Gradeup Magazine: Let's Talk Business #10

Q: What is the economics behind Low cost Airlines?

The pioneer in low cost airlines was Southwest and they cut costs through a variety of means, that eventually became a template for the whole budget industry. If their model is to be simplified in one sentence, it is the extreme focus on keeping the planes in air. Planes are a huge capital expenditure and the more you use it, the lower the overall costs. Southwest is the industry leader in bringing the most efficiency out of their assets.

How do they get more out of their aircraft?

1. Provide only one class of service and just one aircraft [Boeing 737]. This makes for extreme standardization in service - both for flight crew and the maintenance engineers. They also get bulk discounts from Boeing for aircraft as well as the parts. The secrets of Southwest's continued success Bigger airlines have 10 or more aircrafts - making maintenance and standardization complicated.
2. Fly to cheap, less popular airports that charge you lower landing fees & provide faster turnaround.
3. By not assigning seats, they could quickly switch aircrafts [with slightly different seat configurations] if needed without printing additional boarding passes or delays. How Southwest Airlines Turns a Profit, Year After Year After Year
   slate.com
4. Fly shorter, direct routes instead of excessively rely on overcrowded hubs. These large hubs can hold up traffic and lead to delays which can add both fuel costs as well low utilization of aircraft.
5. No unnecessary frills such as inflight meals. But, add a few extra frills like no charged for 2 checked in bags to keep cabin luggage minimum & enable very quick boarding.
6. Pay well and get more productivity. The pilots are paid among the highest in industry [and are also flown more] and same for all workers, getting the best & most efficient.
7. With a very standard aircraft, Southwest cleaning crews are extremely efficient in turnaround times. A southwest flight gets ready for next journey, well under an hour after landing.
8. Aggressively play the energy futures market to reduce the risk of oil prices affecting their margins.
9. Cut the middle man and use the Internet to directly sell to the customer.
10. Be very aggressive in cutting low profit routes. Full service airlines tend to fly to a wide range of geography just for prestige and run a lot of routes with mostly empty flights.

Other budget airlines might add a few more to these:

1. Charge for a lot of things that people take for granted - like seat assignments, cabin baggage, and getting boarding passes in the airport.
2. Use low cost promotions to run the airplanes near full.
3. Some even do crazy ridiculous penny pinching. For instance, GoAir hires primarily skinny women to keep the weight of the aircraft & thus the fuel costs low. Airline recruits women to save fuel [it is horribly sexist as the company weeds out men]

How airlines cut costs

Q: What happens in an economy where everyone is/ wants to become an entrepreneur?

Everyone can be an entrepreneur. Potentially the whole world could be 1-person companies and most of what we do can still work. Corporations are a relative recent construct in human history and until then a lot of people just worked for themselves.

In fact, this is what is being tested by companies like Uber, Upwork and Airbnb. They all have an army of producers who just work for themselves or in other words entrepreneurs. Instead of buying from a big store, you could buy from an entrepreneur on Ebay, Etsy or other places. Corporations could hire contractors instead of employees.

Another great example is the open source movement. Without major corporations or other entities, large body of independent people were able to create monumental works like Linux and Wikipedia. This open source movement further puts the strain on the idea that one needs large corporations with a lot of employees to create highly complex projects.

There is a classic economics work called the Theory of the firm and its underlying principle is that corporations exists due to high transaction costs. It was historically much cheaper to work with employees within a company than outside.

However, technology is rapidly reducing the external transaction costs, through better payment gateways, reviews, remote working tools etc. It is quite feasible that a few decades from now, we could all be just entrepreneurs - working for ourselves and then offering services to other entrepreneurs through contracts.

(The author, Mr.Balaji Vishwanathan, is a Top Writer on Quora with 216,000 followers.)