LOW COST Airlines - Ready for Takeoff in India
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Authors
Authors: Sanjib Dutta
Senior Faculty Member
ICMR (IBS Center for Management Research).
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Ryanair Contd...
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After Ryanair.com was launched in 2000, a large number of tickets began to be booked online. By early 2003, almost 95 percent of the bookings were done through the internet. This allowed the airline to make the booking process cheaper as transaction costs came down considerably. The benefits of lower costs were passed on to customers in the form of lower prices. Although some bookings were done over the telephone and some through agents, the internet brought in the major part of business. So, the airline decided to slash the commissions of agents from 7.5 percent to 5 percent. Analysts estimated that bookings over the internet saved the airline about $6 million a year on an average. Like other discount airlines, Ryanair did not serve food or drinks on its flights. Snacks however, could be purchased on the airline. Unlike Southwest, which served drinks and light snacks, Ryanair even charged for water on the flights (a bottle of water cost about $3). Analysts said that Ryanair transformed a cost into a revenue opportunity, as it not only eliminated all expenses on food (which formed a major portion of the expenditure per passenger), but also made additional revenues through the sale of food and drinks. According to a published report of the airline, Ryanair saved $50,000 a year, simply by not serving ice on its flights. |
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None of the services provided by the airline were free either. Baggage check-in cost the passenger according to the amount of baggage carried. It meant that users paid for what they needed and didn't pay for anything they didn't need. Since Ryanair charged for all the optional parts of a flight, it was able to fix the basic ticket price very low.
What was distinctive about Ryanair was its focus on filling its planes to capacity. If tickets did not get sold at a high price, it tried to sell them by lowering prices. It realized that it was more profitable for it to fly its planes full at lowered ticket prices rather than half-empty at its standard rates, as the per unit cost of flying a person came down. Besides, since Ryanair charged for all additional services like food and baggage, it stood to profit even if the ticket was sold at a huge discount. The airline did not assign seat numbers; this simplified the ticketing and administration processes. It helped the airline save time as it ensured that passengers came to the airport on time to be able to sit together or get seats of their choice on the plane. The decision to fly short and medium haul point-to-point8 flights also enabled the airline to work with a smaller number of personnel than it would have required if it adopted the more complicated hub-and-spoke system.9
Transfer of baggage and people from one plane to another is generally considered a vulnerable area for airlines. Flying point-to-point avoided the need for any kind of transfer, thus keeping operations simple and inexpensive. Ryanair had very low operating costs. The $50 average cost of a Ryanair ticket could be broken down into approximately $35 operating costs and $15 profit. Thirty-five dollars as operating cost per passenger was low by any standards.
Ryanair entered into partnerships and agreements with car rental companies and hotels so that it could earn commissions by selling these products to passengers. These commissions bridged the gap between the airline's cost and profit, which allowed it to sell its tickets for very low prices. Ryanair viewed each passenger as an opportunity to make money in more ways than just transporting them somewhere by plane. By charging them for additional services and earning commissions through them, the airline could constantly drop ticket prices. Ryanair.com also hooked up with hotel chains, car-rental companies, life insurers, and mobile-phone companies to expand the website's range of offerings.
8] In the point-to-point system the planes has a simple flight route and flies from the origin to destination.
9] A hub-and-spoke system uses a strategically located airport (the hub) as a passenger exchange point for flights to and from outlying towns and cities (the spokes).