The entire system of economics is based upon the trading of objects in order for each individual to benefit in the trade. Today, these trades are made with money. Everywhere you look there are costs. Airline's have to spend huge amounts of money in many different aspects. Passengers have to pay high prices for many tickets, but might might be paying twice the price as the man or woman in the seat next to him. Why is this? The economics of the aviation industry, specifically in the airline business are extremely complicated. However, they can still be dissected.
First off, airlines have huge operating costs. In order to operate an airline, a huge number of employees are absolutely required. We already discussed regulation in the last blog, and that requires huge amounts of money to be spent on checking and double checking aircraft. Airlines must spend millions of dollars on airplanes (for which they must get loans) and in order to fly those planes, spend a high amount of money on jet fuel. A new 737-800 costs 90.5 million dollars, which obviously means that the average aviation enthusiast can decide to start a large airline.Twenty-seven percent of an airline's costs come from the hiring of flight related activities (a relatively small number when considering that is the main goal of an airline). Sixteen percent of an airlines expenses go to all of the work required to move passengers when not in flight (such as loading baggage and checking people in).
Now, consider a large airline such as United. It carries about 45,413 passengers a day to a huge number of varying locations. That means an incredibly large number of employees, planes, fuel, and more. The daily costs of large airline operation is larger than one can really imagine. So, why are ticket prices so high? To turn a profit, airlines must get higher revenue than their costs and that means that a whole lot of money must be brought in daily. Tickets must start at a base price that makes sure an airline can at least brake even. High demand for tickets to a certain location causes prices to be increased. If airlines offer a sale, demand is increased because price is decreased. Also, as the supply of seats gets lessened (closer to the date of the flight), then ticket prices increase. The constant changes of ticket prices online reflect the constant change in demand and supply. After all the revenue is brought in, most airlines only have a one to two percent profit margin, meaning that a huge quantity of tickets must be sold in order to generate profit.
