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I've been underestimating the size of the airline industry. I have a hard time reconciling the fact that the airlines always seem to be on the verge of bankrupt

I've been underestimating the size of the airline industry. I have a hard time reconciling the fact that the airlines always seem to be on the verge of bankruptcy with numbers this big -- $90+ billion a year in just passenger revenue.

kevingadd 14y ago
The issue here is probably their margins, not their volume, though? It doesn't matter how much passenger revenue they bring in if the expenses (safety, security, regulation conformance, equipment maintenance, fuel, staff pay...) outweigh it.
- kamkazemoose 14y ago
  It reminds me of the old quip "We lose money on every sale, but we make up for it in volume."
megablast 14y ago
There are plenty of years where some airlines make around $100-$200 profit per flight. Not per customer, but PER FLIGHT. Think about all the costs involved, and that is your reward. http://si.wsj.net/public/resources/images/PJ-BH720A_MIDSE_G_20120606215401.jpg http://si.wsj.net/public/resources/images/PJ-BH720A_MIDSE_G_...
conjecTech 14y ago
Running an airline is an enormously fixed cost business. At 75% occupancy, you are barely covering the costs of renting airplanes and terminals, paying personnel, etc. Once you are clearing enough to pay all of that, your marginal profit margin jumps tremendously because all those costs don't increase with the number of passengers you have, so the only thing you have to pay for that extra person is gas, which is about 20% of the ticket price. That necessarily leads to a boom-bust type industry. Southwest has been consistently profitable to the extent that they have tried to actively undo that. They do so by flying out of airports with cheaper terminal rents, reducing the size of their maintenance crews by only flying 1 or 2 models of aircraft, etc. A professor at NYU posts lectures from his corporate finance classes online and actually goes through a thorough analysis of the industry in one of the lectures. Link: http://pages.stern.nyu.edu/~adamodar/ http://pages.stern.nyu.edu/~adamodar/

kevingadd 14y ago

The issue here is probably their margins, not their volume, though? It doesn't matter how much passenger revenue they bring in if the expenses (safety, security, regulation conformance, equipment maintenance, fuel, staff pay...) outweigh it.

kamkazemoose 14y ago
It reminds me of the old quip "We lose money on every sale, but we make up for it in volume."

megablast 14y ago

There are plenty of years where some airlines make around $100-$200 profit per flight. Not per customer, but PER FLIGHT. Think about all the costs involved, and that is your reward. http://si.wsj.net/public/resources/images/PJ-BH720A_MIDSE_G_20120606215401.jpg http://si.wsj.net/public/resources/images/PJ-BH720A_MIDSE_G_...

conjecTech 14y ago

Running an airline is an enormously fixed cost business. At 75% occupancy, you are barely covering the costs of renting airplanes and terminals, paying personnel, etc. Once you are clearing enough to pay all of that, your marginal profit margin jumps tremendously because all those costs don't increase with the number of passengers you have, so the only thing you have to pay for that extra person is gas, which is about 20% of the ticket price. That necessarily leads to a boom-bust type industry. Southwest has been consistently profitable to the extent that they have tried to actively undo that. They do so by flying out of airports with cheaper terminal rents, reducing the size of their maintenance crews by only flying 1 or 2 models of aircraft, etc. A professor at NYU posts lectures from his corporate finance classes online and actually goes through a thorough analysis of the industry in one of the lectures. Link: http://pages.stern.nyu.edu/~adamodar/ http://pages.stern.nyu.edu/~adamodar/