Economics of low-cost air travel

Shubha Madhukar
16 July 2004

Operating on low-cost flying models, airlines can provide air travel at 40 to 45 per cent of the existing economy airfare

Travelling by air is no longer a dream for many. Not after Air Deccan's blockbuster announcement to offer Rs 500 air ticket for the one hour 55 minutes flight between Delhi and Mumbai. Sounds incredible? Pinch yourself. Low cost, no frills air travel has arrived in India.

In practical terms, this too good to be true offer may not last in perpetuity, but air tickets at 40 to 45 per cent of the existing economy airfare is not just feasible but realistic too as proved by Air Deccan. Its attractive pricing has succeeded in broadening the air travellers segment also.

Low cost, no-frills air travel emerged in the US in the 1970s and spread to Europe in 1990s. In Asia, it made inroads some three years ago led by Malaysia's AirAsia. In India, the low-cost business model happened with Air Deccan opening operations in south India.

Already half a dozen business houses encouraged by Air Deccan's apparent success and the government's policies to liberalise its aviation policy are all geared up to set the Indian airspace buzzing with activity. Among the low cost carriers waiting to take off are Vijay Mallya's Kingfisher Airlines, Modiluft's Royal airlines and Air India's AirIndia Express. AirOne and Visa to be run by groups of former Indian airlines pilots are also in the offing. The latest entrant to the growing number of private investors is the Rs 2500 crore GMR Group.

Low cost carriers have been possible with a different set of economics. Unarguably, the major cost of flying is attributed to fuel, maintenance and salaries. In addition there are parking and landing charges as well, which are quite high. So how does Air Deccan in India, RyanAir in Europe and Southwest Airlines in US manage to sustain low cost carriers? How does a low cost model work?

Low cost carriers generally operate with only one kind of aircraft in their fleet, such as Airbus 320s or Boeing 737s, to lower the maintenance costs. There is no business class just economy class; this increases the number of seats per flight.

Typically, they have quick turn around time, which means higher aircraft utilisation, online ticket reservation to save costs on commission to agents, reduction in flight services - no free meals, no newspapers and no frequent flier programmes either. There are no aerobridges or bus services to ply passengers to the aircraft. What's more, many of them do not even promise seat allocation. Usually the crew size is also small: Air Deccan operates with just one air hostess on board.