5 reasons North American airlines make the highest profits
Airlines in North America are predicted to account for 54% of profits in the aviation industry this year, despite carrying only 22.4% of global passengers.
How are airlines in this part of the world so effective at maximising profits despite carrying relatively few passengers, and what can carriers elsewhere learn from their success?
With global average revenue per passenger standing at $189 and total costs per passenger of $183, it would take a shift of only 3% in either income or expenditure for the aviation industry to become unprofitable. As such, it’s crucial that airlines are meticulous in their approach to generating revenue, managing costs and ultimately maximising profits.
We’ve identified five factors we believe are behind the trend for large profits among North American airlines:
Many of the world’s best airlines now generate as much revenue through ancillary services and products as they receive from fares. And it’ll come as no surprise to find most top performers are based in North America.
With 68% of people now expecting to be offered bespoke promotions and incentives based on their personal data, simply sending generic emails or SMS messages are unlikely to deliver results. Instead, best-in-class airlines rely on platforms that integrate with the reservation system to extract personal details from each PNR and generate and send hyper-personalised notifications that achieve high conversion rates.
Legislation that protects US airlines
US legislation bans foreign airlines from operating intracontinental flights. It means airlines in North America do not operate under pressure from low-cost carriers from outside the United States who may opt to set low fares in order to gain market share. As such, the average price of domestic flights in the country is a hefty $352, allowing greater profit margins on many popular routes.
Ultra-low-cost culture is yet to take off
North America is widely considered the birthplace of low-cost airlines. However, where pioneers such as Ryanair were able to take the US model, enhance it and use it to transform the aviation industry in Europe through the 1990s and 2000s, several key factors limited development on the other side of the Atlantic.
For example, many of Europe’s ultra-low-cost routes are based on airlines flying in or out of smaller airports, often located outside major cities, such as:
Landing fees at such airports are typically cheaper, while some are even reportedly paid by airports in return for bringing passengers to the terminal. The result is airlines passing on savings to flyers and offering bargain-basement fares that would normally fall below standard profit margins.
A lack of capacity and suitable airports in North America prohibit airlines from offering sub-$20 flights that would trigger a price war and reduce profit per passenger. As such, fares – and margins – remain higher than in Europe.
Consolidation has underpinned growth in the North American market in recent years, helping to maintain load factors (including passengers and cargo) above 65%. Combined with positive financial factors such as strong fares and high ancillary revenue, IATA states that the breakeven load for North American airlines in 2019 is just 59.5%, compared with 70.2% in Europe.
Profits in North America cannot be driven by volume alone; after all, approximately three times as many people pass through airports in Europe each day than the US. But consolidation provides another valuable route towards achieving the optimum balance between capacity and demand.
North America is home to some of the industry’s most valuable and aspirational brands. American Airlines, Delta and United Airlines were named as the three most valuable aviation brands of 2018 with another North American carrier, Southwest Airlines, in fifth place.
Customers of prestigious brands are known to be less sensitive to price and may be willing to pay more to fly with airlines that have a reputation for reliability and great service.
Find out how Canadian low-cost carrier Swoop is using automation to lower costs while improving the service it offers to passengers during disruption.
Source: 15below blog
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