Operations Buzz

How Much is a Frequent Flyer Worth?

May 14th, 2010

by

I recently watched “Up in the Air” and could not help but marvel at Ryan Bingham’s (George Clooney’s character) perks as an elite frequent flyer on American Airlines. Out come the Champagne and a visit from the airline’s chief pilot on crossing 10 million miles. While Hollywood has taken its usual liberties with Ryan Bingham, airlines do coddle their most frequent flyers. Dedicated phone numbers, private check-ins, and birthday cakes on the road are all part of the package; in addition to the usual upgrades, lounge access, and priority boarding.

Made me wonder why the airlines go through the trouble – its a few passengers after all. It is really worth, for example, holding a 747 an hour for a Bingham-like passenger to make the connection? What is a frequent flyer loyalty worth to an airline?

Here is one way to look at it.  From the following table, you will notice that the average fare paid by a passenger on American Airlines in 2009 is about $281 (see Note 1). From their 2009 financial statements, they made a loss of $2523 on each flight (see Note 2).  So on a typical flight, they need nine more passengers each paying the average fare to break even. On the other hand,  Southwest Airlines makes a profit of $84 per flight. The average fare on Southwest is $102; so only one passenger on the plane represents profit. Yep, that’s right. If Southwest looses this last passenger each flight, it will make a loss.

The airline industry has high “fixed” costs – you have to buy and maintain the planes, pay the crew, and lease the gates even if you are not filling up the planes. The ticket revenues from most passengers on the plane cover these fixed costs. In the case of the big airlines like American, Delta, Continental, US Airways, Northwest, or United they do not even cover the fixed costs! The good news is that it takes only a few more passengers per flight to become profitable.

For US Airways, just one more passenger each flight and it will be in the black. Bring on the Champagne and caviar and yes, hold that connection – they really want that customer on board.

All numbers are from 2009

Airline

Avg.
Fare (A)

Income/flight
(B)

Income
Passengers (B/A)

American
Airlines

$281

-$2,523

-9

AirTran

$95

$521

5

Continental

$363

-$966

-3

Delta

$305

-$2,235

-7

Frontier

$111

$1,274

11

Hawaiian
Airlines

$152

$1,818

12

JetBlue
Airways

$162

$301

2

Northwest
Airlines

$288

-$871

-3

Southwest
Airlines

$102

$84

1

US
Airways

$224

-$315

-1

United
Air Lines

$319

-$1,444

-5

Notes:

1. Average fare is calculated by diving the passenger revenue by total number of departures. For example, American Airlines’ 2009 passenger revenue was $19,898 million. They carried 70,735,000 passengers – so each paid about $281.

2. Income per flight was computed by diving the Net income by number of departures. American Airlines made a net loss of $1476 million and had 585,000 departures in 2009. So each departure made a loss of $2,523.

3. Data Source: http://www.transtats.bts.gov/carriers.asp?pn=1 Requip

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