Why are low-cost airlines more profitable?
One aspect few people know about Ryanair is that it doesn’t make its profits by being a transportation company; rather, it thrives as a traffic acquisition business.
Ryanair is one of the world’s most profitable airlines, yet with an average ticket price around €50, it’s clear they don’t rely on ticket sales alone for revenue. Nor does it depend solely on additional options like extra baggage, in-flight meals, or other upsell options to turn a profit. Most airlines use optional services to cover the operational costs of flights, but this doesn’t typically yield substantial profit margins.
Venture Insider is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.
Subscribed
To understand Ryanair’s success, consider that in the first half of 2022, the company posted earnings of €1.4 billion—a stark contrast to a more traditional airline like Air France, which posted around €460 million in profit during its best six-month period in 2022.
So, where does this extra margin come from? Unlike traditional airlines, which can rely on first-class seats for higher profit, Ryanair lacks a first-class cabin on most routes. Instead, it uses a much more strategic approach.
One of the most crucial metrics for any company is Customer Acquisition Cost (CAC)—in other words, how much it costs to acquire a customer. This metric is essential for calculating the profitability of marketing campaigns, which can be challenging to predict due to variables like campaign quality and creativity. To maximize acquisition returns, businesses often buy traffic, for example, via Google Ads, where costs are tied to clicks, leads, or other performance measures.
Ryanair operates similarly, but on a much larger scale: regional governments and local authorities effectively pay Ryanair in the form of subsidies to attract flights to their cities, increasing their visibility and tourism. With over 150 million passengers annually, Ryanair’s core value lies in its ability to sell traffic—bringing tourists to a destination—rather than merely transporting passengers.
When Ryanair begins operations in a city, tourism and economic activity in that area typically increase. This model has led to Ryanair receiving between €800 million to over €1 billion in annual subsidies, further cementing its position as a profitable traffic-driving entity rather than a conventional airline.
The takeaway here is to look first at the business model when assessing a company’s viability. Entering a highly competitive market requires either disruptive technology—like a more efficient aircraft that cuts costs by 10x—or a business model aligned with current trends. Over the past two decades, consumer travel habits have evolved significantly, likely influenced by the accessibility of online booking platforms and the broader trend toward more frequent travel.
Aviation Sector Analysis: Opportunities and Risks for Investors
When considering investments in the aviation sector, there are several key players to analyze, spanning both established airline giants and promising new entrants. Let’s start with an overview of the stock performance of traditional airline companies and aircraft manufacturers, followed by insights into some of the most innovative private startups in the aviation space.
Airline and Aircraft Manufacturer Stocks
The global airline industry has experienced significant volatility in recent years, driven by the pandemic, fluctuating fuel prices, and shifting travel patterns. However, companies like Ryanair (RYAAY), Delta Airlines (DAL), and Southwest Airlines (LUV) have shown resilience. Ryanair, in particular, has captured investors' attention due to its unique cost structure, high load factors, and subsidy-driven model, as discussed earlier. This, combined with their incredibly efficient operations, has resulted in stock performance that outpaces many traditional carriers.
The major airline manufacturers—Boeing (BA) and Airbus (AIR.PA)—also present compelling opportunities. Airbus has been capturing a growing share of the commercial aircraft market, driven by its success in delivering more fuel-efficient narrow-body aircraft like the A320neo. Boeing, meanwhile, is still recovering from the impact of the 737 MAX grounding and supply chain challenges, but long-term demand for widebody aircraft keeps it in the spotlight for investors looking at aerospace fundamentals. As countries continue to increase their defense budgets, Boeing's diversification into military contracts also adds stability.
One notable insight for investors is the trend toward sustainability in aviation. Many airlines are focused on reducing emissions, and both Airbus and Boeing are investing heavily in research and development of next-generation aircraft to meet future emissions standards. Airbus's partnership with several startups to develop hydrogen-powered aircraft could also become a long-term catalyst if they manage to bring this technology to market at scale.
Promising Startups in Aviation
The aviation sector isn’t just about big names like Ryanair or Airbus; numerous startups are innovating in ways that could transform the industry. Here are some promising private companies making waves:
Joby Aviation: Joby is working on electric Vertical Takeoff and Landing (eVTOL) aircraft and has raised over $800 million from notable investors, including Toyota and Intel Capital. The company’s focus on air mobility for urban areas could represent a breakthrough in addressing traffic congestion and shortening travel times within cities. Their prototypes are undergoing extensive testing, and the prospect of commercial launches by 2025 makes them a standout in the advanced air mobility (AAM) sector.
Boom Supersonic: Boom is attempting to revive supersonic travel with its Overture aircraft, designed to operate at speeds faster than the Concorde while maintaining fuel efficiency. Boom has successfully raised over $300 million, with partnerships lined up with United Airlines and Rolls-Royce for engines. If Boom’s technology is successfully commercialized, it could significantly reduce long-haul travel times, making it a potential game-changer in premium air travel.
Lilium: Another eVTOL contender, Lilium, focuses on jet-powered air taxis with a range exceeding that of most competitors. Lilium has raised over $500 million and has secured a SPAC merger, highlighting investor confidence in the future of on-demand aerial transport. The ability to offer inter-city flights in a sustainable manner could provide an alternative to short regional flights.
Wisk Aero: A joint venture between Boeing and Kitty Hawk, Wisk Aero focuses on autonomous eVTOL solutions. With a commitment to developing self-flying electric aircraft, Wisk is targeting a slice of the future urban mobility market, betting on an autonomous-first approach to simplify pilot training and reduce operational costs. Their partnership with Boeing ensures deep pockets for R&D, and they have already completed over 1,500 successful test flights.
These startups are collectively reshaping what the future of aviation might look like—one that’s more sustainable, efficient, and potentially accessible for both short-haul urban trips and longer regional journeys. For investors, getting exposure to the electric and sustainable aviation market could be an interesting way to hedge against the cyclical nature of traditional airlines.
Investor Insights
Investing in the aviation sector requires understanding both the cyclical nature of airlines and the longer-term transformative trends that are reshaping air travel. Traditional airline stocks may present value opportunities, particularly during periods of recovery in global travel demand, but they are also heavily exposed to external risks, such as fluctuating oil prices or regulatory changes. Diversification into aircraft manufacturers like Airbus and Boeing can add stability, given their exposure to both commercial and military contracts.
Meanwhile, the rise of electric aircraft, sustainable aviation fuels (SAF), and innovations in air mobility create opportunities for investors who are looking to invest in the future of aviation. Startups like Joby, Boom, and Lilium are still in high-risk stages, but the potential for significant returns makes them worth watching, especially as they move closer to commercialization.
In short, the aviation sector offers a mix of stable growth with established players and high potential with innovative startups. Investors should consider balancing between the two to capture the resilience of traditional models alongside the exponential potential of future aviation technologies.