Low-cost airlines: sitting comfortably?

US airline Southwest just loves to love its customers. It trades on the ticker symbol LUV; it offers free mid-air concerts; and now it promises a wider seat. This hug gets results with both passengers and shareholders. Southwest's profits have more than doubled in the past two years. And its shares have left behind those of downmarket rivals such as US-listed Spirit, outperforming them by 76 percentage points over the past three years.

So there are lessons here for other budget airlines, such as UK-listed easyJet and Ryanair. Both have been trying to become more attractive to customers. These days, low prices alone are not enough to put passengers on seats. Offering seat reservations has made the pair more appealing to corporate and family customers. Ryanair has found new passengers at primary airports it previously did not serve, such as Lisbon, while easyJet expanded at London's Gatwick by acquiring the 25 landing slots of its smaller UK rival Flybe two years ago.

Higher margins help them to keep that investment going. One measure of this is the margin of earnings before interest, tax, depreciation, amortisation and aircraft leasing against revenues. While German-listed Lufthansa's ebitda margins wallowed below 8 per cent last year, both Ryanair and easyJet doubled that. Lower staff costs (around 12 per cent of operating expenses) at the budget airlines are one of the reasons.

And they now have the added benefit of lower oil prices. As jet fuel prices have fallen, that gain for the lower-cost carriers has flowed towards making their customers happier, especially business flyers. For European flag carriers such as Lufthansa the drop in fuel costs simply keeps them out of loss. As fuel prices inevitably stabilise, the winners will be those which have spent to add clients.

The days when customers would put up with lousy service in exchange for lower prices have gone. Today's budget airline customer wants to feel the love.

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