The economics of low-cost carriers

The nation’s low-cost carriers are profitable even as the venerable “legacy” airlines barely tread water. How can they make money while offering fares that are 40 to 70 percent lower? The reasons are many — cost of labor is a big one — but here are 10 major differences between the cheeky upstarts and the big boys.

The list runs as follows:

1. Low cost carriers generally serve cities of 1.3 million or greater.

2. Southwest has 84.6 employees per aircraft, United has 116.

3. JetBlue sells 2 percent of its tickets through travel agents, US Airways sells 61 percent through agents.

4. The low-cost carriers have more point-to-point flights. 40 percent of American passengers have connecting flights, it is only 10 percent for Southwest. Connecting passengers cost more money to serve.

5. Low-cost carriers generally avoid costly foreign flights.

6. A Delta captain earns $215,000 a year, an AirTran captain earns $135,000.

7. The low-cost airlines have cheaper pension plans.

8. Southwest, JetBlue, and AirTran have no downtown ticket offices. US Airways has 13.

9. US Airways pays its telephone reservation agents $21 an hour. JetBlue pays them $8.25 an hour and has them work from home, saving on office costs.

10. JetBlue flies one kind of plane, Delta flies 16 different kinds of aircraft.

Here is the full story. Obviously many of these cost savings can cut into long-run profitability, but that is how the low-cost airlines have penetrated the market.

If air genius Gary Leff offers commentary, I’ll write an addendum.

Addendum: Here’s Gary, he says “It’s the labor costs, stupid”.


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