How do airlines make money?

How do airlines make money? However, even in the best of times, airlines generate a lot of positive cash flow and make profit margins. In this article, we will discuss how airlines make money. Let’s take a closer look at airlines’ revenue streams.

American Airlines; photo via DEPOSITPHOTOs.com

How do airlines make money?

1. Ticket sales

The aviation industry is service-oriented, making it easy, convenient and fast to meet the travel needs of leisure and business travelers. Most airlines earn their revenue from passengers who buy tickets to fly. Airfare is the main source of airline revenue and is used to pay for the air transportation of passengers in the reserved class. Aircraft are valuable assets for carriers as they seek to maximize profits from ticketing. Seats do not generate revenue; the more seats occupied on a plane, the more revenue the airline earns.

Close-up of people holding passports and boarding passports at the airport; photo via DEPOSITPHOTOs.com

A common feature of profitable airlines is the efficient management of their aircraft. As the value of planes depreciates over time, airlines must make the most of them to manage the enormous economic weight on their balance sheets.

The total number of seats on a plane determines an airline’s ability to generate revenue. According to the marketing strategy, airlines make money by selling a certain number of seats in different booking classes. Airlines that focus on leisure travelers often tend to maximize seats to keep airfares as low as possible. Most of their seats are in regular economy class with standard legroom and comfort. On the other hand, airlines with a strong following in the business world devote most of their aircraft space to business class, including premium cabins, comfortable wide seats, generous legroom, and more. A large portion of airlines’ revenue comes from premium passengers, who typically make up 10-12% of all airline passengers, but are often twice as profitable as other passengers. Wealthy travelers, who bring significant income to airlines, pay premium prices for innovative, ergonomic seats designed to provide maximum comfort, personalized service and a supremely luxurious flying experience.

Airlines must maintain a fine-tuned balance to suit their customer mix and set reasonable fares for each booking class to make a profit. Carriers can maximize their revenue by offering the right mix of full-fare and discounted fares for each flight.


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How do airlines price?

Until 1978, American Airlines followed regulated ticket pricing set by the Civil Aviation Board (CAB). The Airline Deregulation Act of 1978 freed airlines from domestic CAB regulation, meaning airlines could set their own prices and open flights to more travelers. In the current situation, airlines use algorithm-based pricing and historical data to adjust their ticket prices. Airlines use algorithms that analyze extensive data to determine ticket prices. These pricing algorithms take into account several factors, such as fuel prices, competitor fares, trip length, current sales, customer profiles, overbooking levels, and more.

2. Ancillary income

In addition to the traditional business model of making money from ticket sales, airlines now sell optional ancillary services to generate additional revenue. Ancillary revenue refers to the non-airline revenue sources that airlines earn by separating air transportation from services such as checked baggage, catering, and in-flight entertainment and billing them separately. Airlines make money by offering optional menus of ancillary services. Let’s dive into the important components of ancillary income:

One.excess luggage

Some fares are all-inclusive and offer free air transportation and luggage. Carriers have established baggage allowances that allow each passenger to transport a certain amount of baggage free of charge. But if passengers exceed the baggage weight limit, the airline will charge them extra.

people with luggage; how airlines make money
Photo via DEPOSITPHOTOs.com

If you’re wondering why airlines have allowed baggage weight limits and charge passengers for excess baggage, there are several reasons behind it. The aircraft has a weight balance mechanism for safe takeoff. Every extra pound brings a commercial aircraft closer to the weight limit and affects its range and fuel consumption. More weight leads to more fuel, which reduces airline revenue. Excess baggage fees allow airlines to offset the cost of soaring fuel prices and help maintain weight limits. In addition, baggage fees are often unregulated and are an important source of revenue for airlines.

b.In-flight service

In the modern era, airlines’ focus has shifted from luxury to revenue. In contrast to the traditional way of bundling airfare prices with in-flight services, airlines now offer optional amenities that give travelers the option to buy them at a separate price. Ancillary in-flight services include meals and beverages, cabin pillows and blankets, in-flight entertainment, in-flight Internet (Wi-Fi) access, and more.

How Airlines Make Money; Woman Watching Movies for Entertainment on the Plane; Photo via DEPOSITPHOTOs.com
Woman watching movie entertainment on plane; photo via DEPOSITPHOTOs.com

Low-cost airlines offer an in-flight food purchase option, which means you have to pay before you can eat on board. Airplane meals are expensive; sometimes more than double the normal price you pay at a restaurant. You can try these meals if you’re hungry on a plane, but don’t be surprised if they charge reluctantly.

Inflight Wi-Fi is becoming a common feature on airplanes to meet the needs of tech-savvy travelers. JetBlue Airways is the only U.S. airline to offer passengers on-the-go free high-speed Wi-Fi onboard. Major U.S. airlines, such as American Airlines, Delta Air Lines, United Airlines, etc., are advancing the transformation of in-flight Wi-Fi products, offering Wi-Fi plans at different prices by the hour or by the month.

C.Seat assignment, priority check-in and boarding, lounge access

Low-cost airlines earn ancillary revenue through services such as seat assignments, priority check-in and boarding, airport lounge access, and more. Depending on the seat location (e.g., window, aisle), airlines charge passengers to select their seats accordingly on the plane prior to the flight. Airlines also make money by offering priority check-in and boarding, allowing passengers to have a seamless airport experience without queuing for check-in and boarding.

d.frequent flyer program

Airline mileage programs aren’t just a pernicious way for airlines to gain extra loyalty from travelers; they’re also great moneymakers. How do airlines make money from these programs? In fact, operators can earn billions of dollars by selling their loyalty program frequent flyer miles to their business partners, card issuers and other financial businesses.

How Airlines Make Money
Airline miles reward credit card for frequent flyers and travelers. Photo via DEPOSITPHOTOs.com

When a flyer makes a purchase with frequent flyer points, the airline receives a portion of the payment from the annual fee holder. Airlines solicit business and sell their frequent flyer points to business partners, which in turn serve as sales incentives to the partner’s customers. On the other hand, passengers can buy mileage credits directly from the airline for personal use or as a gift, helping the airline make more money.

e. Committee

Not only travel agencies, but airlines also make money from commission-based products. Commission-based ancillary revenue is generated when airlines promote or sell products and services on behalf of third-party providers (such as insurance, retail stores, hotels, car rentals, etc.). When an airline refers its customers to a third-party provider and generates a commission on the purchase.

F.Other auxiliary services

Other ancillary revenue streams for airlines include charter flights (flying on behalf of a business or sports team), leasing (dry or wet), technical operations, pilot training programs, and more.

3. Cargo transportation

How do airlines make money from cargo?

Airlines are the poster child for delivering goods and essentials from one place to another in the shortest possible time. Air cargo is a huge business in today’s world, and the demand for freighters and modifications has risen dramatically. Airlines make big bucks by moving cargo in the belly of their dedicated freighter and passenger flights. Cargo revenue has grown substantially over the years and has contributed to the overall profitability of the international aviation business. The cost of shipping the cargo is consistent with its type (live animal, special, fragile, wet, valuable, heavy, etc.), size, weight and shipping time. Overall, cargo flights account for 30-35% of airline flight revenue.

How Airlines Make Money
Loading cargo onto the plane before takeoff; photo via DEPOSITPHOTOs.com

Why are airline profits so tiny?

Now that we’ve seen how airlines make money, it’s time to ask why airlines make so little profit. Although airlines have various sources of revenue, various airline costs such as airport fees, fuel prices, maintenance, salaries, administrative expenses, passenger service, etc. are always present. By nature, the airline industry is capital-intensive (requiring a lot of expensive equipment and facilities), labor-intensive (involving a lot of labor), and highly seasonal (depending on travel patterns), so profit margins are low for global-oriented operators .

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