Budget airlines still locked in a battle to find the perfect pricing model
The airline business is complex – recent examples highlight how tricky it can be to straddle demand for low prices, while minimising the compromises required to make such prices viable
Do budget airline customers have unrealistic expectations? Furthermore is the budget airline business model viable?
These questions came to the fore following the row over the sudden cancellation of Hong Kong Express flights during Golden Week, the collapse of Monarch Airlines in the UK and the furore over cancellations affecting more than 700,000 passengers on Ireland’s Ryanair.
Despite this the business model of budget airlines appears to be a no-brainer. They offer a stripped down service in return for cheaper prices. This is hardly an unknown concept.
It is practised among a wide array of businesses, take the car trade for example, it offers a range of vehicles and buyers clearly understand that bottom of the range of vehicles differ in almost every respect from those at top, yet all vehicles fulfil the basic requirement of getting passengers from A to B.
Travel by air, once the preserve of the rich and corporate travellers, has now also become more accessible to millions of people who previously could only dream of taking to the skies.
They accept that in return for paying less they are likely to have to pay for practically everything that is included in the price of a ticket issued by one of the legacy carriers and they understand that flight times and airport locations might lead to all kinds of inconvenience.
They do, however, expect that budget airlines will honour the basic deal of getting them to their destination. If an airline says it will deliver its passengers at a certain time on a certain day, that’s what they are duty bound to do, even if customers are packed into cramped seats and do not even get a free glass of water.
However as Hong Kong Express has suggested and Ryanair has emphasised, this expectation is not to be taken for granted. The main reason being that budget airlines do not just cut costs by withholding additional services to passengers, they also economise on the basics.
Notably they economise on staff costs by paying less and cutting staffing levels to the bone. This in turn leaves their operations very vulnerable because safety rules stipulate the minimum number of staff required for flights and, understandably, require that crews have an appropriate level of training.
When, as in the case of Hong Kong Express, even quite a small number of staff unexpectedly quit, they have nothing to fall back on.
Here lies the big difference in the cost saving proposition between buying a cheap airline ticket and something like a cheap car.
The latter may well be able to perform the basic job of getting its owner from A to B, whereas the cheap air ticket carries the inherent risk of disruption, simply because the carrier will not only have cut staffing to be bone but will also have reduced to a minimum the number of aircraft it buys.
However a well-run budget airline can overcome these problems right up to the time when it cannot. Ryanair, which is one of the world’s most profitable airlines, claimed with justice to have a good record for on-time arrivals.
Its boss Michael O’Leary was quite happy to describe his customers as ‘morons’ in the knowledge that they did not need to love the airline to use its cheap and reliable service.
Now that Ryanair has become far from reliable, customers are recalling the contempt shown in the past and will, no doubt migrate to other carriers, even if it means paying a bit more.
Hong Kong Express is considerably smaller than Ryanair, and politer to its customers, yet it too showed contempt for passengers by only notifying them of the cancellations a day after it notified the regulatory authorities.
It brings us back to the basic question of how much are people prepared to pay for inconvenience and inferior service?
The growth of budget airlines and the remarkable resilience of Ryanair in the wake of the current scandal are matched by the continuing decline of full service carriers. It is therefore clear that the travelling public will put up with a lot for the sake of cheaper fares.
So, how to find a pricing model that somehow straddles the demand for low prices while minimising the compromises required to make such prices viable?
Ryanair itself addressed this question by upping service standards for those prepared to pay more. The big carriers, including Hong Kong’s Cathay Pacific, are squeezing economy passengers into smaller spaces and offering a progressively scaled down level of service but have yet to reduce prices to a level where they are competitive with budget airlines.
The airline business is a truly complex business, frequently buffeted by factors beyond its control; in some ways it’s a miracle that anyone turns a profit here.