This is a follow-up post to the my call for airlines to innovate their customer experience. An interesting article came out in Fortune magazine (March 21, 2011 issue) showing how much profit an airline makes on an average price of a ticket (including first-class) from Los Angeles (LAX) to New York (LGA). The answer may surprise you.
Ticket cost was $506.62.
What made up that cost?
- $97.85 fuel
- $95.33 labor
- $75.16 federal taxes & fees
- $53.73 payments to regional partners & merchants
- $36.59 miscellaneous
- $32.05 non-employee labor
- $27.47 other airline expenses
- $25.67 aircraft rents & ownership
- $17.07 nonaircraft rents & ownership
- $12.25 interest
- Profit = $33.45 or 6.6%
With a profit margin so thin, it is no wonder that airlines are in trouble. And so the mission is not necessarily to serve customers in as much as to improve profitability.
There are three ways to increase shareholder value:
- Mergers & acquisition
- Organic growth (find new revenue streams within existing business)
- New product innovation
The baggage fees that have been instituted is a great example of the way airlines have moved forward with monetizing their existing business. By controlling inventory (flights) and raising the baggage fees (from $0 to $25), there is instant profit. It does impact the customer experience at the airport with longer lines at TSA security checkpoints since now more carry-on luggages have to be screened.
Interestingly, a few airlines have refused to increase baggage fees in order to further differentiate themselves against the competition. It is clever, but will a consumer make an airline choice based on a $25 difference? No, but it does play well with brand positioning like a low-cost airline.
With airlines stuck with such thin margins, it behoofs the industry or its individual players to innovate in other ways, and claim blue oceans instead of monetizing red oceans. One incredible example is Virgin Atlantic’s partnership with GE to build a more efficient jet engine running on biofuels. All of a sudden, Virgin Atlantic is no longer just in the business of running a transportation business, but also in the development of the transportation equipment, yielding savings along the way, and quite possibly a new revenue stream in selling jet engines.
Time will tell if they are successful, but they are definitely visionaries.