A Record Year for Airlines Is Not What It Seems

In 2025, airlines are expected to earn just $7.90 per passenger, yet total profits may reach $40 billion, according to IATA. As Boeing and Airbus struggled to raise production, airlines operated older aircrafts, increasing fuel and maintenance costs amidst rising demand.— economist.com

Answer the following questions to check your understanding of the story.

1)

How can the airline industry earn a huge $40 billion profit despite earning just $7.90 per passenger?

a) Ticket prices were rising because demand for air travel was high.

b) Airlines flew a very large number of passengers, so a small profit per passenger added up to a very large total profit.

c) Average variable costs were increasing because airlines flew old aircrafts.

d) Airlines cut cost by flying old aircrafts, lowering average total costs.

Wrong! - Increasing costs cannot explain such a huge profit, and prices alone do not determine total profit. Average total cost was actually increasing, not decreasing.

That's Right! - Total profit = (Price − Average Total Cost) × Quantity. A small per-passenger profit multiplied by very large number of passengers results in a large total profit.

2) What is the profit-maximizing number of passengers flown in 2025?

a) Approximately 6 billion.

b) Approximately 4 billion.

c) Approximately 5 billion.

d) Less than in 2024.

Wrong! - You are either underestimating or overestimating passenger numbers, and total profit cannot increase if both profit per passenger and the number of passengers decreased.

Good Job! - $40 billion ÷ $7.90 is approximately equal to 5 billion passengers.

3) How has the profit-maximizing number of passengers flown changed and why?

The profit-maximizing number of passengers has ___________ because ___________.

a) increased; marginal cost rose above marginal revenue for some previously flown passengers

b) increased; ticket prices rose above average total cost for passengers who were not profitable earlier

c) decreased; ticket prices fell below average total cost for some previously flown passengers

d) increased; additional passengers now have marginal revenue above marginal cost, making them profitable

Wrong! - If MC > MR for some previously flown passengers, those passengers would not be flown, so profit-maximizing quantity would decrease. Price above or below ATC affects profit per passenger, not the change in profit-maximizing quantity.

Correct! - Rising demand increases marginal revenue. Passengers who were previously unprofitable now have MR > MC, so the profit-maximizing quantity increases.

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