How did airlines make money before the ancillary revenue boom?

[Jack1985]

Hi everyone, pre 2005 I had very little knowledge of the airline industry and only since I got my job in 2005 as a ground handler I began to take a serious interest in the sector. But I'm wondering if someone could explain to me how airlines made money pre baggage charges, check-in charges, boarding charges etc..

I remember buying a Ryanair flight for €9 in 2003 from Cork to London Stansted included was a 20kg bag and there was no other hidden charges at that time. Surely that was unprofitable? The flight was full however. The same with easyJet they had no baggage charges until August 2007 if I remember, I'm just thinking pre 2007 fares must have been very low yield. Is there something I'm missing? because now its the norm to pay nearly double the cost of the flight when you include credit card fee's, baggage charges etc. I suppose pre-recession had a lot to do with it?

[JobsaGoodun]

Jack - Oil being at $10 per barrel instead of $110 per barrel made a huge difference.

[Just a spotter]

That, and pre-openskies bi-lateral agreements between governments on who could fly between cities allowing their State owned airlines to operate duopolies on routes and not enter into any real price competition.

[Buster the Bear]

Fuel was not $1200 a tonne! Much easier to make money 5 years ago

[Armchairflyer]

If you are interested in the business aspect of airline business history, "Hard Landing" by Thomas Petzinger Jr. might be worth a read.

[Fairdealfrank]

How did airlines make money before the ancillary revenue boom?
Eye wateringly high fares!

If you go back far enough, IATA set the fares and an economy fare was half that of first class. Unbelievable in this day and age, but true. There were no business and premium economy cabins, and all ecomomy fares were fully flexible. Consequently only the rich, senior company staff, and airline employees (and families) on staff travel could afford to fly.

Then came charter companies, not members of IATA, followed by more flexible economy fares such as ABC and APEX. The rest is history.

[racedo]

Don't forget about the required Saturday night stay as well.

[RVF750]

Even back then, a 4-5% margin was considered good on overall trading!

As Fuel was a major cost percentage even at $20-30 the traditional airlines started to lose money hand over fist.

Flybe were the first to introduce seperate baggage charges by the way- and now they're altered their product to include them and other bundled goodies and options. What goes around comes around, eh?

[racedo]

Also many National Airlines received substantial subsidies from Governments which kept them flying.

[Heathrow Harry]

Lots of things

Orinally Airlines controlled the whole food chain and it was a luxury operation

You bought a ticket from a travel agent and they dealt with the airline by post or phone- then automated systems such as SABRE came in which cost money and the airlines subcontracted out (for a fee) that part of the operation - the cake was gradually cut into smaller slices

back in the 50's & early 60's airlines had relatively few, cheap planes - to re-equip with jets and jumbos they went to the banks and thus were exposed to finance charges

in the 70's both fuel prices and exchange rates went wild and became very volatile

Competition authorities cracked down on revenue pooling and then protected routes

Airlines like SIA ditched IATA rules and became highly competitive, res-etting the market expectations of what you could get for a $

Too many airline execs were "visionaries" and not hard headed businessmen

Pension & employment deals signed when times were good had no re-set and thus burdened legacy airlines with a painful cost structure when prices fell

South West launched the modern LCA and passengers started to actively look for the cheapest flight

the Internet allows anyone anywhere to do this - there is no captive market

the ancillary services used to be FREE - its a last gasp solution TBH

[jabird]

I remember buying a Ryanair flight for €9 in 2003 from Cork to London Stansted included was a 20kg bag

Remember, the whole model is based on profiting from people who book late and pay through the nose, not people who book early and pay €9. I paid €12 for a TRS-BHX sector booked c. 2 weeks ago, to be flown in 10 days. So I tell my friends how wonderful Ryanair are. They say "but don't they charge for this and this and treat their customers like................ Oh - only €12? w-w-w-.r-y- ............."

One thing you will hear all the time on this forum is that you can never tell how much the airline is making from the flight, unless you go round and ask everyone.

So it is all about yield, not just bums on seats. As for the bags - well if I'm going to pay for the honour, I'll just stuff my "day" bag full instead. When I bought the bag in '04, intention was to use it for laptop, SLR camera etc, put heavier stuff in the hold. Now you can just use one mobile device that does all that, although I have recently started travelling with SLR again (one lens only, no tripod) as you get better images.

[Doors to Automatic]

Profitability is almost exclusively driven by yield. Low Cost Carriers will always try and fill their aircraft to 85-90% full. If they are flying at this level then in some cases they will make a profit but it is not a foregone conclusion. If they are flying at 70% full then they will almost certainly be making a robust loss.

Competition and downward pressure on fares has had the inevitable consequence of forcing airlines to plug the gap elsewhere. The two main areas have been ancillary revenues, charging for absolutely everything extra possible, and beating up airports to reduce landing fees to negligible amounts, or in the case of some desperate airports on the network of a certain well known LCC, nothing!

[jabird]

beating up airports to reduce landing fees to negligible amounts, or in the case of some desperate airports on the network of a certain well known LCC, nothing!

Yes, that is VERY important.

Old state airline - "This is where you go, take it or leave it"

Traditional holiday airline - "which cities do our passengers want us to fly them to"

Loco "how can we juggle our operations around to extract the maximum profit out of each aircraft on any given day"

In the case of the flying harps, this might mean putting on short runs to Ireland, Belgium or northern France which might not look profitable, but which squeeze in an extra rotation between more profitable circuits.

[racedo]

Competition and downward pressure on fares has had the inevitable consequence of forcing airlines to plug the gap elsewhere. The two main areas have been ancillary revenues, charging for absolutely everything extra possible, and beating up airports to reduce landing fees to negligible amounts, or in the case of some desperate airports on the network of a certain well known LCC, nothing!

This is pretty much the same in every industry, price increases to compensate for commodity prices increases haven't happened or take a long time to happen that the industry is forced to take out lots of cost from behind the scene.

One only has to look at the food industry where different portion sizes or menu changes have happened as otherwise price increases the customer doesn't want will have happened.

[PAXboy]

I used to buy Alpen cereal bars in boxes of 6. Last year, they redesigned the box and made a fanfare of 'newer' 'better' and the usual. Except that there were only 5 bars in the box. It worked out at something like a 12% increase for them.

Whils on the supermarket theme, some suppliers pay some supermarkets to stock their goods, by lowering the price. Sometimes the price is altered depending on which shelf (close to the check out?) and at what height the shelf is.

But the airlines and the airports come in for more stick when they do it. Such is consumer affairs.

[jabird]

Whils on the supermarket theme, some suppliers pay some supermarkets to stock their goods, by lowering the price.

So they aren't making a covert payment, merely decreasing base price to increase volume, then once the promotion is over, increasing price to gain higher yields of a slightly smaller customer base. Sound familiar?

Sometimes the price is altered depending on which shelf (close to the check out?) and at what height the shelf is.

This is the supermarket's take on the route map! Instead of X and Y co-ords where the yield usually rises as you go lower and sunnier, each shelf is optimised - as you say by height, and also be proximity to the end, where eyeballs do the most scanning. The premium position is the last minute reach and grab section by the tills - the equivalent of the airline filling those last few seats on an August Malaga rotation for £200+

No loss leaders by the tills - just pure profit at good margins.


But the airlines and the airports come in for more stick when they do it. Such is consumer affairs.

Not sure that is so. have been several investigations into supermarkets and monopolies, none conclusive - yet the loco industry is really down to just two key players now for pan-European routes ex London.

Also, look at the way you have to take out a pre-paid card just to avoid Ryanair's fees. Can you imagine every supermarket charging even a £1 card fee for anything other than their own pre-paid cards? At least theirs would come with loyalty points!

Then again, you can at least pay cash at supermarkets :D

[racedo]

Then again, you can at least pay cash at supermarkets

Which costs an absolute fortune to process because it got to be collected, processed, secured and transported.

Shared a house once with a guy who worked as an Accountant for BT Payphones in 1980's and he said for every £1 in coins they collected from onstreet payphones BT got 82p because banks charged them for processing it.

Tesco wants to give you cashback because means they don't have to pay to have it collected.

Loyalty cards have their curses because you just give them all your personal detail and what you spend your money on so they can then charge the manufacturer in targeting promotions and vouchers to you.