Building an indie business in the center of venture capital, I am Alex Edmonds, also known as supremerumham on the internet. And this is the building an indie business podcast. Okay, so today, we're going to be talking about airlines, now they generate revenue. They generate revenue from bags, types of seats, in flight, I, cargo, credit cards, charters, subsidiaries, leases, tech Ops, parts, pilots licensing cargo. And we're also talking about how they lose money, that's crashes, bailouts. I'm going to talk about COVID-19 a bit. And then I'm going to give my opinion about the airline industry as a whole. Alright, so let's get into it. bags. So they charge for bags to offset the costs of fuel, and the shortened range. So let's say a plane can go 3500 miles. So that's New York to LA, easily. And I'm with the weight that shortens the range of the plane. And the airline has to make up for that shortened range by having an extra fuel source on the plane. So now, it costs them more money. So what they do is they charge for the backs of passengers. So the price of the bag is based on the weight of the deck. So yeah, that's how they that's why they charge for Beck's. Then they charge for seats. And there's three types of seats, economy, business and first class. So they're like 21st class seats, and that the price depends on so many things. And they make most of their money for the economy seats, because while there's 21st class seats, and they're the most expensive, there's 30 rows of economy seats. So that might be 200, no 180 economy seats, and then 21st class seats. So that's their moneymaker. And the price, it depends they have a formula. There's a charge based on destination, the flight time, the type of seat, the seasonality, when is the the flight, so they're going to charge more for Thanksgiving versus you know, March, right. And you can get the cheapest flight from 12 months out to nine months out, then the median price is nine to one month out. And then one month out. So the day of flight is the most expensive. And the reason their pricing is like this is because they want the money for the flight on their books as soon as possible. So they're gonna give you a discount to the people that book the closest, the farthest out closest. Yeah. So then they make money on inflight and this is entertainment. Food, Wi Fi. Yeah. And so before 2000 they used to bundle all this in the price of the ticket. So from San Francisco to New York. someone $200. And now that flight costs them, or they'll charge 150. And they'll make it up, because the customer thinks that the flight is cheaper. So they are willing to spend more money on the flight to because they're saving money in their mind, right? So they get an extra bag, they bring an extra bag, which might cost them $30, they get a meal that might cost them $10. So 30, we're at $30, they might get the Wi Fi that costs another 10. And you know, it's an eight hour flight. So let me spend, let me get a drink, which costs $15. So instead of $200, they had $205. And that's just one person. Imagine if it's three people flying together, and they all bring a bag that costs them $20. That's $60, right. And then they get meals and everything. And they might spend more money they may get the hum, they get might get one drink each. Yeah, so it's 15 extra dollars. So yeah, it's a whole thing. Then they make money with businesses with cargo. And cargo is another complicated formula. They use time, on what time is how fast that the cargo needs to get to its destination. So if you want the cargo to reach the destination in 24 hours, that's going to cost you more money. Right. So, um, there's also type. So if you have a car, a semiconductor, and a horse, all three of those things have different needs. And the airline is going to charge you for the adjustment for each need. So a horse needs someone to take care of it, the airline needs to provide that person, they're going to charge the company for that, then semiconductor can't be in a cold environment, because it'll get damaged in the cold environment. So the airline needs to provide the proper environment and the car needs. It needs to not move around a lot. So they need to provide the equipment so we won't move around a lot. Yeah, and then their size and weight, size and weight is the same exact thing with the bags. If the size is too big, they need to change the plane and make adjustments right. And the cargo might need special containers. So that cost some extra money. Right. And then there's a route. So if the route is uncommon for them, so like New York to LA, that is a common route, they won't charge too much for that. But New York to me and or Texas to me, they might not even have that route. So they need to figure out what the route is when they can fly it and all that extra work. They charge for that, right? So there's that, um, they make money through credit cards. And what this is, is an airline will work with a credit card company to provide arm points to card holders. And the credit card incentivizes people to buy with the credit card and through the airline. So with the credit card, you might get 1% back with your gas 1% or 2% back with your groceries. But you're getting 4% back with purchases through the airline. And the reason why they want that is because they make money through those purchases. And on the annual fee, which they probably spit split with the credit card company. And then the credit card has different tiers. So there might be like, bronze, silver platinum and emit they might incentivize people born With different benefits through for each tier, so the Platinum person might be making 5% on their airline purchases or have access to a lounge before the flight. So the reason why they have tiers is so that more people, different tiers will spend more money, and they'll make money. Yeah. Okay. And then there's charters. What are charters? You ask? Great question. charters are renting out planes, or blocks of a plane. So the kind of clients that do this are businesses, sports teams, and there are services that specialize in private planes, renting out charters, that was the word I was looking for sorry. Yeah. And then some companies will invest in the travel industry and have subsidiaries. So they might create deals when they buy like a rental company or hotel, to expand their investment in the travel industry. And then some airlines will invest in subsidiaries that lower their costs. So they might invest in oil refinery or a metal like Boeing, or anyone that creates planes to lower their costs. Right. So, leases, there are two types of leases, there's a wet lease and a dry lease. And the difference is operational control. So a dry lease is the one with the operational control. On a wet lease as one way they don't have the operational control. And when someone does a wet lease, that's when they can't fly, when the FAA says your airline can't fly, so they do a wet lease to another, another airline to generate revenue, when during our suspension. So the planes are used in use, and they provide the crew, so they're making money while they're suspended. Okay. Next, there's tech Ops, what is tech Ops, Texas Tech ops is a maintenance, repair and inspection of planes. So some airlines are too small to have their own tech ops department. So they'll outsource from the big airlines. And the reason they do this is to save money. And then that creates a source of revenue for the big engines by doing that, okay, now there's parts what is parts. Um, so a plane can last up to 30 years, the parts are constantly being changed out. So when a plane is retired, some of the parts on the plane might be might still be good. So they can scrape the parts, either put them on a different plane, or they sell them to another airline. And that way, they generate revenue from those parts. Okay, pilot training programs. They train their pilots so that they know that the pilots know their stuff. Some people might have an interest themselves in flying. So they, they put together their training program in a package, and they sell that package to individuals or like a training school, or like the government. So that that's how they generate revenue from their pilot training program. Okay. licensing. There are companies that create video games that they might want the wheel airlines to have their logo in the game or their plane. So the airline gets to lease out their name to the video game for a fee. Right so they're generating passive income just by letting Microsoft username for a video game. Right so that's cool um, government so Some airlines work with the government to provide cargo and charters. So it's basically how they generate revenue from businesses, but for the government, okay. downers get it. It's planes, downers, you get it. Okay. So the first thing is crashes. And four things happen when a plane crashes on their insurance goes up their crash insurance. And this makes it so they are not technically losing revenue, but their revenue has to get spent on candy insurance premiums, then they have to pay damages out to the families of the victims of the passengers, passengers victims, the same thing in this case, okay. So that costs them money. And then people don't want to fly with you. Because you crashed, right? So you're losing future revenue from your crash, right? And then finally, the FAA will find you for your your crash. And so you lose money there. Right. So that's how you lose money on crashes. Another thing is bailouts. Secondly, not losing revenue. The bailout is to keep you even because the airline has lost revenue. And the reason why the government keeps bailing out the airline industry is because air air travel is the most efficient form of traveling. And until there is a new, more efficient way to travel. The air, the government will keep bailing out the airlines, right. Okay, Coronavirus and COVID-19. So, because people aren't flying right now, then the government government needs to bail out the airlines. But I think the airlines can adjust for the future. So they don't have to get bailed out and rely on the government meant. What they can do is focus on businesses and shipping cargo. And the reason why I think they should do this is because there is less contact between people for cargo, if you're shipping like a semiconductor or cars. So when you're not involving people, then the virus is less likely to spread. And you can continue your business and make even more money. Because you can charge a business more money than you can charge a person right? Because flying is generic in terms of people. And the uniqueness of flying cargo gets a an airline more money, right? Then there's e commerce on e commerce businesses, they want to get their items to customers as fast as possible. So they specifically should focus on e commerce businesses to optimize their, um, their shipping for e commerce. And then social distancing. So an airline can charge more in the future for social distancing. They rip out that middle seat, and they in place barriers for the customers to make sure they're safe in the future from spreading the virus or the new virus that is created from someone biting off someone's an animal's head. Right. And then I think that credit cards should be a focus for airlines in the future, because they're scalable, right? They can have more deals, and people don't need to fly to use the credit cards, they cannot use the credit cards at home. So the airlines would generate more revenue than from the flights. And you know, it's more money and people don't have to fly. You know, it's all thing. Okay. So my opinion, I think that flying on a plane is like a restaurant cooking a nice meal. But the Serving the customer, the cooking scraps, they take advantage of the fact that they don't need to provide a great experience, because it's the most efficient way to travel. And I think in the future, the better customer experience. The airline that provides the better customer experience will gain more customers and a win. So yeah, I wanted to thank Ross Kincaid of trash panda capital. Because he helped me with pretty much all the content, all the other revenue generating stuff. I came up with COVID-19 myself, I had my opinion, but everything else was him. So I wanted to thank him. You could check out trash man, a capital M, it's gonna be linked in the show notes. Thank you for listening. Have a nice day. Bye
In this episode, I discuss how airlines generate revenue. I discuss bags, types of airline seats, the airline seats pricing model, in-flight price psychology,
How Airlines Make Money From Cargo,
credit card airline miles, airplane charters, subsidiaries, airline leases, airline tech ops, parts, government contracts
for airlines, airline pilot training, causes of revenue loss for airlines, government airline bailouts, airlines and COVID-19, and my opinion of airlines.
Ross Kinkade of Trash Panda Capitalfor help with the content
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