How Airlines Make Money on $7.50 Tickets

A journalist recently asked me how it’s possible for low cost carriers to make money intentionally selling $7.50 tickets?

The answer is three-fold:

  1. They don’t sell all their seats at such low prices
  2. They earn a disproportionate amount of their revenue from fees and not fares
  3. They have lower costs

The primary ‘ultra low cost carriers’ in the US are Spirit, Frontier, and Allegiant. And they can sell tickets very inexpensively. For instance,

Focusing on a limited number of non-stop routes where the airline believes they can fill planes, doing so with lower costs, and charging extra for anything else a passenger might want besides basic transportation is core to the strategy.

For instance there are no free beverages or snacks on Spirit. If you want an advance seat assignment (versus getting whatever is assigned to you) that can come with a charge. If you want to bring on a full-sized carry on you’ll pay for that, in addition to of course checked bags.

Low cost carriers are fairly advanced in Europe, and they inspired one of my all-time favorite song performances.

Jay Sorensen catalogs how much each airline is recording in ancillary revenue. Spirit is the #1 airline in the world for ancillary revenue as a percentage of total revenue (extra fees comprise nearly half their revenue). Frontier is #3 and Allegiant #5 in the world. It’s not just they fares you want to look at, but total passenger revenue.

In the 2nd quarter of 2018, these low cost carriers had some of the highest operating margins in the industry. American Airlines had a 10% margin, United had a 12% margin, and:

  • Ryanair [European ultra low cost carrier] 18%, #1 in the world
  • Allegiant 17%
  • Frontier 15%
  • Spirit 13%

So they’re certainly profitable.

The Canadian market can be tough, for instance in the second Quarter Air Canada had a 5% margin and WestJet a -2% margin. Not every lower cost carrier makes money all the time.

But what about making money on $0 fares? Tough but not out of the question. They aren’t selling all the seats on the plane for $0. These are a limited number of seats and for an airline that is running a flight with some empty seats it’s not actually bad business.

  • The marginal cost of an airline seat is close to zero. There’s almost all fixed costs for flying a plane.
  • Once that plane is going to take off, the costs pretty much are what they are. And once that plane takes off there is never going to be a chance to sell that seat on that flight again.
  • So airlines take what they can get for spoiling inventory.

It’s not that different from Las Vegas hotels. They’ll drive the price of the room down as low as necessary to fill up a hotel if they’re making money on ancillary revenue (gaming, shows, clubs).

Plus there’s great PR value in $0 base fares, especially if there aren’t many of those seats being offered. The deals get reported. The airline builds brand awareness, consumers think of the airline as offering cheap fares.

Whenever Ryanair’s Michael O’Leary hasn’t been in the news awhile he spouts off about making passengers stand, eliminating windows from planes, or charging to use the lavatory. He gets attention and underscores that ‘this is the airline that will do anything for a cheap flight’.

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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  1. Canadian market tough? Just have to cross the border to Niagara Falls NY to get Spirit flight to fll. Or, travel from Plattsburgh NY on Spirit where announcements are in French and English.

  2. While “close to zero,” what is the true marginal cost of an extra passenger, based on extra fuel burn per mile? Let’s assume an extra 175 pounds, including any belongings. Does anyone know?

  3. @tommyleo – I drove from Cleveland to DC with friends, and drove back by myself. Left Cleveland with a full tank. Departed DC with a full tank. I didn’t notice any significant difference in fuel burn. Definitely less than $1.

  4. While most of your readers probably aren’t willing to fly them, it’s fascinating to watch the different pricing strategies of Spirit and Frontier. These are very similar ultra low cost carriers, with one big exception: they have very different marketing strategies. Spirit has now become the more “mature” airline (quite a break from their past). They sell cheap airfares, but they don’t advertise RIDICULOUS fares. Frontier, on the other hand, bombards us with crazy sales: $19 flights, 90% off, etc. These ultra-discounted fares are generally only offered on very off-peak flights, and their fares can get expensive if, say, you need to fly on a Friday or Sunday.

    My hunch is that Spirit’s strategy is long-term more effective, as my guess is that Frontier is simply training its “best” customers to only fly when the fares are absurd. My average purchased fare on Frontier is less than $30: I won’t fly them for “real money.” My guess is that most of the folks who watch for their ultra lowball fares also know “the game” and don’t buy seat assignments or pay luggage fees. But I could be wrong about this. It’s been more than a year since Frontier started their “wacky” fare sales and they’re still going strong. So somebody must be running up ancillary revenue with luggage, seat assignments, drinks, etc. when they buy the $19 fares.

  5. Point 3 may need further clarifications on what constitutes lower costs – i.e. things like contract of carriage arbitrage.

  6. Frontier has a sale on Halloween, 99% off. I purchased Nashville to Orlando for 6 cents, plus $33.20 in taxes and carrier imposed fees. There are no other costs since I earned 20k elite status from a mileage run that was recommended by this forum. That would be priority boarding, free premium seat and no cost carry on bag, in addition to my backpack personal item. Thank you very much.

  7. Another often forgotten point is that some airports actually pay airlines to deliver passenger traffic to their airports, which will drive ancillary sales at the airport shops too. Those commission basically act as subsidy for the tickets. A Ryan Air employee I spoke to said their ultimate goal is to reduce base fare to 0 and get the airports to pay for the passengers.

  8. @tommyleo

    That’s like asking what the true value of a single frequent flyer mile is. A single frequent flyer mile essentially has a value of $0. I’d never by *one*. I can’t do anything with *one*. Now let’s talk about the value of 140,000 AA miles. While some people may still say the value of that is close to $0, I can actually do something with 140,000 miles. I might even pay a couple of grand for them. But *one* AA mile is only worth something to me if I have 139,999 miles.

    Accounting for individual unit costs when there are high fixed costs and low marginal costs gets really tricky. I’d even go so far as to say “unanswerable”. No matter what kind of math we do, at some point, we’re going to average out the cost across a bunch of passengers — and what is true for a group of passengers won’t necessarily be true for a single passenger.

  9. @Gary: You left out Ryanair’s perennial source of revenue for $1 fares — the destination. Rundown cities in Belgium paid Ryanair to fly British daytrippers to them for years. It had a beneficial effect on their economies.

  10. Personal Testimony: Frontier Airlines has been expanding its routes from Raleigh to many destinations — including many non-strop flights to destinations to which major airlines only offer connecting flights. I’ve flown Frontier five times since June 2018 — (1) one way to New Orleans for fifty dollars (including ticket, one checked bag, and a seat selection); (2-3) round trip to Providence, RI for about one hundred dollars (inc. a seat selection); and (4-5) round trip to San Juan, Puerto Rico for about sixty dollars (including seat selection, and an under-the seat bag for free). All of my flights were non-stop — not offered from Raleigh to those
    destinations by major airlines. Frontier has about 200 modern Airbus planes.

  11. @chopsticks —> You wrote above that, “My guess is that most of the folks who watch for their ultra lowball fares also know “the game” and don’t buy seat assignments or pay luggage fees.”

    While it may indeed be tempting to think that, and — hopefully — even occasional ULLC pax (like my brother-in-law¹), I’ve seen evidence to the contrary whenever I’ve witnessed the boarding for one of these flights. Anecdotally, I’d say 1 in 10 (and occasionally 1 in 5) passengers is getting “dinged” at the boarding gate: denied boarding unless they cough up $____ for their oversized cary-on, or $_____ to check their bag with the rest of the luggage in the belly of the aircraft.

    I’ve watched this time and time again — whenever the flight on my carrier is located near enough to a departure gate for an ULLC. I’m not looking for it, but the noise (raised voices, sometimes devolving into screaming or a shouting match, sometimes into tears or rage) does draw my attention to the scene. And sadly, it’s like a car wreck: you don’t want to watch, but somehow you can’t take your eyes off the carnage…

    Sometimes the passenger is caught totally unaware, like “a deer in headlights”; other times it’s clear they knew better but were trying to “get away with it,” and got caught (how else to you come to the gate with a FULL-sized suitcase?); and sometimes they’re just as argumentative and belligerent as they can be. Meanwhile the airline employee is a cross between that civil police officer directing traffic from the middle of an intersection to a S.W.A.T. team member with orders to shoot to kill…who *needs* the protection of body armor from the passenger’s anger…

    _______________
    ¹ A handful of times in any given year, he will either take Spirit, Frontier, or even Allegiant…but only if a) he has nothing more than a small carry-on; and b) it’s a “close-in” purchase (i.e.: <7 days in advance). Otherwise, he's on WN or AS.

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