Airlines: Where does all the money go?

The Wall Street Journal remains a reliable source of eye candy, to wit:

The article in question (How Airlines Spend Your Airfare, Jun 6) attempts to map to what fraction of costs are covered by what fraction of passengers. Thus with 100 passengers on the flight all paying the same amount, 29% of passengers and hence revenue goes to covering fuel.

There are some interesting things here. First, one wonders to the extent this analysis mixes fixed and variable costs. For example, the maintenance costs the airlines face are largely fixed independent of the number of passengers on the plane. Similarly, although extra passengers add weight and thus require more fuel, it is not a one-for-one trade off. The bulk of the fuel is burned just moving the plane.

The taxes and fees, though, are a little different. The US charges an excise tax tied to the value of the ticket as well as security fees tied to each ticket sale. Those would then vary proportionally with the number of passengers. It is also not clear to me why those taxes should be treated as revenue for the firm. Yes, the airline is charged with collecting that revenue and it does figure into the cost of the ticket when a customer goes to buy, but they are disclosed as taxes.

Also, some of these costs are pretty directly controlled by the firm. Consider the category “Other.”

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.

Obviously, overbooking and thus risking bumping passengers is a choice. No one told airlines they have to do this. However, the increase in revenue must be worth it.

The article makes a big deal of the fact that only one passenger represents profit for the firm. Given the miserable financial history of the industry, it is hard to say that is surprising. It is an industry with large fixed costs that is selling (essentially) a commodity. No one should be making lots of money unless resources can be very highly utilized.

That last point gets us to another fun graphic. This one is from NPR (that’s right: It’s a graphic from the  radio!) and shows how seat utilization has changed over the last decade (Good Times For Airlines, So Where Are The Deals?, Jun 6).

Presumably, if the trend continues, more than passenger might represent profit.