How Airlines Make Money: The Economics of Business Class
Summary
TLDRThis video explores the revenue dynamics of American Airlines, revealing that 80% of income is generated from premium cabins and loyalty programs. It breaks down the cost and benefits of various seating classes on a Dallas to London flight, illustrating the concept of price segmentation in air travel. The video explains how airlines maximize profits by offering different amenities at varying price points, with premium seats like business class and Flagship first generating the most revenue despite their limited numbers.
Takeaways
- 🌟 American Airlines expects to generate 80% of their revenue from premium cabins and loyalty programs.
- 💼 The business class and other premium cabins are essential for airlines' revenue, as they are more lucrative than economy class seats.
- 🛫 Delta Airlines has also reported significant growth in premium cabin sales, indicating a trend in the industry.
- 💺 The cost of a ticket can vary greatly depending on the class, from basic economy to first class, reflecting price segmentation.
- 📈 Airlines use price segmentation to maximize profits, increase market share, and provide flexibility in pricing.
- 💰 Ancillary products, such as upgrades and premium meals, contribute significantly to airlines' revenue, even surpassing total operating profits.
- 🛬 The script provides a detailed breakdown of the different classes on a Boeing 7, including economy, premium economy, business, and Flagship first.
- 📊 Premium cabins, despite having fewer seats, generate a disproportionate amount of revenue compared to economy class.
- 🍽️ Premium passengers pay more for additional space, better amenities, and luxury services, which are relatively inexpensive for airlines to provide.
- 🎟️ Airlines are keen to upsell to premium cabins to maximize revenue, using various marketing strategies and incentives.
- 🔗 The video is sponsored by Nebula, a streaming service that supports independent creators and offers curated news content.
Q & A
What is the main focus of the video script?
-The main focus of the video script is to explain how airlines, specifically American Airlines, make money from different types of cabins on a flight, with a particular emphasis on premium cabins and loyalty programs.
What percentage of revenue does American Airlines expect to make from premium cabins and loyalty programs on a flight?
-American Airlines expects to make an astonishing 80% of their revenue from passengers in premium cabins and from loyalty programs.
How many seats are there in the economy, premium economy, business, and Flagship first classes on the Boeing 7 as configured for American Airlines?
-There are 216 seats in the economy cabin, 28 premium economy seats, 52 in business class, and 8 Flagship first seats, totaling 304 seats.
What is the concept of price segmentation in the context of airline revenue?
-Price segmentation is an economic principle where airlines offer different ticket prices for the same basic utility, allowing them to maximize profits by catering to various customer segments and their willingness to pay for additional benefits or comfort.
How does the video script describe the value of business class seats to airlines?
-The script describes business class seats as valuable to airlines because they allow for the maximization of the price segmentation model, with passengers willing to pay the most for the least actual benefit, thus generating significant revenue.
What are the three broad categories of offerings that airlines can provide to customers according to the script?
-The three broad categories of offerings are transport, space, and luxuries, with each category having different levels of service and cost associated with it.
How much revenue does the business class cabin generate compared to the economy cabin on the flight from Dallas to London?
-The business class cabin generates nearly four times more revenue than the 52 passengers in the basic economy cabin.
What is the significance of ancillary products in the airline industry's revenue?
-Ancillary products, such as upgrades, premium meals, and private car transfers, are significant as they contributed $110 billion to the industry's revenue, which is more than the total absolute operating profits in the same year.
What is the role of loyalty programs in airline revenue according to the script?
-Loyalty programs play a complex role in airline revenue, as they are a separate issue but contribute significantly to the overall earnings of airlines like American Airlines.
How does the script explain the economics of the main cabin compared to premium cabins?
-The script explains that while the main cabin offers basic economy, Main, and Main Plus options with varying perks and prices, the real money is made in premium cabins like premium economy, business, and Flagship first, where passengers pay significantly more for additional benefits and comfort.
What is the significance of the nebula project mentioned in the script?
-The nebula project, alongside partners at nebula, is a news initiative called nebula news, which curates a selection of videos that matter most in the world, helping viewers stay informed and understand current events.
Outlines
🛫 Airline Revenue Breakdown
This paragraph discusses the revenue model of American Airlines, focusing on how they generate a significant portion of their income from premium cabins and loyalty programs. It uses a specific flight from Dallas to London as an example to illustrate the stark differences in ticket prices and the revenue generated from economy, premium economy, business, and first-class seats. The paragraph highlights that while the economy cabin has the most seats, the premium cabins, despite having fewer seats, contribute a disproportionate amount to the airline's total revenue.
💼 The Economics of Air Travel and Price Segmentation
The second paragraph delves into the economic principle of price segmentation in the airline industry. It explains how airlines maximize profits by offering different classes of service at varying prices, allowing wealthier customers to pay more for additional perks. The summary covers the benefits and revenue generated from premium economy and business class, emphasizing the high revenue-to-seat ratio in these cabins. The paragraph also touches on the importance of ancillary products and services, which contribute significantly to the industry's profits, more than the total operating profits in some years.
🎬 The Value of Business Class and Ancillary Sales
This paragraph examines the value proposition of business class and other premium cabins, explaining how they effectively subsidize the rest of the plane through high ticket prices. It discusses the three main offerings of airlines: transport, space, and luxury amenities. The summary points out that while business class passengers pay more per square foot for their seats, they are willing to do so for the additional space and luxury services provided. The paragraph concludes by mentioning a new project called 'Nebula News', a curated news feed that aims to keep viewers informed on important global events, and encourages viewers to subscribe to Nebula for exclusive content and a discount.
Mindmap
Keywords
💡Nebula
💡American Airlines
💡Premium Cabins
💡Loyalty Programs
💡Price Segmentation
💡Economy Class
💡Ancillary Revenue
💡Main Cabin
💡Flagship First
💡Landing
💡Revenue Model
Highlights
American Airlines expects to make 80% of their revenue from premium cabins and loyalty programs.
The video explains the business model of business class and how airlines make money from premium cabins.
Delta Airlines has reported record growth in premium cabins, which now account for a larger share of their overall sales.
Economy class offers basic seating, while Main Cabin offers additional perks for a higher price.
Main Plus provides extra legroom and additional benefits for a premium over Main Cabin.
The price of seats can vary based on factors like location of purchase, timing, and customer status.
Economy class seats are less expensive but offer less comfort and amenities compared to premium classes.
Premium Economy provides a more spacious layout, wider seats, and earlier boarding for an increased price.
Business class offers lie-flat seats, enhanced food service, and airport lounge access at a higher cost.
Flagship First is the most luxurious class with exclusive perks and the highest ticket price.
Price segmentation allows airlines to maximize profits by catering to a range of customer budgets and preferences.
Airlines can adjust ticket prices to maximize market share and fill flights at various price points.
Ancillary product sales, such as upgrades and premium meals, are vital for the airline industry's profitability.
The value of business class seats lies in the maximization of price segmentation, targeting customers willing to pay more for less tangible benefits.
Luxury amenities in premium classes are often relatively inexpensive for airlines to provide but are sold at a high markup.
The video introduces Nebula News, a project that curates important daily news videos from various creators.
Nebula is a streaming service that supports independent creators and offers exclusive content, including ad-free viewing of TDR videos.
A 40% discount is offered for an annual Nebula subscription through the provided link, benefiting both the viewer and the creators.
Transcripts
this video was brought to you by nebula
this is a Boeing 7 and this is its
interior as configured for American
aines inside you'll find 216 seats in
the economy cabin 28 premium economy
seats 52 in business and eight of their
so-called Flagship first seats totaling
304 taking this flight from American
airlines' headquarters in Dallas Fort
Worth to our headquarters right here in
London the thing is that while this map
might give you a good impression as to
who sits where for the 9 and 1 half hour
journey across the Atlantic it doesn't
reveal much about how American Airlines
actually makes money from this flight
because at an investor event earlier
this year they announced that they
expect to make an astonishing 80% of
their revenue from passengers in these
premium cabins and from loyalty programs
so let's unpack the business of business
class and explain how Airlines actually
make their money ladies and gentlemen
this will serve as a final boarding
announcement for like 24 when it comes
to American Airlines recent announcement
they said that they expected to make the
majority of their money from premium
cabins and loyalty programs now the
business of loyalty programs is a
complex separate issue so we're not
going to get into that today but if
you'd like us to then you can subscribe
and let us know in the comments for now
though let's focus on airline classes
and uncover why Airlines earn quite as
much as they do from premium cabins
because it's not just Americans saying
this their competitor Delta has also
reported record growth in these cabins
saying that these seats have become a
bigger share of their overall sales and
is now growing faster than the ticket
sales in the coach cabin so let's take a
look at the economics of each cabin in
turn using as an example the flight I
mentioned earlier flight aa78 going from
Dallas to London now I'm be looking at
flights in exactly 3 months time
Thursday the 8th of August 2024 and
returning one week later now if I wait a
literal Eternity for the AA website to
load Yep this hasn't been slowed down
either it really is this
slow and no my Wi-Fi doesn't suck this
is just their
[Music]
website we finally find the seat in the
main cabin that's their economy offering
who s me back £ 798 for the most basic
return ticket that ticket will land me
somewhere here at the back of the plane
in the least comfortable seats but
that's not my only option for the main
cabin if I pay about £150 more I'll get
a main ticket which will also grant me
the ability to choose my seat for free
one checked bag an earlier boarding
group and the ability to make flight
changes it's still the same seat but
it's got some extra soft perks that's
not all either for another £200 I can
move up to main plus which gets me
another checked bag bumps me up a
boarding group and allows me to select
an extra leg room seat again it's the
same physical seat it's just at this
time you get a little more space from
the row in front and that's these seats
here now not everyone is going to be
charged the same price for all of these
tickets where in the world you buy your
ticket when you buy your ticket if you
buy your ticket directly from AA if you
status if you have a connecting
itinerary all of these things can change
the price of your seat but let's do some
basic maths if all of these extra
legroom seats are sold for £
1,157 and the remaining seats are split
between basic economy and Main then the
airline is set to earn
$164,950 from the main cabin on this
route plus an additional £
the real money is made in the next
cabins like premium economy up here the
layout is slightly more spacious the
seats are wider and recline further
you'll probably get nicer food and
you'll get to board the plane sooner in
return for those benefits you'll pay
approaching 1,000 more for the return
journey and combined this cabin will
earn the airline £
58,7 the real money though is in
business class here you'll get a LIF
flat seat better food maybe even a metal
knife and fork access to an airport
lounge and the ability to get on the
plane ever so slightly sooner for this
AA will charge you £
3,126 return now there might only be 52
seats in this cabin that's barely five
rows back in economy but it will still
earn the airline revenue of
$162,500
nearly four times more than those 52
people back in basic economy and while
these numbers aren't totally accurate
they are reflective of the ratio between
the earnings in the front and back of
the plane anyway right at the very front
of the plane you'll find eight people in
what American Airlines calls Flagship
first sitting up there gets you a
luxurious seat with tons of space but it
will also get you an increased baggage
allowance access to fancier lounges plus
a host of other perks depending on your
airline from a chauffeur to an onboard
shower or bar oh and of course you'll
get to board the plane first in over all
of that you'll be charged £
5,136 which means that these eight
people alone pull in a revenue of £
41,8 but what's the point I'm actually
making here well the economics of air
travel is actually a good example of an
economic principle called price
segmentation fundamentally all of these
tickets offer the same basic utility
they transport you from Texas to the UK
and back again in August this year but
depending on which option you choose
that could cost you anywhere between
£800 and
£5,000 and this is great business for
the airline for three reasons firstly
price segmentation allows them to
maximize profits by making sure that
wealthier customers or those who are
just putting it on the company card have
the opportunity to spend more if all
seats on the plane cost £1,000 then
that's a lot of money left on the table
if eight people are willing to pay
£5,000 secondly it maximizes market
share allowing Airlines to pick up as
many people as they possibly can filling
flights and increasing the routs offered
by giving customers tickets at every
viable price point and thirdly it gives
the airline more flexibility if a flight
isn't selling as well as they hoped they
can adjust individual price points and
bump up passengers in order to maximize
profits in the cabins which are most
likely to sell out on the route in
question and this price segmentation is
actually key to many airlines success
allowing them to charge vastly different
prices for the same basic utility if we
return to the plane from earlier you can
see that these 52 seats alone earn 35%
of the money on board and more generally
that the 116 premium seats on the plane
earn 64% of the money way more than the
188 people at the back of the plane
getting the segmentation right is
actually pretty crucial for Airlines
these days according to McKenzie prior
to co Airlines made $110 billion from
the sales of ancillary products that's
upgrades from aisle seats and premium
meals to Private Car transfers and that
number is actually significantly more
than the airline industry's total
absolute operating profits in the same
year so this $110 billion isn't just a
nice luxury milked from Less Price
sensitive customers it's also vital for
the whole industry and without them many
airlines would fail to return their cost
of capital so why are these business
seats in particular so valuable well
when it comes down to it the things that
Airlines can offer customers fall into
three broad categories transport space
and luxuries when it comes to transport
all tiers of tickets are getting the
same thing all 34 people will end up in
London but when it comes to space
there's a big difference with the
average one of these economy seats
taking up about 4 Square ft of space
while business takes up something like
12 square ft and first class around 35
here passengers are paying more money
for more space although it is worth
noting that although business class
passengers are getting more space
they're also paying more per square feet
than their neighbors at the back first
class actually generally breaks this
rule sometimes earning the airline less
per square foot than economy which is
one of the reasons why first class is
actually kind of dying out something we
could cover in another video If you
subscribe and tell us to in the comments
the third thing that they're selling
though are those little luxury bonuses
the nicer food the airport lounges and
the Priority Access the thing is that
those bonuses are often relatively cheap
to provide sure the fancy food does cost
more per plate but those consuming it
are paying vastly more for the privilege
in any other environment if I was
offering to charge you
£338 for metal Cutlery a fancy waiting
room and the ability to spend even more
time in a metal tube than necessary you
may well tell me to off not with
Airlines though these extras obviously
aren't pure profit airports want money
for the lounges more bags burn more fuel
as do those big seats but these benefits
don't cost the airlines anything close
to what they're charging hence those
massive and sillery revenues but
business and luxury Travelers are happy
to pay the difference if you're flying a
lot if you're less price sensitive or if
you're not even the one paying then why
do you care if the company has charged a
little more your peanuts award and you
get to feel fancy when you border the
plane sooner so why not upgrade well
that's how business class and the other
premium cabins essentially pay for the
rest of the plane these seats are the
maximization of the price segmentation
model they're the people willing to pay
the most for the least actual benefit
and that's why with fancy sales pitches
credit card bonuses and lovely leather
seats airlines are so Keen to get you
into these business class seats if you
haven't heard we've just launched a
project alongside our Partners at nebula
called nebula news where every day the
TDR team creates a selection of videos
that matter the most in the world right
now as you surely already know nebula is
the thoughtful streaming service that's
pushing boundaries on what independent
creators can do with their content
including nebula news where we handpick
a feed of content that should help you
keep up to date with everything you need
to sound smart and be truly informed we
believe that in a confusing and
overwhelming news environment knowing
what to pay attention to is important
you can't track every story so our
curation should help to surface what
really matters showing you videos from
tldr and other superb creators that will
help you understand the world around you
quickly and easily it's not just the
curated news content brought to you
directly by us nebula also features
loads of exclusive original content
that's things that real life Law's brand
new series War Room which every month
runs you through a whole whole load of
ongoing conflicts to keep you in the
loop you can also watch every TDR video
on nebula ad free and in many instances
before they land on YouTube now if
you're already subscribed to nebula then
you can find the brand new nebula News
section at
nebula.com page if you're not a member
already you can click the link in the
description to sign up now if you do
you'll get 40% ENT of an annual plan by
using our link that's less than £2 a
month plus nebula plus nebula will know
that you came from us which really helps
us out
関連動画をさらに表示
5.0 / 5 (0 votes)