November 29th, 2012

Flying High - How Smart Airlines Make Money

Being several thousand feet above ground does wonders for your productivity. At time of writing, I’m on an easyJet flight from Sharm El Sheikh to London Luton, thinking about the different ways in which airlines compete. With no Internet or other nagging responsibilities for these six airborne hours, I decided to write about it. 

The ‘health’ of airlines is well publicised. I’m sure you could name at least one that you know that no longer exists or, for example, relay what you’ve heard about BA’s latest struggle with jobs cuts.

The industry is also obscenely competitive. We know consumers are driven primarily by price, but what fascinates me is how airlines can sell tickets for even less than they cost. Author Chris Anderson uses Ryanair as a case study in his book Free and I’ll use a similar example here to demonstrate how airlines are getting smart.

It costs easyJet around $70 to fly one person from London to Barcelona. To compete with Ryanair and such, they market these tickets for around $45. It doesn’t take a genius to work out that they wouldn’t last very long if they relied on ticket sales alone as their revenue stream. Here’s how they make up the difference: 

1. Baggage & Credit Card charges
Many passengers are forced to add additional luggage to their booking before even entering the airport. Usually these are paid using a credit card. Margins on both of these items are high (sometimes the bag charge is more than the seat!) and the £5 credit card charge incurred on a £30 booking is a decent return.

2. Speedy Boarding
On top of this, easyJet have introduced a reservation charge for booking a specific seat. The charge ranges from £3 to £12 and is another quick win. 

3. In-flight Refreshments
I’ve just been passed by the trolley and spent £20 on a very modest dinner. Margins on flight food are high so I would estimate that around £15 of this is profit and another quick earner for the airlines. 

4. In-flight Advertisments
Think traditional advertising - whether it’s on TV, in the high street or at an event – there is a constant fight for consumer’s attention. Right now there’s a large advertisement on the seat in front of me that has my attention for the next six hours, whether I like it or not. I’ve also been flicking through the inflight magazine; of 186 pages, well over 100 are straight advertisements. I’ve even heard of airlines playing radio adverts over the PA system throughout a flight. They should monetise further by selling earplugs! 

5. Cross Selling
As we approach the UK I’m asked if I want to purchase a National Rail train ticket directly from the flight attendants, or if I want to rent a car. The degree of audience engagement unique to the in-flight environment means that airlines can take hefty commission off any referred business here.

From having a quick look at EZY’s accounts from last year it’s clear that running an airline is far more than just selling tickets. Over 20% of their revenue is from sources other than ticket sales according to last year’s annual report. The next time you think up a business idea try and be clever about your revenue strategy. Can you be competitive on price, offer freemium incentives and generate revenue elsewhere?