Breakeven analysis and route profitability, for SAH-BAH-SAH using A320 aircraft, in this article we define fixed cost, variable costs and revenue. A program is developed and a dynamic impact and effect of changing Fare, Distance, Capacity, and market demand will immediately reflects in final results in defining the breakeven point and minimum passengers required.
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Break even analysis
1. study 21
Route Profitability
The Route of Sana’a / Bahrain / Sana’a By Using A320
B
reak even studies and routes evaluations are the most essential evaluation tools to any aviation
company, whether it is public, private or shared company and whether such a study is a real project
or just a draft plans ,the importance of these studies is to establish scientific evidences and proofs with
quantitative approach for the effective and profits of airline’s operating routes in a way that environmental
effective factors and the impact of economic circumstances are used the break even analysis to identify
the minimum percentage of passengers fullness (Passenger Load Factor), which determine the minimum
number of passengers that can operate the route without loss. At a break even point revenue equal total
costs (Fixed & Variable Costs) and by studying the aircraft type, the cost of flying hours, number of seats
offered, tickets price, and the distance travelled, we can find the proposed load factor percentage at the
point of the break even point of the analysis which compare to with the actual load factor percentage. This Mohammed Salem Awad
will shows the losses or profit of this route, and we notice in any route, whenever we get a lower break even PhD Candidature
point, the higher chance of achieving profits. Aviation Management - India
Identification the main factor for analysis: and, as well as cargo revenues can be
Break even analysis depends on how to presented as 12% of passengers revenue.
identify the main factor. According to the
analyst’s selection and what he wants to Variable Costs:
evaluate, for example to select flying hours Those costs associated with servicing
as the main factor in the analysis makes passengers and by increasing the number of
the most of the analysis elements related passengers, this will increase the costs, as
to the flying hours / variable cost, but if we shown in figure (1) such as meals services of
adopting passengers as a key factor for passengers (Catering / Meals) insurance for
analysis, the flying hours will be classified the passengers (Passenger insurance) and
under fixed cost. This is will be applied Commissions for Travel Agent. table (2).
in this study as shown in Table (2) where
shows the losses and profits of the study. Fixed costs:
Those costs not associated with the number
Break Even Analysis: of passengers, such as fuel cost, maintenance
Break Even Analysis is based on a main cost...etc., as shown in Figure (1).
equation where x is the point of revenue
equals with the total costs, as shown Input Data to operate the Sector:
Revenue = Total Costs Table (1) shows all the cost factors
Revenue = Variable costs + Fixed costs to operate a Route which Excel 2003
Where we classified data / factors used to find point of Break Even.
as it mention in cost assumption The basic information can be
as shown in Table No.(1). classified into the following:
1- information about Route and the
Revenue: Aircraft itself such as the distance
It is company’s income of revenue gained / flying hours / offered capacity.
from Passengers, Excess Baggage 2- information related to Revenue
and Mails services where we assumed 3- information related to cost
relationship between passengers revenue (fixed and variable)8
BREAK EVEN ANALYSIS Sector : SAH - Analysis Sector: SAH - BAH
Figure (1): Break Even BAH Table No. (1): Cost Assumptions
100,000 Cost Element
FUEL 3.25 US$ per US gallon
VARIABLE COST FIXED COST REVENUE
COCKPIT CREW 413.375 US$ per FH
CABIN ATTENDANTS
75,000
CREW ALLOWANCES
MAINTENANCE 1775 US$ per FH
REVENUE - COST (USD)
LANDING 2939.259 US$ per FH
NAVIGATION 0.547 US$ per KM
50,000
HANDLING 1280 US$ per flight
CATERING 6.4 US$ per 1000 RPK
COMMISSIONS 11% of revenue
25,000 HULL INSURANCE 1% of aircraft price
PASSENGER INSURANCE 0.49 US$ per 1000 RPK
LEASE RATE 450000 US$ per month
AIRCRAFT PRICE 36 Million US$
0
0٫1 0٫2 0٫3 0٫4 0٫5 0٫6 0٫7 0٫8 0٫9 1
UTILISATION 3500 Flight hours per year
SEAT LOAD FACTOR (%) OVERHEAD 12% of the fixed cost
CAMA Magazine | issue 14 | March, 2012
2. 22 study
Case study (Sana’a / Table No. (2)
Bahrain/Sana’a Route): Costs Costs
by taking information sector Route SECTOR DATA SAH-BAH BAH-SAH
Fixed Cost SAH-BAH BAH-SAH Variable Cost SAH-BAH BAH-SAH
of Sana’a /Bahrain and by using
Distance (nm) 739 739 Fuel 7100 7100 Catering 1509 1509
all the assumptions shows in
Block Time Landing 2939 2939 Passengers Inssurance
Table (1) some of assumptions
Flight Time 3.15 3.15 Handling 1280 1280 Commissions 8096 8096
provided by Airbus or we can
Block Fuel (US G) 2184.7 2184.7 Navigation 749 749
rely on the information of the
x x Cockpit Crew Total Cost 42,287 42,287
company’s final accounts in Passengers
to be determine Cabin Attendance
order to have the similar values
Seat Avialable 160 160 Crew Allowances BREAK EVEN ANALYSIS
to those assumptions, as we
Average Fare (USD) 400 400 Maintenance 11002 11002 Passenger Break Even
will represent the load factor
Hull Insurance 1250 1250 Load Factor 48 48
percentage by unknown variable
Lease Rate 4860 4860 Number of Passengers
value (x), This will reflect the ratio
Total Fixed Cost 29180 29180 at Break Even 77 77
of Break Even point analysis, Revenue
Average No. of Pax/Flt
and we can apply linear equation
Pax Revenue 64000 64000 based on 5 Flts/week 81 81
(y=mx+c), which represent a fixed
Cargo Revenue 9600 9600 Overhead 3501.6 3501.6 No. of Pax 4 4
cost factor (c) and variable cost
Total Revenue 73,600 73,600 Sub Total Cost 32,682 32,682 (Profit / Losses) Profit Profit
(mx) and represent revenue by
another equation x which pass Table No. (3)
by point of starting (origin) and
REPUBLIC OF YEMEN
represent (y=nx). And at the
CITY AIRLINE DISEMBARKED EMBARKED TOTAL CUMULATIVE 2010/2009
intersecting point of two lines, JAN-DEC 10 JAN-DEC 10 CUMLATIVE 10 LAST YEAR 09 GROWTH %
the break even point will define.
which can be found by solving ADEN(ADE) GULF AIR (GF) 5,938 1,952 7,890 - -
the previous equation i.e SANNAA(SAH) GULF AIR (GF) 12,630 14,488 27,118 35,225 -23%
y = mx + c 2,067 - 2,067 10,379 -80%
SANNAA(SAH) JAZEERA AIRWAYS (J9)
y = nx
so accordingly, we can easily SANNAA(SAH) YEMENIA-YEMEN AIRWAYS (IY) 1,938 3,285 5,223 5,771 -9%
find the Average Load Factor TOTAL 22,573 19,725 42,298 51,375 -18%
at the point of the break even
and then find the number of
Figure (2): Ideal Operation for A320
passengers at the point to more profits. And by breaking the
break even, that is through competition with other airlines Frequencies Vs Market Demand by A 320 of 160 Seat
average load factor multiplied could be reduced ticket prices 450 100 100 100
by Aircraft Capacity. as shown validity after that break even
in Table (2). So by referring percentage, whether in the form 407 90
to market demand of 2010, of of groups or individually, giving 400
85
Bahrain airport, Yemen segment the company an competitive
operation, the total demand advantage than other companies. 350
No. of Pax 80
was 42,298 and the outcomes Good example is airport Load Factor
Number of Passengers Per Flight
of the break even analysis by office that provide tickets at 70
300
using A320 of 160 seat is 48% the departure called (Ticket On 64
i.e equivalent to 77 passengers Departure) to accept tickets 60
Load Factor %
as shown in Figure (2). at the last moments before 250
51 > 48 ( break even
This shows that the companies departure if seats still available. 50
Not Recommend to operate
load factor )
due to spill passangers
can operate profitability when So these seats must be sold if 200 203
42
frequencies 3-5 frequency per possible to increase the revenue 40
weeks where as any operation of the company. Finally we can 36
150
greater than will lead to losses, evaluate all the routes and its 136
32
30
while operation less than that profitability by comparing the
will lead to spill of passengers. rate of actual payload factor 100 102
81 Pax 20
with the number of passengers
68
Yield management: resulted from the break even 50
Ideal 58
51
analysis for the same route. Losses in 10
The importance of this analysis Operation
based on applying it by yield Here a decision can be for A320 Operation
management policy as an empty taken to continue to operate 0 0
seat when the plane take off has the route or not operating. 1 2 3 4 5 6 7 8
no value or as they say does not Number of Frequencies
come back. And this issue can be Yemen – Bahrain Market:
solved by applying this technique. Yemen – Bahrain market is Summary:
when flight reaches the clearly shown in table no. (3) The break even analysis considered as the most important
equivalent point (Revenue as the competition between 3 tool for making decision of airlines, especially in Commercial
= Cost), these goals must airlines i.e Gulf Air, Yemenia, Department/Revenue Management where airlines’ policies might
be planned by the airline’s and Al-Jazeera while Gulf Air be built to increase revenue and the most important elements
decision-makers and carried deminated the biggest market for analysis are these values and assumptions which provided
out by those who are in work share, operating A320 of 160 by company’s final financial accounts report. Also it shows the
field (Booking Offices- first line) (assume) and according to appropriate capacity for this aircraft in this sector/route.
in terms of their ability to be 2010 Bahrain airport statistics, So it is possible to determine the suitable aircraft with break even
flexible and take the appropriate mainly of 42298 pax, so the percentage, either if it is too tight and whether there is no way for
decision in right moment, by typical load factor (B.E.) will be profits or the offered capacity is more than required of market
accepting revenue which is 48% equivalent to 77 pax, and demand and what are the appropriate solutions, is it in re-sizing
really considered a profit to the that will be visible when the aircraft type? or changing the offered capacity? or evaluate the
company at reasonable prices airline operate 5 frequencies per market fare?■
in order to increase and gain week as shown in Figure (2).
CAMA Magazine | issue 14 | March, 2012
3. Route Profitability
The Most Beautiful Country
Civil Aviation & Meteorology Authority (Yemen) January - March 2012, issue 14 Airopts Forecasting
BAHRAIN
Civil aviation overview
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