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How Do Airlines Make Money?  
User currently offlineDocLightning From United States of America, joined Nov 2005, 20365 posts, RR: 59
Posted (5 years 4 months 3 weeks 3 days 2 hours ago) and read 20508 times:

So this is something I'm not understanding, in spite of all my time on this board.

I keep hearing about how airlines do not make money from flying passengers. I get quoted figures about CASM and how you never pay an airline as much as it costs to transport you, etc... and how WN subsidizes its flying from fuel hedges, etc...

...so what I don't get is why are airlines flying people around? If you can't make money doing it, then why does the industry exist and thrive like it's doing? Why doesn't WN just become a fuel broker?

11 replies: All unread, jump to last
 
User currently offlineJetdeltamsy From United States of America, joined Nov 2000, 2987 posts, RR: 7
Reply 1, posted (5 years 4 months 3 weeks 3 days 2 hours ago) and read 20482 times:

Freight is a very underutilized source of income for most airlines.

It's tough to estimate shipping demands so you get all your passengers bags, fuel and a full passenger load on board while meeting shipment committments.



Tired of airline bankruptcies....EA/PA/TW and finally DL.
User currently offlineSteex From United States of America, joined Jun 2007, 1765 posts, RR: 9
Reply 2, posted (5 years 4 months 3 weeks 3 days 2 hours ago) and read 20482 times:

I think the short, oversimplified answer is that some airlines can make money flying passengers around, but maybe not as many airlines are are currently attempting to do so in this environment. As such, the airlines are all trying to tread water until good times come again.

Those "good" times may not come until an airline or two is eliminated (through purchase or failure) or until the economy rebounds strongly. Once capacity is reduced enough for the remaining carriers to increase fares due to increased demand (or demand increases to the rebounding economy), then the remaining carriers should hopefully be able to make money.

[Edited 2009-08-07 14:54:51]

User currently offlineStitch From United States of America, joined Jul 2005, 31440 posts, RR: 85
Reply 3, posted (5 years 4 months 3 weeks 3 days 2 hours ago) and read 20476 times:
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When people quote RASM and CASM, they're usually quoting numbers for the entire system because that is usually what's made public.

Clearly, airlines make money flying passengers. They just don't make money from every passenger on every flight. My RASM can approach $1 a mile for shorter stage lengths and even on intercontinental flights is measured in the scores of cents. Yet I am sure there are some folks in the back who paid less to fly then the raw seat mile costs of flying them they generated.

Then there is cargo revenue and all the new fees and everything else.


User currently offlineDocLightning From United States of America, joined Nov 2005, 20365 posts, RR: 59
Reply 4, posted (5 years 4 months 3 weeks 3 days 2 hours ago) and read 20451 times:



Quoting Steex (Reply 2):
I think the short, oversimplified answer is that some airlines can make money flying passengers around, but maybe not as many airlines are are currently attempting to do so in this environment. As such, the airlines are all trying to tread water until good times come again.

But that doesn't answer why they bother flying passengers around if they aren't making money off it!

Quoting Stitch (Reply 3):

Then there is cargo revenue and all the new fees and everything else.

But if you want to make money flying cargo, then fly cargo. Why fly people if it "never" makes money?


User currently offlineSteex From United States of America, joined Jun 2007, 1765 posts, RR: 9
Reply 5, posted (5 years 4 months 3 weeks 3 days 1 hour ago) and read 20410 times:



Quoting DocLightning (Reply 4):
But that doesn't answer why they bother flying passengers around if they aren't making money off it!

Sure it does. An airline can't effectively just shut down passenger operations now unless it plans to shut them down forever. If an airline feels they will be able to return to profitability flying passengers in the future, they are compelled to continue flying passengers now with as little loss as possible so that they can retain the loyal fliers that they believe will help them return to profitability.

For example, if AA feels they can return to sound profitability in a few years, their best plan of action is to accept any losses in the present and plan to make up for them later. If AA instead decided to stop operating passenger flights today and hoped to re-enter the passenger market later, its market position would be compromised relative to its competitors and it would be that much harder to re-establish its keys routes and reclaim the loyal fliers that were shunned during their shutdown.


User currently offlineRFields5421 From United States of America, joined Jul 2007, 7607 posts, RR: 32
Reply 6, posted (5 years 4 months 3 weeks 3 days 1 hour ago) and read 20379 times:

You've been around enough to know that there is a big difference between "making money" in the business world and actually taking in more cash than you spend.

And you also probably know that you can take in more cash than you spend and still go broke.

A simple example would be a gasoline service station during times of rising prices. If you buy 7,000 gallons at $1.00 per gallon, sell it at $1.15 per gallon, and then have to pay $1.25 per gallon for the next 7,000 gallon load - you don't have enough money to fully restock your store.

Most of the time when you see a headline that an airline lost money - it is not a real loss - but that the profit this quarter was X dollars less than the same quarter last year.

An airline can make $100 million in Q-2 this year, and it be reported as a $100 million loss because the same airline made $200 million in Q-2 last year.

Rules concerning depreciation, accounting for losses, accounting for future expenses, etc - all those can turn a real cash over the counter profit into a loss.

You have to look at each individual airline's details.

WN makes money on most passengers if the plane is near full. Not a lot in some cases but it is more than it costs them to fly the plane. However, WN and every other airline, has huge overhead costs.

People like to blame unions - but the truth is that size counts more than whether or not the airline is union. WN has more planes and probably more employees than LH and AF combined. So of course they are going to have very high costs for maintenance, operations, supplies, etc.

Remember WN's first quarterly 'loss' had nothing to do with ticket sales, cash received, cash paid. It happened solely because of accounting rules decreased the value of their future fuel hedges.

WN went in one day and the SEC accounting rules said their fuel hedges were worth $XXX. The next day the SEC rules said their fuel hedges were worth only 60% of what they were yesterday.


User currently offlineSsublyme From United States of America, joined Dec 2008, 517 posts, RR: 0
Reply 7, posted (5 years 4 months 3 weeks 3 days ago) and read 20311 times:



Quoting RFields5421 (Reply 6):
Most of the time when you see a headline that an airline lost money - it is not a real loss - but that the profit this quarter was X dollars less than the same quarter last year.

Actually it's just that, a loss. The amount they spent is more than the amount they took in that quarter. The only time the previous year quarter comes in is in reference to trending as alot of times comparing q1 2009 to q2 2009 doesn't tell you as much as q1 2008 to q1 2009 would.


User currently offline474218 From United States of America, joined Oct 2005, 6340 posts, RR: 9
Reply 8, posted (5 years 4 months 3 weeks 3 days ago) and read 20274 times:

Airlines make money by selling the space on there aircraft to transport passengers and/or freight from one location to another .

However, once that space is sold the airline has supply a certified/maintained aircraft, crew, fuel, terminal space, airport facilities, etc that can be used to transport the passengers/freight.

If the amount of revenue obtained from selling space on the flight is greater then the expenses required to operate the flight the airline make money. However, if the expenses are greater to operate the flight than the revenue obtained selling the space they lose money.

Simple!


User currently offlineStitch From United States of America, joined Jul 2005, 31440 posts, RR: 85
Reply 9, posted (5 years 4 months 3 weeks 3 days ago) and read 20255 times:
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Quoting DocLightning (Reply 4):
Why fly people if it "never" makes money?

Because it does make money and they people who claim it don't are using hyperbole.  Smile

Seriously, not every route may make money, but if no route truly ever made money, then the airline would (or could) not justify maintaining operations and would fold or merge.

And I expect that while some routes always make money or always lose money, chances are more of them fluctuate between the two states. If it always or generally loses money, the airlines will usually stop service or pawn it off to a regional carrier if they need to keep it for competitive or corporate contract reasons. But for those that bounce between both states, then when times are good the airline makes money and when times are bad they lose money.


User currently offlineVZLA787 From United States of America, joined Jul 2009, 99 posts, RR: 0
Reply 10, posted (5 years 4 months 3 weeks 2 days 23 hours ago) and read 20182 times:

The biggest problem an airline faces is recuperating its investment, or how we say, generate an acceptable level of return on its capital. The cost of new a/c is in the hundreds of millions of $, so it's not easy.

Airlines need to generate a constant, fluent revenue stream to keep their numbers in the black. Bankruptcy has helped some airlines by lowering its cost of capital (as they don't have to pay for their old bills), but this is not viable in the long term.

I personally think that over the long term, the industry will have to consolidate in order to generate the revenue stream necessary to make a profit. As it is, it's too many planes, too many routes, too many costs.

They should keep things simple........


User currently offlineBongodog1964 From United Kingdom, joined Oct 2006, 3695 posts, RR: 4
Reply 11, posted (5 years 4 months 3 weeks 2 days 21 hours ago) and read 20053 times:



Quoting Stitch (Reply 9):
Quoting DocLightning (Reply 4):
Why fly people if it "never" makes money?

Because it does make money and they people who claim it don't are using hyperbole.

Its not that it"never" makes money. For a small number of airlines it is highly profitable.

A further small number run though cash as if they are burning it, Alitalia has traditionally been one of those.

Many seem to regularly produce very poor returns to their shareholder, who in addition watch their shareholdings devalued by chapter 11, or their national equivalant.

A major reason for all this is that aviation has always had a glamour factor


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