How can an airliine make money?

[jrpilot]

How can many airlines out here be making so much money....for example Southwest Airlines a low cost airline....they have been buying alot of new B737-700's lately and at over $50 million dollars a piece how can they have this kind of money to do this...I mean to fly an aircraft like that feul has go to be alot of money, I know these aircraft are "fuel efficient" but with the cheap priced of tickets how can any airline afford to pay for problems, fuel, and service and on top of that still have the $50 million dollar aircraft to pay for?...is there something I'm missing?

[Felix/FFDS]

A simple answer this is not.  Your question, basically, begs for an explanation of economics, specifically as applied to the airline industry, but to any business enterprise.

The whole idea is to have more money coming in (income) than going out (expenses) over the useful life of the asset (airplane).  No, one flight won't pay for the airplane, but if the airplane is to serve a useful life of, say, 10 years with the airline, it better bring in more money, over those ten years, than it costs to fly it (including maintenance), and to cover additional costs - crews, non-flying personnel, reservations equipment, communications, etc.

[Craig.]

In certain cases the planes have already been paid off, IE: Northwests DC9's and those flights are always making them money. The other thing to look at is investors and owners, there is a chance that they paid off the balance of say 5 aircraft, 737-300s are not that expensive considering, those 5 aircraft would then only cost on the basis of crew, fuel and those things that felix mentioned. I am not to good in the business department so i might be completely wrong

[Felix/FFDS]

In certain cases the planes have already been paid off,

They may have been "paid off" but until the cost of buying them is recovered, they're still and expense.

For example, I may have spent 6,000 on a car that I use for work, but until I've had that car make 6,000 for me(exclusive of operating costs), I still haven't "made money" on the car.  That's why you have depreciation.  The cost of obtaining the asset (car, airplane, piece of equipment) is depreciated over a period of time, as an operating expense, so that at the end of that period of time, it's "book value" is 0 dollars.  THAT's when any money made by that airplane starts being "clean" (exclusive of operating costs, etc.).

[Chris_F]

Every industry has its operating capital costs.  How much does a car manufacturing plant cost to put in to operation?  Maybe a couple hundred million?  Maybe closer to a billion?

Airlines don't write cheques for $50 to Boeing.  They get financing and pay for them just like we mortals pay for cars and houses.  They make money when they get more in fares then they pay for the asset during that time period (excluding expenses).  So, if the loan on $50M is $100k/mo (pulled that number out of the air), then they need to make $100k on fares from that airplane (again, minus expenses).  Same with car companies and their factories: they don't write Billion dollar cheques for them.

Obviously this is all a gross oversimplification of finance, but you get the idea.  Southwest probably is the best "seat filler" in the industry, so if you want to figure out what their revenue is take their average fare and multipuly by the number of seats in a B737.  Then figure out how many flights a month that plane can make.  Then figure out what a $50M loan paid off over 10 years would be (at, say 10% interest).  Then figure the cost of gas, swag a maintenance cost, and see if they seem profitable.  If Southwest is buying airplanes then some bean counter has figured out that yes, they are making money on these assetts.

[Boss_BlueAngels]

Oh fun topic, I took an entire class purely on the economics of the airline industry, very interesting stuff.

[Meinas]

its also in the stock market, South West bought a lot of futures stock in fuel, some time ago, so they are getting the cheaper prices of yesteryears now.