airline operating costs and measures of...

Airline Operating Costs and Measures of Productivity

Chapter 5

Lesson 4

Sources:The Global Airline Industry Peter Belobaba, Amedeo Odoni, Cynthia Barnhart, MIT, Library of Flight SeriesPublished by John Wiley & Sons, © 2009, 520 pages, Hardback

http://ocw.mit.edu/OcwWeb/Aeronautics-and-Astronautics/16-75JSpring-2006/CourseHome/index.htm1

Chapter 3 Review

AirlineProfit

RPMYield

ASMUnit Cost

RPM# Flights

RPMQOS

QOSUnit Cost

Spill

Operating Expense

Revenue

EconomiesOf Scale

Chapter 4

Operating Profit = RPM x Yield – ASM x Unit Cost (Revenue) – (Operating Expenses)

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Chapter 4 Review

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Price Discrimination vs. Product Differentiation

D=MxFaxTb

LogD = LogM +aLogF +bLogT

OverbookingAU =CAP /(1‐NSR + 1.645 STD)

3

Chapter 5 ReviewLCC Strategies

AirlineProfit

RPMYield

ASMUnit Cost

RPM# Flights

RPMQOS

QOSUnit Cost

Spill

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Revenue

EconomiesOf Scale

FOC

Ground

System

Fuel/ HedgingLabor/ No Unions Lower Wages

Unit Cost

Maint/ Commonality

No Travel Agencies

Point-Point/ less connect

No Commisions

Unit Cost

No Frequent Flyer

Single Cabin

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4

Chapter 5 Review (Cont.)LCC Strategies

AirlineProfit

RPMYield

ASMUnit Cost

RPM# Flights

RPMQOS

QOSUnit Cost

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Operating Expense

Revenue

EconomiesOf Scale

FOC

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Labor/ No Unions Lower Wages

Unit Cost

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No Travel Agencies

Point-Point/ less connect

No Commisions

Unit Cost

No Frequent Flyer

Single Cabin

No Frills

Inputs$Passengers

Outputs$Passengers

ControlsSafetyPoliciesStrategies

FeedbackAircraft Productivity

Aircraft Utilization (block-hours /day)ASMs /Aircraft /Day

Average Stage Length #of Departures /DayAircraft Capacity (seats /aircraft)Employee Productivity

ASMs /Employee ASMs /Labor $Revenue /Employee Revenue /Labor $

5

Outline

• Airline Cost Categorization– Administrative vs. Functional– Cost Drivers

• Operating Expense Comparisons– Percentage Breakdown– Legacy vs. Low-Cost Airlines– Flight Operating Costs

• Comparison of Airline Unit Costs– Total Operating Cost vs. Unit Costs– Legacy vs. Low-Cost Airlines Unit Costs– Comparisons in Europe, Asia, and Worldwide

• Measures of Airline Productivity– Aircraft Productivity– Labor Productivity

• Delay Costs• Impacts of Frequency of Service and Aircraft Gauge• Airline Profit Model• Review: Market Analysis

6

Airline Cost Categorization

7

DOT Form 41

• Form 41 contains traffic, financial, and operating cost data reported to the DOT by US Major airlines– Data is reported and published quarterly for most tables– Detail of reporting differs for different expense categories

• Aircraft operating expenses by aircraft type and region of operation

• Other expenses more difficult to allocate by aircraft type• DOT Form 41 includes the following schedules:

– P12 : Profit and Loss statement – P52 : Aircraft Operating Expenses– P6 : Operating Expenses by Objective Groupings– P7 : Operating Expenses by Functional Groupings– P10 : Employment Statistics– B1 : Balance Sheet

8

Administrative Cost Categories

• Administrative Cost Categories– Salaries and related fringe benefits for all personnel (general

management, flight personnel, maintenance labor, other personnel)

– Materials Purchased (fuel & oil, parts, passenger food, other materials)

– Services Purchased (advertising & promotions, communications, insurance, maintenance, commissions, other services)

– Landing Fees, Rentals, Depreciation, other Expenses

• Although consistent with general accounting principals, Administrative Cost Categorization does not allow for more detailed analysis of the specific activities that comprise the airline operation and contribute to airline costs– “Salaries & Benefits” does not allow one to separate out important subsets of

this category, aircraft crew cost

9

Administrative Cost Categories

10

Functional Cost Categories• Functional Cost Categories –allocates costs to the different

functions within the airline’s operation– Flight operating costs/ Direct operating costs

• Flying operations – Flight crew, Fuel costs

• Maintenance – routine maintenance, extensive major checks, “labor & parts”Form 41 reports maintenance for direct airframe, direct engine and overhead/ burden

• Depreciation & Amortization

– Ground operating costs• Aircraft servicing – handling aircraft on ground, landing fees

• Traffic servicing – processing passengers, baggage and cargo at airports

• Promotion and sales – airline reservation centers, ticketing offices, travel agency commissions, and distribution system fees

– System operating costs• Passenger Service – meals, flight attendants, in-flight services

• Advertising and Publicity

• General and Administrative – can’t be associated to a particular activity

• Transport-related – costs associated with the generation of transport related revenues. Fees paid to regional airline partners, extra baggage expense, and other misc overhead

11

2004 Functional Cost Breakdown

12

Cost Drivers by Functional Category

• Flight operating costs– Per Block Hour (for example, $3415 for 185-seat B757-200 in 2003)

• Aircraft Servicing Costs– Per Aircraft Departure (average $1135 in 2003)

• Traffic Servicing Costs– Per Enplaned Passenger (average $18)

• Passenger Servicing Costs– Per RPM (average $0.015)

• Promotion and Sales Costs– % of Total Revenue (average 10%)

• Other Indirect and System Overhead Costs– % of Total Operating Expense (average 12%)

13

Operating Expense Comparisons

14

Airline Operating Cost Breakdown

• Adapted from Form 41FLIGHT (DIRECT) OPERATING COSTS (DOC) = 53.1%– All costs related to aircraft flying operations– Include pilots, fuel, maintenance, and aircraft ownership– Varies primarily because of fuel priceGROUND OPERATING COSTS = 20.5%– Servicing of passengers and aircraft at airport stations (14.2%)– Promotion and reservations/sales charges (6.3%)– Dropped from a high around 30%, because of major reductions in promotions

and sales costsSYSTEM OPERATING COSTS = 26.4%– Passenger Service (6.7%)– General and Administrative (5.9%)– Transport-Related expenses (13.7%)– The growth in Transport-Related expenses can be attributed to changes in

reporting rules and a higher reliance on regional partners as feeder airlines

15

Flight Operating Costs

• Flight operating costs (FOC) by aircraft type:– Reflect an average allocation of system-wide costs per block

hour, as reported by airlines for each aircraft type– Can be affected by specific airline network or operational

patterns– Collected by US DOT as Form 41 operating data from airlines

• Typical breakdown of FOC for US carrier:CREW: Pilot wages and benefitsFUEL: Easiest to allocate and most clearly variable costMAINTENANCE: Direct airframe and engine maintenance cost,

plus “burden” or overhead (hangars and spare parts inventory)OWNERSHIP: Depreciation, leasing costs and insurance

16

Legacy vs. Low-Cost Airlines

• Network Legacy Carriers (NLCs)– More Traditional Airlines– Operate large hub-and-spoke networks– Regional, Domestic and International Service– Big Six (American, United, Delta, Northwest,

Continental, US Airways/ America West)

• Low-Cost Carriers (LCCs)– Operate smaller networks– High proportion of point-to-point or non-hub– Reduced levels of service and low fares– Southwest, AirTran, Frontier, ATA, JetBlue, Spirit

17

The LCC Business Model• Characteristics of all or at least most LCCs

– Fleet Commonality – reduces the costs of spare parts, maintenance and crew training

– Point-to-Point instead of connecting hub networks – reduces costs of handling connecting passengers and improves productivity of both aircraft and crews

– No labor unions and lower wages – higher productivity due to less restrictive work rules

– Single cabin/ class service – reduces complexity and costs– Open seating – less time processing passengers and no boarding

passes, improves productivity and reduces costs– Reduced Frills – less seating space, no food and no beverages ,

increases ASM and reduces passenger service cost– No frequent-flyer programs – reduces administrative costs– Avoids traditional distribution channels – no travel agencies, no

commissions, tickets directly from airline (website or phone)

18

Comparison of Major LCC Characteristics

South West JetBlue AirTran West Jet Easy Jet Ryan Air

Single Aircraft Type or Family

X X X

Point-to-point no hubs

X X X X

No labor unions/lower wages

X X X

Single cabin/ class X

Open seating X X X

Reduced Frills X X X X

No frequent flyer program

X X X X

Avoid global distribution systems

X X X

19

Recent Trends in Operating Costs• Flying Operations (Figure 5.7)

– Costs doubled between 1995 to 2007– NLCs 50% higher than LCCs

• Maintenance (Figure 5.8/5.9)– From 2000 – 2005 NLCs spent 60% more than LCCs– By 2007 NLCs spent 100% more than LCCs– Positive relationship between the average age of an

airline’s fleet and maintenance costs per block hour? (NextGen?)

• Passenger Service (Figure 5.10)– NLCs spend twice the amount LCCs spend per RPM on

Passenger Service until 2001– Gap has narrowed to 50% by 2007

20

Recent Trends in Operating Costs (Cont.)

• Aircraft and Traffic Services (Figure 5.11/5.12)

– Steady increase, especially with security related expenses after 9/11

– NLC costs double the costs of LCCs (larger aircraft, longer distances)

– NLC traffic servicing expenses 2-3 times the LCC costs

• Promotion and Sales (Figure 5.13/5.14)

– Gap has closed between NLC and LCC Costs per RPM

– NLC costs double LCC costs per enplanement

21

Flight Operating Cost Comparisons

• Flight Operating Costs (FOC) can differ– Across different aircraft types

– Across different airlines for the same aircraft

• Four Components of FOC– Crew – all wages and benefits paid to pilots

– Fuel – most variable cost element in FOC

– Maintenance – Direct and Overhead

– Ownership – Depreciation, Leasing, Taxes and Insurance

22

Example: A320 FOC (2008 US data*)

• Cost per block-hour of operations (avg. 149 seats)– Crew $ 477

– Fuel/Oil $2413

– Maintenance $ 523

– Ownership $ 730

– Total $4143

• Based on 1135 mile average stage length and 11.2 block-hr daily utilization

* Aviation Daily Quarterly Reports23

Example (Cont.): A320 FOC (2008 US data*)

Airline Crew Fuel/Oil Maintanance Ownership Total

Overall 477$ 2,413$ 523$ 730$ 4,143$

JetBlue 449$ 2,235$ 264$ 575$ 3,523$

United 486$ 2,482$ 589$ 784$ 4,341$

US Airways 470$ 2,501$ 916$ 934$ 4,821$

Northwest 543$ 2,480$ 446$ 670$ 4,139$

USA 3000 Airlines 372$ 2,919$ 670$ 1,002$ 4,963$

Airline2 # Aircraft Stage Length Seats/Dept. Block Hours RPMs ASMs Load Factors

Overall 360 1135 149 11.2 525,380 639,919 0.821

JetBlue 105 1282 150 13.1 610,284 760,446 0.803

United 97 1116 147 10.7 498,479 604,783 0.824

US Airways 75 1151 150 11.1 529,099 640,100 0.827

Northwest 73 917 148 9.6 432,923 508,483 0.851

USA 3000 Airlines 10 1168 168 10 543,231 675,119 0.805


A320 Costs Changes 2006 to 2008*

Airline Crew Fuel Maintenance Ownership Total

Northwest$ 543

(-12%)$ 2,480(53%)

$ 446 (17%)

$ 670(2%)

$ 4,139(26%)

United$ 486 (7%)

$ 2,482 (52%)

$ 589 (25%)

$ 784 (16%)

$ 4,341(34%)

JetBlue$ 449(15%)

$ 2,235(43%)

$ 264(14%)

$ 575(-1%)

$ 3,523(27%)

* Aviation Daily Quarterly Reports

2008 cost per block hour% change from 2006

25

FOC $ for Selected Aircraft*

Type of Aircraft FOC $ per hr SeatsFOC $ per

seat-hr Stage Length Block Hours

777 $10,272 262 $39 4444 13.2

747-400 $14,300 367 $39 4751 12.5

757-200 $5,307 180 $29 1433 10.5

A330-200 $8,378 281 $30 3686 13.4

A319 $3,854 128 $30 908 10.8

737-300 $3,880 132 $29 596 9.5

CRJ 100/200 $1,702 50 $34 425 8.9


Comparison of Airline Unit Costs

27

Low fare carriers have lowest CASM across all average stage lengths

Figure 5.1828

Lessons from CASM vs. Stage Length

• Unit cost comparisons should not be made between airlines unless differences in their average stage length are taken into account

• Differences in unit costs between NLCs and LCCs in 2003 were significant, even when we account for stage length

29

Unit Cost by Airline Group

30

Unit Costs by Functional Category 2004

31

NLC vs LCC Unit Costs

• Fuel expenses are compared under assumptions all airlines are subject to the same fuel price environment (They are not)– Fuel price hedging

• Both NLC and LCC experienced a drop in unit costs after 2001 and a rise in unit costs after 2004– NLC’s drop reflects cost-cutting strategies put in place

after 9/11 (employee layoffs and passenger service cutbacks)

– NLC’s rise in costs primarily due to fuel prices– LCC’s rise in costs tempered by their capacity growth

during the same period

32

Unit Cost and Ave Stage Length 2000-2004

33

Yield and Stage Length 2000-2004

34

Measures of Airline Productivity

35

Aircraft Productivity• Measured in ASMs generated per aircraft per day:

= (# departures) X (average stage length) X (# seats)

• Aircraft “utilization” measured in block-hours/day:– Block hours begin at door close (blocks away from

wheels) to door open (blocks under wheels)– Gate-to-gate time, including ground taxi times

• Increased aircraft productivity achieved with:– More flight departures per day, either through shorter

turnaround (ground) times or off-peak departure times– Longer stage lengths (average stage length is positively

correlated with increased aircraft utilization = block hours per day)

– More seats in same aircraft type (no first class seating and/or tighter “seat pitch”)

36

Components of Aircraft Productivity

37

US Major Airlines Aircraft Productivity Aircraft Productivity (ASMs per day)

38

AIRCRAFT UTILIZATION 1999-2003

39

Example: Boeing 737-500 Productivity

40

Example: B737-500 FOC per Block Hour

41

Lowfare carriers lead in aircraft utilization at all average stage lengths

42

Employee Productivity

• Measured in ASMsper employee per period• As with aircraft, employee productivity should be

higher with:– Longer stage lengths (amount of aircraft and traffic

servicing for each flight departure not proportional to stage length)

– Larger aircraft sizes (economies of scale in labor required per seat for each flight departure)

– Increased aircraft productivity due to shorter turnaround times (more ASMs generated by aircraft contribute to positive employee productivity measures)

• Yet, network airlines with long stage lengths and large aircraft have lower employee productivity rates

43

Legacy carrier employment down by 25% since 2000, a loss of over 100,000 jobs

44

US Major Airline Labor Cost per Employee Average Salary+Benefits per Employee$

45

Lowfare carrier salaries/benefits per employee 25% lower than legacy carriers

Salaries and Benefits per Employee$

46

ASMs/employee vs. Average Stage Length

47

ASMs/employee and Average A/C Size

48

Employee Productivity Up 30% From 2002

* ATA49

ASM per Employee 2000-2004Annual ASM per Employee

50

Revenue per EmployeeAnnual Operating Revenue per Employee

51

ASM per Dollar of Salaries + Benefits Annual ASM per Dollar Salaries & Benefits

52

Revenue per Dollar of Labor Expense Operating Revenue per Salary/Benefit Dollar

53

Summary: Airline Productivity Measures

• Aircraft Productivity– Aircraft Utilization (block-hours per day)

– ASMs per Aircraft per Day

• Average Stage Length

• Number of Departures per Day

• Aircraft Capacity (seats per aircraft)

• Employee Productivity– ASMs per Employee

– ASMs per Labor Dollar

– Revenue per Employee,

– Revenue per Labor Dollar54

Delay Cost Model

55

U.S. Delay Cost Model• To modify the model for the US data and for all

aircrafts

ICAO Engine Emissions• Taxi Fuel Burn Rate

BTS P52• Maintenance Cost• Fuel prices • Crew Costs• Airborne Fuel Burn Rate

PAX delay cost for the US airlines is 0, since airlines do not have to compensate the passengers as they do in Europe. Additionally the maintenance coefficient was found to be ~ 0.

Cost of Delay Factors from the US data

General Model

56

Calculating Delay Costs for Airlines

• Gate Delay Costs – other costs = $.21/min

Cgate_delay= ccrew*crew cost + cother

Cgate_delay_15= .03*crew cost + $.21

Cgate_delay_65= .46*crew cost + $.21

• Taxi Delay Costs – other costs = $.12/min

Ctaxi_delay= cfuel*taxi burn rate*fuel price + ccrew*crew cost + cother

Ctaxi_delay_15= 1*taxi burn rate*fuel price + .00*crew cost + $.12

Ctaxi_delay_65= 1*taxi burn rate*fuel price + .43*crew cost + $.12

• Airborne Delay Costs – other costs = $.10/min

Cair_delay= cfuel* burn rate*fuel price + ccrew*crew cost + cother

Cair_delay_15= 1* burn rate*fuel price + .01*crew cost + $.10

Cair_delay_65= 1* burn rate*fuel price + .46*crew cost + $.10

Ccr

ew

Gate Delay

15 65

.03

.46

57

Delay Cost Study Results

Gate Delay Taxi out Delay Airborne Delay Taxi in Delay Total Delay

July 2007 Delay costs 8,492,145$ 10,754,556$ 41,441,667$ 3,110,810$ 63,799,178$

Delay cost per flight 30.26$ 38.33$ 147.69$ 11.09$ 227.37$

Delay minutes 4,022,321 2,276,214 1,052,131 728,188 8,078,854$

Delay cost per minute 2.11$ 4.72$ 39.39$ 4.27$ 7.90$

July 2007 Departure delays by segment of flight for selected airports (New York, San Francisco, Washington, Boston, Philadelphia, and Dallas)

Airline Gate Delay Taxi out Delay Airborne Delay Taxi in Delay Total Delay # Flights $ per flight

american 1,272,838$ 1,828,159$ 5,859,727$ 873,476$ 9,834,200$ 38,399 256.11$

southwest 581,768$ 581,715$ 6,201,624$ 229,303$ 7,594,410$ 28,722 264.41$

delta 727,080$ 1,215,887$ 3,079,572$ 290,221$ 5,312,760$ 13,233 401.48$

us airlines 416,258$ 892,844$ 3,764,669$ 196,096$ 5,269,868$ 15,129 348.33$

united 550,133$ 1,030,883$ 2,945,020$ 254,389$ 4,780,425$ 19,015 251.40$

continental 885,487$ 1,111,575$ 2,341,061$ 218,211$ 4,556,335$ 14,387 316.70$

jet blue 626,087$ 1,001,468$ 2,048,026$ 183,966$ 3,859,548$ 14,752 261.63$

northwest 184,893$ 364,349$ 1,536,632$ 99,053$ 2,184,927$ 7,048 310.01$

american eagle 423,625$ 376,629$ 851,741$ 142,279$ 1,794,274$ 24,508 73.21$

air tran 393,055$ 287,737$ 927,879$ 103,138$ 1,711,810$ 7,670 223.18$

air wisconsin 204,604$ 133,906$ 1,204,321$ 28,433$ 1,571,264$ 12,259 128.17$

com air 223,066$ 337,824$ 939,059$ 69,319$ 1,569,268$ 8,556 183.41$

ExpressJet 321,204$ 348,175$ 586,765$ 51,283$ 1,307,427$ 11,211 116.62$

Republic Airlines 131,820$ 75,043$ 886,370$ 16,935$ 1,110,167$ 5,147 215.69$

July 2007 Departure delays for airlines exceeding $1M in delay costs 58

Delay Cost Study ResultsAircraft Gate Delay Taxi out Delay Airborne Delay Taxi in Delay Total Delay # Flights $ per flight

B752 794,859$ 1,435,696$ 3,691,511$ 444,658$ 6,366,725$ 18,662 341.16$

B737 602,399$ 582,814$ 4,649,791$ 204,566$ 6,039,570$ 22,570 267.59$

MD82 619,102$ 895,085$ 3,230,645$ 455,587$ 5,200,419$ 20,840 249.54$

A320 666,428$ 1,315,475$ 2,594,288$ 294,020$ 4,870,211$ 20,241 240.61$

B733 574,161$ 618,854$ 3,464,556$ 181,687$ 4,839,259$ 19,561 247.39$

A319 308,906$ 603,246$ 2,826,820$ 145,379$ 3,884,352$ 14,650 265.14$

CRJ2 333,964$ 333,642$ 2,528,964$ 78,126$ 3,274,695$ 22,824 143.48$

B738 523,472$ 683,996$ 1,764,857$ 190,269$ 3,162,595$ 12,479 253.43$

E145 542,696$ 422,478$ 1,808,727$ 109,635$ 2,883,536$ 23,464 122.89$

MD88 295,444$ 503,327$ 1,659,392$ 98,798$ 2,556,961$ 6,142 416.31$

E170 189,513$ 119,199$ 1,321,926$ 29,081$ 1,659,718$ 7,637 217.33$

B735 355,881$ 430,128$ 741,454$ 79,724$ 1,607,188$ 6,102 263.39$

MD83 187,480$ 233,817$ 1,015,068$ 119,692$ 1,556,057$ 5,900 263.74$

E190 211,808$ 228,699$ 1,021,585$ 31,092$ 1,493,185$ 4,694 318.11$

E135 256,153$ 276,426$ 711,110$ 63,297$ 1,306,986$ 13,355 97.86$

B712 262,947$ 197,903$ 700,814$ 71,115$ 1,232,779$ 6,894 178.82$

CRJ1 177,892$ 252,791$ 732,486$ 54,852$ 1,218,021$ 6,498 187.45$

B734 120,198$ 213,059$ 819,107$ 54,217$ 1,206,580$ 4,268 282.70$

July 2007 Departure delays for aircraft exceeding $1M in delay costs

59

Delay Cost Study Results

Airport Gate Delay Taxi out Delay Airborne Delay Taxi in Delay Total Delay # Flights $ per flight Total Delay $ per min delay per flight

DFW 959,984$ 881,398$ 2,674,620$ 213,078$ 4,729,080$ 26,013 181.80$ 715,435 6.61$ 27.50

JFK 701,569$ 1,819,817$ 1,929,810$ 132,221$ 4,583,418$ 12,594 363.94$ 675,469 6.79$ 53.63

PHL 505,110$ 1,006,537$ 2,147,482$ 127,386$ 3,786,516$ 17,089 221.58$ 585,909 6.46$ 34.29

LGA 409,444$ 1,035,883$ 1,895,051$ 119,169$ 3,459,548$ 14,760 234.39$ 533,884 6.48$ 36.17

EWR 594,332$ 1,093,532$ 1,296,275$ 115,202$ 3,099,341$ 13,075 237.04$ 535,720 5.79$ 40.97

BOS 416,529$ 475,273$ 2,035,500$ 147,260$ 3,074,561$ 11,680 263.23$ 367,926 8.36$ 31.50

SFO 262,320$ 328,623$ 1,933,248$ 151,861$ 2,676,051$ 12,782 209.36$ 280,038 9.56$ 21.91

DCA 214,479$ 322,695$ 1,838,970$ 90,158$ 2,466,301$ 11,087 222.45$ 266,938 9.24$ 24.08

IAD 244,891$ 356,161$ 1,575,527$ 87,773$ 2,264,352$ 11,246 201.35$ 292,379 7.74$ 26.00

BWI 264,315$ 264,049$ 1,585,187$ 99,819$ 2,213,370$ 10,248 215.98$ 242,499 9.13$ 23.66

OAK 96,497$ 95,769$ 1,227,613$ 64,249$ 1,484,127$ 6,875 215.87$ 125,457 11.83$ 18.25

SJC 66,585$ 44,986$ 1,049,198$ 55,618$ 1,216,387$ 5,843 208.18$ 89,718 13.56$ 15.35

July 2007 Departure delay costs and delays for departures from 12 selected airports

60

JFK-ATL Profit Analysis• Daily Cost = # flights * (landing Fee + avg hrs *

(DOCless fuel/hr + Burn Rate * fuel price))/days

• Profit = itineraries (passengers*airfare)*10/days

Year QUARTER Fleet Seats Burn Rate DOC-Fuel/Hr landing fees ATL hrs # flights cost

2007 3 1 25 202$ 640$ 112$ 2.18 0 -$

2007 3 2 50 435$ 854$ 137$ 2.48 36 159,118$

2007 3 3 75 458$ 779$ 218$ 2.50 58 258,354$

2007 3 4 100 854$ 1,154$ 330$ 2.62 0 -$

2007 3 5 125 844$ 1,074$ 356$ 2.55 1 7,399$

2007 3 6 150 963$ 1,150$ 367$ 2.48 136 1,088,990$

2007 3 7 175 1,252$ 1,277$ 686$ 2.58 0 -$

2007 3 9 200 1,428$ 649$ 546$ 2.33 84 732,629$

2007 3 10 225 1,723$ 1,786$ 945$ 2.53 0 -$

2007 3 11 250 1,942$ 1,842$ 904$ 2.52 1 15,312$

2007 3 12 275 2,236$ 1,377$ 904$ 2.52 1 15,624$

2007 3 15 300 3,125$ 3,084$ 904$ 2.52 61 1,488,084$

2007 3 17 325 3,471$ 3,301$ 904$ 2.52 28 747,105$

cost 4,512,616$

daily cost 49,589$

61

Profit Analysis Example (minus Delay)

• JFK-ATL

– Average 4.5 flights per day

– Average 656 passengers per day

– $137 Average Fare

– $89.9K of Revenue per day

– $49.6K of Operational Cost per day

– Profit ~$89.9K-$49.6K = $40.3K per day

• Profit Margin = Profit/Revenue = 44.8%

62

Profit Analysis Example (With Delay)

• JFK-ATL Delays

– Profit ~$89.9K-$49.6K = $40.3K per day

– Average Daily Gate Delay costs = $11.2K

– Average Daily Taxi out Delay costs = $19.2K

– Average Daily Airborne Delay costs = $9.4K

– Profit = $40.3K - $11.2K - $19.2K - $9.4K = $0.7K

• Adjusted Profit Margin = .8%

Taxi Burn Rate = 1/20 Burn Rate63

Impacts of Frequency of Service and Aircraft Gauge

64

y = 1529e-0.007x

R² = 0.9895

0

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0 200 400 600 800 1000 1200 1400

Cu

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JFK-ATL WTP Curve

cum demandExpon. (cum …

65

Creating Revenue vs Demand Curves

• Demand = M * exp(Price*Coeff)

• Ln(Demand) = Ln(M) + Price*Coeff

• Price = (Ln(Demand) - Ln(M) )/Coeff

• Rev = Demand*Price

= Demand*(Ln(Demand) - Ln(M) )/Coeff

y = 1529e-0.007x

R² = 0.9895

0

100

200

300

400

500

600

700

0 200 400 600 800 1000 1200 1400

Cu

mu

lati

ve D

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Average Airfare

JFK-ATL WTP Curve

cum demandExpon. (cum …

Ln(C

um

ula

tive

De

man

d)

Average Airfare

Rev

enu

e

Demand

D

P

R=D*P

D

66

Creating Cost Curves

• Cost = # flights * (landing Fee + avg hrs *

(DOCless fuel/hr + Burn Rate * fuel price))

• Demand = # flights * Aircraft Size * LF

Seats .8 load factor Burn Rate DOC-Fuel/Hr fuel price landing fees ATL hrs Cost per flight seat cost per flight

25 20 201.871063 639.5336063 $2 111.90723 2.183333333 $2,389.73 $95.59

50 40 435.416042 853.9040381 $2 136.854702 2.483333333 $4,419.95 $88.40

75 60 457.862811 778.9684357 $2 217.636991 2.5 $4,454.37 $59.39

100 80 854.052282 1153.857825 $2 330.257006 2.616666667 $7,819.06 $78.19

125 100 844.192546 1073.760104 $2 355.917262 2.55 $7,399.39 $59.20

150 120 963.060289 1150.468386 $2 367.084226 2.483333333 $8,007.28 $53.38

175 140 1252.49704 1276.665393 $2 686.174268 2.583333333 $10,455.46 $59.75

200 160 1427.53677 648.8347814 $2 545.993237 2.333333333 $8,721.78 $43.61

225 180 1723.4391 1786.161585 $2 945.152783 2.533333333 $14,202.19 $63.12

250 200 1941.70643 1841.879827 $2 903.811259 2.516666667 $15,312.46 $61.25

275 220 2235.88571 1377.113204 $2 903.811259 2.516666667 $15,623.50 $56.81

300 240 3125.1471 3083.879418 $2 903.811259 2.516666667 $24,394.81 $81.32

325 260 3471.22935 3300.659972 $2 903.811259 2.516666667 $26,682.33 $82.1067

$(80,000)

$(60,000)

$(40,000)

$(20,000)

$-

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

80 160 240 320 400 480 560 640 720 800 880 960 1040

Re

ven

ue

/ C

ost

/ P

rofi

t

Aircraft Size

JFK-ATL Profit analysis for 4 Flights per day LF=.8

cost

rev

profit

Seats .8 load factor Burn Rate DOC-Fuel/Hr landing fees ATL hrs 4 flights airfare cost rev profit

25 20 201.871063 639.5336063 111.90723 2.183333 80 421.48$ 10,089$ 33,718$ 23,630$

50 40 435.416042 853.9040381 136.8547016 2.483333 160 322.46$ 18,492$ 51,593$ 33,101$

75 60 457.862811 778.9684357 217.6369908 2.5 240 264.53$ 19,123$ 63,488$ 44,365$

100 80 854.052282 1153.857825 330.2570056 2.616667 320 223.44$ 33,412$ 71,499$ 38,087$

125 100 844.192546 1073.760104 355.9172622 2.55 400 191.56$ 31,804$ 76,623$ 44,819$

150 120 963.060289 1150.468386 367.0842257 2.483333 480 165.51$ 34,207$ 79,446$ 45,239$

175 140 1252.49704 1276.665393 686.1742678 2.583333 560 143.49$ 46,168$ 80,355$ 34,187$

200 160 1427.53677 648.8347814 545.9932367 2.333333 640 124.41$ 37,799$ 79,625$ 41,826$

225 180 1723.4391 1786.161585 945.152783 2.533333 720 107.59$ 62,606$ 77,464$ 14,858$

250 200 1941.70643 1841.879827 903.8112586 2.516667 800 92.54$ 66,733$ 74,029$ 7,296$

275 220 2235.88571 1377.113204 903.8112586 2.516667 880 78.92$ 67,977$ 69,451$ 1,473$

300 240 3125.1471 3083.879418 903.8112586 2.516667 960 66.49$ 103,062$ 63,831$ (39,231)$

325 260 3471.22935 3300.659972 903.8112586 2.516667 1040 55.06$ 112,212$ 57,258$ (54,954)$

Avg Airfare = $137

68

$(200,000)

$(150,000)

$(100,000)

$(50,000)

$-

$50,000

$100,000

$150,000

$200,000

120 240 360 480 600 720 840 960 1080 1200 1320 1440 1560

Re

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ue

/ C

ost

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rofi

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Aircraft Size


cost

rev

profit


25 20 201.871063 639.5336063 111.90723 2.183333 120 363.55$ 15,133$ 43,626$ 28,494$

50 40 435.416042 853.9040381 136.8547016 2.483333 240 264.53$ 27,738$ 63,488$ 35,750$

75 60 457.862811 778.9684357 217.6369908 2.5 360 206.61$ 28,685$ 74,379$ 45,694$

100 80 854.052282 1153.857825 330.2570056 2.616667 480 165.51$ 50,118$ 79,446$ 29,328$

125 100 844.192546 1073.760104 355.9172622 2.55 600 133.63$ 47,706$ 80,181$ 32,474$

150 120 963.060289 1150.468386 367.0842257 2.483333 720 107.59$ 51,311$ 77,464$ 26,153$

175 140 1252.49704 1276.665393 686.1742678 2.583333 840 85.57$ 69,251$ 71,876$ 2,625$

200 160 1427.53677 648.8347814 545.9932367 2.333333 960 66.49$ 56,699$ 63,831$ 7,133$

225 180 1723.4391 1786.161585 945.152783 2.533333 1080 49.66$ 93,909$ 53,638$ (40,271)$

250 200 1941.70643 1841.879827 903.8112586 2.516667 1200 34.61$ 100,099$ 41,536$ (58,564)$

275 220 2235.88571 1377.113204 903.8112586 2.516667 1320 21.00$ 101,966$ 27,717$ (74,249)$

300 240 3125.1471 3083.879418 903.8112586 2.516667 1440 8.57$ 154,594$ 12,337$ (142,257)$

325 260 3471.22935 3300.659972 903.8112586 2.516667 1560 (2.87)$ 168,319$ (4,473)$ (172,792)$

More Flights would increase delay costs

Down Gauging

Historic Actual Avg Airfare = $137

69

$-

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

40 80 120 160 200 240 280 320 360 400 440 480 520

Reve

nue/

Cos

t/ P

rofit

Aircraft Size


cost

rev

profit


25 20 201.871063 639.5336063 111.90723 2.183333 40 520.50$ 5,044$ 20,820$ 15,776$

50 40 435.416042 853.9040381 136.8547016 2.483333 80 421.48$ 9,246$ 33,718$ 24,472$

75 60 457.862811 778.9684357 217.6369908 2.5 120 363.55$ 9,562$ 43,626$ 34,065$

100 80 854.052282 1153.857825 330.2570056 2.616667 160 322.46$ 16,706$ 51,593$ 34,887$

125 100 844.192546 1073.760104 355.9172622 2.55 200 290.58$ 15,902$ 58,116$ 42,214$

150 120 963.060289 1150.468386 367.0842257 2.483333 240 264.53$ 17,104$ 63,488$ 46,384$

175 140 1252.49704 1276.665393 686.1742678 2.583333 280 242.51$ 23,084$ 67,903$ 44,819$

200 160 1427.53677 648.8347814 545.9932367 2.333333 320 223.44$ 18,900$ 71,499$ 52,600$

225 180 1723.4391 1786.161585 945.152783 2.533333 360 206.61$ 31,303$ 74,379$ 43,077$

250 200 1941.70643 1841.879827 903.8112586 2.516667 400 191.56$ 33,366$ 76,623$ 43,257$

275 220 2235.88571 1377.113204 903.8112586 2.516667 440 177.94$ 33,989$ 78,295$ 44,306$

300 240 3125.1471 3083.879418 903.8112586 2.516667 480 165.51$ 51,531$ 79,446$ 27,915$

325 260 3471.22935 3300.659972 903.8112586 2.516667 520 154.08$ 56,106$ 80,120$ 24,014$

Less Flights would decrease delay costs

Upgauging

Avg Airfare = $137

70

$(200,000)

$(150,000)

$(100,000)

$(50,000)

$-

$50,000

$100,000

25 50 75 100 125 150 175 200 225 250 275 300 325

Pro

fit

Aircraft Size

JFK-ATL Daily Profit analysis LF=.8

4 Flights profit

2 Flights profit

6 Flights profit

71

Avg Airfare = $223

Avg Airfare = $165

Avg Airfare = $206

Airline Profit Model

72

Airline Profit ModelRevenue per Passenger

– Airfare• Ticket (-7.5%)1

• Segment Tax (-$3.60) 1

• PFC (-$3.63) 2

• 911 (-$2.50) 1

– Freight/ Mail (+2.4%) 3

– Fees (+$10.17) 4

Direct Cost (per segment)• Fuel

• Labor

• Maintenance

• Other

• Landing Fees (BTS) 5

–Per Landing (+$306.69)–Per Klbs (+$2.85)

2008** 2009

Ancillary Fees* 7.50$ 10.17$

Bags 2.09$ 3.54$

Cancel 2.20$ 3.08$

* Bags, Cancel/Change, Pets, Freq Flyer

** Based on 3rd & 4th Quarter

New Airfare = .949(Airfare) + $.44

BTS Reports 4

1- http://www.airlines.org/Economics/Taxes/Pages/GovTaxesandFeesonAirlineTravel.aspx2- http://www.faa.gov/airports/pfc/monthly_reports/

3- Aviation Daily Airline Revenue (4QTR09)4- BTS Airline Revenue Reports (2008-2009)5- BTS Airline Cost Reports (2007) and BTS T-100 (2007)

4QTR09 Revenue

Passenger $18,513 70.0%

Regional Affiliates $5,337 20.2%

Cargo $633 2.4%

Other Revenues $1,964 7.4%

3

73

Impacts of Frequency of Service and Aircraft Gauge

Review: Market Analysis

74

Airline Markets Example

75

Market Itinerary Segment/ Leg

Airline Seats PAX Connecting PAX

O-DTraffic

% Connecting

Load Factor

DailyFreq

IAD-BOS IAD-BOS IAD-BOS Airline 1 100 50 N/A 50 N/A .5 2

IAD-BOS IAD-PHL-BOS IAD-PHL Airline 1 150 100 75 25 75% .67 4

IAD-PHL-BOS PHL-BOS Airline 1 100 75 N/A 75 N/A .75 4

IAD-BOS IAD-JFK-BOS IAD-JFK Airline 2 200 150 50 100 50% .75 2

IAD-JFK-BOS JFK-BOS Airline 2 100 50 N/A 50 N/A .5 2


IAD-PIT IAD-BOS-PIT IAD-BOS Airline 2 200 100 25 75 50% .5 1

IAD-BOS-PIT BOS-PIT Airline 2 150 75 N/A 75 N/A .5 1

For this example no additional passengers are boarding at the connection

• Frequency Share for IAD-BOS –

– Airline 1 = 2/6 = 33%,Airline 2 = 4/6 = 67%

• Market Share for IAD-BOS –

– Airline 1 = ((2x50)+(4x75))/ ((2x50)+(4x75)+(2x50)+(3x75)+(1x75)) = 50%

• “Market” O-D Traffic for IAD-BOS = ((2x50)+(4x75)+(2x50)+(3x75)+(1x25)) = 750

• “Segment” or “Leg” O-D Supply for IAD-BOS = ((2x100)+(3x100)+(1x200)) = 700

Airline Markets Example

76

For this example no additional passengers are boarding at the connection

• RPM = (2x50x1)+(4x100x1)+(4x75x1)+(2x150x1)+(2x50x1)+(3x75x1)+ (1x100x1)+(1x75x1) =1600

• ASM = (2x100x1)+(4x150x1)+(4x100x1)+(2x200x1)+(2x100x1)+ (3x100x1)+(1x200x1)+(1x150x1) = 2450

• ALLF for IAD-BOS = (2x.5)+(3x.75)+(1x.5)/6 = .625

• ALF for this network – for this example all flight legs are 1 unit of distance= RPM/ASM = 1600/2450 = .653

Market Itinerary Segment/ Leg

Airline Seats PAX Connecting PAX

O-DTraffic

% Connecting

Load Factor

DailyFreq


IAD-BOS IAD-PHL-BOS IAD-PHL Airline 1 150 100 75 25 75% .67 4

IAD-PHL-BOS PHL-BOS Airline 1 100 75 N/A 75 N/A .75 4

IAD-BOS IAD-JFK-BOS IAD-JFK Airline 2 200 150 50 100 50% .75 2

IAD-JFK-BOS JFK-BOS Airline 2 100 50 N/A 50 N/A .5 2


IAD-PIT IAD-BOS-PIT IAD-BOS Airline 2 200 100 25 75 50% .5 1

IAD-BOS-PIT BOS-PIT Airline 2 150 75 N/A 75 N/A .5 1

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