We often hear the claim from airlines, particularly legacy airlines, that it is the business class passenger who pays for the bulk of a flight but is that true?  Well, maybe. 

 

The frequent business flyer does provide much of the profit that an airline might earn but the business class passenger on today’s domestic flight is often a frequent flier who paid for a coach ticket and who received enough upgrade points to move to Business Class.   But that passenger doesn’t necessarily make for a profitable flight either. 

 

If the full fare business traveler was the most profitable passenger on an aircraft, then all of those business class airlines formed over the years would still be around, wouldn’t they?  Over the years airlines like Legend (a business class airline that flew from Dallas to major trunk destinations in the 1990’s) and like EOS and MAXJet (who flew the NYC to London trunk routes) tried the all business class model and it never worked. 

 

Some would say it was because there just aren’t enough business class travelers any one day for a  particular flight.  Others would say it was because the legacy airlines fought back with greater frequency, frequent flier awards and unprofitable fares that put them under.  The truth is, it was probably a bit of both but if an all business class airline made sense, it would have succeeded by now.

 

Everyone pays the the way for a flight in reality.  Most often, it’s those last 5 to 10 passengers on a flight that provide any real profit for an airline and those last 5 to 10 passengers are often passengers who wouldn’t have flown but for a discounted fare being available.  Airline revenue management dictates that an airline has to sell as many of those seats on a particular flight for a price that people are willing to pay.   Some people are willing to pay $1000 for a seat that others only value at $200.  Airlines manage this demand by offering unrestricted fares for a high price and discount fares with a string of restrictions that most business travelers can’t accept.  These different fares create enough demand for a flight and if it is done the right way, that flight earns a profit. 

 

If those low discount fares didn’t make sense and add profit to the bottom line, the airlines wouldn’t offer them.  You, the consumer, wouldn’t benefit from those low fares if there weren’t a certain number of people willing to compete for them at a low price by conforming to the restrictions placed on them. 

 

When the airlines reduced their capacity in the latter half of 2008, they essentially bet that there would be increased competition for those last few seats and that the competition would raise fares for those same seats.  Now it appears that that theory had a fault.  Once more airlines have realized that at a certain higher price, those last 10 passengers will either forgo that airline trip or find another means to make the trip.   When they start declining those opportunities, airlines have to reverse course and make a concerted effort to win them back by offering fare sales through expensive advertising. 

 

Why would airlines routinely engage this activity?  Because that is what competition is about.  It’s a natural part of any business cycle and it means that the market is constantly adjusting to its present circumstances. 

 

With the rather dramatic fall-off of demand, we are, once again, seeing low fares blossom again.  It isn’t because fuel is cheaper.   Cheaper fuel makes a fare sale a bit more possible but what happens if an airline sells a ticket for late April and finds itself paying twice the cost of fuel in January?  They lose money.  No, low fares show up because filling those airplanes is critical.  If they take off with an empty seat, it is giving up a revenue opportunity forever. 

 

 

Filed under: Airline Service, Deregulation by ajax