Airlines’ Profit Actually Comes From Baggage and Change Fees, Not Ticket Sales
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US airlines are making money hand over fist, yet most of them are worsening the passenger experience, especially for economy travelers. American Airlines just reduced the legroom on its new 737 MAX 8s.
The big three legacy carriers have also introduced basic economy fares so passengers are charged for seat selection and carry-on bags. Fares have dropped over the years due to increased competition from low-cost carriers like Norwegian and Spirit, internationally and within the US — and airlines are actually making those profits on something other than the price of tickets.
As reported by the Wall Street Journal, airlines make their profit by all the ancillary fees they charge customers. So when you’re paying that $25 to check a bag or $8 to select a seat, that’s going straight to an airline’s bottom line. Airfare, or the cost of just the base ticket itself, is used to cover operating costs (i.e. salaries, jet fuel and aircraft maintenance).
US Department of Transportation data says that airlines will likely make $4 billion from baggage fees and $3 billion in reservation-change and cancellation fees in 2017 — that $7 billion is more than half of the net profits that US airlines reported last year.
The Wall Street Journal ran the numbers of average profit per passenger and relative to the average fare. Interestingly enough, the airlines that charge the fewest fees — Alaska, JetBlue and Southwest actually made the largest profit per passenger. Southwest, which allows every customer two free checked bags, a perk completely unmatched in the US market, still beat out larger airlines like Delta and United.
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And, those larger airlines actually had higher average fares than Southwest! So Southwest is making a larger profit and charging considerably less in airfare and fees. Its profit margin was 16.5%, the highest in the industry, compared to American Airlines which placed last with a measly 4.5%.
It seems counter-intuitive that the airlines charging the lowest fees and with the lowest average fares are actually making the most profit. Some of it can be chalked up to their operations. JetBlue, Southwest and Alaska all operate a solely single-aisle fleet, and Southwest flies only one type of aircraft, the Boeing 737. These efficiencies and low operating costs can add up to some real savings for airlines.
Profits are also boosted by the airline’s deals with banks to purchase frequent flyer miles. Some reports even say a majority of their profits come from these deals — Delta said it expected to receive $4 billion in revenue per year through 2021 from American Express through its credit card co-brand partnership.
Still, higher fuel and labor costs have nipped at airline’s profits. Jet fuel prices rose 26% from 2016 levels and may increase another 10% in 2018. AA’s CEO Doug Parker said that ticket prices are too low in relation to fuel costs and that they’ll rise over time.
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