Etihad Airlines: One of The Most Luxurious Airlines which provides Its Passengers with high end Facilities Photo: Md Shaifuzzaman|Wikimedia Commons
In 2010, Rynair’s airlines which is famously known for its cheap ticket prices, faced a backlash for wanting to charge extra money for even letting the passengers use the toilet. In 2009, this budget airline from Ireland “was carrying 66.5 million passengers for an average fare of €35“, reported Simple Flying. Some users on online platforms have reported that the carrier offered a flight between Poland and Germany for less than $10. In stark contrast to that is Etihad Airlines’ charge of $ 5.5 million for a first class seat, The Residence.
While one might feel that such difference in ticket prices means that Etihad’s profits would be unconscionably higher than those of Ryanair, this is not the case. In 2022, Etihad recorded its highest-ever profit of $296 million, while Ryanair made a staggering $1.6 billion—more than five times Etihad’s earnings. This striking difference in profitability raises an important question: How do airlines make money? The airline industry operates on a complex business model, as was evidenced by our article that covered how subtly airports earn:
Just like any other business would, airlines also factor like pricing strategies, additional fees, operational efficiency, and cost-cutting measures to achieve great profits. But how do airlines make money? Let’s find out.
The Emirates Airlines Onboard Lounge exemplifies how premium airlines incorporate luxury experiences into their business models to attract high-end travelers. Photo: Travelarz | Wikimedia Commons
Types of Airlines and Their Business Models
There are two types of airlines, one of which is called full-service airlines. Full-Service airlines, such as Nepal Airlines, Etihad, Emirates, and Singapore Airlines, offer passengers a premium flying experience with added amenities. Their tickets typically include:
In-flight meals and entertainment
Baggage allowance included in the fare
Multiple cabin classes (Economy, Premium Economy, Business, and First Class)
The other type of carriers are known as low-cost airlines. These are also known as budget airlines and include the likes of Ryanair, IndiGo, and Southwest Airlines, all of which follow an entirely different strategy. Their goal is to offer the lowest possible fares while making u for lost revenue through additional charges. To achieve this, they:
Eliminate in-flight services (no free meals or entertainment)
Charge extra for baggage, seat selection, and check-in
The interior of an Air Deccan Airbus highlights how low-cost airlines maximize space and cut costs to boost profitability. Photo:Kprateek88|Wikimedia Commons
How do low-cost airlines make money?
Globally, Ryanair stands out as a well-known low-cost airline. However, its budget-friendly tickets, but compromise on many amenities, often sparking criticism. Ryanair even charges fees on online payment methods, reported the Guardian:
“Ryanair claims instead to charge an “admin fee” per passenger per one-way flight. This £6 charge is levied when a passenger comes to pay and can only be avoided by using the airline’s own prepaid Mastercard. It states on its website that this charge “relates to costs associated with Ryanair’s booking system.”
The income generated from add-on services is often dubbed to be “ancillary revenue” – something that has turned out to be a goldmine of sorts for budget airlines. For example, in 2019, Ryanair earned 28% of its total revenue from ancillary charges, including baggage fees, seat selection, and in-flight purchases, while the general rise in ancillary revenue for airlines was reported by OAG to have risen more than twofold:
“Over the span of less than a decade, global ancillary revenues dramatically rose from $42.6 billion USD in 2013 to over $102 billion USD in 2022. Even more impressive, 2022’s figures almost matched 2019’s record of $109.5 billion USD, despite the disruptions caused by the global pandemic.”
This Ryanair aircraft highlights how low-cost carriers generate significant revenue beyond ticket sales through baggage fees, in-flight sales, and other ancillary services. Photo: Bill Harrison | Wikimedia commons
Dynamic Pricing Strategy in Airlines
Both full-service and low-cost carriers use dynamic pricing, meaning airfares are never fixed—they constantly fluctuate based on real-time demand and market conditions. When you search for flights online, prices change frequently due to factors like:
Travel timing (weekday vs. weekend, peak vs. off-peak hours)
Competitor pricing on the same route
Seat availability and booking trends
Promotional offers or seasonal discounts
Airlines rely on sophisticated algorithms to adjust prices dynamically. For example, if a flight has 100 economy seats available 10 days before departure, the airline may divide them into four pricing tiers (with 25 seats each). Here’s one of the possible strategies that Dynamic Pricing Model might allow:
The first 25 seats are sold at the lowest price.
The next 25 seats increase in cost as demand rises.
The third tier of 25 seats might even be priced higher.
If seats remain unsold close to departure, prices drop to avoid empty seats. A glaring example of this was seen while booking for flights during the floods in Nepal. Many airlines in India and Nepal that operated between Mumbai Airport and Tribhuvan International Airport had prices as high as $250 before the flood. But after the floods it, the prices were as low as $60 (due to a decrease in demand for passengers to go to a flood-afflicated zone).
[ Note: It is not only airlines that resort to dynamic pricing. According to Harvard Business School even online giants use dynamic pricing, which is based on Supply and demand, competitor pricing, and inventory levels:
“Amazon Marketplace uses it to compete in the e-commerce industry, where 35 percent of all retail sales are expected to occur by 2027. Using real-time data, Amazon not only matches or beats competitors’ prices but tailors its own to customers’ preferences, browsing histories, and purchase behaviors.”
]
This premium airline seat highlights how Business and First Class offer more space and luxury, justifying their significantly higher fares and impacting airline profitability. Photo: calflier001 | Wikimedia Commons
Profitability of Different Airline Classes: A Surprising Reality
Airlines typically offer four seating classes: Economy, Premium Economy, Business, and First Class. While low-cost carriers operate with only Economy seats, full-service airlines price their premium cabins significantly higher—sometimes reaching ₹5 million per ticket for First Class.
At first glance, one might assume Business and First Class drive most airline profits. However, data reveals a more nuanced picture. According to the Michigan Journal of Economics, as quoted in popular Youtuber Dhruv Raathee, long-haul flight pricing averages of flights were:
Economy: $1,443
Business: $5,000
First Class: $9,000+
But then comes the space utilization as ticket price alone doesn’t determine profitability. Here’s a breakdown of the space occupied by each of the different types of tiers:
Economy: ~5.5 sq ft per seat
Business: ~20 sq ft
First Class: 30+ sq ft
Business-class tickets offer you almost six times the space in an economy class tickets- hence the tickets are almost (more than) six times higher. The amenities might also be different. Take Singapore Airlines’ Airbus A380, as an example. According to Aerolopa, the services offered on the different tiers of the largest passenger aircraft of Singapore’s flag carriers are different:
Economy: 343 Recaro CL3710 seats arranged in a 3-4-3 configuration; Seat width: 18.5″; Seat recline: 5″; Row pitch: 32″
Suites: Six fully enclosed individual suites ..separate 27″ wide, 76″ long bed. Suites 1A/2A and 1F/2F have a retractable wall, allowing them to be combined into a single space with the option to create a double bed in the middle.; Seat width: 21″
Business: Seventy-eight bespoke Jamco Business seats (2017 iteration)… Each seat converts to a 78″ long fully-flat bed (measured between diagonal corners); Row pitch: 60″ ; Seat width: 25″
Premium Economy’s revenue per square foot after cost differentiation by cabin is $322 (the highest of all tiers) while First Class earns $269 (the lowest). Latching on to the such analyses, airlines are phasing out First Class, though the scope of a tantalizing ultra-luxurious business class looms. American, United, Air New Zealand, and others have removed First Class entirely, while the carrier that we quoted above – Singapore Airlines – reduced First Class seats by 50%.
Airlines, like Madeira Airport’s ‘Welcome Drinks’ ad, use boarding pass and seatback ads to generate millions in extra revenue. Photo: cudi | Wikimedia commons
Other cost-saving tricks for airlines to generate revenue
ADS, often known as Ads on seats, is another way for airlines to generate revenue. Advertisement on boarding passes also have the potential to add millions to an airline’s revenue, reported CNN:
” Susan Booth said these ads are “destination specific,” meaning that they advertise restaurants and performances at the flight’s destination city, with information on local weather and events. Delta rolled out its first ad-plastered boarding passes on July 15. Continental plans to follow suit in the fourth quarter. The other airlines did not specify the timing of their boarding pass ads. Al Lenza, vice president of distribution and e-commerce for Northwest, told the Associated Press on July 15 that the ads are “going to be responsible for many millions of dollars for each airline.”
The advertisement in in-flight magazines can cost $1000, another revenue potential. Eliminating seatback TVs cuts costs while ad space generates income. Some other strategies used by low-cost carriers would include:
Avoiding flying to and from major aerodromes, saves a lot of money as smaller airports have lower landing and aprking charges.
Minimizes turnaround time as evidenced by Ryanair’s 25 minute turnaround time.
We have covered other strategies in our guide below:
One of the more controversial ways airlines save money is the adoption of Flap 3 landings which save around 6 kilograms of fuel per landing. A famous example of this was the instructions given to pilots of the Indian low-cost airline to its pilots, reported the Deccan Chronicle:
“As a company policy, the crew were asked to carry out flap 3 landing every time, which is not in line with the Airbus Flight Crew Operating Manual (FCOM) procedures,” said a DGCA official while responding to a media query sent by a publisher.
