How Do Low Cost Carriers Actually Make Money: A Complete Breakdown

One might expect that the ticket price itself is what allows airlines to make a profit. This is more often the case for many traditional carriers, less so for low-cost carriers. It turns out that scheduled revenue is most often lower than total operating costs. This means that ancillary revenue is what allows low-cost airlines to make money.

European airlines coronavirus
Low-cost airlines no longer make a profit just on ticket sales. Photo: Getty Images

What exactly are ancillary services?

In short, ancillary services are considered those beyond the transportation of the passenger from origin to destination. Airlines provide various services and engage in other activities connected with its core air passenger service, including non-flight scheduled services, internet-related services, and the in-flight sale of beverages, food, and merchandise.

Profit Breakdown

We analyzed Ryanair’s performance over the last three years. Since 2017, Ryanair’s scheduled revenues have been smaller than its operational expenses by around 2 billion euros annually. While scheduled revenue has grown by roughly 400 million Euro or 8% since 2017, ancillary revenue grew by 600 million Euro or 33%. Ancillary revenue has been the key profitability driver throughout the years.

Other interesting conclusions can be made about Ryanair’s strategy based on this phenomenon. The Irish carrier expands its operations, simultaneously lowering its fares, which attracts more passengers. Ryanair is not aiming to make money on its cheap tickets; instead, it attracts passengers and sells them ancillary services, such as extra luggage, food, or insurance.

This effort to attract passengers has some intended side effects, of creating a fare-competitive landscape. Ryanair hopes to eliminate the weakest airlines which, if successful, increase Ryanair’s traffic even further. It is an excellent, self-propelling strategy, which has been proven successful. Over the last five years, Ryanair consistently grew its traffic and network while driving down fares and… increasing ancillary revenues.

Ryanair, easyjet, Peter Bellew
Ryanair’s strategy has proven successful over the last years. Photo: Getty Images

Flight-by-flight Breakdown

The aforementioned strategy is evident when we break down the numbers. Last year Ryanair carried 142.1 million passengers, with an average passenger fare of 37.03 Euro. Whereas, the cost per booked passenger was almost ten Euro higher, as it stood as 47.02 Euro. If tickets were to be the sole revenue driver for the airline, Ryanair would have lost 1.4 billion Euros in 2019.
However, as mentioned earlier, tickets are not the only revenue source. If we add the ancillary revenue per passenger of 17.15 Euro, we get to a profit of roughly a billion Euros, which is what we saw with Ryanair. Ancillary revenues account for almost a third of Ryanair’s total revenues. Thanks to statistics and predictive analytics, Ryanair knows how low it can sell its tickets for but still make a profit.

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For all three biggest low-cost carriers in Europe, ancillary sales are crucial. Photo: Getty Images

It’s not only Ryanair

The first part of the article focused on Ryanair – Europe’s largest low-cost carrier. Yet, ancillary revenues are as significant to other airlines’ as to the Irish airline.

Wizzair’s ancillary sales of 1.2 billion Euro accounted for 45% of total revenues and are much higher than at Ryanair, as ancillary revenue last year stood at 31.3 Euro per passenger. Interestingly, Wizzair’s average fare price was around 37.7 Euro, which is very similar to that of Ryanair, which means that the Central-Eastern European leader has been more successful in reaping ancillary sales benefits.

Easyjet’s situation is relatively similar, with 21.5% of revenues coming from ancillary sales. The ancillary sales generation strategy differs slightly between the airlines, but one feature remains unchanged across all three of them.
None would make a profit without ancillary sales.

The increasing importance of ancillary

While low-cost carriers have first exploited the benefits coming from ancillary revenues, traditional ones will follow. This transition has, in fact, already started to happen, as traditional airlines begin to sell “bare-seats,” that is, tickets without cabin luggage. This new, industry-wide strategy bets on attracting passengers with low fares and profit on ancillary sales.