Last week Scott Kirby, CEO of US Airways, announced at the Hudson Securities conference that 100% of their profits will stem from ancillary airline fees, such as checked baggage fees, seat or flight change fees, and on-board service.
Most of the commentary I have read on this concerns the usual storylines about consumer gripes on miscellaneous fees generally, there is another side that is being missed in the commentary.
(By the way if fees in generally annoy you, check your itemized cell phone bill.. many of those surcharges ... not to mention the purchase... are end-run ways for filling state coffers by politicians who just don't want to admit to voters they are raising your taxes).
But with regards to the airline, what I find interesting is that what the CEO is saying, is that after adding up all of the revenue from airline tickets, and subtracting from this number the real costs of running the airline: leasing the planes, paying salaries of pilots, attendants, ground crew, and agents, buying the fuel, and any bond interest or loan payments, the profitability of the entire operation is precisely zero. Zip. $0.
Now the literal capitalist would say the item that contributes marginal profit is the most important focal point of business management. As bag fees comprise the biggest component of all fee revenue, a literal capitalist reading is that all of the infrastructure and personnel exist to ensure bags get transported from one location to the next, since they provide all the profit. You are incidental to the bottom line since your fare just helps cover costs. Perhaps even more succinctly, your main job is to make sure those bags get to the counter so they can be checked in. When you pay for their transit you are throwing that money directly to the bottom line.
Now musing on the substantial costs invested in air transport infrastructure, from the oil drilled and refined into high-grade jet fuel, airport complexes, raw materials used to build and service planes, personnel hired etc. etc., this must represent the most capital intensive bag transport logistic operation, ever.
Richard Branson, the UK billionaire investor and entrepreneur had an interesting take. When he was asked how to become a millionaire, he quickly replied:
"There's really nothing to it. Start as a billionaire and then buy and airline."
He of course later invested in US Airways, before starting Virgin Atlantic Airways and most recently, Galactic.
Me, I'll stick with the carry-ons.
