A full flight does not mean it is profitable

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In this installment we want to debunk the myth that a full flight will always be profitable, when the reality is that a full flight does not mean it is always profitable.

Many times we have seen how airlines close routes (for instance Quito – New York, Quito – Dallas or others around the world) that at first glance seem to be profitable and that there is no logical reason to stop flying, because the flights are always full to the last seat or with average occupancy of the 80% al 90%, but it really is that in a flight there are many parameters that affect that profitability and that are reflected in the ticket price what users pay.

In a previous installment we talked about the reasons that make air passengers more expensive and in another how is it possible lower these prices, so now is the time to know how a flight becomes profitable or not..

Profitable flight

The goal of all airlines in the world, even those social, is to maintain financial profitability in its operations for which it is necessary to frame and standardize some concepts:

• On previous posts The reference to fixed costs and variable costs was explained and a link was left in the efficiency that each airline achieves under its cost management policies, so we must define this time:
  • Direct Costs, are those who intervene in the process of carrying out the service that the company (development and operation), clearly identified and that are directly related to the final price of the service provided and the profitability of the company is guaranteed. At higher direct cost, higher final sales price to the user.
  • Indirect Costs, are all additional costs that are indirectly involved in the provision of the service such as commercial costs, administrative and some financial. These costs are directly related to the efficiency of the company by subtracting profitability..

We are going to relate these costs to the load factor or occupancy level on the planes., considering multiple factors including the volatile nature of demand.

In simple words, The direct costs plus the indirect costs are related to the income, so the final benefit will be positive or negative depending on the management of the costs in such a way that there is inefficiency in their management no matter how high the occupancy factor is maintained., will cause losses to the airline.

Direct costs have been reduced due to operational efficiency.

Indirect costs have increased due to the presence of unions, high personnel costs, heavy administrative structures (bureaucracy) etc, This inefficiency has taken away competitiveness and reduced profitability margins and put airlines at serious risk regardless of the load factor being favorable to airline statistics..

The administration in search of balance transfers this need to the user by raising fares and ticket costs., thus directly affecting the occupation, becoming a wheel by not attacking with strategies the efficient management of costs and specifically, to the indirect ones that go through structural issues.

Through the previous paragraph we can also clarify the claim of some users for the closure of a route, who say they should raise the price of the ticket to make the route profitable, but clearly, By doing this you will harm yourself even more, occupancy affecting users' purchase intention.

It should be considered that these characteristics are not exclusive to air transport., But there are other sectors that find themselves in the same situations..

The common perception that full planes generate high profits is not corroborated by the data of high direct and indirect costs.. This factor is what has led to innovation in airlines, with the aim of generating more income with the same load factor without attacking efficiency, as a central problem.

The real need is to improve management capacity to make an airline efficient in the face of constant changes in the industry and thus avoid the closure of routes that have significant occupancy or attractiveness..

Conclution

• Direct costs are improved with better planning and improved schedules.
• Reducing parking times and turnaround helps improve profitability.
• Indirect costs are improved with staff reduction, light structures, efficient and use of new technologies.
• It may also be the case that a flight with low occupancy is profitable for the airline., all for the management of their costs and additional line of business, such as cargo transportation in the warehouse..
• Finally, There are also cases of airlines operating profitable flights, but do not meet the expected parameters or projected base, despite generating income for the company.

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