The Role of Deregulation

Until the 1970s, all U.S. airlines that flew across state lines were regulated by the Civil Aeronautics Board (CAB). CAB set minimum fares, doled out flight routes and generally kept all the major airlines on equal footing (while keeping smaller competitors out). Regulated fares lead the airlines into strange forms of competition, such as serving steak dinners or attracting their predominantly male customers with stewardesses in short skirts. In 1978, the airlines were deregulated, opening the door to low-cost airlines.

Airline Operating Expenses

­Running an airline is unavoidably expensive. One of the most basic costs is the price of buying the airplanes themselves. For instance, a Boeing 737, a relatively small passenger jet, costs around $50 million or more. Larger jets can approach $300 million in price [source: Boeing].

Hiring qualified pilots to fly the planes is another major cost. A pilot with 10 years of experience will earn upwards of $100,000 in annual salary. First officers and other crew members make less, but still represent a major cost [source: Payscale.com].

Fuel costs not only take a huge chunk out of an airline's revenue, they are notoriously volatile. From month to month, airlines never know exactly how much fuel is going to cost. Domestic airlines in the U.S. spend a combined $2 to $5 billion on jet fuel every month [source: Air Transport Association].

Countless other expenses also weigh down an airline's bottom line: maintenance costs, fees paid to airports, fees paid to the government, the cost of food served to passengers, the cost of running computer systems to track bookings, fees and percentages paid to travel agents and Web sites, pilot training, and other incidental costs all add to operating expenses.

These costs can be compounded by certain realities of the airline industry. For example, long flights cost the airline proportionally more money -- that's because they're in the air for a long while and burn a lot of fuel -- but the passengers still only pay for a single ticket. Empty seats represent an additional cost. The plane has to make the trip for the paying passengers, but if not all of the tickets were sold, the airline is not making the maximum possible profit on that flight.

If airlines have to deal with so many costs, how do budget airlines offer cheap tickets? Find out in the next section.