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Analyzing Airfare
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Low fuel costs and burgeoning demand for air travel have created a very profitable environment for airline marketers, but the profit potential has been somewhat hampered by the increasing presence of low cost carriers, which, luckily for consumers, help keep prices down. But with the average one-way ticket costing $177, just how much of that ticket is profit?

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After many years of declines, margins have been relatively excellent over the past four years and now sit at about 9%, and so airlines are taking in an average of $18 every time a passenger boards a plane. But what is so interesting is the fact that half of those profits come in the form of baggage fees and reservation change fees. And much of the rest of it is through fees derived from cancellation penalties, early boarding, extra legroom, pets, and other "extras" that pretty much drive most consumers nuts. At the end of the day, airlines are pretty much covering their costs with tickets and making their profits from the extras. The "a la cart" approach to pricing is working rather well.

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But fuel prices are rising as supply begins to drop, and labor costs continue to rise for airlines. And so airline engineers endeavor to squeeze an increasing number of seats onto each aircraft, as marketers learn that, in addition to the extras, keeping first class and business class customers absolutely happy is also of paramount importance. It's likely that margins over the next few years won't be as good as 9% (which is about average for businesses in general, but relatively high for an airline industry used to operating on thin margins); but rising passenger volume can make up for lower profit margins, meaning that net profits should increase despite these external threats. Fares will also likely rise as industry costs rise.

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Another interesting point concerns the fact that the airlines with better customer service records (JetBlue, Alaska, Southwest, Delta) enjoy a higher than average profit margin than do those with ongoing service quality issues (United, American, Spirit) which have lower than average margins. This suggests a relationship between customer satisfaction and return on investment, which is always exciting. of course there will be winners and losers, but let's see if the industry as a whole can keep up the momentum it has gained as the economy (and consumer demand) continues to improve.

 

Discussion: Discuss the relationship between profit margins and passenger volume. Refer to the previous post. What does increased capacity mean for the industry? Why do you think service quality and profit margin might be related?