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Costs of No-Frills Flight

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Costs of No-Frills Flight

Old 29th Aug 2003, 17:00
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Costs of No-Frills Flight

The following figures are for easyjet Luton-Nice, supplied by the Guardian. What is interesting is

1) the low aircraft capital cost – from high utilization
2) modest admin overhead
3) 9% net profit – you can see why MOL and Stellios are so rich

Gross Revenue ___________£6136
Costs ___________________£5340 ____87%
Tax ____________________£251 ______4%
Net Profit _______________£545 ______9%

Cost Breakdown:

____________________Cost _____% ________per pax
Aircraft _____________£676 _____13 ________£4.50
Maintenance _________£584 _____11 ________£3.90
Fuel ________________£614 _____12 ________£4.09
Crew _______________£643 _____12 ________£4.29

Sub-total ____________£2517 _____47 ________41% of ticket price

Ground Hndlg ________£542 _____10 ________£3.61
Airport Chgs _________£817 _____15 ________£5.44
Navigation ___________£420 _____8 _________£2.80

Sub-total ____________£1779 _____33 ________29% of ticket price

Admin ______________£728 _____14 ________£4.85
Advertising ___________£215 _____4 ________£1.43
Card Charges _________£101 ______2 ________

Sub-total ____________£1044 _____20 ________17% of ticket price
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Old 29th Aug 2003, 17:34
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Based on what 'Load factor' ?

BTW - The link to the original article is: Anatomy of a budget flight

Anatomy of a budget flight

On today's EasyJet flight from Luton to Nice, some people will have paid only £20 for their seats. Yet the airline still makes a profit while established carriers nosedive. Nils Pratley explains where every penny goes

Wednesday August 20, 2003
The Guardian

It's the question everyone who's ever flown with a low cost airline has asked: how do they do it? Some of the passengers travelling on today's 10.45 EasyJet flight from Luton to Nice, a popular route at this time of the year, will be paying just £20 for their seats. A flight of nearly 700 miles for less than the price of a couple of CDs.
Admittedly, others - the late bookers - may be charged closer to £140 but that still represents a revolution in travel. The average price for all EasyJet flights is £48.70. In the bad old days before no-frills airlines, you would struggle to get a seat to Nice for £200, however early you booked.

But low fares still equate to very healthy profits for the low-cost airlines. Ryanair is the only European carrier to make profits in each of the past 13 years, while the detail in EasyJet's accounts enables some simple calculations to be made about the how the economics of the low-cost game work.

The basic fact is that every time an EasyJet flight takes off, the company receives, on average, £6,136 in fares and makes £545 profit.

That might not sound much, but it represents good business when you are carrying almost 20 million passengers on 156,000 flights, as EasyJet will this year. It also works out as a profit margin of 8.9%, after paying all taxes, which compares well with other consumer industries. Tesco, the country's biggest and most efficient supermarket chain, made profits of just 3.6p in the pound last year after tax.

The breakdown below explains the costs involved for firms such as EasyJet - how much of that £6,136 goes on fuel, how much on crew and so on - but there is a broad philosophy behind the low-cost airline game and how to beat the bigger established airlines.

It was set out 30 years ago by Herb Kelleher, founder of Southwest airlines of Texas, the world's first budget airline and still the biggest. Stelios Haji-Ioannou, founder of EasyJet, and Michael O'Leary, the driving force behind Ryanair, both cite Southwest as an inspiration and both studied its business model in detail.

Kelleher's philosophy runs to just four rules:

Rule 1: Only fly one type of plane. The idea is to allow any aircraft in the fleet to operate any route. It also makes life easier for the maintenance engineers and enables fewer spare parts to be stocked. The plane of choice for low-cost airlines is the Boeing 737 - Southwest, EasyJet and Ryanair all use it.

EasyJet, though, has now decided to break the rule and mix its planes. It ran a year-long competition between Boeing and Airbus and opted to order 120 new Airbus 319s. Its justification was price - Airbus was desperate to break Boeing's domination of the booming low-cost industry and made a knock-down offer. EasyJet reckons it will lower its costs by 10% as a result and, given that both models hold about 150 passengers, it will not have to abandon the "any plane, any route" idea.

Rule 2: Drive down costs every year. As it grows, EasyJet aims to cut its unit costs by 8-10% a year by reaping economies of scale. It means demanding better terms from the insurer, the fuel supplier and all the other suppliers. The internet is also the friend of the low-cost carriers: it cuts out the commission for the travel agents. The likes of British Airways still have to deal with them.

Rule 3: Turn around your aircraft as quickly as possible. Aircraft make money by going from A to B, not by standing around on the Tarmac. That's why budget airlines don't bother with seat numbers - a sit-anywhere policy gets the passengers loaded more quickly.

A single plane may be making eight flights a day - for example, Luton to Nice and back four times - and it is only possible if it spends little more than 30 minutes standing still at each end. This is also the reason why the in-flight trolleys don't sell peanuts: they take too long to clear up when the bags split.

Rule 4: Don't try to sell anything apart from seats on a plane. In other words, don't mess about with complicated and fiddly things such as Air Miles and loyalty schemes. "Price is the best form of loyalty," is O'Leary's philosophy.

The cost of a single flight

£542: Groundhandling charges
This is the cost of check-in staff, the luggage handlers and the people who refuel the plane. These staff usually work for an outside agency. Only at Luton and Geneva airports are the check-in staff employed directly by EasyJet

£817: Airport charges
These are paid per passenger. At Luton, the rate is £5.50 per passenger

£101: Credit card charges
Charges made by the credit card company for passengers booking online - more than 90% of EasyJet and Ryanair customers do so. For those that book by phone, there is a 95p-per-booking incentive payment to the call centre staff and that cost is also included here

£728: Administration
The main items are the lease on the head office, IT costs and the salaries of the management and operational staff. There is also a small element to cover refunds etc. This is the key area where low-cost carriers aim to beat British Airways and its peers by extending the lowcost mentality to the head office

£614: Fuel
Fuel prices can move sharply - for example, the oil price rose steadily in the build-up to the war in Iraq. There is also a currency risk: airline fuel is bought in dollars, whereas most of EasyJet's passengers are paying in sterling and euros. But at the moment, there is little to worry about: oil has been comparatively steady for several months and the dollar is weak

£420: Navigation
Part of this goes to the air-traffic control tower at the airport at each end. The rest goes to the national air-traffic control organisation for the countries that the plane flies over

£215: Advertising
In EasyJet's case, it is mostly newspapers, billboards, bus shelters and the tube

£676: Cost of the aircraft
Almost all of EasyJet's planes are on long leasehold arrangements with financing companies such as GE Capital. Prices have fallen sharply in recent years because there are a few hundred mothballed in the deserts of California. Also included here is the small amount that EasyJet made in interest on its cash at the bank

£251: Tax
Like every company that makes profits, EasyJet pays tax to the Treasury

£643: Crew salaries and training
The captain earns about £80k a year; the first officer £50-55k; the senior crew member about £17k; and two junior crew about £14k each

£584: Maintenance and servicing
Including the cost of owning spare engines and parts

How it adds up

Ticket sales: £6,136
Outgoings: £5,591
Profit: £545
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Old 29th Aug 2003, 18:38
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Since when does easyJet actually make money?
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Old 29th Aug 2003, 19:28
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Maybe dumping their price structure in favour of NOW airlines idea might help.
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Old 29th Aug 2003, 20:44
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Is that the same banded price structure that Go used at the very beginning which almost closed the airline down within only a couple of months?

Where is the incentive for pax to pruchase early and therefore the airline hold on to their money for longer? There is none! I wouldn't be so sure about how successful NOW will be with this fare structure!!
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Old 29th Aug 2003, 20:58
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Twistedenginestarter - your per-passenger amounts are assuming 150 pax (i.e. 100% load factor, or just over ) so might be a tiny bit misleading. I can't remember EZY's latest load factors but would be inclined to take something like 85% (i.e. dividing by maybe 128 rather than 150). But the comparison is very instructive (and of course the percentages of ticket price are still correct).
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Old 29th Aug 2003, 22:12
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Given that crew costs are only 12% of total and admin costs are 14%, why is it then that crew costs are always the first attacked during cost-cutting as "the biggest expense".
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Old 29th Aug 2003, 23:01
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Crew costs generally relates to a number of financial transactions associated with crew, not just their salaries. Hotac, travel and allowances can make a major difference to the profitability of a company and it is generally these that are targetted. However, captains earning 50k + will also attract more than their fair share of interest from the bean counters as a relatively small percentage cut in their salaries gives a higher saving when converted into hard currency.

Back to thread, what EZY do is nothing new, just identify how to get the most possible money out of each sector you fly. Once the costs of operating the flight are covered, all other income is pure profit (minus tax of course). It was the likes of Bob Crandall at American that pioneered the use of computers to create flexible pricing structures thereby maximising the revenue potential of each flight.
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Old 29th Aug 2003, 23:02
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Dockjock, to answer your question : crew costs are always the first attacked because pilots never move a finger to say "no" and management knows that.

You don't tell fuel suppliers or aircraft manufacturers to lower their prices down. But you can easily tell pilots : "look, the airline's strategy now is to cut prices to passengers so we'll have to take some of your money away. No questions asked because you can only keep your mouth shut about the company's strategy".

Should pilots be a bit less fragile, passengers tickets would be a bit more expensive by only a fraction which probably would not change much to sales figures.

Instead, everybody's strangled : the airline as it's trying to dig out even the most minute of cost drivers, pilots (and stewards,let's not forget about them as they have to be saints to accept such low salaries) because they have that very strange feeling they're being slowly but surely munched away.

But passengers can at least fly for a couple of quids less than then they would without that specific pressure. Big deal for them.

Wait for pilots to strike again and you'll see all fares going up with passengers barely noticing.

We'll be waiting until hell freezes over...
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Old 29th Aug 2003, 23:04
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Why no mention of insurance?????
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Old 29th Aug 2003, 23:55
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Crew costs

I vote for Big Tudor's answer over Bijave's.

Bijave: you write "You don't tell fuel suppliers or aircraft manufacturers to lower their prices down."

I suggest that Mr Boeing in the aftermath of Ryanair's big 737 order, or M. Airbus in the wake of EZY's Airbus order, might disagree rather strongly with you. You don't seriously think that these airlines paid list price for their new orders, do you? (I recall MO'L crowing, in what I rate as probably one of his most objectionable comments ever, "We raped them," when asked about the deal he got from Boeing for the aircraft.)

And even if we're not *buying* the aircraft, but leasing (as we do), in the current market I would most definitely be playing off lessors to get the best deal.

As for fuel suppliers: the company I work for is a small player at most airports, so we have limited leverage to argue with suppliers. But we monitor fuel prices at all our stations and tanker at the cheap ones where we can. In other words, we *do* care about the price of fuel. And the capital cost of our aircraft. And all the other costs in the above list.

Please excuse this brief intrusion of reality into your victimhood...
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Old 30th Aug 2003, 20:31
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Thought the article was a bit mistimed, given their recent multi million euro loss. Didn´t mean to offend you there Yeager, just keep resting on your laurels and i´m confident you guys will manage another profit making year.
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Old 31st Aug 2003, 01:28
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Captain's earn 80k and FO's 50-55....

Where do i sign up ????
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Old 31st Aug 2003, 18:31
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FO salary slightly inaccurate I would say. A senior FO salary including sector pay will make mid 40's.
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Old 31st Aug 2003, 19:38
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EZY load factor are very good. Can't remember last time I did a flight with lesss than 140 Pax. ( only have 149 seats!) Amazingly they doo sell a great deal of tickets at the sales desk on the day of travel. I'd say EZY have the best loads of all the locos.
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