Elias and Sean grew up together overseas before studying engineering in Germany and the US respectively. Breadcrumbs is their weekly chat about things past, present, and future.

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197: The Calculus of Detergent Choices

02-03-2021

Taking a page from a different genre of podcast to try something new, Elias and Sean look at the economics of budget airlines.

Transcript

Elias: So in my time traveling around Europe and all, I’ve actually flown Ryanair quite a lot. The detergent they use on the airplanes between flights is just nasty stuff. So I ended up getting into the habit of putting something into my bag, like a deodorant stick or toothpaste or something that would smell strong and I could rub below my nose so I wouldn’t be so overwhelmed by whatever this detergent smell is. I can’t even quite describe it.

Sean: So why use a, uh, detergent that you have to overpower with a stick of deodorant?

Elias: Yeah. I mean, I think—okay. Ryanair is a budget airline and maybe they’re just saying, okay, well, everyone’s paying less so they can buy their own deodorant sticks and survive the plane. I don’t know for sure. We did actually get a brief intro and business model of budget airlines in a design class, but that didn’t cover the calculus of detergent choices. So my guess is because it’s cheap and it has a quick drying time. This is kind of just me trying to put myself into some person’s shoes, making this decision. Maybe there’s even something with the application—like they have some machine or something that makes it time-saving and it only works with this detergent. I mean, Ryanair definitely has less layover time. So, you know, every minute counts and there’s probably something. It’s probably more the time savings actually than the cost savings, but of course, time savings are cost savings.

Sean: Well, I don’t know. I guess as long as everyone just brings their deodorant along, hopefully that’s worth it.

Elias: Yeah. I mean, perhaps everyone else is olfactorily wired differently than me, and this detergent is a sweet-smelling perfume to them, but I think it’s more probable that people fly just because it’s cheap. Ryanair’s a budget around after all, so they can kind of get away with that. But I mean, budget is in the name and it’s true. The cheapest flight I ever booked was from Basel to London for 12 euros.

This is Breadcrumbs. I’m Elias.

Sean: And I’m Sean. Elias and I have been podcasting together for more than four years now. We’re trying a new format here.

Elias: Today, we’re talking about budget airlines and sharing some of our travel stories along the way.

Sean: See, I haven’t been on these as much as it sounds like you have—budget airlines, that is. My impression is they are more of a European thing, though I have flown something like a budget airline in the States. So they’re maybe starting to catch on a bit there. When I think of flying budget airlines, most of that has been between Europe and Turkey: a couple of times visiting you and on the way to visit my parents here before moving.

Besides even less leg room, I remember having to pay for each piece of luggage, snack, sandwich, drink, all that, but then the base ticket was pretty cheap, so I guess, again, it was worth it. Of course, that said, most of my flights since then have been Turkish Airlines, transatlantic, and it’s a very different experience: nice service and good meals and in-flight entertainment and everything. You get what you pay for, I guess. But you mentioned that you did hear somebody explain kind of the business model of budget airlines and how they turn a profit for so cheap.

Elias: Yeah, we had a bit of a class where it was one of the examples that the guy gave, just to help us to think differently about how to approach a business model, how to think about customers and the offering that you have. And it was very good in a design kind of way to take a bit of a different perspective on things.

Of course, you know me, I always like to take a bit of a step back when I explain things. So you need to start by asking just what a flight is.

Sean: Like a plane with a bunch of people on it?

Elias: Yes. Yes. Of what service is the flight to each person?

Sean: I guess they have somewhere they want to go and the plane is how they get there.

Elias: Yeah. Yes. I mean, all of these, all of these things are true. The flight is a way to get from A to B. It’s not the only way to get from A to B. Before Ryanair and EasyJet and all those came along flying was different. And when it started, it was more of a luxury. It meant there was no economy class and flight was an experience, and it was marketed as such. And of course not to say people didn’t get from A to B, but it was kind of like a package deal, and part of that was the pleasantries and that’s what flying meant.

So, thinking of past flights, can you recreate that moment of decision? What led you to purchase the flight and how did you go about that?

Sean: I mean, the last flights I booked were going back to the States after I’d been here a year. So I’d kind of already planned on making that trip even before leaving. I kinda just figured after I’d been here, I’d want to go back and see some people again. So I do remember it was kind of this whole big thing because I had the flights to and from the States and then a couple of domestic flights in there. And then I was also planning on renting some cars to get between some other destinations. Cause I was kind of all over the country, or at least the Eastern half of it, in about five weeks.

So yeah, there was this whole puzzle going on of looking at when the different flights could go and what they would cost and where do I need to be to get from A to B to C to D in the time I have and all of that. So it was quite an operation.

Elias: Yeah. So you pointed out there quite nicely how especially longer trips can get quite complicated and it’s really about getting from A to B in the most efficient, appropriate way possible. And you know, sometimes you take a rental car but for a lot of times, the trip that’s most appropriate or the thing that you need is a flight, and then it’s a question of what flight and what kind of flight. And sometimes you just need to go somewhere and sometimes you want to go somewhere.

So things people need, they’re willing to spend more on. The demand is not price sensitive. If like, if you have to go somewhere, well, you know, you’re going to take the price. You might take the cheapest price available, but you’re definitely going to go there. If you want to go there, well, you’ll just have to look at what the price is and then see if it’s worth it because it’s not set.

Sean: Yeah. I mean, for me, in a sense, that trip was not quite a need need, but again, it was kind of a something that I planned on doing and committed to doing and so it was going to happen. And honestly, you know, when I was crossing the ocean, like sure, I was looking for the good price as far as timing, but was happy to pay for the experience of a nicer airline, but I can certainly see where—when offered a really good deal, you might take a flight where you wouldn’t have to begin with.

Elias: Yeah. I mean, that’s exactly the value proposition there and what we’re getting at now is the interior of the plane is a lot less on your mind when you’re making that decision. And so you can, you know, you can place a Lufthansa plane next to a Ryanair plane and play spot the difference, but you’re playing the wrong game and, you know, you can see their cramped seats and the advertisements on the Ryanair plane, and of course, less space for cabin luggage and all that stuff. And then you can ask yourself, well, why would anyone fly with a budget airline? But no one makes the decision while standing on the plane. And far more importantly, it’s not the thing that you think about. You don’t conjure up images and dream of sitting in a plane. I mean, you get a bit of it now with the pandemic thing and people just, you know, being nostalgic for airplane food, but like, it’s not really what the airline’s selling. They’re selling the opportunity and holidays and dreams and all those things at a low budget. And making the getting there as cheap as, like, a train ticket to the next city or as a good meal out—I could go for a good meal out or I could fly to London, you know, then you really start to think about it: “I could go to London.”

So who are a budget airline’s customers primarily? Picture a pie chart. It’s completely filled in, and that represents basically all the people in the world, or let’s say all the people that reasonably could board a plane. You know how we think about stuff, like just, plant a flag at one extreme. So if we’re looking at this pie chart and now picture on that slice that represents the percentage of people who fly once a year, how big is that slice?

Sean: Hm. I mean, at first I feel like it’s gotta be a lot, but I don’t know. Maybe there’s some like, not quite confirmation bias there, but you know, we think more about people that do travel than all the many, many, many people who don’t, I guess. Yeah.

Elias: And also we belong to people who have traveled a lot.

So it’s not a lot. Of course, how do you know this or say this? The couple very back of the envelope things I saw was like 10%, maybe 5%, somewhere around there, which I think is already quite a lot. So the question then is: if that’s what it is now, what was it like 10, 20, 30 years ago before budget airlines took off,

Sean: Hm. I mean, definitely smaller.

Elias: Yeah. Yeah. So it’s definitely smaller. Of course, even without budget airlines, you would assume that over time more and more people would fly because airlines do take off more, but it is noticeable that budget airlines were a big part in that. And that gets at the crux of their business model.

So—I mean, I don’t think budget airline people walked into an elevator pitch with a flip chart and a pie chart on it—I love that image—but that’s the easiest way I think to think of this, you know, like: “Here we have, you know, so, and so many people who could potentially fly once a year, but only 1% of them do. And there’s all of these airlines battling for that 1%. We’re going to go after the 99 and just carve out a bigger piece of the market.” And how do you do that? By ridiculously cheap prices. That’s always how you win market share of people who just haven’t adopted something yet. You give a good value proposition.

Sean: Right. And then, once you have these airlines coming in, undercutting the big ones by price, that could start to even win over that little initial slice of the pie, right?

Elias: Exactly, yeah. I mean, it’s fun talking about these things as slices of pies. That’s exactly the effect of a new business model. You know, it changes the market as you business models do. And so you could say budget airlines are an acquired taste, and a lot of people would say, “No, I like my little slice and I want my old stuff and my make it an experience and pleasantries and comfort and stuff.”

But a lot of people once you’ve tried it, you know the flight might not be the five course meal that you look forward to, but it feeds you all right. And so even people who’ve had better, after adjusting expectations, happily—more or less—fly budget airlines. It does get them from A to B after all.

Sean: Yeah. I mean, certainly I can see where, yeah, that gets a lot more people in the door being able to pay bargain basement prices, but there are certainly a lot of people who maybe appreciate more the experience of flying or at least want to pay a bit more to enjoy that flight itself a little bit more.

Elias: Yeah, so of course a much better experience can be had elsewhere, but it’s also where budget airlines have now learned to upsell you. Once they’ve got you hooked on flying, it’s basically the equivalent of a free trial of living a traveling life, then they start to offer you these things and like, “Oh yeah, now that I’ve flown to a couple of cities in Europe, I can’t not go to these other places, but being able to choose my seat and have a more comfortable spot or maybe a bit more leg room, or actually be able to take my hand luggage on and all these things, I wouldn’t mind that.” Or all the other stuff that they come up with: fast tracking and all those things. Yeah. So then they make money off of that. And that’s actually, back to the business model thing, where they make the most money: upselling, because those are the people who are willing to pay for more, and that’s where you then get the best margins.

Sean: Right. Yeah. I mean, I guess eventually you’ve up-sold yourself to maybe paying what you would have paid for a normal airline.

Elias: Yes. And this is the beauty of disruption: when a newcomer to a market with a different business model, disrupts it in such a way that all the incumbents have to adapt to the new rules of the game and the expectations of what a flight is and all those things. And there’s just a new equilibrium that forms.

And so you have budget airlines that are now upselling, after having entered the market, with cheap prices and you have the regular airlines unbundling their offering, and you have a new form of air travel. And fundamentally, now we think of air travel differently than we did before in the same way that we think of air travel very, very differently than it first started.

Sean: Yeah. And you know, the bottom line being that far more people have access to air travel and, you know, opportunities it provides than they did in the old world.

Elias: When I was flying to New Zealand, this is 2014. So I was there for three weeks and yeah, this is my equivalent of your trip you were mentioning earlier. Planned it all out. I don’t think I’d spent as much time planning a trip as that, because I was trying to do New Zealand in three weeks. It wasn’t even three weeks. I was like 18 days in the country. So the question was how I was gonna do it, but the first thing I was needing to do was book the flight and I had these two options and one was, I think, 750 euros. And one was like 1,200 and something euros. What’s the difference there? Something around 500 euros.

And one was China airlines, I think, was the cheaper one. And then Emirates was the more expensive one and we’d flown Emirates a lot from Germany to Pakistan and I knew they were great. I mean, they’re one of the best rated airlines. It would have been a dream and—I’ve already given away what I’ve chosen. And also like, ah, it’s a 12 hour time difference. It’s a really long flight. It also did have the better time—like layovers. So the China airlines flight had like a 17 hour layover in Taipei, which makes it like a, I don’t know, 30 hour travel time or longer. 30, 35 hours was the travel time. So I was like, “Oh, I’ve never traveled that long. Do I really want to do this? I’ve only got that long in the country and all that.” So all of these things were factoring into it until I realized one thing.

The thing that actually decided it for me was realizing, wait a second, where is that better spent, on the flight or in New Zealand? And that made the decision for me. And so the prospect of just having at least a better sense of mind about spending stuff in New Zealand. I didn’t actually end up budgeting, “Oh, I have 400 more euros to spend or whatever in New Zealand now.” That’s not how that works. I mean, that’s also not how saving money works. When you just think of, “I’m going to go to buy the most expensive thing. I’m not going to buy that expensive thing. So now I can spend all the money I didn’t spend on the most expensive thing on something else.” Yeah. Financing 101 with Sean and Elias.

It’s about the experience there, but also justifying your expenses and what you’re doing. And that was definitely the right choice and China airlines was fine.

And it, it showed me also when I was thinking about making the purchasing decision, very consciously kind of working through this—very conscious buyer—in the end, it wasn’t actually about the flight, even though I was trying to think about the flight and purchasing the flight. But the moment I didn’t anymore and thought about the destination, it was a no-brainer to go with China airlines.

@breadcrumbsfm | @splunsford | @muffinworks

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