How Airlines Make Money: The Economics of Business Class

Summary

This 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

00:00

🛫 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.

05:01

💼 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.

10:02

🎬 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.

Keywords

💡Nebula

Nebula is mentioned as the sponsor of the video. It is described as a 'thoughtful streaming service' that supports independent creators and offers a curated news section called 'Nebula News'. The service is positioned as a platform for staying informed and smart about current events.

💡American Airlines

American Airlines is the primary subject of the video, which discusses the airline's revenue model and the configuration of its Boeing 7 aircraft. The video uses the airline as a case study to explore how airlines make money, particularly from premium cabins and loyalty programs.

💡Premium Cabins

Premium Cabins refer to the higher-class sections of an aircraft, such as business and first class, which offer more comfort, space, and amenities. The video emphasizes that airlines like American Airlines generate a significant portion of their revenue from these premium sections, highlighting the economic strategy behind their pricing and services.

💡Loyalty Programs

Loyalty Programs are mentioned as a significant source of revenue for airlines, alongside premium cabins. These programs reward frequent flyers with benefits like priority boarding, free upgrades, and other perks, which encourage customer retention and spending.

💡Price Segmentation

Price Segmentation is an economic principle discussed in the video, where airlines offer different prices for the same service based on the value customers are willing to pay. It is a strategy used to maximize profits by catering to various market segments.

💡Economy Class

Economy Class is the most basic and affordable travel class on an airplane, characterized by less space and fewer amenities compared to premium cabins. The video uses economy class as a contrast to premium cabins to illustrate the disparity in revenue generation.

💡Ancillary Revenue

Ancillary Revenue refers to additional income generated by airlines through services beyond the basic ticket fare, such as baggage fees, seat upgrades, and premium meals. The video points out that this revenue stream is crucial for the airline industry's profitability.

💡Main Cabin

Main Cabin, in the context of the video, refers to the economy section of the aircraft with different tiers of service within it, such as basic economy, Main, and Main Plus. These options offer varying levels of comfort and convenience at different price points.

💡Flagship First

Flagship First is a term used by American Airlines to denote their first-class service, which offers the highest level of luxury and comfort on board. The video discusses the premium experience and the substantial revenue generated from this exclusive cabin.

💡Landing

In the context of the video, 'landing' refers to the release of content on platforms like YouTube. The video mentions that subscribers to Nebula get to watch 'every TDR video, on Nebula ad-free and in many instances, before they land on YouTube', indicating an advantage of the Nebula service.

💡Revenue Model

Revenue Model is the focus of the video's analysis of how airlines like American Airlines make money. It explains the different sources of income, emphasizing the importance of premium cabins and ancillary sales in the overall revenue generation strategy of airlines.

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

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