I know about high fixed & variable costs, but leasing and buying an airplane isn’t cheap either, and entrepreneurs with that much capital and surely great IQ couldn’t turn an airline profitable. How is this possible? there has to be something “internal” or something I’m missing?
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I believe it’s primarily due to the commoditization of flights, thanks to the internet. Websites such as Expedia.com, Priceline.com, and other fare comparison abilities, allows people to search for the lowest cost flight, regardless of carrier so it became a “race to the bottom” in terms of price.
Since the actual transportation became identical between companies, they sought other ways to increase revenue (early boarding, seat selection, WiFi, bag fees, and the like.)
Airplanes can move around the world fairly quickly and the crews don’t necessarily have to live in the country where the plane is operating for international flights.
So imagine that you’re a European airline. Your maintenance facilities are in Europe, your employees are European and you’re buying aviation fuel at the market rate. Competing with you for international routes are airlines from the Middle East.
Their maintenance facilities are in Saudi Arabia, using labor from Pakistan and Indonesia. Other than the pilots, their crew is also Pakistani or Indonesian. Because the standard of living in those countries is substantially lower than it is in Europe, salaries for labor from those countries is also substantially lower.
They’re also not paying the market rate for fuel – they fill their plane up to capacity with subsidized fuel in Saudi Arabia, then just top up with what they need in Europe.
International routes are the most profitable because they’re the most fuel efficient. But its hard for first world airlines to compete against third world ones on international routes. That means that large, first world airlines have to make their money on lower profit domestic routes. But they’re also competing on those domestic routes with low cost budget carriers that don’t bother to compete on the international routes.
So if you’re a large first world airline, you’re competing against low cost foreign airlines on your international routes and low cost domestic airlines on your domestic routes. Its hard to do both of those things at the same time while remaining profitable.
Airports have a limited capacity and regulations restrict how noisy a plane can be and when they can fly all this limits the number of takeoff and landing slots available and most of the good ones are already taken by the major airlines, add to that the airplane are expensive piece of kit and need to be maintained and fuelled which adds to the costs, then the price of fuel can suddenly double in price and make all the profit and loss operating figures suddenly worthless.
The short answer is something called breakout cost. Airlines fall into this interesting category of business which the profit per customer starts negative and increases per customer PER INSTANCE OF SERVICE RENDERED essentially. If an airline can nit guarantee some minimum number of people on a flight, the flight is a loss.
Well, how do you guarantee a lot of people on a flight? Service a high traffic corridor. Well, those are all already serviced by existing companies with multi year contracts with the airports and more comprehensive services and bigger and better planes that fly more people per landing and takeoff, so they can outbid you for space on a big airports runway.
So, you have to service smaller local or regional airports.
Well, those usually have three to four major airports the connect to and they complete four or six flights a day per. There and back two or three times. So, you have to fill two flights out and two flights back to whatever small city you’re based in. And remember the fees you pay when arriving at the large airport are still expensive, so you’re probably barely breaking even on that half of the trip.
So, you have two flights worth of passengers to make all your income, and pay your crew for a full day’s labor. Pilots are expensive and aircrew aren’t exactly cheap either.
So basically, if you aren’t flying a ton of flights on giant airplanes, you’ll never get enough throughput for it to be worth it. If you’re flying out of a small airport cause you can’t compete at the larger ones, you can never fill a big enough plane.
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