Ultra Low-Cost Carriers Have Better Profit Margins
Joe Cortez June 20, 2018
Every quarter, the attention turns to the legacy airlines to find out how well they financially performed over the previous three months. However, they may not deserve the entire spotlight. A review of the world’s biggest airlines discovered the strongest profit margins comes from ultra low-cost carriers.
When it comes to the best financial performances, America’s legacy carriers may have a larger quantity – but ultra low-cost carriers around the world may have a better quality to their quarterly numbers. A report from Airline Weekly discovered global no-frills carriers carry some of the best operating margins across the industry.
Comparing total revenue, it should come as no surprise that America’s three legacy carriers – American Airlines, Delta Air Lines and United Airlines – reported the biggest numbers. Between April 2017 and March 2018, American and Delta pulled in more than $41 billion in revenue, while United reported $38 billion.
But when it comes to actual operating margin, those three fall by the wayside to the ultra low-cost competition. Allegiant Airlines reported a 17 percent positive operating margin during the same period and Frontier Airlines reported a 16 percent positive margin. At the top of the chart was Ryanair, with a 23 percent positive margin. Comparatively: Delta had a 14 percent margin, American reported an 11 percent margin, while United only reported a 10 percent margin.
Why are ultra low-cost carriers outperforming their legacy counterparts? Editors at Airline Weekly noted the shift in consumer attitudes about flying. With the three major airlines adding “basic economy” fares and ancillary fees, it’s possible flyers are eschewing from the traditional choices and choosing fare over options.
“Maybe people love low fares more than they hate the things they don’t like about these airlines,” Seth Kaplan, managing partner of Airline Weekly, told Chicago Business Journal.
How did Southwest Airlines, arguably the nation’s largest low-cost carrier, perform? On $21 billion in yearly revenues, the Texas airline reported a 16 percent positive operating margin, tying with Frontier and outperforming all three legacy carriers.
[Photo: Shutterstock]
Southwest has my undying affection and loyalty. They don't fly out of HSV, so I drive two hours to BNA. As an American, I like the egalitarian policy of "open" seating. I just wish my flights weren't always 100% full and people would check their carry-ons so they didn't block the aisle during boarding. My checked bags arrive with me reliably at no extra charge. I never have to trundle a carry-on when boarding; what a pleasure to just walk down the aisle with just my purse and laptop bag. Baggage handlers are fairly careful, from what I've seen out the plane window. ONT and BNA have speedy baggage delivery. An agent collects and secures bags that haven't been claimed immediately, so no need to rush to baggage claim. Southwest rules are clear re reservations and check ins, and no change fees. The mobile app is super easy to use. OK, so you don't get a meal... seriously, you can't go four hours without eating? TSA allows you to bring a meal through if you don't want to buy take out from terminal concessions. Their FAs are the best. Management allows them to have a personality, make jokes, sing and lead passengers in songs and games. Many times I've seen the humor reduce anxiety in nervous fliers seated near me. The gate agents are super and do everything possible to avoid stranding passengers. Sometimes this results in delayed departures, but reasons for delays are announced. The FAs encourage us to cheer the passengers who are forced to board late. Once I got lost at LAS trying to connect (terminal under construction, I was exhausted) and they held the plane for me! I can't tell you how many times my family has done something stupid or arrived late and they fixed the problem without charging an extra fee. One time, just after pushing back from the gate on an early flight, my husband passed out briefly from acute kidney stone pain (stones can have oddly unpredictable timing). After an emergency room visit cleared him, Southwest agents got him routed to his destination that same day... no extra charge. Lastly, I will never forget the kindness of a Southwest gate agent thirty years ago. My husband and I had a tight connection ON ANOTHER AIRLINE. We got turned around in the terminal at PHX (this was before 9/11, and TSA security). A Southwest agent saw our distress, left her desk and walked us to the right passage to our gate. We couldn't believe how caring she was. That's the kind of service I admire. Whether or not my cocktail is garnished appropriately is of absolutely no concern to me. I don't need obsequious, perfectly coiffed, immaculately uniformed FAs. True kindness and caring with a humorous twist is the best.
Makes complete sense. And if reports like this were widespread enough, people would stop flying ULCCs altogether and retreat to the majors. ULCCs first of all, have industry leading (if you want to call it that) seat counts, done not just by all economy layouts, but reducing the seat pitch to almost inhumane levels. Then, throw on deceptive practices by having irresistible low 'fares' that are too low to pass by, then tack on fees for anything you can think of and more. Sure, legacies have their own set of fees. But you don't get charged, for example, checking in/printing boarding passes at the airport. I don't doubt that the right kind of traveler could save money flying LCCs, if they are willing to sacrifice things like comfort, reliability, and the ability to get to their destination in a reasonable time should there be IRROPS (I've heard first-hand experience from friends, for example, on a canceled Spirit flight, and its why I won't fly ULCCs). However, most travelers, I believe, if they added up everything they spent to get from A to B, are spending more on a ULCC then with a legacy. I don't fly ULCCs, but I've done this calculation myself a few times to see, and there is not a single time where I've determined I would have saved money. For a worse experience to boot, no thank you. If travelers stopped booking based solely on the option showing the lowest upfront fare, and after their trip, looked at the all-in amount they spent on one of these no frills carriers, I can almost guarantee most spent well more than they thought, and more than on a comparable legacy carrier.
Our first experience on Spirit. Primarily booked Spirit since the flight was NONSTOP and departed both ways at a convenient time of day. The flight was on time; EZ check at PIT and pleasant experiences with ticketing, TSA and flight attendants. Checked 1 bag and 1 Carry-on. Last minute booking so price was competitive but not inexpensive. Spirit fees can become ridiculous for just about any preference. However the in flight experience was equivalent to the more traditional carriers like Delta , American and United. .Like those carriers, Spirit flight closes 45 minutes before departure time even if airline delays are posted. Returned from MYR to PIT with round trip booking although at MYR check in and TSA security agents were more irascible than at PIT. NK 437 Flight was fully booked and oversold. Whoever missed that flight was SOL because typically Spirit has only one non stop between city pairs per day and no agreements with other carriers to arrange alternate transportation. In addition, should baggage fees not have been purchased on line at the time of booking, the gate keepers (agents) were collecting $65 per person per bag for either carry-on or checked luggage. All three legacy carriers only offered connecting service to ILM via BWI, ATL, IAD, CLT . Two other members of our group did choose to fly United and American. Each paid a fare more than double the cost of Spirit. They were able to share a car rental at ILM. However on their return, both were stranded by American in CLT. One for 6 hours who was returning to PIT; The other, returning to SFO, was stranded overnight because American missed their own connection and she was forced to stay overnight at her own expense and was absent from work the next day. We are so glad we opted for the Spirit 70 minute nonstop , then drive the 90 minutes between MYR and Wilmington. Otherwise we would likely have been stranded in one of the legacy carrier's hubs and/or subjected to a four to 6 hour flight time with a layover then still be charged baggage fees of $50 per person round trip. .
From a business perspective, it’s difficult to compare the margin of an airline operating 100 aircraft versus 1000 aircraft. Allegiant, for example, picks and chooses markets where it’s business strategy will fill planes. AA, DL, UA serve communities large and small with diverse fleets. These add to operating costs, but they can get customers to more places. While the margin is tighter, the total profit is more than ultra low cost carriers. Let’s use Sprit as an example, 14% margin in 2017, with revenue of $420million (pre-special items). DL was $41.2 billion in revenue, 5.5 billion in pre-tax income. While the margin is lower, the amount of money DL made far exceeds what Sprit made. DL has the advantage of more $, more value, more assets.
So legacy carriers give more to the customer for their money in other words? 😄 I am so happy I discovered the big alliances anyway. They made my life 10 times more interesting, making flying interesting and fun again 😊