Airline income predictions – the basics

When creating a business plan for any company, income prediction may be one of the most difficult tasks. Predicting airline income is a little awkward as in some cases it may prove to be even more difficult than usual, but in others it may actually be quite a lot easier. We’ll go through some of the airline basics with respect to airline income predictions.

6 1024x327 Airline income predictions   the basics

To start predicting airline income you have to have a solid foundation in the form of a proper airline business model. This model will reveal what income sources you may have and a proper analysis of those sources may yield a close-to-real income prediction. We have gone a bit through basic airline business models before, and now let’s take a look at possible airline income predictions for those models as well as what form of analysis is required to make such predictions valid.

Legacy airline income predictions

For legacy airlines a proper income prediction may be a difficult task. On the other hand, most people don’t start a legacy airline from scratch (especially that it needs to be around for a while to actually become “legacy”). Therefore, it is to be expected that those airlines have a firm history of sales, including demographics, customer behavior and similar features.

Here are the main income streams, for which legacy airline income predictions should be made (unless, of course, the airline decides to give up on some of these):

  • Direct ticket sales to individuals in all fares
  • Corporate ticket sales – generally business and first class, with agreements assuring a specific level of sale in a given time period
  • Sales of additional products through the airline’s reservation system (things like advanced seat booking, additional insurance, etc.)
  • Forced sales of additional products (especially payments for excess luggage)
  • On-board sales (for legacy airlines, this will probably be only a duty free shop on board)

The options for legacy airlines are fairly limited, as customers generally expect to have all services included in the basic fare. Nevertheless, they all need to be taken into account for legacy airline income predictions.

As you can see, to obtain valuable data on those income streams there is just no better way that a large airline history. It’d be perfect if one could get ones hands on such data from major airlines out there, but of course these would be company secret. If you don’t have that, you’re left with proper market analysis for the ticket sales (average price people pay to other operators, how many people travel the route, how wealthy they are, what are their trends in spending money on travel, do they buy things on board, would they be travelling with a lot of luggage).  To further expand on those, I kindly invite you the airline market research section of this site.

Low cost airline income predictions

For low cost carriers there may be several more income streams than for a typical legacy airline. This makes the airline cost predictions even more difficult, as you have to distinguish between more kinds of specific customer behavior. On the other hand, the pricing policy is pretty simple – the ticket will generally tend to be as cheap as possible with everything else being as expensive as possible.

Let’s take a look at possible income streams for a low cost carrier:

  • Direct ticket sales – generally on-line, with no third party involvement. This stream may generally be easy to predict if you have properly established your fare prices, because for a low cost airline you would be assuming that the planes will be fully booked – otherwise the plan probably will not make too much sense.
  • Forced sales during reservation – for instance additional fees for paying via credit or debit cards
  • Additional sales during reservation – luggage (note – this is often not additional luggage, but luggage at all), priority boarding (allows passengers to board the plane before the rest of them, which may be important as there is no assigned seating)
  • Forced sales during check-in – by that I mean sales which have to occur if the passenger didn’t really understand the terms on which the ticket was sold. This would generally include fees for printing a boarding pass or fees for additional luggage which was not paid for during reservation.
  • Additional sales on-board – this is pretty big in low cost carriers, as many passengers assume that since they did not pay much for the ticket, they can knock themselves out on board. This, of course, includes all food and drink, including expensive alcohol as well as an on-board store, which is generally not duty free (at least when you’re travelling across Europe).

Again, the airline income predictions for all those income streams (except  the ticket income stream) are quite difficult to predict if you do not have the resources to perform a full blown market research. Alternatively, it may a great idea to hire an expert who has done it and seen it while working for your competitors – even if he or she was not directly engaged in airline income predictions, they will know what the general trends were. And of course, the competitors pricing is available for viewing at their web site, so that’s the easy part.

Charter (holiday) airline income predictions

This is probably the easiest business model for which you may be creating your airline income predictions. This is because a charter airline will generally have only a few clients (meaning tour operators) and the size of the income stream is known from the start, assuming that the airline management is already discussing cooperation possibilities with some of them. Also, it may be quite easy to get information about the general rates which tour operators are willing to pay in your region and for your particular routes.

Apart from the general income, which would come from the tour operators, charter airlines generally tend to behave a slight bit like low cost carriers in that they may be offering paid meals and drinks on board or other additionally paid products. Those streams, of course, would need to be included in the airline income predictions.

Regional airline income predictions

Regional airlines are generally not too different from legacy airlines when it comes to the overall income streams and airline income predictions. This mainly because they quite often work for the main legacy airlines either in code-share or in the form of a franchise, and this forces them to apply the same level of service as their partner provides. There is, however, one main difference which needs to be described.

Regional airlines often connect large hubs with small, regional airports. In many cases, those airports (or rather, the geographical area in which the airports are located) are not able to provide an amount of passengers which would make any airline profitable. This means that no one in their right mind would start serving those routes as it would only waste cash.

To solve this problem and provide people from all over to be able to use air travel many regional (or, sometimes, national) government create subsidy programs in which they pay the airline a certain amount of money for them to open a given route. Even though there may be many possible models for such cooperation, it will either lead to the government taking upon themselves the entire business risk of the operation or at least share that risk with the business owner.

The airline income predictions from such subsidiary streams are fairly easy to do, as they government will generally bid a certain amount which they can pay for opening a given route. Alternatively, they may sit down with a few airlines and discuss what actual costs are involved. Either way, once the deal is signed the airline owner know exactly what minimum income stream will be available from the give, subsidized, route.

At that I will finish the first article on airline income predictions. Please let me know what your experience has been with the different income streams and airline business models.

Posted in Airline Business, Airline Income Predictions
Michal Swoboda - Personal Blog

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