Cost Saving Approach of Budget Airlines and Its Impact

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Table of Contents

Introduction
First part
Second part
Conclusion
Reference List

Introduction

In the contemporary era, the access of Low Cost Carriers (LCCs) has completely transformed the airline sector. Ryanair, like several other Low Cost Carriers, could be termed as employing reduced costs to be desirable to a great number of passengers that could not have been thought of being possible before (Malighetti, Paleari & Redondi 2009).

Nevertheless, this strategy fails to bear fruits for every one of the Low Cost Carriers and thus it is significant for airports to have either a great demand for Low Cost Carriers traffic or a constructive economic prediction to augment requirement for destination-to-destination traffic.

In addition, passengers are ready to go further in search of low cost flights thereby posting a slighter concentration on the present catchment region of airports and more on availability. Requirement could as well be augmented by putting in place convenient slot periods, in conjunction with auxiliary airport facilities, thus allowing the servicing of both the company and the vacation marketplace.

This move as well boosts functional effectiveness by augmenting the use of aircraft. This paper analyses the cost saving business exercise that budget airlines initiated and crucially assesses its impact on the tourism sector.

First part

In the article by Warnock-Smith and Potter (2005), the authors state that in selecting the airports to function from, some aspects are taken into consideration by Low Cost Carriers (LCC). With respect to Ryanair, airport selection aspects are encompass reduced airport costs, fast turnarounds, easy terminals, speedy check-in amenities, excellent passenger amenities and availability. An extra aspect is the rivalry between the airports and airlines.

A number of airlines in Europe exploit powerful airport rivalry and bargain with as many as more than three airports, in spite of bearing the mentioned purpose of setting up a fewer number of routes. This aspect takes advantage of the augmenting commercial concentration of airports in Europe that have brought about in a yearning to draw fresh airlines at nearly any charge.

Warnock-Smith & Potter (2005) state that owing to increased airline competition; the intensification in the number of Low Cost Carriers has generated more rivalry between them, in addition to raising the number of liquidations. The aforementioned aspect means that the selection of airports could as well be influenced by airline competition (Warnock-Smith & Potter 2005).

According to Warnock-Smith & Potter (2005), there exist dissimilarities around the fundamental Low Cost Carrier representation and, consequently, some varying huddles were considered to quantify these dissimilarities. These differences include the following.

Airline origin – for the formation of Low Cost Carriers, there has been consideration of two perspectives. One of the perspectives includes the formation of fresh airlines devoid of previous functional practice, for instance, EasyJet. The second perspective is that Full Service Carriers (FSC) and charter airlines have adapted themselves or a section of their functions to the Low Cost Carrier representation, for example, Air Berlin.

A number of the dissimilarities involving airlines and adaptations could be present as the latter frequently utilise their previous functions as the beginning of reduced charge services. In this regard, reliability in routes and workforce subsists. Importantly, dissimilarities associated with great airport rivalry, extra airport facility and increased airline rivalry exist.

Airport rivalry is seen as somewhat insignificant to the set up carriers but significant to improved airlines (Warnock-Smith & Potter 2005). A good explanation for this observation could be the improved Low Cost Carriers looking to influence an enhanced agreement from the airports they presently supply.

Contrary, newly established airlines consign a bigger significance on the stipulation of standby airport facility. With the fact that adaptation frequently holds on to their past functions, this element turns out to be predictable and is as well replicated via a vaguely lesser obligation for suitable slot periods, based on the fact that they already possess slots assigned to them. The ultimate dissimilarity is associated with airline rivalry. Additionally, newly established Low Cost Carriers rate the aforementioned aspect more greatly.

These airlines seem to take up market allocation from full service carriers who are their business rivals, in addition to generating fresh markets thru decreasing the charges of air travels.

Likewise, the existence of competitors shows that an air travel market prevails. Adaptations already bear a market share that they desire sustaining (Warnock-Smith & Potter 2005). The existence of rivals could result in the present clients shifting to different airlines, the cheapest charging in addition to the ones desiring an extra-classic to optional full service carriers.

Airline size – with the present gains of the airport sector from economies of scale, there is anticipation that airport selection aspects could be affected by the airline size, which is mainly displayed four aspects. These aspects include excellence experience of Low Cost Carriers, excellent non-aeronautical returns, great instance of airline rivalry and excellent surface admittance.

Out of the aforementioned aspects, airline rivalry obtains the highest standing from superior airlines. In accordance with Warnock-Smith & Potter (2005), smaller Low Cost Carriers turn out to be less risk indisposed during judgment making pertaining to selection of airports. Lastly, smaller LCCs face the difficulty of making their brands known and they end up not being as much popular as those of big LCCs (Warnock-Smith & Potter 2005).

Time of entry in the Low Cost Carrier market – it is evident that the first movers in this market have a greater benefit. Thus, dissimilarities between the airport selection aspects could come up (Warnock-Smith & Potter 2005). Further, fresher airlines are more indisposed to airline rivalry because they are not excellently founded.

According to O’Connell and Williams (2005), LCCs have reconstructed the competitive setting in the liberalised marketplaces and have generated important influences in the international internal traveller marketplaces that had earlier been heavily dominated by FSC. In the United Kingdom, about 15 percent of the present airlines are currently offered by LCCs, with Ryanair and EasyJet playing the greatest role. The LCCs have focused on simplicity, effectiveness, output, and a great use of assets to ensure low charges.

Before 2002, LCCs did not exist in Asia Pacific rim. Some airlines came into existence in the early days with no noteworthy influence in their markets (O’Connell & Williams 2005). Examples of the aforementioned airlines include Sky mark, JAL Express, Citilink, and Air Do. The slow advancement that was initially evident was partially out if the concept that LCCs could ultimately flood the Asian markets.

O’Connell and Williams (2005) further state that LCCs draw a great number of the youthful individuals. Most of the young people had non-trade reasons like paying visits to families and friends or educational reasons. The difference in age of passengers in the dissimilar carriers is evident.

The elderly people normally have a tendency of favouring the FSCs, probably since they provide extra airline products that are not provided by LCCs. The individuals that travel for business purposes have a tendency of using singular travels with the individuals that travel for leisure using group travels.

The location of secondary airports far from the big cities creates no noteworthy hindrance to the utilisation of LCCs (O’Connell & Williams 2005). Te airlines in Europe have frequently proposed that people who use LCCs have an inclination of exploiting savings obtained from cheaper charges of their accommodation, like hotels.

The article by O’Connell and Williams (2005) appears to be more credible than the one by Warnock-Smith and Potter (2005) because unlike the article by Warnock-Smith and Potter (2005) that discusses the European market alone, the article by the former compares two markets (in Europe and Asia).

O’Connell and Williams (2005) disclose that even with the differences involving passengers in LCCs and those in FSCs, there seems to be no dissimilarity in the approach and concept of the two types of passengers in the two markets. In addition, a powerful prejudice exists towards youthful individuals using LCCs. It is also appealing that these travellers shift to incumbents after getting enough income in later years (O’Connell & Williams 2005).

Unlike the article by O’Connell and Williams (2005), this article makes it apparent that passengers on the LCCs have a high inclination to cost and seem to organise their travels by choosing the cheapest airfares. It thus seems that the brand status of LCCs has turned out to be entrenched in the mentalities of clients.

Contrary as the article suggests, travellers on the FSCs will not mind a high charge if it comes with an extra product provided by the carriers. Finally, the article by O’Connell and Williams (2005) illustrates that perfect situation for travellers requires low charges in addition to the further products provided by the incumbent airlines. Thus, it appears that travellers desire a situation where the two airlines come close together.

A suitable journal paper on the topic is one by Salanti, Malighetti, and Redondi entitled Effects of all-inclusive pricing regulations on airfares: an empirical study of low cost airlines. This article discusses the regulatory strategies enhancing cost transparency and that are usually considered welfare boosting in view that extensive and correct information promotes competition (Salanti, Malighetti & Redondi 2012).

Additionally, competition boosts the interests of clients. This article further compares the charges and the effect of dynamic charging used by both Ryanair and EasyJet in their market in Europe. It is evident that the “two carriers lowered their charges, dynamic charging turned out to be apparent in every route, and that charges on the Italian routes proofed an inclination to come towards equal prices” (Salanti, Malighetti & Redondi 2012, p.5).

A different suitable journal paper on the topic is by Alamdari and Fagan entitled Impact of the adherence to the original low‐cost model on the profitability of low‐cost airlines. From this article, it is indubitable that low cost action has turned out to be a triumphant feat in the airline sector.

The LCCs had a tendency of pursuing a differentiation policy instead of cost leadership (Alamdari & Fagan 2005). The aim of this journal article is to evaluate the intensity by which LCCs has been adjusted with time, and to determine if the level of compliance with the initial model has in any way influenced the profits of LCCs.

This journal paper illustrates that even if a rising number of LCCs are attaining low functioning charges, providing low charges, and realising high profits; it is proposed that compliance to the initial model could guarantee high productivity.

Second part

Ryanair is among the initial European airlines that instigated the cost saving process back in 1992. The greatest competitor of Ryanair is EasyJet and started its operations in 1995. Even if the experience is somewhat recent, the dazzling outcomes achieved by budget airlines in the tourism sector necessitate intellectuals to assess the reasons behind their triumph.

Ryanair has been typified by swift advancement, owing to the deregulation in the airline sector and the accomplishment of the cost saving operation model. The company has established the cost saving operation model thus redefining the airline and tourism industries (Malighetti, Paleari & Redondi 2009).

Its greatest competitor, EasyJet, has as well taken up a comparable model. Nevertheless, Ryanair has maintained its leading position in the cost saving business operation. The firm management over the price base of Ryanair has enabled its capacity to provide the cheapest service while simultaneously retaining its profitability.

During a period when price is the most powerful propeller of the client selection, the cost saving exercise by Ryanair offers it a competitive advantage. This case study discusses the way Ryanair employed a cost saving business exercise (that it initiated) to turn out to be a leading airline in the tourism sector.

Ryanair employs its online portal and mobile phones in selling and booking of its flights. Nevertheless, Ryanair affirms that nearly all of its bookings are made through the Internet and as a result, Ryanair does not require many travel agents. A number of other players in the industry have to pay their travel agents an amount that exceeds 15 per cent of their income. In this regard, it is evident that Ryanair has adopted a cost saving approach (Malighetti, Paleari & Redondi 2009).

Since the company does not have many costs to pass on to its clients, it is therefore able to provide its services at a cheap cost. The company functions at low charges at destination-to-destination flights in Europe, the United Kingdom and some parts of Africa like Morocco. Ryanair provides more than 1,000 flights each day with over 150 destinations. The Ryan family started Ryanair Holdings Limited in the mid 1980s.

Initially, the company the company has a plane that could accommodate just 15 people. From its start, the company has sought a violent expansion strategy, resulting in the creation of new routes as well as fresh functioning regions. From its aggressive operation, Ryanair has become one of the major airlines for flights across the globe having served more than 72 million travellers by the close of 2011.

The operation by the company represents a very creditable performance in a competitive sector. Ryanair has to compete intensely with other budget airlines like EasyJet to ensure maintenance of the leading position. Unlike other players in the industry, Ryanair offers purely a destination-to-destination service.

The reality that the company offers services directly to end terminus make Ryanair capable of shunning the charges related to connecting of travellers, luggage transfer, and transport of passengers to different destinations before alighting. Moreover, the point-to-point operation by the company eradicates numerous potential drawbacks of having to pay travellers for routes missed due to holdups.

The destination-to-destination approach thus provides competitive advantage since travellers frequently perceive it as more suitable when judged against an expedition that entails connection of flights (Dobruszkes 2006). The company provides flights at the lowest charges ever in the market, as for this reason the “frills” provided by its competitors like criterion are alternative additions with Ryanair.

The company provides a purchase-onboard arrangement where passengers buy whichever drink or food they take a while on the journey and there exist not a single literature without charge. Upon demand by the client, sick bags are offered, entertainment in the course of flight does not exist, the seats lack pouches and the personnel must get uniforms at a cost.

Moreover, travellers are not capable of booking seats of their choice. These practices assist in making the reservation arrangement of Ryanair easier and less expensive to run. Travellers as well have to pay a small fee of 6 pounds while booking flights through the Internet and £12 when booking through mobile phones, which plays a key role in saving the company the expenses of physical bookings at the airports.

Ryanair in addition does not provide air bridges leaving the travellers with the choice of either walking there or board cars. Furthermore, this element acts as a cost saving approach for the cars are operated by the company and travellers board them at a fee. The company markets itself as a LCC and in reality boasts of being the most budget (Malighetti, Paleari & Redondi 2009). Ryanair functions outstandingly in pushing one persistent message: inexpensive services.

The company saves on the expenses that would have otherwise been spent on promotions as it does not use advertising services with agencies and instead opts to conduct all the promotion actions from within.

The advertising operations of the company simply consist of inexpensive advertisements in newspapers and on the Internet that highlight the fact that Ryanair provides the cheapest services to its different destinations. The cost is vital to the image of the adverts and is normally indicated in clear and bold writings. Ryanair as well employs controversy to market itself.

Recently, it has hit headlines o the fact that it is intending to charge its toilets in the course of flight and the notion of monitoring pornography during the flights. Nevertheless, all this publicity guarantees the staying of the company in the news as well as in the mentalities of airline passengers (Barros & Peypoch 2009).

The affirmations of the company offering the cheapest services are supported by facts. In accordance to newspapers across the United Kingdom, the average fee charged by the company for flight at the close of 2011 was 27 pounds.

When this element is judged against the prices of it competitors like EasyJet (with an average charge of 49 pounds, Ryanair remains the cheapest. Importantly, the seats of the company are not sold at the same cost, as 70 per cent of them sell at the cheapest and advertised charge with the other 30 percent selling at a higher charge.

The company is so certain of maintaining its cheap charges that it conducted a charge guarantee from late 2010 to the close of 2012. Reducing the charges as much as achievable is vital to the triumph of the company as it permits it to seek an aggressive low-cost strategy. Ryanair must nevertheless face the challenge of increasing costs, mainly concerning fuel, which bears a principal noteworthy influence as fuels take up around 40 percent of the operation costs.

With the fuel prices ever increasing, it poses a threat to the cheapest service strategy of the company and the company has of late slightly increased costs of its services.

Nevertheless, this increase in charges was lower than the increases in the cost of fuel and thus the company was able to retain its reputation as the cheapest in terms of travel charges (Malighetti, Paleari & Redondi 2009). This challenge must sensitise the company to seek aggressive means to ensure maintenance of the low-cost strategy.

Conclusion

In the modern times, the access of LCCs has utterly transformed the airline and tourism sectors. Ryanair, like some Low Cost Carriers, could be regarded as employing the cheapest costs to be enviable to a vast number of travellers that could not have been considered as achievable before.

In picking the airports to function from, some features are taken into deliberation by LCCs. There exist divergences around the basic Low Cost Carrier representation, and subsequently some varying jumbles were considered to compute these dissimilarities. The majority of the youthful people have non-commercial reasons like paying visits to relatives and friends or for educational reasons.

The distinction in age of passengers in the different carriers is apparent. The aged individuals usually have an affinity to the FSCs, possibly because they provide extra airline products that are not supplied by LCCs. Ryanair has established different cost saving operations thus redefining the airline and tourism industries. Nevertheless, the company has to be more aggressive in a bid to maintain its leading position.

Reference List

Alamdari, F & Fagan, S 2005, ‘Impact of the adherence to the original low‐cost model on the profitability of low‐cost airlines’, Transport Reviews, vol. 25 no. 3, pp. 377-392.

Barros, C & Peypoch, N 2009, ‘An evaluation of European airlines’ operational performance’, International Journal of Production Economics, vol. 122 no. 2, pp. 525-533.

Dobruszkes, F 2006, ‘An analysis of European low-cost airlines and their networks’, Journal of Transport Geography, vol. 14 no. 4, pp. 249-264.

Malighetti, P, Paleari, S & Redondi, R 2009, ‘Pricing strategies of low-cost airlines: The Ryanair case study’, Journal of Air Transport Management, vol. 15 no. 4, pp. 195-203.

O’Connell, J & Williams, G 2005, ‘Passengers’ perceptions of low cost airlines and full service carriers: A case study involving Ryanair, Aer Lingus, Air Asia and Malaysia Airlines’, Journal of Air Transport Management, vol. 11 no. 4, pp. 259–272.

Salanti, A, Malighetti, P & Redondi, R 2012, ‘Effects of all-inclusive pricing regulations on airfares: an empirical study of low cost airlines’, International Journal of Management, vol. 29 no. 3, pp. 3-15.

Warnock-Smith, D & Potter, A 2005, ‘An exploratory study into airport choice factors for European low-cost airlines’, Journal of Air Transport Management, vol. 11 no. 6, pp. 388–392.

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