Matthew H Fish
Lead Service Attendant
- Joined
- May 28, 2019
- Messages
- 499
As many people have pointed out, Amtrak is often being beaten not just on speed, but on cost, by budget and ultrabudget airlines.
The question is...how? When I try to do some envelope math, the numbers don't seem to add up to anything close to profitability. I am not an expert on this, and I am looking for some information that would allow me to get some sense of what the income and cost of an airline is. Some of these things have been discussed in passing in other threads, but mostly in passing.
The basic question is: a commercial jet costs on the order of 100 million dollars. A coach bus might cost a few hundred thousand. So just looking at that first capital expense, how are airlines able to have cheaper tickets?
I tried to do a breakdown of how many flights it would take to pay off a 100 million dollar airplane. At 100 dollars a ticket, that would be...a million passengers. Since there are around 100 seats on an airplane (mostly so I can make the unit conversion cancel better), that is 10,000 flights. At about 3 flights a day, that is 1000 flights a year. Meaning that it would take about 10 years to pay off the cost of that plane from ticket sales. (Notice that I used some round numbers to get a convenient number---it might actually be 8 years, or 7 years, but still, several years). But jet planes also take fuel---a lot of fuel. I was reading estimates of how much jet fuel costs, and one source said that on a flight like Denver-San Francisco, it averages out to $5,000-$7,000 on the low end. So if we have 100 passengers at $100 each, 50-70 of those passengers are just paying for the fuel! And of course, pilots and mechanics don't work cheap. The labor costs for an airline have to be pretty high. (Although apparently not as high as I thought, even at $100 for a three hour flight, only a few of our passengers are paying for the working cost of the pilot---but there is also a co-pilot, as well as many people on the ground.
Anyway, adding all of these things up, the budget model doesn't seem to make sense as a sustainable business practice. Even if we add in things like the fact that many passengers are paying extra for luggage, it still seems like it would be a stretch.
My guess is that it is a byproduct of the very low interest rates we have had for the past 10 years. The business model of the budget carriers is to buy or lease airplanes using credit, and to have cheap fares to try to build up a market, with the eventual idea of having a more sustainable fare structure. They also are assuming that interest rates will be low enough that they will be able to sell their own assets later. As far as I can tell, low airfares are being powered by having a lot of investment money coming in, but it can't continue indefinitely.
A lot of the answers to this question might just end up kicking the can down the road---for example, the airlines might not own the airplanes, they might just be leasing, but then the question just becomes "how do they pay enough to the leasing company?"
(The overall question is very relevant to ground transit, both train and bus: how can a mode of travel that can literally have 100 times the capital cost, as well as higher operating costs, be at all competitive? And specific types of financial methods, such as being able to write-off capital costs or depreciation, exist ceteris paribus across modes, and don't account for the long term sustainability of a business model.
The question is...how? When I try to do some envelope math, the numbers don't seem to add up to anything close to profitability. I am not an expert on this, and I am looking for some information that would allow me to get some sense of what the income and cost of an airline is. Some of these things have been discussed in passing in other threads, but mostly in passing.
The basic question is: a commercial jet costs on the order of 100 million dollars. A coach bus might cost a few hundred thousand. So just looking at that first capital expense, how are airlines able to have cheaper tickets?
I tried to do a breakdown of how many flights it would take to pay off a 100 million dollar airplane. At 100 dollars a ticket, that would be...a million passengers. Since there are around 100 seats on an airplane (mostly so I can make the unit conversion cancel better), that is 10,000 flights. At about 3 flights a day, that is 1000 flights a year. Meaning that it would take about 10 years to pay off the cost of that plane from ticket sales. (Notice that I used some round numbers to get a convenient number---it might actually be 8 years, or 7 years, but still, several years). But jet planes also take fuel---a lot of fuel. I was reading estimates of how much jet fuel costs, and one source said that on a flight like Denver-San Francisco, it averages out to $5,000-$7,000 on the low end. So if we have 100 passengers at $100 each, 50-70 of those passengers are just paying for the fuel! And of course, pilots and mechanics don't work cheap. The labor costs for an airline have to be pretty high. (Although apparently not as high as I thought, even at $100 for a three hour flight, only a few of our passengers are paying for the working cost of the pilot---but there is also a co-pilot, as well as many people on the ground.
Anyway, adding all of these things up, the budget model doesn't seem to make sense as a sustainable business practice. Even if we add in things like the fact that many passengers are paying extra for luggage, it still seems like it would be a stretch.
My guess is that it is a byproduct of the very low interest rates we have had for the past 10 years. The business model of the budget carriers is to buy or lease airplanes using credit, and to have cheap fares to try to build up a market, with the eventual idea of having a more sustainable fare structure. They also are assuming that interest rates will be low enough that they will be able to sell their own assets later. As far as I can tell, low airfares are being powered by having a lot of investment money coming in, but it can't continue indefinitely.
A lot of the answers to this question might just end up kicking the can down the road---for example, the airlines might not own the airplanes, they might just be leasing, but then the question just becomes "how do they pay enough to the leasing company?"
(The overall question is very relevant to ground transit, both train and bus: how can a mode of travel that can literally have 100 times the capital cost, as well as higher operating costs, be at all competitive? And specific types of financial methods, such as being able to write-off capital costs or depreciation, exist ceteris paribus across modes, and don't account for the long term sustainability of a business model.