How Airlines Spend Your Airfare

[cyrilroy21]

On an airplane carrying 100 passengers, how many customers does it take, on average, to cover the cost of the flight?

The Middle Seat asked US Airways and consulting firm Oliver Wyman to crunch airline expenses down to the percentages that an individual passenger pays, taking a hard look at costs of running an airline. US Airways created a hypothetical flight of 100 passengers. Each one paid the average $146 fare for a domestic flight ($292 round-trip), plus $18 each in fees and add-ons, based on a year's worth of data ending March 31. The bottom line: There is very little wiggle room on the plane for profit.

Somebody on every flight helps cover crash insurance and compensation paid for bumped passengers or lost luggage. The person beside you on your next trip may be partly paying to repair baggage carts or to buy and maintain passenger oxygen and defibrillators.

"It's like a wristwatch. You only see the face and hands, but all the parts inside are really necessary," said former airline chief executive Gordon Bethune. "Those bags don't get downstairs by themselves. All those things that move bags have to be purchased and then they break. It never stops."

Fuel now is by far the biggest cost for airlines—greater than even airline salaries. On that 100-passenger US Airways flight, the tickets and fees of 29 people pay just for the fuel to make the trip. (Salaries are the second-highest cost, with 20 passengers covering personnel paychecks.)

Oliver Wyman's research pegs fuel costs at an even bigger percentage of costs for the airline industry as a whole. Bigger carriers with longer flights tend to spend a bigger portion of their money at the fuel pump. The industry spent more than 34% of its revenue on fuel—it takes the fares of more than one-third of passengers on a flight, on average, to pay for the gas.

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, according to the Bureau of Transportation Statistics. Last year, that improved to 22.5 gallons per passenger. The industry is using less fuel but carrying more passengers. But the fuel bill tripled—airlines spent $32 billion more on fuel in 2011 than in 2000.

After fuel and salaries come ownership costs—buying and leasing planes. That includes the cost of spare engines and insuring planes in case of accidents. In the hypothetical 100-passenger flight, 16 people cover these costs


Another 14 passengers cover the collective federal taxes paid by passengers, US Airways calculated. That money helps fund the Federal Aviation Administration, plus the Sept. 11 security fees that cover much of the cost of Transportation Security Administration screening, and facility charges that most airports add to tickets. Fuel taxes paid by airlines are counted with other fuel costs. In the end, passengers pay more in government taxes and fees than they do for baggage fees and other add-ons.

Total maintenance costs equal 11 passengers on the plane of 100, according to US Airways, which built its own repair shop in Philadelphia just for the trucks, baggage carts and the tugs that haul them. That is a tiny part of all the airline's maintenance responsibilities. Planes' parts often break. Every few months they undergo routine maintenance. Every few years more intensive maintenance is performed. And once every five or six years planes literally get taken apart and put back together


Cost of 'Free' Soft Drinks
Nine passengers cover the "other" category—everything from catering (the soft drink you get free on most, but not all, carriers) to compensating passengers for bumping them from flights and paying to deliver or replace lost baggage. Food costs—mostly for first-class meals—add up to less than 2% of airline costs, according to Oliver Wyman's research. Rental fees for airport gates and ticket counters also factor into the big "other" category. So do regular business things like advertising and legal fees.

Landing fees eat up more than 2% of airline revenue, according to Oliver Wyman, so that it takes two passengers out of 100 to cover the use of airport runways and taxiways. Airports charge airlines by the weight of the airplane.

With 99 passengers accounted for, what does that leave the airline in terms of profit? One passenger.

"It's not exactly one, but we rounded up," said Robert Isom, chief operating officer at US Airways Group Inc.

Airlines don't have some of the expenses of other industries. Research and development is virtually nonexistent—innovation tends to come from airplane makers, seat makers or other businesses that supply the carriers. While airlines have lots of inventory expense, it isn't like what Boeing Co. BA +0.37% or other manufacturers encounter.


The Weather Variable
But airline operating costs are off the charts compared with other industries. In a business where much of the work is done outside, routine storms can eat into margins. And there are many moving parts to flying people through the air, and many safety costs required by regulation.

While ticket revenue pays the bulk of these costs, "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.

It's these myriad fees that can be most maddening to passengers—customers who now pay higher fares yet feel like they're getting less service. But these fees, in part, offset the expense of operating an airline.

"It's a crazy business," Mr. Bethune said. "There are so many costs you could never articulate it all."


How Airlines Spend Your Airfare - WSJ.com

[ExXB]

I don't think this is particularly accurate (nor timely, the reference to Gordon Bethune who retired in 2004), but demonstrative.

It does show that at a 100% load factor there is a very low return, but at the industry average of 80-85% there is a constant loss.

As some famous investment banker is often misquoted as having said: "If I'd been at Kitty Hawk, I would have shot them both"

If you want to make money in this crazy business, be a supplier not an operator.

[PhineasC]

My previous employer had an aviation analyst who wrote detailed research on airlines.

While reading one of these I came accross the most shocking figure, Eazyjet made GBP 248M in 2011 flew 54.5M passengers, that is GBP 4.50 profit per passenger.

For a real airline, the demand, especially at the front of the aircraft is strongly correlated with the economy, revenues and costs are in multiple currencies and for year to year the oil price can double or halve. From a finance perspective an airline is a commodity, currency macro hedge fund.

[PAXboy]

Thanks for posting, cyrilroy21, and this could be useful to people new to the field. For those in the biz, or long terms pax, none of this is new.

The questions to be asking are :

• How will it end?
• Given that the carriers cannot club together to force prices up, the pax will continue to force prices down.
• When will national govts (where not restricted by statute) finally stop funding their loss making flag carriers?
• When will more carriers merge?
• When will national govts allow more cross border ownership?
• Is merging and cross border ownership (to reduce overheads) the answer?
• When will owners/shareholders decide that owning an airline is not as glamourous as it once was and stop throwing money at it?
• Etcetera etcetera

Of course, it goes without saying that, the fuel is going to be crux of it all.

[PhineasC]

With airline travel growing by 5% per annum in 10 years time there will be 50% more pilots and aircraft

[ExXB]

Originally Posted by PAXboy

Thanks for posting, cyrilroy21, and this could be useful to people new to the field. For those in the biz, or long terms pax, none of this is new.

The questions to be asking are :

• How will it end?
• Given that the carriers cannot club together to force prices up, the pax will continue to force prices down.
• When will national govts (where not restricted by statute) finally stop funding their loss making flag carriers?
• When will more carriers merge?
• When will national govts allow more cross border ownership?
• Is merging and cross border ownership (to reduce overheads) the answer?
• When will owners/shareholders decide that owning an airline is not as glamourous as it once was and stop throwing money at it?
• Etcetera etcetera

Of course, it goes without saying that, the fuel is going to be crux of it all.

PaxBoy, just some thoughts on the items in your list.

• Even when the airlines were allowed (encouraged) to club together to force prices up they were unsuccessful Having one fixed price for all direct and indirect journeys encouraged the indirect carriers to find ways to fudge and undercut the direct operators, who in turn ... etc.
• In the EU governments can only fund loss making airlines under certain conditions (i.e. a valid decision that any shareholder would make). This is much less of a problem that it used to be.
• Your points 4 and 5 should be reversed. Cross-border mergers are still very difficult to manage. Recently the Russians questioned Swiss's ability to operate from Switzerland to Russia as it was not an airline 'owned and controlled' by Swiss nationals. Similar with Austria. (Both Swiss and Austrian are owned by Lufthansa). In the EU there are no rules, but that only applies to flights within the EU.
• How many players in the Oil industry? Less than 20 big ones? How many players in the Auto industry? About the same, perhaps a few less. How many airlines are there? 300 or so. Merging and otherwise reducing the number of players would indeed improve the situation. Economies of scale are to be had.
• Shareholders in all industries are looking for a quick return. The days of 20 year, five year and one year plans are long gone. The key these days it's the next shareholder's meeting. Keep them happy for a year and you're a hero, fail and you're a bum.
• Fuel is a cost, and like any cost needs to be managed. But every increase in total price means that you will spill passengers. Soft economies (i.e. fewer business travellers) is probably a much bigger influence.

[GroundedSLF]

There isnt much profit as a supplier (travel agent) either.

I have worked in both corporate & leisure travel, and the profit margins are typically 1-2%

Compare that with general retailing where you can add a couple of zeros to that profit margin, and you can see just how hard agents have to work to scrape a living.

[Tableview]

It does show that at a 100% load factor there is a very low return, but at the industry average of 80-85% there is a constant loss.

The fallacy in that statement is the same as when people say : "The flights are always full so they must be making lots of money."

It's not about load factors, it's about yields. In theory, if you filled the front of an aircraft with full F and J class passengers, anything else could be pure profit.

[PhineasC]

It's an old saying, but the passengers in the back are only there to make the aircraft easier to trim

[kenhughes]

It's not about load factors, it's about yields.

Let's not forget the cargo carried in the hold either. Far more profitable than pax - you don't have to feed cargo!

[Tableview]

Certainly true about cargo, although a lot of airlines that need fast turnarounds, typcially the LCC model, don't carry cargo due to the handling equipment and time required.

[The SSK]

On an airplane carrying 100 passengers, how many customers does it take, on average, to cover the cost of the flight?

If you are in possession of the key metrics, break-even load factor BELF) is easy to compute. It is simply Unit Cost (expenses divided by capacity, measured in Available Tonne-km) divided by Yield (Revenues divided by traffic, measured in Revenue Tonne-km). Both yields and costs have been very volatile in recent years but in a ‘normal’ year, for full-service airlines breakeven would typically be around 68-70%.

That describes the utilisation of all capacity, passenger and cargo. In theory, separate breakevens could be calculated for passenger and cargo but that would involve allocating costs between the two, by no means an exact science. If I recall correctly, a standard methodology used by IATA was abandoned because it regularly gave nonsense results for cargo. Individual airlines may have in-house allocation models which give better results.

Caution: this algorithm may not work (in fact it almost certainly doesn’t) for the LoCo business model.

[Tableview]

If you are in possession of the key metrics, break-even load factor BELF) is easy to compute. It is simply Unit Cost (expenses divided by capacity, measured in Available Tonne-km)

That really only starts to address the mathematics. The challenge lies in calculating the expenses in terms of what factors, such as leasing costs, depreciation, interest on loans, infrastructure, etc, you allocate to expenses, and over what period.

[G&T ice n slice]

That describes the utilisation of all capacity, passenger and cargo. In theory, separate breakevens could be calculated for passenger and cargo but that would involve allocating costs between the two, by no means an exact science. If I recall correctly, a standard methodology used by IATA was abandoned because it regularly gave nonsense results for cargo.

oh how true, how true... even the "in-house" systems were never exactly wonderful.

[The SSK]

Tableview: by ‘expenses’ I mean all operating costs. The standard IATA classification is:
(Direct operating expenses)Flight deck crew
Fuel & oil
Flight equipment insurance
Maintenance & overhaul
Depreciation
Rentals
Airport charges
Navigation charges
(Indirect operating expenses)Station & ground
Cabin attendants
Passenger service
Load insurance
Ticketing, sales & promotion
General & administrative

Relatively easy to do the allocation by region/route group, more difficult by individual route or flight.

[Capot]

In the case of the World's Favourite, part of the answer to the question "Where does the money go?" is just North of the M4.

This is just the Head Office, of course. You know, the people on the payroll who need peace, tranquility, plenty of social interaction and sports facilities, good restaurants and entertainment to help get through the working day, well away from the frightful hubbub of aeroplanes, operations, maintenance, passengers, cargo and so on that would make life so difficult if it were allowed to intrude.

This drawing is quite old; perhaps they don't use it all these days. But we have to ask whether or why they need it - and/or the people inside it - at all.





Ryanair, with 76m or so passengers to BA's 30m or so (fairly recent figures, countered by BA's 105bn RPK vs FR's 85bn RPK), but rather more conscious of keeping the overheads down, makes do with a single, nondescript 3-floor building called the White House on Dublin Airport to manage its affairs.

[Capot]

With 99 passengers accounted for, what does that leave the airline in terms
of profit? One passenger

In the early 1980s we recalculated the sector fuel needed for a Viscount charter series Southend-Palma, and as a result reduced the seats available by 4, from the full complement of, I think, 80 or so.

The tour operator acidly informed us that these 4 seats represented his total profit on the series. I'm sure that what with everything that's happened in the last 30 years that figure has worsened.

(The airline's owner/boss got over the difficulty by using an old trick; declaring Marseilles as the destination and Palma as a diversion, and then routinely diverting, but that's another story from the good old days, sorry, bad old days of buccaneering aviation and compliant regulators.......)

[Gulfstreamaviator]

Dan Airs profit was the Duty free sales

If I remember correctly, the charter operator made its money from the last 5-10 seats sold, and Dan made its profit from the Duty free sales.

So nothing has realy changed, just now it includes: hold bags and fees for printing boarding cards, loan of safety cards..

How did Laker make its money...????

[Metro man]

Jetstar make their profit from muffins.

Jetstar makes more money from muffins than tickets | News.com.au

JETSTAR chief Bruce Buchanan has revealed the budget carrier is making more from in-flight service than ticket sales.
He told BusinessDaily last night that the profit from sales of ancillary items - such as cups of coffee, muffins, baggage and special seat charges - was about $24 a passenger. The revelation comes as the airline's pilots warn that new contracts being forced on pilots pose a threat to passenger safety.
Mr Buchanan said ancillary revenues had increased from $2-$3 per ticket to the mid-$20s in the space of a few years and were growing "very fast''. This is the second-best result in the world when benchmarked against other carriers.
This money goes straight to the bottom line.
"One way to look at it is that if we didn't have the ancillary revenue we wouldn't be making any money. We would be losing money," Mr Buchanan said, in a likely reference to the hurt caused by the rocketing price of jet fuel.
Jetstar passengers are charged $4 for a muffin or a small container of Pringles, and $3 for a small bag of M&M chocolates.
A can of Coke costs $3 in-flight, but costs an average of $1.20 in supermarkets in Sydney and Melbourne. Coffee will set you back around $3 - below the national average of $3.20 - and a hot chocolate $4.
Meanwhile the cost of a window seat in the exit row can cost up to $60, while in-flight entertainment can cost $15 and extras such as blankets and pillows $7.
In other developments yesterday Jetstar parent Qantas rolled out its biggest gun - the 7.5 million member Frequent Flyer program - opening a new front in its war with arch rival Virgin Australia.
The Qantas loyalty program has been revamped to give Jetstar passengers the ability to earn and burn points, a move designed to appeal to the budget-conscious suits market.
Qantas chief Alan Joyce said the changes will give the airline a competitive edge on other carriers.
Under the changes Jetstar's fare structure will change.
StarClass - the carrier's equivalent of business - will be replaced with a full business product, a move that industry observers say is clearly aimed at Virgin Australia's attempt to lure small and medium businesses.
Safety concerns
Meanwhile Jetstar has received hundreds of emails from its pilots warning that it is placing the lives of passengers and crew at risk in it's move to force recruits on to contracts outside the enterprise bargaining agreement, the Sydney Morning Herald reported.
Captain Michael Danahar, a senior A320 captain with Jetstar, said the new contracts offer less pay and worse working conditions for new pilots, which will compromise the airline's safety standards.
'On a daily basis, my crew and I are constantly blocking errors and threats to the safety of our aircraft, staff and passengers,'' he said in an email to Jetstar.
''We need skilled crew on the flight deck with ample experience to do this rather than pilots with little experience.''
Another email by Captain James Matthews said that the move could lead to mid-air distractions.
''I am worried that this will start to have safety impacts on the operation as this issue is all that people are talking about and everyone is so angry, and this leads to a huge distraction in the flight deck.''

[PhineasC]

It should be an industry in which it is easy to make profits, there are high barriers to entry the infrastructure and aircraft are expensive, there are not many routes that have more than 3 or 4 airlines and as people get richer they travel more and further.

For the legacy carriers the demand especially business travel, is tied to the economy so there is 5 to 10 year cycle in profitability. For LCCs the demand is price sensitive thus there will always be an emphasis on cutting costs.

Perhaps the industry is not as unprofitable as it would appear and it is using the current economic downturn to reform working practises that it inherited from a world where airlines were monopoly operators controlled by the state. This leaves employees in a difficult situation they have little market power and there is no shortage of new entrants willing to work at any wage