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How Much of Your $355 Ticket Is Profit for Airlines_ -WSJ.pdf

How Much of Your $355 Ticket Is Profit forAirlines?

Airlines are healthierthan everinancially—and that’s why theyadd more fees and more seats

Next time you board a flight, just imagine you’re putting a $20bill in the airline’s tip jar. Profit per passenger at the sevenlargest U.S. airlines averaged $19.65 over the past four years—record-setting profitable years for airlines. In 2017, it stood at$17.75, based on airline earnings reports. In truth, airlines nowcover their costs with tickets and get their profits from baggagefees, seat fees, reservation-change fees and just about all theother nickel-and-diming that aggravates customers. You might alsocall those extra 12 to 15 passengers now crammed onto each flight“Andrew Jackson” for the profit they bring. It takes a lot to earna little moving people. U.S. airlines experienced plenty of yearsof steep losses, when creditors were subsidizing tickets fortravelers. But now, profit margins—about 9% in 2017—are healthy.Keeping $20 from every passenger is about twice the profit airlinesin the rest of the world get, according to data from theInternational Air Transport Association. “It’s certainly high byairline historic standards. But it’s not high if you look acrossother companies in the U.S. economy. It’s average,” says BrianPearce, IATA’s chief economist. U.S. airlines were on pace to takein more than $4 billion in baggage fees and $3 billion inreservation-change and cancellation penalties in 2017, according toTransportation Department data. (The full year hasn’t been talliedyet.) Most of that drops straight to the bottom line. The twocategories add up to about more than half of the net profitsairlines posted last year. Airline earnings are further boosted byother fees for things like seats assignments, extra legroom, earlyboarding and pets, plus sales of frequent flier miles to banks forcredit-card rewards. Given the $20-per-passenger haul ($40round-trip), it’s easy to see why airlines are so intent oncramming in more seats, even when they know travelers hate the lackof space and complain bitterly about shrunken bathrooms, slim seatpadding and skinny rows. Last year, the average round-trip fare onthe seven largest U.S. carriers— American , Delta , United,Southwest , Alaska , JetBlue and Spirit —was $355, based on theirfinancial reports, up from $351 in 2016. Getting an extra two rowsof seats on a plane can mean the difference between profit andloss. Of course, some passengers are far more profitable thanothers. First-class and businessclass travelers are more valuablewhen they pay for their tickets; less when they get a free upgrade.But even then, road warriors are often upgraded from high-dollar,last-minute coach tickets. Frequent travelers account for a largepercentage of airline revenue—and profit. Low-fare passengersshoehorned into the back of the plane may not even be covering whatit costs to transport them. But they scored a low fare because theairline was concerned it might not fill all the seats on aparticular flight, and some fare is better than no fare. IATA’s Mr.Pearce says airline profits last year were squeezed by higher fueland labor costs, and that trend is continuing in 2018. Jet fuelprices were up 26% last year compared with 2016, and prices areexpected to be about 10% higher this year. Airline fuel efficiencyhas improved significantly world-wide as newer planes go intoservice, and older gasguzzlers are retired. But higher fuel priceshave driven airline costs higher. At the same time, expandingcompetition from low-fare carriers has kept fare increases small.Big airlines are building up in competitive markets like Seattle,Boston and Los Angeles. Even some cities that saw dramaticair-service cuts are getting more flights now; Delta recentlyannounced an expansion in Cincinnati, for example. With more emptyseats to sell, airlines are finding it even harder to raise ticketprices. “Fares are too low for oil prices this high,” AmericanAirlines Chief Executive Doug Parker said on an earnings call withanalysts last month. “Over time you’ll see it adjust.” Americanspent $1.3 billion more on fuel in 2017 than the previous year, a22% increase. The carrier also spent nearly $1 billion more onlabor, a 9% increase. The airline grew only about 1% last year, sorising costs meant earnings were down $757 million. Thus Mr. Parkeris pushing for higher fares. Among the big U.S. airlines, Southwesthad the largest net profit margin last year, at 16.5%. Southwestcontinues to defy conventional airline wisdom. It doesn’t chargebaggage fees; instead, it believes it attracts more passengers toeach flight because many want to avoid the baggage fees charged bycompetitors. Alaska, JetBlue and Spirit all had higher profitmargins than American, Delta and United. American had the lowestprofit margin among the top carriers, at 4.5% in 2017. Airlines’average profit margin of 9% is about average for a U.S. business.Last year McDonald’s posted a net profit margin of 23%; FedEx , 5%.But that average is a leap for an industry that had cumulativelosses from 1979 to 2014 of $35 billion and suffered six majorbankruptcies in the 2000s.

Questions.

1. How profitable are airlines today in comparison to historicalperformance? In comparison to other industries?

2. What does the author mean when he states that airlines gettheir profits from fees rather than ticket sales? Is this based onthe fact that there is no cost of goods sold as there is for ticketsales? Explain your answer.

3. What earnings metric is used to compare profits acrossairlines of different sizes?

4. Consider the note to the graphic entitled "Flight Change."How much difference exists in determining this metric acrossairlines? Do you think the differences hurt this comparison?Explain.