| Revenues and Costs
While airlines earn revenue from transporting cargo, selling frequent flier miles to other companies and up-selling inflight services, the largest proportion of revenue is derived from regular and business passengers.
Major airline costs include:
- Labor – According to the Air Transportation Association (ATA), labor is an airline's No.1 cost. Airlines must pay pilots, flight attendants, baggage handlers, dispatchers, customer service representatives and others to operate.
- Fuel cost – Fuel ranks second in an airline's total costs. Fuel efficiency varies widely among different carriers. Short haul airlines typically enjoy lower fuel efficiency because take-offs and landings consume large amounts of jet fuel.
- Financing costs – As aircraft are expensive, leasing or debt financing is necessary. The airline industry is sensitive to changes in interest rates.
The airline industry is capital-intensive which translates into high fixed costs, i.e. about two-thirds of the cost structure of the airline industry are fixed costs. Coupled with a high dependence on the economic cycle and fuel prices, the airline industry is considered to be unstable. Many airlines fail to survive when negative externalities strike. Positive externalities often result in over-optimistic future projections. Market conditions greatly affect both the demand and the ticket prices for tickets.
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