Is Selling Seats the Best Way to Airline Profitability?
Is Selling Seats the Best Way to Airline Profitability?
At first, this question may sound controversial, considering the fact that the entire century-old airline industry has been built around selling seats. However, the rationale behind the question will become clearer as you consider the following fundamental questions.
- Why do airlines and especially schedule airlines sell seats?
- Why did the first airline choose to sell seats?
- Is selling seats the best way for an airline to make profits?
So let’s begin with the first question.
Why do airlines and especially schedule airlines sell seats?
If you were indeed shocked by the title of this article, chances are you have never asked nor considered this question before. You would agree that this is a practical illustration of things, which are often taken for granted in business or in life in general.
One may offer a generic answer: “Well, every airline I know of is selling seats, so I guess that is why all the other airlines are doing the same.” And the generic answer is true, at least partially. The true reason why airlines sell seats to fill their flights is because, the very first airline, the St-Petersburg Tampa Airboat Line (SPT Airboat Line) sold seats. Had Percival E. Fansler, the entrepreneur who started that airline chosen a different business model, chances are that would still be around today. As a matter of fact, Mr. Fansler considered other means, which are also widely spread across the airline industry today, namely: auctions and subsidies.
As you may already know, the SPT Airboat Line ceased operations less than five months after its inaugural commercial flight on January 1, 1914. The main reason was that the airline ran out of subsidies and obviously, the revenues generated through seat sales were not sufficient to sustain the operations.
And with very few exceptions, that is still the reality within the airline industry across the globe, a little more than a century later.
With that said, Mr. Fansler deserves all the credit for having come up with a powerful, innovative and far-reaching vision from which the airline industry was born.
Why did the first airline choose to sell seats?
Now, let’s consider why Percival E. Fansler chose to sell seats? An obvious answer to that question is that all other means of transportation did and do sell seats. The rationale might have been that what is widely accepted as common practice for travel by boat, train, or bus might as well apply to air travel. That line of reasoning in itself may not be wrong. However, it most probably didn’t back then and up to this very day still doesn’t take into account the fact that airline operations are arguably the most capital intensive means of mass transportation.
Is selling seats the best way for an airline to make money?
Let’s move to the next question: is selling seats the best way for an airline to be making money? Most probably not. Firstly, that has been proven well enough by Fansler‘s SPT Airboat Line going bankrupt in less than five months. Secondly, the fact that airlines have felt the need to supplement ticket sales with a plethora of often arbitrary ancillary fees, in order to make ends meet, clearly indicates that the business model is not sound enough to sustain ongoing profitable airline operations. Finally, the widespread use of frequent flyer programs to incite customer loyalty is yet another point, which highlights the fact that selling seats is not a right business model for airlines.
Although Percival E. Fansler was a visionary in launching the very first scheduled, commercial airline at the beginning of 1914, it is safe to suggest that the basic business model he applied was not effective enough to ensure continuous operations and profitability. Unfortunately, the airline business recipe, which led to the demise of the St-Petersburg Tampa Airboat Lines less than five months after its inaugural commercial flight, has been copied worldwide with little or no improvements. Subsequently, the financial results of the airline industry with very few exceptions have been overall mediocre compared to other industries. For instance, the view that the airline business model makes no economic sense was also vividly highlighted by billionaire investors like Warren Buffett and Sir Richard Branson, based on their own experience with the airline industry. A 2012 article by The Economist sums it up well by stating that “Airlines are wonderful generators of profit—for everyone except themselves. Even in good times, their margins are as thin as a boarding pass…” The recent wave of record profits has done nothing to change that perspective. It may be important to note that the exceptional financial performance of the past three to four years was the result of externally-controlled cost savings instead of self-generated revenue-driven profits. And that is certainly an unsustainable position, which tends to confirm that selling seats has proven its limits long enough for airline leaders to start questioning the soundness of their business models. Finally, the solution to this chronic issue cannot be a one-size-fits-all approach. However, it will take a rethinking effort in order to question all pre-conceived and widely accepted assumptions so prevalent in the airline business to determine a more congruent and profitable business model. At Airline Profits, we are convinced that the time for rethinking the airline business is now.
If you like this article, you may also like our book series on airline business and technology. You can learn more of the first book Airlines for Business: A Customer-centric and Profitable Model for the 21st Century Airline.
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