How airlines make a profit on €9 fares

In an attempt to compensate travelers for Ryanair's hundreds of flight cancelations and disruption this summer, the airline tried early this week to break the market by offering one-way tickets for €7-9 each - the price of a beer in Israel. Ryanair probably did not intend to lose money on the gesture; it knows that anyone buying a ticket at this price will have to pay for other services, such as luggage, seating, sandwiches, and beverages, and a return ticket, probably at a higher price.

At a time when rising competition is eroding ticket prices, the airlines' sources of income are based on accompanying services for which they charge passengers. In the past, when ticket prices were much higher, it was taken for granted that the price included selecting seating, food, and luggage. Today, passengers have already realized that they must pay for these services.

Furthermore, most passengers are no longer angered by the idea that a suitcase can cost more than the ticket. They know that purchasing the service in advance is not only wiser, but also cheaper.

According to figures from the US Department of Transportation, the 23 airlines active in North America, the world's largest civil aviation market, earned $4.6 billion least year just from passengers buying refreshments. American Airlines charged its passengers $1.17 billion for refreshments, Delta Airlines $917 million, and United Airlines almost $800 million.

Another source of income for the airlines is fees for canceling or changing tickets. The changes range from the passenger's name to the flight date. Revenue in this segment totaled $2.9 billion in the US alone.

The Hopper flight monitoring website says that the average payment by passengers for changing or canceling a flight in the US was $191. This sum reflects an inflexible policy by airlines in the US on internal flights, according to which 99% of the tickets include no cancelation option.

Future: Free tickets

Another factor contributing to airlines' income from accompanying services is the switch to a pricing model based on three rates: a basic cheap rate that does not include a suitcase or seating, in which the cancelation terms are inflexible (no money refunded for a cancelation); a medium price that includes a suitcase and sometimes also seating on the airplane, in which cancelation is possible, but a fine must be paid; and a high price with flexibility for cancelations and changes and accelerated boarding of the plane. Many airlines (including El Al Israel Airlines Ltd. (TASE: ELAL), at this stage on its flights to Europe) have adopted this price model.

Increased profits from accompanying services was significantly bolstered when low-cost airlines made this idea public. First the low-cost airlines changed people's ideas about the flying experience - it is no longer part of enjoyment of the vacation; it is now just a way of getting from place to place. If a passenger needs something beyond a seat and a smile from the flight crew, he or she will therefore have to pay for it. For Ryanair CEO Michael O'Leary, it is legitimate to charge using toilets during a flight - a statement he has repeated several times, but which has not yet been put into practice.

McKinsey & Co. senior partner Alex Dichter predicts that as a result of carrying the policy of increasing profits from the services surrounding the flight to an ever greater extreme, we will pay nothing for the flight itself in the future.

"It's evolution," Dichter told "Globes." "The ticket will be free, but we'll pay for other services. Similar evolution took place in the banking world. We once paid to have an account. Today, it's free, but we pay for the services and transactions that the bank provides. The consumers are sensitive to the price when they have no choice. I need a bank account, but I'm not willing to pay for it. On the other hand, I'm willing to pay for a transaction such as depositing a check. I don't appreciate the flight itself, but I do appreciate the services it provides, and I'm willing to pay for a better meal than the one served to me for free, and for fast boarding. That's the psychology of the market."

Published by Globes [online], Israel business news - www.globes-online.com - on September 6, 2018