Airlines are in business to make money and even though they may be on the receiving end of government bailouts from time to time, the bulk of their revenue comes from travelers. Aside from the cost of tickets themselves, airlines can also collect fees from passengers that help to add to their profit margins.
But just how much do airlines make? And how much of that revenue comes from their passengers? The numbers might surprise you.
- Airlines make the majority of their revenues from travelers, though they can also profit from affiliations with travel partners and credit card companies.
- Business travelers make up 12% of airline passengers, but they pay higher rates than other customers and are typically twice as lucrative, accounting for as much as 75% of profits.
- Businesses are generally willing to pay more to book last-minute and non-stop flight options but rarely allow premium-section seats for rank and file employees.
- Businesses usually allow employees to leverage business travel to earn and keep frequent flyer miles and points, which are increasingly valuable to airlines as a source of revenue and data.
How Airlines Make Money
Airlines receive nearly 60% of their revenue from passengers directly (the other 40% comes from selling frequent-flier miles to credit card companies and other travel partners like hotels and car rental agencies). That revenue includes the cost of airfare, fees, and other travel expenses the airlines charge.
But of that 60% of passenger consumer revenue, the big money comes from business travelers—as opposed to those flying for leisure or personal reasons—in percentages that far outweigh the number of travelers. Business travelers account for 12% of all airline passengers, but they tend to buy more expensive seats, buy last-minute tickets, and are typically twice as profitable as other passengers. In fact, on some flights, business passengers represent 75% of an airline's revenues.
This phenomenon has obviously changed in light of the pandemic, as overall airline traffic has been decimated in Q2 and Q3 2020 and was at one time down 96% (in April 2020) compared with the same period in 2019, though it has "recovered" to only being down about 70% as of the first week of October 2020 vs. the same week in 2019.
With the proliferation of Zoom meetings and most corporate employees working remotely, business travel, in particular, has been sharply curtailed in 2020. Still, business and consumer credit card customers are continuing to add to airline profits in the form of racking up miles and points with everyday spending even if they're not currently redeeming for free travel in the current environment.
When booking air travel, be sure to research updated airport health and safety requirements both in the terminal and aboard the plane.
Corporate travel policies used to emphasize saving money. However, (pre-pandemic, anyway), given the hassle-prone nature of air travel, managers often showed concern about employee comfort, convenience, and productivity—as it was counter-productive if an employee arrived too tired or stressed-out to do his or her job. So, businesses were often willing to pay more to book last-minute flights or non-stops options, though typically not seats in an elite section of the aircraft.
For senior executives or employees that are subject to special corporate travel policy consideration, first-class and business-class tickets can cost as much as 10 times the price of coach tickets. This premium pricing typically brings passengers better service and higher quality amenities than economy-ticket offerings. Business and premium consumer spending on these goods and services encourage competition among airlines for the most lucrative passengers. Many airlines, in order to lure new passengers, introduce innovative services or refit aircraft for more first-class legroom.
Business travelers and high-end travelers also bring substantial revenue to airlines by purchasing additional services and using frequent-flier and other incentive programs.
When booking first-class or business fares be sure to compare the cost of the flight and the amenities provided to see which one offers the most value for your money.
Increasing Business Travel Focus
As a result of being able to bank larger revenues from business travelers, many airlines are now focusing attention on corporate trade. For example, since 2017, Southwest Airlines—once known for its low frills and low fares—has targeted business travel with a growing in-house department. The airline has also undertaken other efforts, including working with companies' travel managers, the team can offer discounted fares or match a passenger’s status with other frequent flier programs. In 2021, Southwest announced additional plans to target business travelers and expand that segment of its revenue.
Frequent Flier Programs and Airline Revenues
Frequent-flier mileage programs are increasingly valuable to airlines, as business travelers and other first-class passengers link their credit cards to the programs and allow their consumption and spending behaviors to be tracked. High-income consumers have significant levels of disposable income to spend on a broad range of goods and services. Many businesses gather or purchase consumer spending data for use in developing a marketing strategy and product research and development.
The data airlines gather on high-end consumers using frequent-flier miles programs is extensive and tremendously profitable. Some frequent-flier programs are now worth many times the value of the airlines that own them, in fact. For most airlines, these incentive programs are an essential source of revenue and profitability that allow them to offer better pricing on tickets and more routes.
Many companies benefit from this data and are willing to pay for programs that are inexpensive for the airline to operate. Not all miles or travel points earned by consumers are actually used due to lack of travel redemption or expiration (which is termed "breakage"), further lowering program costs and profit contribution.
If you're enrolled in a frequent flyer program, consider opening an airline miles credit card to earn additional miles each time you fly.
The Bottom Line
Airlines earn their revenues in a variety of ways but the lion's share comes from business travelers, at least according to the latest industry data. Whether you fly business class, first-class, or economy, it's important to ensure that you're getting the best deal possible on flights. Researching fares and costs across airlines and using a travel rewards credit card to earn miles or points back on those purchases can help with managing your travel budget.