US Airways: Without Fees, We Have No Profit

At the Hudson Securities conference last week, US Airways President Scott Kirby explained that the airline's entire 2010 profit depends on fees -- or ancillary revenue, as the industry calls it. That's really quite a revelation, and it really shows how important this industry shift has been to US Airways (LCC). People may love to hate fees, but the reality is that this is the best option for this industry to survive in its current state.

Here's a basic look at what the first three quarters of 2010 have looked like for the airline:

Sure, there's a lot of revenue, but the profit margin is thin. That might be surprising to the average Joe, but what's even more surprising is that this is a very good year. Airlines have been posting huge profits (huge in airline terms) and the industry is at a peak. So while this looks bad for most industries, it actually looks good for the airlines.

But this is just looking at the year-to-date. Scott Kirby was looking at the full year. Most analysts are predicting a small profit for the fourth quarter, so US Airways could end the year with a profit of around $450 million. If we assume that fees continue to come in at around $130 million for the last quarter, then US Airways would have lost money without fee revenue. And again, this is a good year.

Most people simply ask, "why can't they just put the fees into the ticket price and raise ticket prices?" The short answer, they can't. (I wrote more on this on Cranky.) Don't get me wrong. They can raise fares and they've been doing so aggressively. But they just can't raise fares enough to cover costs without killing demand. Since people don't really account for most fees when they're booking their trips, it's a way for US Airways and other airlines to get more revenue without the customer even realizing it.

Others will say, "how did airlines make money before? It's not like airlines can't make money without fees?" Ah, but there's one big difference. The price of fuel.

In the 1990s, airlines were dealing with $20 a barrel oil. Even in the 2000s, as oil prices crept up, they didn't creep up to the levels they're at now. I remember when United's bankruptcy exit plan expected $50 per barrel oil. Hah, that would be a dream. Oil has been climbing ever higher lately and it's pushing $100 a barrel again. For airlines to be able to post a profit with the price of fuel where it is is truly remarkable.

For US Airways, the idea that the airline can just add $500 million on top of its revenue thanks to things not in the ticket price is tremendous. It's what makes the airline profitable and because of that, we won't see fees go away anytime soon.

Related:

• The Good Side of Fees: Paying for Convenience
• Airline Baggage Fees: The Perils of Making Air Travel Suck More
• The Business Logic of Airlines' New Standby Fees