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Airline Economics

This document discusses key metrics used to analyze airline economics, including available seat kilometers (ASK), revenue passenger kilometers (RPK), load factor, yield, and unit cost. It explains how these metrics are calculated and used in the basic airline profit equation of RPM x Yield - ASM x Unit Cost to determine profitability. Examples are provided to illustrate calculating yield from a given flight scenario and how airlines determine ticket prices based on yield management.

Economy & Finance◦
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AIRLINE ECONOMICS Cahit Kutay Uysal AVM 101
OUTLINE  The Basic Measures ◦ Available Seat Kilometer (ASK) ◦ Revenue Passenger Kilometer (RPK) ◦ Load Factor (LF) ◦ Yield ◦ Unit Cost  Revenue  Basic Airline Profit Equation  Examples  Conclusion  Bibliography
THE BASIC MEASURES  Available Seat Kilometer (ASK)  Revenue Passenger Kilometer (RPK)  Load Factor (LF)  Yield  Unit Cost
AVAILABLE SEAT KILOMETER (ASK)  The most common measure of airline output is an available seat kilometer.  If we have an aircraft with 500 seats and flown at a distance of 10.000 km, than we will have 5.000.000 seats kilometer.
TRAFFİC – REVENUE PASSENGER KILOMETER (RPK)  Althought the airline produced seats, not all will be sold. The sale of the products will measured by RPK.  So in the earlier example, if only 400 out of the 500 seats were sold, than the RPK will be 4.000.000.
MEASURE OF SALE RATE – LOAD FACTOR  Is the rate of passenger to aircraft capacity.  In the earlier example, we have an aircraft with 500 seats but we sold only 400 seats. So, our load factor is 80%  LF = Revenue Passenger Kilometer / Available Seat Kilometer  It changes for all airlines. However an airline had many types of aircrafts and different sectors like business and economy class.
MEASURE OF UNIT REVENUE - YIELD  Avarage fare paid by all passengers per kilometer.  Yield measures average earnings made by an airline by transporting passengers per kilometer.  Yield = Established Total Revenue / Available Seat Kilometer
UNIT COST (COST PER ASK)  This is the cost of the seat.  Unit cost calculated same formula with yield.  Unit Cost = Total Revenue / Available Seat Kilometer  If the unit cost lower than yield, airlines will make a profit.
REVENUE  What is the revenue? ◦ Ticket fares, including fuel surcharge ◦ In-flight sales ◦ Extra or oversized baggage ◦ Freight not linked to passanger  What is the not revenue? ◦ Taxes, fees or other charges
BASIC AIRLINE PROFIT EQUATION  RPM x Yield – ASM x Unit Cost (Revenue) – (Operating Expenses)
EXAMPLES  We have a route  Aircraft First Class Economy Class 10 Seats 110 Seats 600 TL 350 TL A B 1000 Km  What is the yield?
Yield: Total Revenue / RPK  Revenue: (10*600) + (110*350) = 45700  Passenger: 10 + 110 = 120  Distance: 1000 Km  RPK: 120 * 1000 = 120000  Yield: Total Revenue / RPK = 45700 / 120000 = Nearly 0,38 The airline earned nearly 0,38 kuruş per passenger per kilometer
Istanbul to Antalya 475 Km 100 TL Istanbul to Bodrum 430 Km 150 TL  This price difference’s reason? Same airline, same fuel consupmtion, same crew salary... - Robert Crandall’s Yield Management System
CONCLUSION  The basic measures for the calculate profit/loss for airline. ◦ Available Seat Kilometer ◦ Revenue Passenger Kilometer ◦ Load Factor ◦ Yield ◦ Unit Cost  How airlines detect their ticket prices?
BIBLIOGRAPHY  http://en.wikipedia.org/wiki/Airline#Econo mic_considerations  http://catsr.vse.gmu.edu/SYST660/Chap 3_Airline_Economics[2].pdf  http://www.havayolu101.com/2010/08/31 /ucak-biletinin-fiyati-nasil- belirleniyor/#content-anchor  http://www.slideshare.net/pgarodia/reven ue-passenger-kilometer?related=1  http://ocw.mit.edu/courses/aeronautics- and-astronautics/16-75j-airline- management-spring-2006/lecture- notes/lect2.pdf