rickair7777

The $ of tickets is driven by overcapacity and SWAs fuel hedges, in that order. Let's look at a couple of examples of businesses operating in a non-profitable market to see why:

Fixed Cost= overhead business related costs that are always there regardless of the amount of product produced (ie factory/office rental, admin staff, lights, HVAC, etc)

Variable Cost= Cost incurred ONLY while actually producing the product (factory labor, energy, raw material, shipping, equipment maint.)

Total Cost of product= Fixed + Variable (ideally you can sell your product for MORE than total cost to make a profit, but that's not what we're looking at here)

Typical Factory: Variable costs = 85%, Fixed Costs = 15%. If this factory can sell its product for 80% of total cost, it will not bother to make the product...by not making the product it can save all variable costs (80%), and only have to pay its small fixed costs. If the factory can sell the product for 90% of total cost it WILL make the product because even though it's losing money, the sale price of the product covers ALL of the variable costs plus some (5%) of the fixed costs. This means that you might be able to buy a Ford pickup for a little less than what it cost to make.


Typical Airline: Variable Costs = 20%, Fixed Costs = 80%. Notice right away the BIG difference here...the airline's fixed costs are much higher than variable costs. Their overhead, aircraft leases & maintenance, gates, and most labor costs are fixed...as long as you can cover your variable costs (fuel, peanuts, and a small % of labor) you may as well fly so that you can also make a dent in your fixed costs...an airline such as this would sell it's product for 25% of cost...covers all the variable and leaves 5% to apply to fixed costs. This is where your LA-NY $49 fares come from.

Any non-profitable business will continue in this manner until a) market conditions improve, b) it reorganizes, or c) runs out of money.