Airline Unit Economics 101

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A couple of weekends ago, I visited some friends in San Francisco. One thing that caught my attention was just how cheap airline tickets are these days.

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A quick Google search will show you that you can get a roundtrip airline ticket from San Francisco to Los Angeles for $48. That’s less than a full tank of gas in California.

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So, how do airlines make money?

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Hint: It’s not from flying people from point A to point B.

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Airlines make less profit on a per-passenger basis than the cost of a cup of coffee.

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In 2023, the IATA forecasted the airline industry would earn a mere $2.20 per passenger. 

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The airline industry profits from ancillary services – priority seating, baggage fees, food and beverage, travel insurance, in-flight Wi-Fi, and more.

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Revenue from ancillary services as a percentage of total revenue has increased year-over-year since 2013.

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The most significant driver of growth in revenue from ancillary services is loyalty programs. 

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On average, many airlines make 10-20x more on a per-passenger basis from their loyalty programs than on airline tickets, per IdeaWorksCompany.

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When passengers sign up for an airline’s loyalty program, they earn frequent flyer points for every mile they fly. Airlines then turn around and sell these frequent flyer points to banks, which then reward them to their credit card holders. Airlines earn 1-1.5 cents per mile from banks and additional bonuses when someone signs up for their cobranded airline credit card, per Axios.

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Airlines have mastered the art of turning miles into millions.