Time to Chart A New Flight?

This is a follow-up post to the my call for airlines to innovate their customer experience.  An interesting article came out in Fortune magazine (March 21, 2011 issue) showing how much profit an airline makes on an average price of a ticket (including first-class) from Los Angeles (LAX) to New York (LGA).  The answer may surprise you.

Ticket cost was $506.62.

What made up that cost?

  • $97.85 fuel
  • $95.33 labor
  • $75.16 federal taxes & fees
  • $53.73 payments to regional partners & merchants
  • $36.59 miscellaneous
  • $32.05 non-employee labor
  • $27.47 other airline expenses
  • $25.67 aircraft rents & ownership
  • $17.07 nonaircraft rents & ownership
  • $12.25 interest
  • Profit = $33.45 or 6.6%

With a profit margin so thin, it is no wonder that airlines are in trouble.  And so the mission is not necessarily to serve customers in as much as to improve profitability.

There are three ways to increase shareholder value:

  • Mergers & acquisition
  • Organic growth (find new revenue streams within existing business)
  • New product innovation

The baggage fees that have been instituted is a great example of the way airlines have moved forward with monetizing their existing business.  By controlling inventory (flights) and raising the baggage fees (from $0 to $25), there is instant profit.  It does impact the customer experience at the airport with longer lines at TSA security checkpoints since now more carry-on luggages have to be screened.

Interestingly, a few airlines have refused to increase baggage fees in order to further differentiate themselves against the competition.  It is clever, but will a consumer make an airline choice based on a $25 difference?  No, but it does play well with brand positioning like a low-cost airline.

With airlines stuck with such thin margins, it behoofs the industry or its individual players to innovate in other ways, and claim blue oceans instead of monetizing red oceans.  One incredible example is Virgin Atlantic’s partnership with GE to build a more efficient jet engine running on biofuels.  All of a sudden, Virgin Atlantic is no longer just in the business of running a transportation business, but also in the development of the transportation equipment, yielding savings along the way, and quite possibly a new revenue stream in selling jet engines.

Time will tell if they are successful, but they are definitely visionaries.

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About Stephane

Stephane Bardin has a deep understanding of consumers, combining go-to-market strategy and successful execution to drive sales growth. He is a strong marketing executive with strategic consumer and analytical talents in growing brands in the US and internationally. He is a consumer catalyst, producing results for: - Budweiser Beer - McDonald's - Hasbro - Pfizer - Kraft - Starbucks - Bumble Bee - Designer Whey - Aquafina - Tropicana - BRISK - Pepsi and more • Drove Budweiser Beer achievement of #1 foreign beer brand recognition in China. • Developed strategies to re-launch McDonald’s chicken sandwiches. • Developed top-line revenue stream for Bumble Bee in two new markets • Created the best-ever consumer promotion for Unilever brands. Stephane has a reputation for conceptualizing and executing integrated consumer marketing programs that positively impact P&L results. Stephane Bardin is an expert in using new technologies and media to connect consumers with brands and drive bottom-line results. He is a collaborative contributor who is an expert at building brand equity, loyalty, and ROI for highly recognized consumer products and brands. He has demonstrated performance using key levers of marketing to drive strategy and sales growth: advertising vehicles, consumer promotions, consumer/market research/syndicated data, new product development/innovation, multicultural marketing, interactive/digital/mobile/social media, SEO, public relations, shopper marketing, and partnership/alliance marketing. • Positive P&L Impact and Growth • Branding / Equity Building • Strategic Alliances / Partnerships • New Product Development / Innovation • Social Media/Online/Ecommerce Marketing • Cross-functional / Cultural Team Leadership • Strategic Planning /Tactical Execution • Syndicated Data Analysis and BASES • Advertising and Sales Promotion • Shopper Marketing • Trademark Management • Global Marketing Strategy
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