Don't Blame Budget Airlines for the AirAsia Crash: They Are Cheap Because of How They Operate, Not Because They Cut Corners on Safety

The AirAsia crash is a good moment for a primer: "budget" describes how an airline runs its business, and it has nothing to do with safety.

Just as the disappearance of the Malaysia Airlines flight early this year was starting to fade from memory, another plane has gone down, this time an AirAsia jet.

On the morning of December 28, AirAsia flight QZ8501, flying from Surabaya, Indonesia, to Singapore, lost contact with air traffic control. All 162 passengers and crew on board were missing. At 6 p.m. local time on the 30th, AirAsia said in its latest statement that Indonesia's national search and rescue agency had confirmed that wreckage found that afternoon came from QZ8501.

AirAsia has been named the world's best low-cost airline six years running, so it is tempting to ask whether "cheapness" caused the crash. In fact, a budget airline, also called a low-cost carrier, is simply a way of running an airline. It has nothing to do with safety, and sometimes it is even safer.

To keep operating costs down, budget carriers tend to fly relatively new aircraft. New planes cost more up front but much less to run than old ones: maintenance costs generally climb sharply once an aircraft is more than 10 years old, and newer aircraft break down less often. QDaily has reported before that airline safety records actually follow no real logic.

Why are budget airlines cheap?

1. Lower operating costs

• Higher utilization: a budget carrier typically flies each aircraft 12 hours a day, against 10 hours at a full-service airline.
• Most routes are short- to medium-haul hops between neighboring regions. Planes spend less time on the ground and make more takeoffs and landings, so more flights carry more passengers, and the airline saves on airport parking fees.
• A single-type fleet: buying one aircraft model in bulk lowers the purchase price and keeps later maintenance and repair simple, which cuts costs. One aircraft type also means less crew training time, lower training costs and easier scheduling.
• Some airlines fly used or leased aircraft.
• They avoid large airports and use smaller ones on the edge of cities to save on airport fees.
• They rent fewer of an airport's more expensive facilities, such as boarding bridges, and use shuttle buses and small boarding stairs instead.
• They hire retired staff to avoid training costs, cancel discounted or free tickets for employees, and keep insurance premiums low.

2. Stripped-down in-flight service

• No first class; the whole cabin is economy.
• Seats are packed tighter, and shared space on board is cut to fit more seats.
• In-flight meals are simplified or sold only to order, and some airlines ban outside food.
• Services that traditional carriers include as standard, such as "priority seat selection," "extra-legroom seats," "checked baggage" and "blanket rental," become paid extras.
• They push partner products and meals on their websites and on board, and often schedule departures around mealtimes to earn money beyond the fare.
• In-flight entertainment, magazines and newspapers are limited and cost extra.
• To save weight, they cut the free checked baggage allowance or offer no checked baggage at all.

3. Lower ticketing costs

• One cabin class and one fare type, so the plane carries more passengers.
• Fares vary by time of day, with cheaper tickets at off-peak times to fill empty seats.
• The earlier you book, the lower the fare, which draws passengers and helps the airline plan its schedule.
• Fewer connecting services, which limits knock-on delays such as waiting for connecting passengers.
• Instead of traditional card boarding passes with a magnetic strip, they use ordinary paper passes with a barcode, or even make passengers print their own, cutting costs further.
• Some low-cost airlines give no refunds. If you miss the flight or cannot travel for any reason, the ticket is waste paper. Change the time or destination at short notice and the airline charges a fee that is sometimes more than the original ticket.

In 2013, there were more than 170 budget airlines worldwide, carrying 26% of global air traffic. Their share is high in mature markets: budget carriers hold as much as 38% of the European aviation market and about 30% of North America's. In Asia-Pacific the figure is roughly 19%. In China, it is still only 5%.

Budget airlines began with Southwest

The "budget airline" was born in the United States in the 1960s. Southwest Airlines, America's first budget carrier, was founded in 1968. At first it concentrated on short flights within Texas. Fares were low and departures frequent, almost every hour, and Southwest soon dominated the Texas market. By the 1980s it was growing fast, with passenger numbers rising 300% a year, while its operating cost per mile stayed under 10 cents, nearly 5 cents below the US airline industry average.

The budget airline is, in a sense, what happens when an air travel market matures and passenger demand diversifies. For passengers, the practical differences from a traditional airline are these: no free meals, a free baggage allowance cut to 15 kg or less, no compensation for delays, and worse on-time performance.

Asia-Pacific is where budget airlines are growing fastest

In Europe, the United States and Southeast Asia, budget airlines are fairly mature and hold a steady share of total traffic. According to Flightglobal, most budget carriers kept growing traffic and profits quickly in 2013. The world's top 75 budget carriers flew more than 800 million passengers that year, up 9.9%, and their profits rose by more than 50%.

The older players, Southwest Airlines, Ryanair and easyJet, carried a combined 275 million passengers in 2013. Their traffic grew slowly, and Southwest's actually fell. Budget carriers in Asia-Pacific, by contrast, grew fast: Malaysia's AirAsia, Indonesia's Lion Air, India's IndiGo and China's Spring Airlines all posted double-digit traffic growth.

But competition is getting fiercer

Under intense competition, some Southeast Asian budget carriers saw profits slump in 2013. AirAsia, for example, carried 11% more passengers in 2013, yet its profit fell 53.9%. AirAsia blamed "irrational" fare-cutting by rivals. Singapore's Tigerair lost money for the second year running.

This suggests that capacity in Southeast Asia's budget market may have outgrown demand. Data from the Centre for Aviation (CAPA) show that the region's low-cost fleets grew from 408 aircraft at the start of 2013 to 485 by year-end, an increase of 19%. In 2014 they are expected to add another 88 aircraft, reaching 573, up 18%. Analysts say that with economic growth in Southeast Asia slowing, politics unstable in some countries and fleets already much larger after 2013, the risk of falling profits at the region's budget airlines is rising.

AirAsia has not served its customers well this year either. According to the Consumer Affairs Center of the Civil Aviation Administration of China (CAAC), from January to June 2014 the CAAC received 66 consumer complaints about foreign airlines and airlines from Hong Kong, Macao and Taiwan. AirAsia drew the most: 26 complaints, or 39% of the total against foreign carriers.

China will be the next battleground for budget airlines

Compared with the budget markets of Europe, the US and Southeast Asia, China's is still emerging. Even Spring Airlines, which has the largest market share and is reported to be preparing an IPO, is small next to the world's leading budget carriers.

Spring Airlines, China's first budget carrier, made its maiden flight in 2005. When it first offered special fares of 99 yuan and 199 yuan, consumers saw it as a novelty, and some joked about whether flying budget meant bringing your own stool. By the end of December 2014, Spring Airlines had 46 Airbus A320s, and it expects its fleet to reach 100 by 2018. It has also won approval for a listing that will make it the first private Chinese airline to go public.

Past experience shows that in an economic crisis or an industry downturn, budget airlines often do surprisingly well, so much so that the industry has a saying: "An economic crisis is a business opportunity for budget airlines." In 2009, for example, when the financial crisis dragged airlines down, global air passenger numbers fell 3.5%, yet the well-known budget carrier Jetstar expanded its capacity by 14%. The same pattern has played out in China's aviation industry over the past year or two.

For the past two years, profits at China's traditional airlines have been falling. The CAAC estimates that the industry as a whole made a total profit of 27.3 billion yuan in 2013, down 2.29 billion yuan, or 7.7%, from 29.59 billion yuan in 2012. In the first half of 2014, net profits at the major domestic airlines fell sharply year on year: Air China's by 57.64%, China Eastern's by 98.17% and Hainan Airlines' by 25.12%, while China Southern's plunged 437.09% to a loss of 1.018 billion yuan.

Spring Airlines, meanwhile, kept growing. Its financial statements show net profit of 483 million yuan in 2011, 625 million yuan in 2012 and 732 million yuan in 2013. In the first half of 2014, it earned 270 million yuan.

One reason is the stage China's civil aviation industry has reached. Li Xiaojin, director of the Air Transport Economics Research Institute at the Civil Aviation University of China, has said that the industry's overall growth has slowed markedly compared with ten years ago. Most of today's passengers are not very sensitive to fares, but their numbers will grow little from here; most future growth must come from more price-sensitive travelers. Those are exactly the passengers budget airlines attract.

The other reason is Spring Airlines' strict cost control. The key to running a low-cost airline is "carry more, fly faster," in other words "thin margins, high volume." In practice that means raising daily aircraft utilization, cutting stopovers as far as possible, flying short- and medium-haul trunk routes nonstop, adding more frequent flights and shortening turnaround times, so that each plane flies more than 10 hours a day. In the first half of 2014, Spring Airlines' average load factor was 92.75% and its daily aircraft utilization 11.37 hours, both well above the industry average. Its main operating costs were 20% below the industry average, its administrative expenses 47% below, its financial costs 67% below and its selling expenses 78% below.

On December 2, 9 Air, 69% owned by Juneyao Airlines, made its maiden flight. The airline, which calls itself "the first low-cost carrier in central and southern China," was founded by several shareholders including Juneyao Airlines, Elion Resources Group and Macrolink Holding, and is based at Guangzhou Baiyun Airport. 9 Air ordered 50 Boeing aircraft in one go, an aggressive bid to overtake Spring Airlines' 39.

Juneyao Airlines was often mentioned in the same breath as Spring because it is privately owned, is also based in Shanghai and was also seeking a stock listing, even though it was not itself a budget carrier. By taking control of 9 Air, Juneyao has only now truly entered the budget market.

Earlier this year, China Eastern Airlines also announced plans to turn its subsidiary China United Airlines into a low-cost carrier. Add West Air, the Hainan Airlines Group unit that switched to a low-cost model in May 2013, and this emerging market is drawing more new players.

One obstacle for budget airlines in China is that fixed costs such as fuel, aircraft acquisition and airport charges make up most of an airline's costs, and in China these are largely controlled by state-owned monopolies.

A civil aviation professional who posts as "Ma Po Chang'an" argued on Zhihu that in China's current market, takeoff and landing slots at many airports, including those in Beijing, Shanghai and Guangzhou, are nearly full and cannot meet budget carriers' needs. China also has no budget-airline terminals, so departure handling is hard to make cheaper. Spring handles its own departure services, but it still uses the same terminals as everyone else. Pilots, maintenance engineers and cabin crew are all in short supply, pilots most of all, and their numbers cannot keep pace with the rapid growth of budget carriers. As for buying aircraft, budget carriers need scale and bulk purchases to cut costs. Yet because of government trade controls, airlines do not fully decide which aircraft they bring in.

In February 2014, the CAAC issued its "Guiding Opinions on Promoting the Development of Low-Cost Aviation," which, if carried out, would give budget airlines some policy support. How much of the market they can win from the state-owned giants remains to be seen.