Airline Industry Overview - Products and Services

Many of us know the airline industry from our experience as passengers. While flying passengers is certainly at the core of the commercial airline revenue model, it is not the full picture. Revenue comes from a mix of products and services. The vast majority of revenue, commonly more than 90% of the company total, comes from passenger fares. While this may seem more like a service, passenger fares are commonly described as products in the airline industry. Different fares on a given flight are treated as distinct products. Passenger products are defined by the seat type and the fare rules. For example, refundability, baggage allowance, or even how far in advance the purchase is made. Last-minute high-priced tickets are considered separate products from lower-priced advanced fares. At the top of the product hierarchy is the cabin, either the economy cabin or a premium cabin like business or first class. Within the economy cabin, sometimes called coach, airlines commonly offer a number of different products. For example, an extra legroom product or a more basic product doesn't include seat selection or any carry-on luggage allowance. Premium cabin products vary, depending on the aircraft size and route flown. Smaller aircraft typically only have one premium cabin. This is often called business class or, in North America, domestic first class. Larger aircraft that run longer international routes have more real estate, therefore more opportunity for product differentiation. These planes commonly have multiple premium cabins, like first class, business class, and premium economy. By offering a number of tiers at different price points, airlines can maximize flight revenue by capturing the spectrum of willingness to pay across customers. Customers are commonly grouped by corporate and leisure. Corporate or business travelers tend to have a higher budget, a stronger preference for specific brands, and require more flexibility to make changes or book last minute. On the other hand, leisure travelers are typically price sensitive and less loyal to specific brands. To cater to these segments, airlines typically market premium cabins and other high-priced products to corporate travelers and offer lower fares and discounts to attract leisure travelers. Identifying and catering to high-value leisure travelers who value premium products is an increasing focus for many airlines. But passengers aren't the only revenue generators on the plane. Consider what lies below. The cargo, which airlines commonly carry in addition to passenger luggage for a fee. Depending on the airline, cargo can play a large or small role in the overall operations. Certain passenger airlines, like the Dutch carrier KLM, own and operate entire fleets of dedicated cargo-only planes. Other airlines, conversely, may take cargo on a more limited basis. There are also airlines primarily dedicated to cargo, like Atlas Air or the fleets operated by UPS and FedEx. Airlines most commonly source cargo via cargo brokers, but customers can also work directly with airport agents to make arrangements for cargo transport. Since planes are limited by the weight capacity, optimally filling the plane means choosing between cargo or passengers. Cargo, unlike passengers, has a flexible schedule. Delays, or even being bumped to a later flight, are more tolerable. When flights are overloaded, boxes are easier to remove than people. Plus, boxes don't need a meal service. During the COVID-19 pandemic, when passenger demand dropped, airlines shifted space to cargo, in some cases even placing boxes in main cabin seats. In addition to selling space on the plane, airlines increasingly sell ancillary products. These can be add-ons to the flight experience, like additional baggage, food or beverages on the plane, or Wi-Fi. Or these can be add-ons to the trip. For example, hotel stays, or car rentals. These are high margin additions and are increasingly a focus in the industry. Some airlines have adopted a particular add-on strategy, bare minimum fees with more as add-ons. In the U.S., this is a tax advantage strategy, since the federal aviation tax applies only to the base fare, not the add-ons. Airlines can also earn revenue by offering their maintenance teams to other airlines. For example, a United plane at a Delta hub, like Atlanta, might be serviced by a Delta maintenance crew for a fee. The final set of products are related to the loyalty program, the biggest being the co-branded credit card, which is, in fact, a major driver of company profit overall. Airlines have large affluent customer bases, which they offer to credit card companies and banks. In return, they share in card profits. Since airline operations are notoriously low margin, and credit card operations are high margin, this is a major source of profit for some airlines, as much as 50% of total airline profit, with little risk, complexity, or downside. Reward miles are another loyalty-based product, which airlines can sell directly as a high margin add-on.