The Hidden Business Empire Behind the World’s Cheapest Airlines — and How It Really Makes Money

Almost every passenger on a low-cost airline experiences a certain realization at some point, usually between clicking “confirm booking” and reaching the departure gate. The ticket stated €10. Somehow, the total comes to €67. There’s a fee for choosing a seat here, a fee for bags there, and a surcharge for processing payments that almost apologetically shows up on the last screen.

The initial price feels more like an opening bid in a negotiation you didn’t realize you were entering by the time the boarding pass prints, which you’d better have done at home or that’s another fee. This is not a coincidence. It is the whole business plan, designed with greater accuracy than the majority of travelers ever pause to think about.

Today, budget airlines account for almost one-third of all airline capacity worldwide, a market share that would have seemed unthinkable to aviation executives in the 1970s who thought that flying required, at the very least, a hot meal and a smile. The first airline to seriously question that notion was Pacific Southwest Airlines in California, which introduced a low-cost, basic model in 1949 that put getting passengers from one location to another at a low cost above all else.

Throughout the 1970s and 1980s, Southwest Airlines developed it into something robust and extensively imitated. However, Ryanair under Michael O’Leary was the one who ultimately took the idea to its logical—and some would say cruel—extreme, creating a carrier that charges so little for the seat itself that it has virtually stopped being the product being sold.

After closely examining the Southwest model, O’Leary realized that the ticket price was a customer acquisition expense rather than a source of income when he reorganized Ryanair in the early 1990s. Build the actual margin on everything that comes after you get passengers through the door with a number low enough to stop them mid-scroll. bag fees. priority boarding.

Choose a seat. Due to the captive audience and lack of competition at 35,000 feet, in-flight food and beverages are priced similarly to those of airport restaurants. In order to keep the Ryanair name in the news for weeks, the airline even briefly and seriously considered charging for bathroom access. This proposal received a lot of media attention. It almost doesn’t matter if O’Leary believed in it. The man has always known that attention is free advertising in and of itself.

Upon reflection, the numbers supporting this model are shocking. Prior to the pandemic, airlines worldwide were making about $110 billion in ancillary revenue from fees, upgrades, and add-ons that were completely outside of the base fare. That amount was so much higher than the industry’s total operating profit of about $43 billion that it is difficult to accept the numbers.

When McKinsey’s analysts examined which airlines actually generated shareholder value between 2012 and 2019, they discovered that those whose passengers spent at least $20 on ancillaries reported returns on invested capital that were more than five percentage points higher than those whose passengers spent less than $5. The analysis came to the conclusion that most airlines would just not be able to recoup their startup costs without these add-ons. In other words, the inexpensive ticket is not a gift to the customer. It is the price of bringing the customer close enough to charge them for everything else.

This engine runs so smoothly in part because of Ryanair’s fleet discipline. Each aircraft in the fleet is a Boeing 737. Not roughly, but precisely. The airline can negotiate from a position of scale when buying new aircraft thanks to this single-type approach, which also reduces the complexity and expense of training pilots and mechanics across various aircraft configurations and maintains a manageable spare parts inventory.

Secondary airports, such as Beauvais in place of Charles de Gaulle and Charleroi in place of Brussels, charge lower landing fees and provide quicker turnaround times with less traffic, allowing aircraft to spend more time making money in the air and less time at gates. While wide-body aircraft only manage one or two flights per day, narrow-body aircraft complete five or six. Every component of the model is focused on achieving the same objective: maximize what enters, minimize what exits, and occupy every seat. In an industry where the average is typically much lower, Ryanair’s load factor—the percentage of seats occupied per flight—often surpasses 90%.

It’s difficult to ignore how the model has changed the surrounding competitive environment. After witnessing Ryanair and EasyJet draw in large numbers of budget-conscious travelers, legacy airlines like British Airways and Lufthansa eventually established their own low-cost subsidiaries, Eurowings and Level, respectively, effectively creating Ryanair-style operations apart from their primary brands. A few competitors failed to make it at all.

The low-cost pressure was too strong for Monarch Airlines, Flybe, and other airlines to withstand, and they folded under the pressure of a market where low-cost carriers had permanently raised prices. The floor of the industry had fallen, and it was not rising again.

The impact that the budget model has on the traveler experience is real and should be acknowledged without acting as though it doesn’t occur. The seats are not very roomy. There is not much legroom. The overhead bin policy is enforced with the zeal of a toll booth operator, and there is no entertainment or freebies.

In response to persistent customer dissatisfaction, Ryanair has softened some of its harsher edges in recent years, such as more transparent pricing and fewer unexpected fees at the gate. This is likely due in part to the “Always Getting Better” rebranding initiative’s requirement for at least some tangible proof of improvement. It’s still not entirely clear if those changes are the result of careful brand management or a real shift.

The model’s effectiveness is evident. While legacy carriers were still sorting through their post-pandemic balance sheets, Ryanair reported record profits of €1.43 billion in its 2023 fiscal year. Because the price at the top of the booking page still stated something that made the rest of the calculation feel reasonable, the passengers continued to arrive even though they were fully aware of what the experience would entail. The conflict between the price of the ticket and the actual cost of the trip is not a weakness in the low-cost airline industry. It is the whole point, and always has been.