Money air
In this breifing, we dig into the latest developments in the airline industry, which include significant moves made by airlines globally to improve their services. These range from the addition of new jobs, the introduction of new routes, and the overhaul of loyalty programs, among others. We also examine how airlines generate income from sources beyond ticket sales and how these revenue sources have impacted the airline industry. From cargo and ancillary services to loyalty programs and partnerships, we explore how airlines make money and how these have become essential to their business models. How do you think you`ve contributed to the success of your airline? Knowingly or unknowingly. What you read may surprise you.
It was a bustling week at the airport as airlines across the globe made significant moves to improve their services. In the United States, major airlines such as American, Delta, and United announced a combined addition of 2,544 jobs in March 2023. The decision was made in response to the increasing demand for air travel as more people returned to the skies after the COVID-19 pandemic. Meanwhile, United Airlines also announced an increase in its flights to Hong Kong starting in August 2023. The move came after the airline had seen a surge in demand for travel to the bustling Asian city, making it a priority for the airline. JetBlue Airways also made headlines as it announced the completion of its TrueBlue program overhaul, which rewards its customers with points for travel purchases. The revamped program includes features such as no blackout dates, unlimited points, and better flight redemption rates. In addition, some US airlines unveiled their exclusive invite-only elite tiers, offering extra benefits to loyal customers who spend the most on travel. These benefits include early boarding, guaranteed seating, and complimentary food and drinks.
Outside the US, Ryanair, Europe's largest low-cost airline, invested significantly in its fleet with an order for 75 Boeing 737 MAX aircraft. The order was a vote of confidence in the controversial model, which had been grounded worldwide for 20 months following two fatal crashes. Chinese airline China Airlines also announced its purchase of eight additional Boeing 787-9 aircraft as part of its ongoing fleet expansion and modernization strategy. The airline had been focusing on expanding its long-haul routes to Europe and North America. SpiceJet unveiled its plans to reintroduce 25 aircraft into its fleet to increase its capacity and operations in India. The move came after the airline struggled due to the pandemic and showed its determination to bounce back. In the UK, British Airways revealed its fleet plans for 2023, which included retiring all of its Boeing 747s and replacing them with more fuel-efficient Airbus A350s. The airline also planned to add more Boeing 787 Dreamliners to its fleet.
LATAM Airlines announced a profitable quarter in South America, with passenger revenue increasing significantly. The airline had been struggling due to the pandemic and had undergone a restructuring process to improve its operations and cut costs. In Asia, Malaysia Airlines also turned a significant loss in 2022 into a profit in 2023, thanks to its efforts to restructure and cut costs. The airline had been grappling with financial woes for years, and the turnaround was a welcome relief. Finally, Turkish Airlines made headlines as it achieved a $2.7 billion profit in 2023, thanks to its innovative strategies and investments. The airline had been focusing on expanding its network and improving customer experience, which had helped it become one of the most profitable airlines in the world.
In our aviation rundown, we heard specific examples of airlines taking significant steps to improve their services and respond to the evolving demands of travelers. This includes adding jobs in response to increased demand for air travel, expanding flight routes to meet specific market needs (such as United Airlines increasing flights to Hong Kong), and overhauling and enhancing loyalty programs to offer better rewards and benefits to customers.
While airlines continue embracing innovation, adaptability, and customer-centric approaches to thrive in the ever-changing industry landscape. How do airlines maximize revenue opportunities beyond traditional ticket sales? And how do airlines expand their networks and invest in modernization and efficiency? What you’re about to hear may surprise you.
Airlines play a crucial role in the global economy by connecting people and businesses worldwide. While their primary function is to provide flights, airlines generate income from various sources beyond ticket sales. Let's explore the fundamental ways airlines generate revenue and their impact on the industry. Cargo is a significant income source for airlines, contributing around 12% of total airline revenue, particularly during periods of reduced passenger demand. For example, American Airlines reported a 25% increase in cargo revenue in 2020, while passenger revenue fell by 65% due to the COVID-19 pandemic. Ancillary services also generate income for airlines. These services, such as baggage fees, seat upgrades, in-flight meals, and entertainment options, are not included in the ticket price but can be chosen and paid for by passengers.
In 2019, the top 10 airlines earned a combined $58 billion from ancillary services, according to IdeaWorksCompany. Loyalty programs are another essential revenue source for airlines. These programs allow passengers to accumulate points or miles when they fly, which can be redeemed for flights or other rewards.
Airlines generate revenue by selling these points to banks and other companies, which use them as incentives to attract customers. Delta Airlines reported an 8% increase in revenue from its loyalty program in 2019. Partnerships and alliances also contribute to airlines' income. These agreements enable airlines to share routes, resources, and marketing efforts, increasing revenue for all parties involved.
For instance, in 2020, United Airlines and American Airlines announced a partnership to expand their flights and destinations, enhancing their networks and customer base. Leasing or selling aircraft is another source of income for airlines, primarily when they aim to expand their fleets or replace older aircraft.
The global market for used commercial aircraft was valued at $2.5 billion in 2020, as per the Aircraft Fleet Recycling Association. In addition to these revenue sources, airlines have increasingly turned to credit card reward programs as a significant income stream. By charging banks and credit card companies for co-branded credit cards, airlines earn revenue while allowing customers to accumulate points or miles with every purchase.
The top 10 US airlines earned over $29 billion in credit card revenue in 2019, surpassing their ticket sales revenue of $28 billion that year. For example, American Airlines' loyalty program, including its co-branded credit card, generated over $6.4 billion in revenue in 2019, accounting for over a quarter of its total revenue. Credit card reward programs benefit airlines beyond revenue generation. They foster brand loyalty and customer retention, as highlighted by Andrew Nocella, Executive Vice President, and Chief Commercial Officer of United Airlines. Moreover, these programs help fill seats and generate demand during slower periods by offering bonus miles or points to cardholders who book flights at specific times, such as off-peak travel seasons or weekends with traditionally lower demand. In conclusion, airlines diversify their income streams beyond ticket sales to remain profitable and competitive.
Cargo, ancillary services, loyalty programs, partnerships and alliances, aircraft leasing and sales, and credit card reward programs contribute to their revenue. As Steve Sear, President of Delta Vacations, emphasizes, understanding and capitalizing on these income sources are crucial in the dynamic airline industry. Glenn Hollister, Senior Vice President of Partnerships and Loyalty at Delta Air Lines, acknowledges the importance of credit cards and loyalty programs in building a loyal and engaged customer base. And, of course, airlines have long relied on miscellaneous fees and hidden charges as a source of revenue. These fees have become increasingly crucial in airlines’ business models in recent years, allowing them to generate significant profits.
According to a report from IdeaWorksCompany, a consultancy specializing in airline ancillary revenue, US airlines collected a record $38.1 billion in ancillary revenue in 2019, up from $15.8 billion in 2010. This revenue comes from various sources, including baggage fees, seat selection fees, and charges for food and drinks on board. Baggage fees, in particular, are a significant source of revenue for US airlines. In 2019, airlines in the United States collected $5.1 billion in baggage fees alone, according to the same report. This is up from $3.4 billion in 2010. In addition to baggage fees, airlines charge for seat selection, early boarding, and priority access to security lines. These fees can add up quickly, especially for travelers who are already paying for airfare. According to a survey conducted by Expedia, 55% of travelers believe that airlines are "nickel and diming" them with fees. Many travelers feel these fees are unfair, as they are often hidden or not disclosed upfront.
Despite these concerns, airlines rely on ancillary revenue to generate profits. In a 2019 earnings call, American Airlines CEO Doug Parker stated that "ancillary revenue is really critical to our success." Similarly, Delta Airlines CEO Ed Bastian has said that "the key to our success is our ability to offer a differentiated product, including a suite of ancillary products and services." Critics argue that these fees are deceptive and unfair to consumers, as they can be challenging to understand and are often not disclosed upfront. In response to these concerns, the US Department of Transportation has introduced new rules requiring airlines to disclose all fees associated with a ticket upfront. Despite these regulations, however, airlines continue to generate significant profits from ancillary fees. As long as consumers are willing to pay for these fees, airlines will likely continue to rely on them as a source of revenue.
In conclusion, US airlines generate significant profits from miscellaneous fees and hidden charges. These fees, which include baggage fees, seat selection fees, and charges for food and drinks on board, have become an increasingly important part of airlines' business models in recent years. While some consumers may find these fees unfair or deceptive, airlines continue to rely on them as a source of revenue. Airlines will continue embracing innovation, adaptability, and customer-centric approaches to thrive in the ever-changing industry. Airlines should continue exploring and maximizing revenue opportunities beyond traditional ticket sales while enhancing customer experience, expanding their networks, and investing in modernization and efficiency. By staying agile and customer-focused, airlines can build loyalty, attract more passengers, and achieve profitability in a dynamic and competitive market. How do you think you`ve contributed to the success of your airline? Knowingly or unknowingly.
Want more information? Learn more or request a detailed analytical report on the data in this article by visiting Consulting by Cota or listen to episode 22 of The CoaTcasT as I discuss this topic. Listen for free on Spotify, anchor, or apple podcast on the cotacast homepage.
