For an industry that appeared down and out a decade ago, the airline industry has enjoyed a strong comeback, capped with what's expected to be a highly profitable 2013 when the final accounting is done.
For 2013 airlines around the world are expected to return a global net profit of $12.9 billion, rising to $19.7 billion in 2014, according to the International Air Transport Association (IATA). That stands in stark contrast to 2004, when six U.S. airlines filed for bankruptcy protection.
Airlines have bounced back through consolidation, reducing available seats, lower fuel costs and, for course, a myriad of new fees for things passengers once took for granted. These “ancillary” revenues are a key driver of the industry's improved financial performance, according to the IATA report.
Worldwide, these ancillary revenues have risen to an estimated $13 per passenger, the trade group says. IATA says airlines are underpinning their profitability with innovative products and services. Without these fees, IATA says, the industry would be making a loss from its core seat and cargo products.
“Overall, the industry’s fortunes are moving in the right direction,” said Tony Tyler, IATA’s Director General and CEO. “Jet fuel prices remain high, but below their 2012 peak. Passenger demand is expanding in the five to six percent range, in line with the historical trend. Efficiencies gained through mergers and joint ventures are delivering value to both passengers and shareholders. And product innovations are growing ancillary revenues.”
Since consumers' willingness to pay a fee to check a bag is boosting airlines' profits, what are consumers getting out of the deal? The improvement in system efficiencies that has helped the airlines save money has come at the expense of fewer flights and fuller planes. Direct flights, even between major cities, are fewer than in the past.
Paying for perks
However, consumers willing to pay extra for perks are finding commercial air travel a bit more tolerable. For example, airlines have added priority seating. Want to sit by a window? You can but there's a fee for that.
American Airlines offers a package of boarding perks that allows you to board with the first group, priority stand-by status if you need to take a earlier or later flight and a $75 discount on any change fee. By boarding early you get the early dibs on overhead bin space, which is at a premium these days with so many passengers trying to avoid checked-bag fees. The cost of the package varies depending on the flight.
Continental allows passengers to purchase extra legroom. The fee varies, depending on how long the flight takes and the market. For example, you would pay more for extra legroom on a flight from New York to Los Angeles than you would from St. Louis to Chicago.
JetBlue charges extra for “roomier” seats and Southwest offers an early-bird check-in for $10, placing you in the”A” boarding group. All airlines seem to be moving to allow some of their passengers increased comfort and convenience, for a price.
While consumers may gripe, the published air fares have actually gone down in inflation-adjusted dollars. Today you can fly round trip on JetBlue between New York and Los Angeles for less than $325. If you could have matched that fare in 1977, when airlines were regulated, the airfare in today's inflation-adjusted dollars would have been $1,249. So airlines are selling tickets for less but making it up by charging for things that, in 1977, were free.
Still, with all the fee-generated income, the airline industry said it could encounter new turbulence at any time.
“It’s a tough environment in which to run an airline,” said Tyler. “Competition is intense and yields are deteriorating. Cargo volumes haven’t grown since 2010 and cargo revenues are back at 2007 levels. The passenger business is expanding more robustly. Some airlines will out-perform our estimates and others will under-perform. But, on average, airlines will only make a net profit of about $5.94 per passenger in 2014.”