Budget airlines Spirit, Ryanair: How they make money

Budget airlines Spirit, Ryanair: How they make money

Budget airlines have become common, making a no-frills experience for travelers a core part of their business models.

The carriers have proliferated throughout the world since Pacific Southwest Airlines first implemented the low-cost business model in 1949, and Southwest Airlines perfected it in the early 1970s.

Today, Southwest’s service has evolved to more closely resemble a hybrid between conventional and low-budget airlines, but many other players have sprung up in the space. In the U.S., popular low-cost carriers include Spirit Airlines, Allegiant and Frontier, among others. Budget airlines in Europe include EasyJet, Ryanair and Wizz Air, while Asia is served by players such as AirAsia and IndiGo. Some of South America’s low budget airlines include JetSmart, GOL and Wingo.

As consumers become more acquainted with the airlines, they may not be as familiar with what exactly makes them budget carriers.

“One of the common misnomers when people think of low-cost carriers, they think low cost means cheap tickets, but actually the low cost refers to low expenses on the airline’s part, that they try to really go all out to minimize their expenses so that the money that they bring in is much more profitable,” said Scott Keyes, founder of flight-deal company Going.

Budget airlines keep costs down in part by limiting their amenities to the bare minimum. Think no internet or seatback entertainment. They tend to entice travelers with low base fares and then charge for add-ons such as seat selection, food and luggage, all of which will frequently add up to more than the fare itself. Budget airlines try to keep a close eye on their operational costs by maximizing time spent in the air and passenger volume.

“Most U.S. airlines, interestingly, ultra-low-cost carriers, they charge more for a carry-on bag than a checked luggage because with [a] carry-on bag, it takes longer to turn a plane around. So it’s more cost savings if you check your luggage for them than if you carry it on,” said Savanthi Syth, a managing director at Raymond James who covers airlines.

Unlike conventional airlines, budget carriers also tend to have only one cabin class on board and operate fleets with a single model of airplane, which streamlines pilot training and plane maintenance. Budget airlines also tend to fly out of smaller, less trafficked airports where they can negotiate better rates for using the airport.

Still, fuel and labor are their biggest expenses.

“You typically see pilot pay a little bit lower on Spirit and Frontier and some of the budget airlines compared to the full service airlines,” Keyes said. “And so you see lower labor expenses.”

To find out more about how budget airlines operate and why airlines in Europe are able to offer even cheaper fares than their U.S. counterparts, CNBC decided to try out Europe’s largest low-cost airline: Ryanair. Watch the video here.

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