An airline makes money when the revenue from each flight is higher than the cost of operating it. That sounds obvious, but the gap between the two is usually small. Revenue comes mainly from passenger fares, supplemented by cargo, fees for extras and loyalty programmes. Costs are dominated by fuel, labour, aircraft and airport charges. Small changes in how full the planes are, or in fuel prices, can swing a route from profit to loss.
Where the money comes in
Most of a passenger airline’s income is the fare paid by travellers. Beyond that, there are several other streams:
- Cargo. Freight carried in the belly of passenger aircraft, or on dedicated freighters, can be a meaningful extra stream, particularly on long-haul routes.
- Ancillary revenue. Charges for checked bags, seat selection, priority boarding, onboard sales and change fees. The piece on ancillary revenue on this site covers how this category grew.
- Loyalty programmes. Frequent flyer schemes sell points to banks and retail partners, and some carriers earn a large share of profit from this arrangement.
- Other services. Maintenance work for other operators, ground handling, charter flying and training.
Where the money goes
Operating an aircraft is expensive, and the bills arrive whether seats are full or empty. The main cost groups are:
- Fuel. Usually among the largest items, and one of the least controllable because prices move with global oil markets. Some airlines hedge, which means agreeing a price in advance to reduce surprises, though hedging can also lock in a price that later looks too high.
- Labour. Pilots, cabin crew, engineers, ground staff and managers.
- Aircraft ownership. Either depreciation and interest on owned aircraft or lease payments on rented ones.
- Maintenance. Scheduled checks and repairs required by aviation regulators.
- Airport and air-navigation charges. Landing fees, terminal charges and en-route navigation fees.
- Sales and distribution. Booking systems, payment processing and commissions.
Because many of these costs are fixed once a schedule is published, the key question for each flight becomes how many seats it sells.
The metrics airlines watch
Airline managers rarely look at total revenue alone. They use ratios that normalise for the size of the operation.
| Measure | What it describes |
|---|---|
| Load factor | Share of available seats that are filled |
| Yield | Average revenue earned per passenger-kilometre or mile flown |
| RASK / RASM | Revenue per available seat-kilometre (or mile) |
| CASK / CASM | Cost per available seat-kilometre (or mile) |
| Break-even load factor | The load factor at which revenue equals cost |
The simplest test of a route is whether RASK is higher than CASK. If it is, the route is profitable on that measure. If not, the airline needs to raise fares, cut cost or fill more seats.
A simplified example
The numbers below are invented to illustrate the arithmetic, not taken from any airline.
Imagine a 180-seat aircraft operating a short route. If the total cost of the flight is 18,000 units and the average fare is 120 units, the break-even point is 150 passengers, a load factor of about 83 per cent. At 160 passengers the flight earns 1,200 units of profit. At 140 passengers it loses 1,200. The swing from profit to loss comes from just twenty empty seats.
That example also shows why airlines use revenue management: adjusting fares by date and demand to fill as many seats as possible without selling them all too cheaply.
Why margins stay thin
The International Air Transport Association (IATA), the industry’s trade body, publishes regular financial outlooks for the sector. Over the long run, net margins for the industry have been low, often in the low single digits as a share of revenue, with some years in loss. You can look at the current outlooks on the IATA website, since these figures are updated at least once a year.
Several structural reasons explain this. Capacity is added in large steps, because aircraft are bought in batches. Competition on popular routes pushes fares down. Demand is cyclical and sensitive to economic shocks, health scares and fuel spikes. And regulation, from safety rules to airport slot limits, restricts how quickly an airline can reshape its network.
Who decides the strategy
Choices about which routes to fly, which aircraft to buy and how to price are made by management and overseen by a board. Governance of that kind, including independence of directors, is discussed in what an independent board director does. More general airline business topics are collected on the blog index.
Frequently asked questions
Do airlines make most of their money from tickets?
For most passenger airlines, yes. Fares are the biggest single revenue line. But non-ticket income, including baggage fees and loyalty programmes, makes up a growing share at many carriers.
Why do airlines go bankrupt so often?
High fixed costs, thin margins and sensitivity to shocks leave little cushion. A sharp fall in demand or a spike in fuel prices can turn a profitable year into a heavy loss quickly.
What is load factor?
It is the percentage of seats filled on flights over a period. A higher load factor usually means better profit, but filling planes with very cheap fares can still lose money.
Is fuel always the biggest cost?
Not always. Fuel and labour are typically the two largest, and which is bigger depends on the airline, the length of its routes and the fuel price at the time.