Air Transport World

Marketing costs pose major challenge to airline profitability.

Marketing csts pose major challenge to airline profitability If it wasn't for all those passengers streaming down the jetways, the airlines might be able to get down to business and make some real money.

That is the conclusion one might have reached from U.S. airline explanations or at-times disappointing financial performance over the past few years. Too many people, 90.1% of the total, buying tickets discounted an average 62%, said carrier officials, almost double the discount traffic eight years ago. Airline marketing, in other words, was too successful.

Interestingly, airlines are spending ever-increasing amounts of money to sell and distribute those low-yielding tickets. "That's what the wonderful world of competition does," comments American Airlines Senior VP-Marketing Michael Gunn.

Disappointing financial results or not, the problem certainly is not traffic. Air Transport Association (ATA) member figures show revenue passenger-miles for 1985 were 57% higher than in 1977. In the first half of 1986, international traffic was down but, despite lack of direction in the U.S. economy, domestic traffic was up. Load factor in July was 65%, 10 points higher than the old regulatory standard for rate of return. August was the best traffic month in industry history. Through October 1986 RPMs were up 9.3% systemwide. October domestic traffic was up a whopping 17.1%.

Sharp declines in major cost areas also helped operating results. Labor is down to 35.7% of total operating expenses, compared with 41.5% in 1977. And the decreases continue. Some 40% of American's labor costs are at the lower end of two wage tiers, with more to come. Other carriers didn't negotiate lower wages as quickly as American but their reductions will come, too.

Commission rate increasing

The No. 2 expense, fuel, is selling (for the moment) for an average 43^ a gallon. That's now 16.6% of total operating costs, compared with 20.1% in 1977.

Marketing costs are another story. Mercifully, some of these costs are still calculated on a percentage basis. …

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