Why Airlines Struggle to Make Money

Why airlines have historically earned thin profits despite huge demand, from high fixed costs and fierce competition to fuel price swings.

Air travel has grown enormously over the past half century. Yet airlines have a reputation as one of the hardest industries in which to make money. Warren Buffett once joked that a far-sighted capitalist at Kitty Hawk would have done investors a favour by shooting down the Wright brothers’ plane.

Why margins are thin

Several features squeeze airline profits:

High fixed costs: aircraft, maintenance, airport fees and crews are expensive whether flights are full or not.
A perishable product: an empty seat on a departed flight can never be sold.
Fuel price swings: fuel is one of the largest costs, and its price is volatile.
Fierce competition: when one airline cuts fares on a route, others often follow.
Shocks: wars, terrorism, recessions and pandemics can suddenly empty planes. During the COVID-19 pandemic, global air travel collapsed in 2020.

Load factor and yield management

Airlines watch their load factor, the share of seats filled. Because an extra passenger costs little once the plane is flying, filling seats is crucial. Airlines use yield management, constantly adjusting prices based on demand, booking time and seats remaining, to squeeze as much revenue as possible from each flight.

Two passengers, one row

Two passengers sitting side by side may have paid very different fares. One booked three months ahead for a holiday; the other booked two days before a business meeting. The airline sets prices to capture more from travellers who need to fly at short notice, while filling other seats with price-sensitive holidaymakers.

Deregulation and low-cost carriers

The United States deregulated airlines in 1978, ending government control of fares and routes. Fares fell and many more people could afford to fly, though several major airlines later went bankrupt. Low-cost carriers, such as Southwest in the United States, Ryanair in Europe and IndiGo in India, cut costs by using one aircraft type, flying planes more hours a day, and charging extra for bags and seat selection. IndiGo has grown into India’s largest airline by passenger share.

Thinking high ticket prices mean airlines are rich

Tickets can feel expensive, but most of the fare goes to fuel, aircraft, staff, airports and taxes. Over the long run, the airline industry as a whole has earned thin profits, with frequent losses during downturns.

Key takeaways

Airlines face high fixed costs, perishable seats, volatile fuel prices and fierce competition.
Filling seats is crucial, so airlines use yield management to vary prices.
U.S. deregulation in 1978 lowered fares and increased competition.
Low-cost carriers like Southwest, Ryanair and IndiGo cut costs and expanded air travel.