.5 euros to use the toilet at a gas station. So, I don't know why the media made O'Leary out to be a monster.
People have always wanted to fly cheaply, and many carriers have tried to follow this strategy. In reality, travel wasn’t always as cheap as the ads promised – hilariously mocked in this funny video.
No strategy textbook author forgets to mention Southwest Airlines, the pioneer of the cheap flights industry. Though Herb Kelleher, a co-founder of SWA, was the father of the low-cost airline concept, Ryanair, with its nickel-and-dime approach, became the role model for Spirit Airlines, an American budget airline, in 2006.
A few weeks ago, Spirit Airlines filed for bankruptcy, once again proving that being a low-cost carrier is a risky strategy.
To sell low doesn’t necessarily mean to fly high.
Check out my book, Red and Yellow Strategies: Flip Your Strategic Thinking and Overcome Short-termism
Low-cost as an all-in strategy
Budget airlines buy the same jets as their traditional rivals and can’t operate with fewer flight attendants. They use cheaper, more distant airports but can’t pay lower wages to their staff.
While traditional airlines earn additional profit from business-class tickets and premium services, low-cost carriers focus on maximizing the utilization of their assets.
A low-cost carrier is profitable only if its planes spend minimal time on the ground, with cabins packed to capacity.
“The plane is not making any money while it is on the ground” – it is a mantra of budget airlines.
It applies to any other low-price strategy. You just need to replace 'plane' with 'truck,' 'machine,' or 'ship.'
Turnaround Time (TAT) of an aircraft is the time that passes from its landing until take off for a new flight. It’s a key metric for budget airlines.
It takes Ryanair just 25 minutes to complete the process, while Wizzair and SWA oscillate around 30 minutes. For most traditional carriers, such as American Airlines, Lufthansa, or British Airways, the TAT averages around an hour.
But even when planes don’t waste time on the ground, they must be fully booked.
And this task Spirit failed to solve.
The Wall Street Journal reports:
“As cooped-up consumers clamored to go on vacation after Covid restrictions lapsed, Spirit… made ambitious expansion strategy. Bigger rivals crowded into those routes to make up for the business travel traffic that was slower to return. The supply of seats, in some cases, outstripped demand, pushing fares lower. Spirit’s losses mounted.”
A low price sells itself. But if a company’s assets aren’t fully used for some reason, it nosedives. Sell it all, or you're out.
Paraphrasing the Red Queen: in business, you need to run as fast as you can just to stay in place, and to move forward, you must run twice as fast. For those choosing a low-price strategy, this rule applies even more.
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Cut-price comes with a cost
In the world of scarce resources, saving is a basic instinct. Steven Reiss included ‘saving—the need to accumulate something’ in his list of basic human needs.
But if you help customers save by selling them cheap products, it always comes at a cost.
1. No matter how low your prices are, someone will always try to sell cheaper—either because they're smarter than you or just sillier.
2. And when you cut product quality to keep prices low, customers will hate you—even if you warned them from the start.
3. You offer nothing but a low price to your customers. The moment someone offers them a better deal, they’re gone. No loyalty, no customer engagement.
If all you give is a low price, all they give is their cash.
The only good news is that boosting your asset utilization is the quickest way to increase profits.
So, there’s definitely something we can learn from those who go the risky low-cost, low-price route.
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FELICES THE AIRLINE THAT NOSEDIVED
FELICES