Ever since Wilbur and Orville’s first flight …

The airlines industry — in aggregate — hasn’t made money.

Think about that for a second.

There have been some brief periods of prosperity, but longer stretches of losses … some  pretty deep.

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Makes sense when you think about the number of airlines that that have consolidated, gone through bankruptcy or fallen off the radar screen (think, Pan Am, Eastern, TWA)

The irony is that we feel gouged by airlines … especially when they start charging us for bags and peanuts.

Side note: “ancillary revenue” supplements the flight by another $18 per person on a 100-passenger flight.

That includes fees for checked baggage, seat assignments, ticket penalties and revenue from cargo.

According to the Bureau of Labor Statistics, baggage fees for the U.S. airline industry last year totaled a hefty $3.4 billion, or roughly $5 for every passenger boarded.

Cancellation and change fees totaled $2.4 billion, or more than $3 for every passenger.

Source: WSJ

What’s the problem?

First, there are pricing pressures.

In the past 15 years, fares haven’t come close to matching inflation.

In other words, “real” prices in the industry have stayed flat or declined.

image

That makes sense …

In the airlines, there’s a huge amount of capacity … something close to a commodity product … with high fixed costs and virtually no marginal costs.

Since one more  passenger.doesn’t cost you anything except, maybe a cup of coffee, there’s great  temptation to sell seats at rock bottom prices — just to fill them.

Further, there’s the Southwest factor.  Legacy airlines (think United or American) have big infrastructures, huge hub-and-spoke networks, old fuel – inefficient planes, and high cost, unionized employees.  Southwest’s cost-effective operations — point-to-point network, fuel-efficient 737s,  happy employees — changed the pricing game.

Then, think about fuel costs — generally high, and subject to wide, unpredictable swings.

According to the WSJ, “fuel now is by far the biggest cost for airlines. , the tickets and fees of 29% of passengers pay just for the fuel to make the trip.

Airline gas mileage has improved over the years, the result of filling more seats on each flight, replacing multiple trips on small planes with fewer trips on larger aircraft and replacing older planes with newer, more fuel-efficient jets.

In 2000, U.S. airlines burned 28.6 gallons of jet fuel per passenger. Last year, that improved to 22.5 gallons per passenger. “

Add on maintenance that keeps the planes safe and government fees and taxes (think TSA) and the bottom line is that there is very little wiggle room on the plane for profit.

Put it all together, and airlines — the well run ones — are only able to convert  less than 1% of revenues into profits.

Decoding a Flight
Source: WSJ

Probably not what Wilbur & Orville had in mind …

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2 Responses to “Ever since Wilbur and Orville’s first flight …”

  1. Peter Gasca Says:

    It’s actually unfortunate that flying has become such a an inconvenient and often unpleasant experience. I try not to complain, because let’s face it, we can hop in tin can and be anywhere in the world we desire, often for a very affordable price (think opportunity cost if you decide to hoof it to India). Flying has brought cultures together, improved the living conditions of millions, positively affected economies … and yet, we still complain about paying for bags and food. I understand, once you give something to the consumer (bags fly free, flight changes if you miss a flight), it is almost entirely impossible to take it back from them, but when you consider that you can still fly across the country for $500 … and now I see that they are making pennies in profits on this $500 … I’ll take my free pretzels, single serve water and grumpy flight attendants and count my blessings. Because it has to change, and when it does … then I’ll complain.

  2. Brad Steeples Says:

    Long time reader, first time commenter. Love your blog, always insightful.

    As an ex-airline finance manager, I’ll correct a couple of the things stated in this particular entry:
    * The chart indicates that airfares, in real terms, have actually declined, not stayed flat. Thus the push to make up the gap in “anciallary revenue”, which I prefer to call “nuisance fees”. My first rule of business is that when a business relies on nuisance fees simply to survive, it is in big trouble.
    * Southwest Airlines does not have non-Union employees. In fact, as a % of employees, they are the most heavily Unionized airline in the business. What was unique about Southwest was that in their culture, management actually respect the Unions and the Unions actually respect management. Southwest was the first airline to get Unions to go along with things like defined contribution retirement plans (i.e. 401k’s) instead of defined benefit pensions, and rich profit sharing and stock compensation plans based on the airline’s performance on a variety of metrics instead of guaranteed “step” pay increases simply for longevity.
    * Amazing how quickly times have changed with fuel prices as high as they are. When I was in the business, labor was easily our number one line of expense, fuel was a distant second. Now apparently fuel is number one. Which is another driver of airlines’ effort to motivate passengers to minimize heavy baggage.
    * The last time I flew (a couple months ago), I checked in at the kiosk and was simply amazed by the number of times I was asked if I wanted to spend more money. Nuisance fees (or “ancillary revenues”) are way, way out of hand in this business today.

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