At what price does an airline break-even when it sells you a ticket to fly from Point A to Point B? It’s an interesting question and makes a good example for covering break-even in Supp.7 (see Figure S7.5).
Fortune (March 23,2011) just provided an excellent analysis, along with an interactive pie chart that allows you to alter the price of fuel. It takes Delta’s flight from Los Angeles to La Guardia (NY), with a brief layover in Detroit, as its basis. With the average price of a one-way ticket (including 1st class) on this particular flight of $506, Delta was making a $33 profit per ticket in 2010. When fuel was pre-Mideast instability jitters just a few months ago, $98 of the cost was in that one item, the largest of all costs incurred.
Today, the profit is down to $4! Fortune makes the point that if you fly coach on a competitive route, the carrier is probably in the red. (Hello baggage, pillow, and food fees).
Here is the cost breakdown: Labor ,$95; Plane rent/ownership, $26; Non-plane rents,$17; Nonemployee labor, $32; Payments to partners, $54; Interest, $12; Taxes
/fees, $75; Other/misc., $63.
As the flight begins, with a 23 min. boarding time and a 24 min. taxi to the runway, Delta has already spent over $1,000 in labor, fuel, and maintenance. Flying to the layover in Detroit costs $11,674, and getting to the gate another $309.
I think using the interactive fuel price graph makes a point that any flying student will appreciate.
Here is another reader comment that was just emailed to me by M. Libow:
Interesting on the $4 profit but you are understating the revenue in my opinion, not just from ancillary items but also the real biggie is change fees which have a 100% incremental margin. So if you figure conservatively that 1 in 20 passengers pays a change fee which is now $200 plus a further average of $10 a passenger on baggage fees which admittedly have a variable cost but that may already be packed into the $4 profit figure u cite, the profit is far higher. It is just not being earned on the ticket price alone.