A:

Airlines receive about 60 percent of their revenue from consumers directly and the other 40 percent from selling frequent-flier miles to credit card companies, repairing aircraft and offering other services. Of consumer revenue, business travelers contribute more than leisure travelers. Business travelers account for 12 percent of passengers but are typically twice as profitable for airlines. On some flights, business passengers represent 75 percent of an airline's profits. First-class and business tickets may 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 do. Consumer spending on these goods and services encourages competition among airlines for the most lucrative passengers. Many airlines, to lure new passengers, introduce innovative services or refit aircraft for more first-class legroom.

Business travelers and high-end travelers bring substantial revenue to airlines by purchasing additional services and using frequent-flier programs and other incentive programs. Frequent-flier miles 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 high amounts 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 marketing strategy and product research and development. The data airlines gather on high-end consumers using frequent-flier miles programs is extensive and tremendously valuable. Some frequent-flier programs are now worth many times the value of the airlines that own them. 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 earned by consumers are actually used, which lowers the cost of the programs even further and contributes to their profitability.

With gradual increases in the number of passengers, many airlines modestly expanded service capacity in 2014. Revenue growth continues to be driven by offering improved first-class and business service on popular routes. Leisure travel, while accounting for about 70 percent of the entire travel industry's revenue in 2014, remains less of a focus for the airlines. High-end passengers are primarily driving revenue in the airline industry, and airlines continue to compete strongly for these passengers. Several major airlines plan to add lie-flat seats and mini-suites to domestic routes and offer more legroom to passengers. Incentive programs are being redesigned to cater to business needs and reward dollars spent rather than miles flown. Routes that are popular with business travelers are receiving additional service with more flights and seating added to attract high-revenue passengers.

RELATED FAQS
  1. How can I use the load factor as an indicator for the profitability of the airline ...

    Learn more about how investors and airlines use load factor. Find out about some of the major expenses of airlines and how ... Read Answer >>
  2. What are the major expenses that affect companies in the airline industry?

    Discover the major expenses that airlines must pay. The two largest are labor costs and fuel costs. Fuel costs are the biggest ... Read Answer >>
  3. Are travel rewards credit cards worth it?

    A travel rewards credit card may be worth it depending on how frequently you travel and whether you can afford to spend on ... Read Answer >>
  4. What Canadian credit cards offer the best travel rewards?

    Discover Canada's best credit cards for travel rewards and the benefits that they offer. Learn how these cards can help you ... Read Answer >>
  5. Why is there a negative correlation between quantity demanded and price?

    Learn what the law of demand is, the basic assumption of the law of demand and why there is a negative correlation between ... Read Answer >>
  6. What economic indicators should an investor in the aerospace sector consider?

    Discover the economic indicators that investors in the aerospace sector should consider. Two major parts of the sector are ... Read Answer >>
Related Articles
  1. Investing

    Who Are American Airlines’ Main Competitors? (DE, JBLU)

    Understand what makes American Airlines a good company and what sets it apart in the industry. Learn about the top four competitors to American Airlines.
  2. Personal Finance

    7 Air Travel Perks That Used To Be Free

    If you're a long-time air traveler, you've probably noticed that flying means pulling out your wallet a whole lot more often. Find out what's fallen off the list of airline freebies.
  3. Insights

    Alaska, Virgin America Report December Traffic Statistics (ALK)

    Alaska Air Group has released December operational results for its five subsidiary airlines.
  4. Personal Finance

    Ever-Higher Airline Fees: Will Congress Save Us?

    Democratic senators want to crack down on high fees the airlines charge for things like changing flights. The airlines say this would end cheap airfares.
  5. Investing

    American Airlines Trades Ex-Dividend Wednesday (AAL)

    The company is adjusting to an environment where there are more seats available across the industry than demand, which forces airliners to cut prices.
  6. Investing

    Frequent Flyer Miles, the Hidden Lynchpin of Airline Sector

    Analysts at Stifel argue that frequent flier programs are secretly generating big, reliable profits across airlines.
  7. Personal Finance

    5 Changes To Airline Rules You Need To Know

    Passenger rights advocates have been clamoring for the government to issue new rules to prevent airlines from abuses such as tarmac delays and lost luggage.
  8. Insights

    American Airlines Updates Q4 Guidance, Announces November Traffic (AAL)

    American Airlines issued a press release detailing its November 2016 traffic performance. The airline also revised its Q4 guidance.
  9. Insights

    Falling Prices, Revenue Hit Airlines

    2016 has been a tough year for U.S. airlines with overcapacity and falling prices.
  10. Managing Wealth

    Specialty Websites for Low First Class Airfares

    If a first class airline ticket is your goal, there are specialized websites that can help you find a good deal on one.
RELATED TERMS
  1. Revenue Passenger Mile - RPM

    A Revenue Passenger Mile is a transportation industry metric ...
  2. Revenue Seat Miles

    The number of miles a plane flies multiplied by the number of ...
  3. Transferable Points Programs

    With transferable points programs, customers earn transferrable ...
  4. Travel Expenses

    Travel expenses are costs associated with traveling for the purpose ...
  5. Cost Per Available Seat Mile - CASM

    Cost per available seat mile (CASM) is a common unit of measurement ...
  6. Traveler's Check

    A traveler's check is a medium of exchange that can be used in ...
Hot Definitions
  1. Return on Assets - ROA

    Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
  2. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  3. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  4. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  5. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  6. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
Trading Center