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Business Model

How does it work ?

Typical low-cost carrier business model practices include:

* a single passenger class

* a single type of airplane (commonly the Airbus A320 or Boeing 737), reducing training and servicing costs).

* a simple fare scheme (typically fares increase as the plane fills up, which rewards early reservations)

* unreserved seating (encouraging passengers to board early and quickly)

* flying to cheaper, less congested secondary airports and flying early in the morning or late in the evening to avoid air traffic delays and take advantage of lower landing fees

* short flights and fast turnaround times (allowing maximum utilization of aircraft)

* simplified routes, emphasizing point-to-point transit instead of transfers at hubs (again enhancing aircraft utilization and eliminating disruption due to delayed passengers or luggage missing connecting flights) * emphasis on direct sales of tickets, especially over the Internet (avoiding fees and commissions paid to travel agents and Computer Reservations Systems) * encouraged use and issuance of the electronic ticket or ticketless travel

* employees working in multiple roles, for instance flight attendants also cleaning the aircraft or working as gate agents (limiting personnel costs)

* "Free" in-flight catering and other "complimentary" services are eliminated, and replaced by optional paid-for in-flight food and drink (which represent an additional profit source for the airline).

* Aggressive fuel hedging programs.

* "Unbundling" of ancillary charges (showing airport fees, taxes as separate charges rather than as part of the advertised fare) to make the "headline fare" appear lower.

Not every low-cost carrier implements all of the above points (for example, some try to differentiate themselves with allocated seating, while others operate more than one aircraft type, still others will have relatively high operating costs but lower fares). Nonetheless these are general characteristics, most of which apply to any given low-cost carrier.


No-frills long-haul flights

The first airline offering no-frills transatlantic service was Freddie Laker's Laker Airways, which operated its famous "Skytrain" service between London and New York City during the late 1970s. The service was suspended after Laker's competitors, British Airways and Pan Am, were able to price Skytrain out of the market. In 2004 the Irish company Aer Lingus lowered its prices to compete with companies such as Ryanair and also started offering no-frills transatlantic flights for just above 100. Late in 2004 the Canadian airline Zoom Airlines also started selling transatlantic flights between Glasgow, UK; Manchester, UK; and Canada for 89. It has been suggested that an extended version of the Airbus A380, able to hold up to 780 passengers, would enable true low-cost long-haul service. While the per-seat costs of such an aircraft would be lower than the competition, there are fewer cost savings possible in a long-haul operation and therefore a long-haul low-cost operator would find it harder to differentiate itself from a conventional airline. In particular, low-cost carriers typically fly their aircraft for more hours and flights each day, scheduling the first departure early in the morning and the last arrival late at night. However, long-haul aircraft scheduling is more determined by timezone constraints (e.g. leaving the US East Coast in the evening and arriving in Europe the following morning), and the longer flight times mean there is less scope to increase aircraft utilization by adding one or two more short flights each day. The industry magazine Airline Business recently analysed the potential for low-cost long-haul service and concluded that a number of Asian carriers are closest to making such a model work. In August 2006, Zoom Airlines announced that it was to establish a UK subsidiary, probably based at Gatwick Airport, to offer low-cost long-haul flights to the USA and India. On 26 October 2006, Oasis Hong Kong Airlines started flying from Hong Kong to London Gatwick Airport. It was supposed to fly on 25 October but was delayed for one day because Russia suspended fly-over rights for that flight an hour before the flight's scheduled departure. Tickets for flights between Hong Kong to London can be as low at 75 (approximately US$150) per leg (not including taxes and other charges) for economy class and 470 (approximately US$940) per leg for business class for the same route. Its next planned destination is to Oakland, CA, a city east of San Francisco, CA in the United States.


Environmental impact

Air transport has been accused of contributing to global warming through the high carbon emissions of aircraft. Although the airline industry accounts for a relatively low percentage of emissions, this is growing rapidly, and in Europe at least, this growth is principally due to the expansion of the low-cost carriers' operations. There has been discussion of the possibility of imposing additional taxes on airline tickets or on aviation fuel, something which would particularly impact low-cost carriers' more price-sensitive customer bases and could severely impair their business model. It should be noted that in most countries, and in accordance with the provisions of the Chicago Convention, aviation turbine fuel is not taxed.


Carbon offset

A carbon offset is a service that tries to reduce the net carbon emissions of individuals or organizations indirectly, through proxies who reduce their emissions and/or increase their absorption of greenhouse gases. A wide variety of offset actions are available; tree planting is the most common. Renewable energy and energy conservation offsets are also popular, including emissions trading credits. The intended goal of carbon offsets is to combat global warming. The appeal of becoming "carbon neutral" has contributed to the growth of voluntary offsets, which often are a more cost-effective alternative to reducing one's own fossil-fuel consumption. However, carbon offsets are not without controversy, with some environmentalists and economists questioning the overall benefits of the practice. Many environmentalists disagree with the principle of carbon offsets. George Monbiot, an English environmentalist and progressive writer, has compared carbon offsets to the practice of purchasing Indulgences during the Middle Ages, whereby people with money could purchase forgiveness for their sins (instead of actually repenting and not sinning anymore). Monbiot also says that that the trade in carbon offsets is an excuse for business as usual with regards to pollution. In addition, some economists have questioned if carbon trading schemes are delivering the expected benefits. These questions result from a collapse in the price of carbon credits at two of the major carbon trading schemes. There are also concerns that using carbon offsets actually increases demand for polluting sources of power since overall power consumption isn't being reduced. Other controversies around carbon offsets revolve around the absence of adequate market regulation or standards. This has resulted in a number of offset projects being questioned over their supposed benefits. However, offsets provide an additional cost to energy users that reduces the payback period for installing energy efficiency measures. In practice, the net effect to the environment of buying carbon offsets may prove to be negligible and not worth the investment.

First ever Budget Airline

Southwest or Pacific Southwest

The first successful low-cost carrier was Pacific Southwest Airlines in the United States, which pioneered the concept when their first flight took place on May 6, 1949. Often, this credit has been incorrectly given to Southwest Airlines which began service in 1971 and has been profitable every year since 1973. With the advent of aviation deregulation the model spread to Europe as well, the most notable successes being Ireland's Ryanair, which began low-fares operations in 1991, and easyJet, formed in 1995. Low cost carriers developed in Asia and Oceania from 2000 led by operators such as Malaysia's AirAsia, and Australia's Virgin Blue. The low-cost carrier model is applicable worldwide, although deregulated markets are most suited for its rapid spread. In 2006, new LCCs were announced in Saudi Arabia and Mexico. Low-cost carriers pose a serious threat to traditional "full service" airlines, since the high cost structure of full-service carriers prevents them from competing effectively on price - the most important factor among most consumers when selecting a carrier. From 2001 to 2003, when the aviation industry was rocked by terrorism, war and SARS, the large majority of traditional airlines suffered heavy losses while low-cost carriers generally stayed profitable. Many carriers opted to launch their own no-frills airlines, such as KLM's Buzz, British Airways' Go, Air India's Air India-Express and United's Ted, but have found it difficult to avoid cannibalizing their core business. Exceptions to this have been bmi's bmibaby, germanwings which is controlled 49% by Lufthansa and Qantas's Jetstar all of which successfully operate alongside their full-service counterparts. For holiday destinations, low cost airlines also compete with seat-only charter sales. However, the inflexibility of charters (particularly as regards length of stay) makes them unpopular with many travelers. The entry of new nations into the European Union from Eastern Europe and moves towards compliance with EU legislation by those who have not yet joined, has led to an extension of open skies arrangements. This has led to the establishment of low-cost routes by existing and new operators such as Hungarian Wizz Air which took its first flight on 19th May 2004. From 2004 to 2006 routes have been established into Bulgaria, Slovenia, Poland, Hungary and the Czech Republic. Low cost airlines are also now starting to fly into Turkey. In Canada, Air Canada has found it difficult to compete with new low-cost rivals such as Westjet, Canjet, and Jetsgo despite its previously dominant position in the market: Air Canada entered a period of bankruptcy protection in 2003, but emerged from protection in September 2004. Air Canada operated two low-fare subsidiaries, Tango and Zip, but both were discontinued. (Jetsgo itself ceased operations on March 11, 2005 and Canjet announced that it will discontinue scheduled air services at the end of business on September 10, 2006.) India's first low-cost airline, Air Deccan started service on August 25, 2003. The airline's fares for the Delhi-Bangalore route were 30% less than those offered by its rivals such as Indian Airlines, Air Sahara and Jet Airways on the same route. The success of Air Deccan has spurred the entry of more than a dozen low-cost airlines in India. Air Deccan now faces stiff competition from other low-cost Indian carriers such as SpiceJet, GoAir and Paramount Airways. IndiGo Airlines recently placed an order for 100 Airbus A320s worth 6 billion USD during the Paris Air Show, the highest by any Asian domestic carrier. After a year of operation, in 2006, Kingfisher Airlines changed its business model from low-cost to value airlines. In Finland the competition went in a different direction, as the national carrier Finnair lowered prices so that the low-cost competitor Flying Finn was forced to cease its operations. Three months after Flying Finn's bankruptcy, the other operator Blue1 began flights to three of Flying Finn's most profitable destinations. In Norway the first low cost carrier was ColorAir in 1998. Their low prices were matched by competitors SAS and Braathens, and Color Air folded in 1999. The next low cost carrier, Norwegian Air Shuttle (or Norwegian), starting their Boeing 737 operations in September 2002, provided tougher competition for the merged Norwegian part of SAS and Braathens. Although Norwegian started with domestic routes, today their international operations are larger than their domestic service. By launching nonstop flights from cities like Stavanger, Bergen, Trondheim in addition to Oslo, they soon became very popular. Norwegians are amongst the most frequent fliers in the world, mostly due to the geography of the country but also due to the high level of income. Australia's first low cost airline was Compass which launched operations in 1990 but was short lived. In 2000 Impulse and Virgin Blue commenced low cost operations bringing fierce competition to Australian cities. Virgin Blue has become the nation's second largest airline, whilst Qantas purchased Impulse and operated it in a 'wet leasing' arrangement before transforming it into its new low cost carrier Jetstar. Qantas has launched two low cost carriers: JetStar competes with Virgin Blue in the Australian domestic market, while Australian Airlines operated internationally to Asian destinations. In 2006 Qantas began operating the Australian Airlines operation in a 'wet leasing' arrangement which essentially means Australian Airlines crew and aircraft operate services under the Qantas brand. As at 2006, Qantas intends to continue developing a sole low-cost brand around Jetstar which will include international destinations. In 1995, Air New Zealand established a low-fare subsidiary, Freedom Air, in response to the commencement of discount trans-tasman services by the upstart Kiwi Airlines. Fierce competition on trans-Tasman routes lead to the collapse of Kiwi Airlines in 1996. Freedom Air continues to provide discount services between Australia and New Zealand. Wholly owned Qantas subsidiary Jetconnect was set up as a low cost New Zealand arm of Qantas, with Jetconnect operating all New Zealand domestic services and several trans tasman services in a 'wet leasing' arrangement, using the Qantas brand. Qantas has also launched trans-Tasman Jetstar flights . On Feb 3, 2003, Air Arabia was established on and started operations on October 29, 2003. Air Arabia can be safely said to be the first budget airline in the Middle East region On May 5, 2004, Singapore's first low-cost carrier, Valuair was launched, prompting dominant carrier Singapore Airlines to invest in a new low-cost startup, Tiger Airways, to beat the competition. Not to be outdone, Singapore Changi Airport's second most dominant carrier, Qantas Airways, also started its Asian offshoot, Jetstar Asia Airways based in Singapore and commencing operations on December 13, 2004. Malaysia's AirAsia made repeated attempts to set up a Singaporean operation, but its insistence in using Seletar Airport, in addition to other demands to cut airport usage charges, delayed its abilities in gaining the relevant permits from the authorities in Singapore. This set-back may block AirAsia's Singapore expansion ambitions. In July 2005, the owners of Jetstar Asia took over Valuair and are merging the two carriers. In contrast with AirAsia, none of the Singaporean low-cost carriers are yet profitable. As the number of low-cost carriers has grown, these airlines have begun to compete with one another in addition to the traditional carriers. In the US, airlines have responded by introducing variations to the model. US Airways, offers a first class product and airport lounges, for example, while Frontier Airlines and JetBlue Airways advertises satellite television. In Europe, the emphasis has remained on reducing costs and no-frills service. In 2004, Ryanair announced proposals to eliminate reclining seats, window blinds, seat headrest covers, and seat pockets from its aircraft.