is it true that economy class pays for

[ian173]

cost of the flight and business and first class is the profit



just wondering if its true

 

[NM]

Maybe for some flights, but I suggest that is a very broad statement to apply to all flights. Yield Management is a very complex art where generalities generally do not apply.

 

[medhead]

I would guess that in general terms that is about right. Of course, there has been much written about the excessive fares on the trans-pacific route when there waas limited competition on that route.

But I'd expect that airlines will set their economy airfares at about the cost of moving a person on that flight. Maybe with some profit overall if all economy is sold - i.e cheapest fare at cost price and more expensive economy fares cost price + profit. The premium fares then cover that base cost and get more cash, which is then offset by the level of service provided. So premium fare = cost price + service charge + profit. Then I guess one trick is to minimise the cost of providing the service, and bearing in mind that the cost of providing service is spent whether or not you have premium pax.

Edit: this is a general appreciation, as NM mentions it is not going to be correct in all situations.

 

[NYCguy]

I'd be more inclined to think that the passengers in first and biz subsidize the cheap seats at the back.

 

[Keith009]

A source from a large airline once told me that, all things being equal (ie under normal economic circumstances with sustainable fare levels), at least 70% of Economy has to be filled for the flight to break even, as Economy covers the fixed costs of the flight. When that threshold is met, Business and First cabins start being profitable - think of them as the cream on top.

 

[simongr]

This simply doesnt work as an accounting concept. Sure it is interesting to talk about but saying " x pays for Y and z is profit" is just shuffling the allocation.

You could flip it totally and say "J/F pays for the flight and whY is the profit".

Essentially the cost of the flight is X and the revenue is A+B+C (or A+B+C+D if you have why+) and the difference is profit. All the rest is people justifying their jobs...

 

[harvyk]

Don't forget that they also carry freight and mail on board as well and that'd earn them some cash for the flight.

I don't think any one area pays for the flight itself, because remember that eccon is split into many different classes, for example tomorrow morning I can fly from MEL - CBR in eccon and pay $368, or I can fly on the exact same flight, and sit in the exact same seat and get the exact same level of service and only pay $89.

Obviously QF would have made far more money from me by me paying $368, but I doubt they are making a loss from me only paying $89 (their probably not making much of a profit either, but for them it's guarenteed income with no risk)

 

[odysseus]

I'd be more inclined to think that the passengers in first and biz subsidize the cheap seats at the back.

I wouldn't think there's much subsidising that wilfully goes on. Subsidising 70% of your business doesn't make a lot of sense.

 

[medhead]

Indeed. I think that if there was any subsidy it would be the Y fares subsidising the N fares. If you're not planning to at the absolute very least break even in economy, then there doesn't seem to be much point in being an airline

 

[NM]

Essentially the cost of the flight is X and the revenue is A+B+C (or A+B+C+D if you have why+) and the difference is profit.

Or maybe that should be A+B+C+D+E+F+G+H+I+J+K+L+M+N+O+P+Q+R+S+T+U+V+W+X+Y+Z+freight

given that there are so many different fare types purchased. And even within each booking class there are different fares. And the "revenue" realised from FF redemptions. And the on-board duty-free sales. And ...

It all goes to the revenue side of the ledger.

And while it may be interesting to look at it at the micro-accounting level of a per-flight basis, I expect the major airlines look it more at a macro level of routes and even overall performance, where some individual flights may operate with less than attractive micro-accounting ledger entries, but they contribute to an overall business result that is less easy to measure at the micro level.

 

[simongr]

I wouldn't think there's much subsidising that wilfully goes on. Subsidising 70% of your business doesn't make a lot of sense.

Depends how you define 70% really - by passenger numbers, by revenue, by recurrent business...

 

[senojynot]

The answer is not straight forward. People have often suggested this, but its a very simplistic analysis of a much more complex revenue:costs equation.

Basically, each section of the plane generates different costs per passenger according to the amount of floorspace and weight they contribute to the flight.

Good airlines look to make a profit out of every single passenger relative to their share of revenue, floorspace occupied, share of weight and direct costs. Its true that business and first pax should generate more dollars each in gross profit, but they should also contribute a lot more to the cost of the flight than a Y pax. Simply put, QF probably seats 20 Y pax in the same space they would probably put 6 or 7 business passengers, so for the "real estate" share of the costs they need to be charging at least three times as much.

If you think this is complicated, remember that an airline accountant would tell you that my analysis is superficial! So the short answer to your question is that its an irrelevant observation for people to make and not a principle that should drive any airline executive.

A final point, which airlines are making money at the moment? If any, its the budget guys with no first or business class!

 

[harvyk]

I'm With with yoiu NM,

I'd say the airlines will usually look at a route as being profitable or not, rather than the specific flight. An airline probably doesn't care if it runs an individual flight at a loss provided that overall it's making a profit across all flights which fly the route (I've been on some very empty B747 flights). Whilst they may cut down on the number of flights per week if a route is not profitable, they probably wouldn't do it if a route is profitable as they'd see it as a way of advertising "we have x number of flights to distination y a week" BNE - LAX is a classic example of a route which they advertise the number of flights per week flown on that route.

 

[odysseus]

Depends how you define 70% really - by passenger numbers, by revenue, by recurrent business...

It's an arbitrary figure looking at passenger share by class, and as mentioned by others that goes up and down, based on route, aircraft and other factors. However, Economy is always the majority, so the point remains that it's not a sensible business to be long-term subsidising the majority of your customers.