United AirlinesCost and Productivity Analysis

Nahid BoustaniSpring 2013

United Airlines Inc.

– It is a Legacy carrier– It provides a higher level of services than a low-cost carrier

• first class and/or business class• frequent-flyer program• airport lounges• Is member of an airline alliance through which it has

partners that agree to provide these services to its passengers as well.

• There is a higher level of services in the cabin, such as meal service and in-flight entertainment.

– Operating major hubs– Serving Domestic as well as International markets

Definitions

• ASMs– One aircraft seat flown 1 mile. – ∑ i (Number of seats (Flight i) * Distance Flown (Flight i)

• RPM– One paid passenger flown one mile. – ∑ i (Number of Passengers (Flight i) * Distance Flown (Flight i)

• RASM (Unit Revenue)– Total operating revenue/ASM

• CASM (Unit Cost)– Total operating cost/ ASM

• PRASM– total passenger revenue/ASM

• Yield– Average Fare paid by passenger per mile flown= Total revenue/ RPM

• Fuel Consumed– Total amount of fuel used

• Fuel Costs per ASM – Total fuel cost /ASM

• Non-Fuel Costs per ASM:– (Total Operating Expenses-fuel cost)/ASM

• ASM and RPM have the same trends and are pretty stable between 2006 to 2011. • Average Load Factor does not seem to be the right metric to use for calculating the quarterly load factor. It does not reflect the changes in ASM and RPM.

2006 2007 2008 2009 2010 2011 20120

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RPMASMAvg Load Factor

Chart 1

United Airlines, All major airports (origin airports)-All numbers are for Scheduled services. Data are for Q3 of each year. The load factor is an average percentage load factor of monthly data in Q3.

•Total revenue and total operating cost have the same pattern.•From 2011 Revenue and Operating Cost increase.•As total cost increase in 2008 due to depression and rise of fuel price, the Income before tax decreases dramatically.

2006 2007 2008 2009 2010 2011 2012

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Total Operational RevenueTotal Operational CostIncom/Loss before Tax

Chart 2

Note: All numbers are in thousands of dollars.

Note: Passenger Revenue used to calculate PRASM is from Scheduled Passengers only to be consistent with ASM data on chart 1.

2006 2007 2008 2009 2010 2011 20120

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RASM ($/ASM)CASM ($/ASM)Yield ($/RPM)PRASM ($/ASM)

Chart 3

•During 2008-2009 Revenue decreases and cost increases that lead to decreasing in RASM and PRAZM and increase in CASM.

•The peak in Fuel cost around 2008 is due to United’s pre-purchasing fuel in prediction of fuel costs to go up.

2006 2007 2008 2009 2010 2011 20120

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Fuel Cost ($)Non-fuel Cost ($)Fuel Consumption (gallons)

Chart 4

•Fuel Prices and operational expenses/ASM are oscillating in the same pattern with a max peak in 2008 due to United’s pre-purchasing fuel.•Fuel price affects fuel cost.•Non- fuel Cost is influenced by the economy recession in 2008.

2006 2007 2008 2009 2010 2011 20120

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Fuel Operational Expenses/ASMNon-fuel Operational Expenses/ASMFuel Price/gallon

Chart 5

Effects

• a. Fuel Prices on Expense– Fuel price has changed the fuel cost.

• b. Fuel prices on Airline Finance– Changes in the fuel price directly affects the operational expenses and

operational revenues• c. Fuel Prices on Airline Network Structure

– No answer. I used average load factor of the monthly data for Q3. It seems like this is not the right way to calculate the load factor of the quarter. The load factor trend does not comply with the ASM and RPM trends.