Everything You Knew About Airline Economics is Wrong

In traditional airline economics, a major airline makes money by locating its hub in a major city with significant business travel.

Ideally owning that hub, business customers will pay a premium for non-stop flights and there will be limited competition for those non-stops.

The airline builds its schedule around meeting the needs of those business customers, and then fills empty seats at a discount with leisure passengers. They prevent business customers from buying those cheap leisure fares by placing restrictions on purchase — advance purchase requirement of 14 days, a Saturday night stay for instance.

If you owned a hub you made money with non-stop traffic from that hub, and connecting passengers were filler. The greater percentage of business travelers starting and ending their destinations in your headquarters the better. If local economic conditions changed, the airline’s fortunes did too. Arguably St. Louis was the biggest problem faced by TWA in the early 1990s.

When Scott Kirby was President of American Airlines, he talked about how the old model has been blown up by ultra low cost carriers.

It used to be that airlines would forecast demand for full fare tickets and they would forecast demand for leisure tickets, and those were treated as distinct – but in a world where there are discount fares with no advance purchase requirements that simply isn’t true anymore. People only buy more expensive tickets when less expensive tickets aren’t available.

That’s why In the past they segmented customers based on fare rules. Now they’re moving to segmenting customers based on the product those customers want to buy. Instead of treating everyone the same after their tickets are purchased, they want to give customers exactly what they are buying.

Scott Kirby is now the President of United Airlines. And this is why United has gone as far as it has in announcing details of new Basic Economy fares that will ban carry on bags.

At United’s Investor Day Kirby argued that connecting traffic is more profitable than non-stop traffic. That’s a surprising claim.

United is going to rebank its hubs, which is costly and operationally more difficult, but makes schedules look more appealing (more connecting options and shorter connections) hoping for instance to increase connecting traffic through Newark from 35% to 45% making it ‘more like Philadelphia’ at American.

Kirby relays that Denver is United’s most profitable hub driven by:

  • Low airport costs
  • High connecting traffic.

What Kirby is saying here is that the traditional high yield business routes have become less profitable because those get cherry picked by ultra low cost carriers, and they’re setting the (new low) prices.

Connecting traffic used to be less profitable because it was competitive — Delta, United, or American could take you from one small city through a hub to another small city. However those competitive routes are only competitive amongst the big legacy carriers, so fares are often higher, while you no longer have the big premium for non-stops in major business markets.

More connecting traffic also means being able to schedule larger planes on a route. It’s less expensive in total to fly a regional jet than it is to fly a widebody. But your cost per seat is much higher. If you can fill a plane with more seats your per seat cost is going to be lower and you’ll make more money at a given fare.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. “Instead of treating everyone the same after their tickets are purchased, they want to give customers exactly what they are buying.”

    More like they want to inflict as much pain and discomfort on the customer as they can, to get away with charging for something that’s not even a service. I don’t mind paying for a service or feature that actually requires effort on their part, but paid seat assignments are just extortion. you’re going to sit somewhere on the plane anyway, having you choose one in advance doesn’t add any workload to them so they’re playing on your fears.

  2. What I think the airline’s don’t understand is, I the customer, do not want a 45 minute connection, I want 1h30 because:
    1- I don’t trust the airlines to be on-time.
    2- I have a carry on bag, and I don’t want to gate check it.
    3- If you do misconnect, the flights are so full, you have no guarantee of making a new flight or you’re in a crap seat.
    4- Airlines board early…

    Maybe Ma and Pa kettle want that tight connection, but as a business traveler I don’t. If I’m not direct, I want a min 90m connection

  3. Tighter connections at EWR = good luck to those people, esp. with terrible A and now B even in use along with C

  4. I was going to type out a long reply, but Scott basically said everything I was going to. I agree with him 100%.

  5. Scott, that is understandable. Though, I prefer the opposite.

    I prefer 45 minute connections, and would rather risk missing a connection one out of 10 times to not spend the extra 45 minutes every single time. It the extra 45 minutes adds to the grind for me, and it adds up. Nothing pleases me more than walking right from one flight to the next, with no down time.

    Someone once told me, if you’ve never ever missed a flight, then you’re spending too much time in airports.

    One good reason to fly the major airlines, is the reasonable rerouting options when things go sideways.

  6. Scott must be referring to UA. They still are not reliable. Yes, when I do fly UA, I build a 2 hour transit/connection. That is an absolute requirement when flying UA. And, this makes flying very stressful.

    When I fly DL, I usually do a 30 minute transit/connection in ATL. Yes, ATL. Why? DL will arrive on time – or 30 minutes early in many cases. And, 30 minutes is more than sufficient to transit ATL.

    I would NEVER EVER NEVER EVER do a 30 minute transit/connection when flying UA.

  7. Spoken from a man who has no clue and has never worked in the industry.

    Stick to hawking credit cards and reviewing hotels in Dubai they practically pay people to stay at.

  8. Your story title is certainly wrong. Most of the old imdustry adages are still generally true, but Kirby is noting that there are now some variables due to changes in the industry. Hubs in high volume business destinations are still EXTREMELY valuable. As are hubs where there aren’t many alternatives (DEN, CLT).

    The most successful airlines in the USA — and, for that matter, the world — are airlines that have hubs in major USA business markets. And they’ve never been more successful than now. So maybe the industry isn’t really being turned upside down?

  9. If I can get direct, I’ll fly WN. If not, as (commenter) Scott said, I want a long enough connection time not to miss my flight due to delay. And without status, it doesn’t hurt to be able to grab a bite to eat while I’m connecting too.

  10. Hmmmm, so airlines still make money by shuttling passengers between different destinations? I guess everything I knew WASN’T wrong! HA!

  11. Interesting no comment at all about how miles subsidize the follies of airline execs – maybe that’s in the next chapter. Because with the programs that Gary loves and the cards he hawks, airline profits would tank

  12. Banking at EWR is going to turn into a disaster for United. Summer thunderstorms, winter snow storms, high wind, etc. and the airport is a wreck already. Imagine if they have a lot of flights trying to arrive/depart in the same time due to the banking and you will see United’s on-time rate plummet and the cancellation rate rise. That will lead to unhappy customers for sure.

  13. I agree with Scott as well. I hate tight connections, it adds stress to my travel.
    Hey maybe UA and others can go the WN model where the plane stops and you stay on until your final destination. That way they could avoid giving you EQ segments for each stop and just call the direct flights one long segment.

  14. @travli. Depends again on the time of the day and availability of later flights in the day. If i am connecting in the morning and I know that the airline has more flights on the same route later in the day, i dont mind tight connections and missing one. If i am travelling late in the evening and connecting to the last flights of the day, i would definitely plan for delays rather than get stuck overnight in an airport hotel

  15. @Josh G a.k.a the attack chihuahua for the airlines…

    why do you bother reading the post and commenting if you know so much better than everybody else?
    at least tell us who you brownnose from the big 3…the suspense is killing us

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