Airlines Nickel and Dime Their Way to Profitability

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This is particularly good news for the industry, under the circumstances. Is the business finally sustainable?

600 Airline Fees Matt Rourke AP.jpg

You know those extra fees that airlines have tacked on to your fare, like for baggage, food, or "premium" coach seats? They actually may be working: most airlines are becoming profitable. This is a somewhat surprising result, particularly now. Is the industry finally on the road to sustainability?

Profitable At Last

First, here's the news via Jad Mouawad at the New York Times:

After a decade of losing money because of cutthroat competition, slumping traveler demand and volatile fuel prices, the industry has found a way to regain control of its fortunes -- and make money -- by shelving its 1990s strategy of aggressive growth. Despite the weak economy, most domestic airlines will have their second consecutive profitable year in 2011, after losing $55 billion since 2001.

Considering their problems historically, two consecutive profitable years would be a notable milestone for the airlines at any time. But for 2010 through 2011, this result is particularly significant.

Think about what has characterized the past two years: relatively weak consumer sentiment and subdued spending. It's a time when Americans and firms are cutting back where they can. This should imply that vacations and business travel are suffering. 

And that's not all: 2011 has been a year when oil prices have skyrocketed. Jet fuel prices had risen 31% year-over-year as of August. In 2011 alone, prices are up 29%. Fuel is a major, unavoidable cost for airlines.

Are the Airlines Now Sustainable?

Despite these obstacles, the airlines have been profitable. This shows a few things. First, their cost cutting techniques must be working. That food they used to provide may have been costing them more than it was worth to customers. Encouraging people to stop over-packing by forcing them to squeeze everything in a carry-on or face a charge for checking may be saving them money on fuel.

But the airlines' recent success also likely shows that these new fees aren't reducing airfare in proportion to their cost. If they were, then airline revenue would remain largely unchanged relative to costs. So these fees must be sneaky fare hikes after all, since they're providing airlines with the extra revenue that they need to turn a profit. 

While this conclusion might infuriate flyers, maybe it shouldn't. Although nobody likes paying more for a service, the unfortunate truth is that airlines weren't charging enough money before to be profitable. The new total price to fly, including various fees, means that the airlines are more viable.

Really, consumers must be able to stomach these fees too. If airlines are profitable, then the higher all-in prices they're charging must not have cut demand enough to substantially reduce the number of consumers who can afford to fly. 

I wonder, though, whether the unforeseen nature of some fees matters here. Some less frequent flyers might not realize that they'll be hit with fees for items like baggage and food until they've already purchased a ticket. So some consumers might not be purchasing tickets based on their tolerance for the total price, but just the fare alone.

If that's the case, as flyers become more acquainted with these fees over the next couple of years, we could begin to see demand decline. Some might realize that flying isn't as affordable as they believed, after all. If that happens, then revenues will also decline and some of those profits we're seeing now might be reduced as well.

But by then, the economy may be stronger. That would mean that incomes will be higher and consumers will find those higher prices more affordable. It also means that demand will rise more generally, since consumers and business people will be more willing to travel. So these profits could be sustainable either way.

Image Credit: Matt Rourke/AP

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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