If you came into a handsome inheritance and you decided to perhaps invest in a budget airline, the question of just how the major airlines stay in business will inevitably start to form in your mind. This is because even at the level of the budget airlines, the profit margins appear to be very small and the whole operation’s profitability seems very heavily reliant on sales volumes.
Let us lift the veil on the major airline industry though and explore what it takes for them to stay in business.
At the end of the day, big airlines are in it to make a profit and the fact that they manage to stay in business suggest that they are indeed making a profit. It isn’t always smooth sailing though, because the typical income graph of a major airline might see the airline operating at a loss for much of the financial year, but then at some point in that period, like when it’s peak travel season, the profits made over that short period are enough to cover the losses which were reported earlier on.
So it’s a game of long-term survival, before profits.
Huge start up and operational capital
Your measly inheritance likely pales in comparison to the amount of money required to start and operate a major airline, so it only makes sense to note that people and entities who go into the major air-travel business are usually already wealthy. They’re likely just seeking to consolidate on their existing wealth.
Believe it or not, but with most major airlines, the bulk of their business comes from other business. You would think that commercial passengers who are going away on holiday make up the bulk of their airline’s profit, but even when the seats in the cabin are full occupied, that specific flight isn’t making most of its money from the passengers.
Cargo is where it’s at as far as the profits required to keep major airlines in business. When an aircraft is full of passengers, the total amount of money paid by those passengers for their airfare usually constitutes less than half of what the airline makes from that flight. Most of the money comes from the cargo which that aircraft is carrying, which also would likely constitute more than twice the amount of baggage the commercial passengers are carrying.
Government subsidies and outright financial support
It’s not uncommon for governments to be outright owners of major airlines, particularly each of their country’s official carrier, which naturally means that the taxpayers are ultimately footing the bill to keep the airline in business, whether this would be through government subsidies or bailouts in the case that the airline hits some financial turbulence.
Credit deals with suppliers
Finally, air-travel industry suppliers often extend credit to the airlines, such as how as an airline you can lease a jet from the likes of Boeing and Airbus instead of buying one outright. The same applies to many of the other suppliers.