‘Shops with wings’ — how low-cost airlines are beating the headwinds

Subscription models are more typically associated with watching films on Netflix or streaming music on Spotify, but now one airline has brought the model to flying.
Wizz Air, the low-cost carrier, launched its All You Can Fly scheme in an attempt to shake up the industry. The annual subscription costs £534 and sold out within 24 hours as 10,000 customers eagerly snapped up the offer of unlimited flights across the airline’s network. Subscribers will be charged an additional £8.90 per flight and will have to pay extra for carry-on or checked luggage — only a small personal item is free.
Airlines may have experienced a recovery in demand after pandemic travel restrictions were lifted but low-cost carriers are not taking anything for granted. Subscription models are just one example of how they are innovating as their share prices remain under pressure.
Low-cost carriers have always been adaptable — switching its business model saved Ryanair from collapse. Today, four of the world’s ten largest airlines fit into this category: Southwest, Ryanair, IndiGo and easyJet. Since the pandemic, low-cost carriers have increased their global share of capacity by 13 per cent while legacy airlines have yet to fully return to 2019 levels. Timing was everything, with new aircraft orders being delivered both during and immediately after the pandemic.
Yet in the UK, their share prices have largely fallen this year as investors remain wary following a number of issues including manufacturing delays, wavering demand and concerns about falling ticket prices. Shares in Ryanair have declined 15 per cent since April while Spirit Airlines in America has suffered an 85 per cent drop this year as it grapples with financial challenges.
The sector has become adept at unbundling perceived extras such as seat selection and carry-on luggage rebranding them as ancillary services. For some low-cost airlines the ancillary revenues generated per passenger are now greater than the fare paid for the original ticket, creating an interesting concept of “revenue per seat sold” rather than the “yield per seat”.
“We want to make sure that consumers are paying for the things that they are using so there have been some movements towards unbundling our products,” Heather Figallo, chief transformation officer at Vueling, the Spanish airline, said.
“I think at the end of the day that’s really good because for a cost-conscious person you’re paying for exactly what you’re using and if you use more, you pay more,” she added.
Low-cost American carriers, such as Spirit Airlines and Frontier Airlines, are also getting in on the action by adding options for customers to order drinks before their flight, which is straying from the traditional budget image.
According to John Grant, chief analyst at OAG, the travel data provider, airlines are “now just shops with wings in many cases”.
Many, including easyJet, have gone further, with their own holiday companies that compete against the mainstream tour operators. Credit cards, mobile phone contracts and even hotels and cruises are all becoming aligned by airlines willing to sell a complete package rather than just an airline seat.
All of these ecommerce activities and more are part of the evolution of the low-cost carrier model and its future fragmentation is inevitable as each airline competes for a share of your cash, Grant wrote in a recent article.
As with any product the basic model must evolve and that evolution at its simplest is the addition of new destinations and routes that appeal to the existing customer base.
Wizz Air is one of those expanding into new geographies. It is hoping to revamp budget travel between Europe and the Middle East after announcing that it would begin flights between London Gatwick and Jeddah, Saudi Arabia, as well as a new route from Milan to Abu Dhabi.
“It’s about bringing the reach of low-cost to that part of the world in the Middle East. It’s continuing to develop its low-cost capabilities. Our early results in Abu Dhabi have demonstrated that’s definitely something that’s welcomed and appreciated in the region and that connectivity with the UK will also further enhance that,” Michael Delehant, chief operations officer at Wizz Air, said.
Headwinds lie ahead. Having overcome pandemic travel restrictions and high levels of inflation the industry is now faced with the challenge of maintaining profitability after two years of strong summers.
“I think in general, and we’ve seen this historically with airline fluctuation, people are still going to fly … So I think people will find a way to do it but a lot really does depend on their wallet. Do they have enough money? If they don’t they might put off that trip,” Daniel Bubb, an associate professor at the University of Nevada and aviation specialist, said.
Earlier this week Ryanair reported a 18 per cent fall in half year profits yet the airline’s boss Micheal O’Leary remained upbeat about fares and said that “the decline in pricing appears to be moderating”. Investors eyes are set to turn towards easyJet on November 27 when it reports its results for the 2024 financial year.
Alexander Paterson, an analyst at Peel Hunt, the City broker, said bookings at Ryanair had declined following a row with online travel agents, in which they stopped selling flights on the Irish carrier. The airline has since agreed deals with a number of them to offer its flights as part of package trips.
Airlines are also grappling with delays to manufacturing times and aircraft deliveries.
“The supply chain is where so much of our inflation is pushing through,” Delehant said. “Our ability to offer low fares is paramount to what we do and so I think the disruptive nature right now of the manufacturers, the suppliers and everybody in between is the biggest pressure we’re going to face probably for the next couple of years.”
Last month, O’Leary said he was “optimistic but not confident” that Ryanair’s order of the Boeing 737 Max 10 would be delivered on time. Boeing has suffered manufacturing delays because of a strike and quality problems with its 737 Max.
Manufacturing issues also look set to hamper capacity at easyJet, according to Gerald Khoo, an analyst at Panmure Liberum, the City broker.
“Ongoing production rate problems at Airbus suggest to us that it may continue to disappoint its airline customers. Although easyJet flagged delivery delays at its interim results in May, we believe additional delays are increasingly likely,” he said.
Despite the challenges facing low-cost airlines, Paterson said that investments and new innovations meant that the future of the sector looked optimistic.
“In a number of respects it’s very positive. We can see that demand for travel is good and continues to improve,” Paterson said. He remains hopeful that low-cost air carriers will be able to navigate the challenges facing the industry as more efficient aircraft and new offerings arrive on the runway.
They could even be creating an entirely new business model. They may have been able to hang on to the “low-cost” tag but when you include the cost of the ancillaries compared with a legacy airline’s fare, sometimes it’s a close call.