How airlines make money: Business models explained

 How airlines make money: Business models explained

  An industry that has been revolutionizing travel for close to a century now, from its first commercial flight in 1939 to the present day. An industry often seen as a glamorous business flying millions of people around the globe should be a business that runs seamlessly, right? I thought so too. Behind the extravagant luxury that we see day to day is an industry that runs on a thin line of margin and complex stream of revenue. Many might think the only form of revenue is ticket sales but that is just the tip of the iceberg!

So, without further Ado, Let's briefly understand the different ways airlines make money.

1. Passenger Revenue

The amount of money levied to transport the customer from point A to Point B using a specific aircraft carrier easily sums up as the definition. Some airlines provide three classes of seats - Economy, business and First class and some offer just economy seats(Low cost carriers). Airlines quote different fares and provide different services based on the class of seat selected by the customer. Fares increase in ascending order from economy to business and then first class with economy class providing the most affordable prices to the customer but lowest margin to the company and business class providing the company with highest margin. This is because the economy tickets are highly price sensitive where airlines fight to give the cheapest fares to customers and hence less revenue to cover the fixed costs of the airline. 

So if this is how the passenger revenue works, naturally, the first class seats should provide the highest margin right? Theoretically, yes and that is true in most cases. But recently, there is an inclination from first class travelers to move to using private charters instead of commercial majorly to reduce the time consumption at airport security which is relatively quicker for customers using private charters and faster connectivity. Charter airlines have even reduced in some cases their exorbitant prices to increase passenger flow.

2. Cargo operations revenue

Airlines offer to transport goods(Perishable items, e-commerce packages, medical supplies, etc.)from one place to another in the belly hold of a passenger aircraft or even specific freighter aircraft. This could be international or domestic. Surprisingly, this source of revenue is what most airlines thrive on. Why? Because cargo operations provide higher margin on goods per kg than economy passengers, they can fly without cabin crew, meals or even seats if its a dedicated cargo aircraft and there is always a demand globally regardless of the world’s situation, a recent example would be, airlines with high volumes of cargo did not have their aircraft on ground even though the world came to a standstill as supplies still needed to be transferred. Bottom line is cargo has proven to be quiet the cushion in the industry during a financial turbulence.

3. Loyalty Programs

Often termed as frequent flyer program is another source of revenue. Airlines sell miles to other companies as a tie up which is provided to customer who purchase services from those specific companies. Airlines even have tie up with banks and credit card companies. They also have loyalty program within the airline where they provide miles to passengers who choose the same airline or code-share repeatedly. These miles can be used by the passenger to avail extra baggage, preferred seats or even a cabin upgrade free of charge. This program proves to be very profitable to the airline as other companies from different industries purchase miles in bulk which infuses heavy cash flow to the airline.

4. Ancillary Revenue

This type of revenue refers to the extra income an airline can earn excluding the base passenger ticket price. The airline provides extra amenities for the passenger from the point of check in till touchdown at destination for a price. This includes :

•  Extra baggage allowance 

•  Purchase and choose preferred seats

• Purchase in-flight food WiFi, amenities(headsets, blankets, travel pouch) 

•  Priority check -in , security screening and boarding etc.

Airlines even provide advertising services on their products that allows brands to display their ads on items such as boarding pass, seat head rest covers, in-flight magazines(if applicable). This source of revenue stream is best seen with low cost carriers that usually provides staggering low base fares on seats.

5. Maintenance Repair and Overhaul (MRO)

Airlines provides technical support or lease own aircraft and certain equipment to other airlines.  This one in particular is not very common because it is usually done by third party organizations approved by IATA(International Air Transport Association) to conduct inspection and maintenance. But some airlines that operate at a high capacity with strong workforce can provide the service . However, aviation giants like Airbus, Boeing, Bombardier are known to be the best service providers in this domain.

This industry is complex and far from being  straightforward. I have tried to include as many variables as possible to have a general understanding of how the airline industry makes money. However, we have not even scratched the surface of unfolding this giant of an industry. 

Coming from this industry, I have started to like the differences and layers of complexity this business holds. To all the airline enthusiasts who wish to understand what happens behind the curtain and my fellow people from the fraternity, join me as I slowly unfold and encapsulate how airlines function through my upcoming blogs. 

Stay tuned.