2.2 Operational Characteristics
2.2.2 Basics
6 h for United and Delta); union and government agreements; and corporate history.
Given that operating margins are already narrow to begin with, it has always been important to contain labor costs, as even small savings in this area may often translate into the difference between profit and loss.
As a consequence, the industry has had a long history of labor strife, with work slowdowns or strikes being not all that uncommon (and with strikes occasionally averted in airline and railroad disputes through presidential intervention under the Railway Labor Act of 1926). This history of labor dissent, expressed in frequent union/management clashes, has extended across the board from pilots (e.g., the Airline Pilot’s Association, ALPA) to machinists (e.g., the International Associa- tion of Machinists and Aerospace Workers, IAM) and to flight attendants (e.g., the Association of Flight Attendants, AFA).12 In attempts to relieve tensions and to combine the interests of labor and management, several airlines have—through union governance and in lieu of larger pay raises—sometimes given their workers equity stakes in the companies.13To date, however, experiences with such arrange- ments have not proven viable over the long term. Whether or not they are, though, does not change the fact that labor unions are significant participants within the airline industry’s operating structure.
Organization [ICAO] as a combined measure of passenger, freight, and mail traffic which also takes into account distances flown). From this it may be inferred that on a worldwide basis the cargo-hauling (freight) aspects of airline operations account for roughly one-fourth of total airline output (i.e., compare the two right-hand columns) and perhaps up to an eighth of total operating revenues (Table 2.2).14 This means that for many airlines, especially those with international routes, cargo carriage will contribute significantly to profitability.15
From these definitions, it is then a simple step to calculate what is known as the yield, which is total revenue divided by the total number of passenger-miles flown (or in the case of cargo, tons flown). Yield, which can also be calculated as average revenue per passenger, is thus an arithmetic mean that indicates on the average how much revenue is generated per unit of output. It is usually stated in terms of cents Table 2.2 Airline scheduled-service carriages of passengers, freight, and mail, domestic and international routes, top eight countries, 2013 and 2014a
Type of service
Passengers carriedb (millions)
Passenger-km performed (millions)
Freight tonne-km performed (millions)
Total tonne-km performed (millions)
ICAO total 3,103 5,782,174 185,626 724,350
Domestic 1,865 2,162,132 26,170 221,708
International 1,238 3,620,042 159,456 502,642
United States 763 1,352,529 37,107 161,303
Domestic 524c 930,007 15,237 100,437
International 238c 422,522 21,780 60,866
China 391 562,748 16,054 66,612
United Arab Emirates
76 290,268 13,985 42,420
United Kingdom 125 259,164 6,032 29,399
Germany 108 217,834 7,334 29,306
Rep. of Korea 59 100,826 11,785 21,338
France 63 177,950 4,383 20,837
Japan 111 148,323 7,456 20,246
Other Sources: http://www.icao.int/annual-report-2013/Documents/Appendix_1_en.pdfICAO Annual Report of the Council, 2010, Doc 9952 available at: and “Annual Review of Civil Aviation, 2013 Appendix A” ICAO Journal, July/August 2010 (www.ICAO.org)
aRanked by total tonne-kilometres performed, which includes passengers, freight, and mail (right- hand column)
bWorld Bank data for 2014 available at:http://data.worldbank.org/indicator/IS.AIR.PSGR
cApproximate
14Doganis (1991, p. 23).
15It is difficult to determine the precise profit contribution from carriage of freight and mail because, in most instances of scheduled services, the operating costs of the flight and the fixed costs of the terminal, service equipment, and so forth are combined with costs related to serving passengers. Calculation of cargo-carriage contributions to profits would thus require somewhat arbitrary allocation of costs among the different categories.
per passenger-mile. The industry also finds it competitively important to closely track another yield-like metric – passenger revenue per available seat-mile (PRASM).
Passenger trips per day each way (PDEW) would, however, be additionally useful as a measure of demand in an origin to destination (O-D) market.
Carriers will further manage revenues through use of price discrimination features (see Chap. 1) or “fences,” through which barriers limiting the use of discounted fares only to price-sensitive passengers are implemented. Such barriers include advance purchase requirements and restrictions, ticket refundability limi- tations and change fees, weekend stay conditions, and passenger loyalty programs.
As such, in the determination of airline profits, yield is usually more important than the actual passenger fares charged. But yield also tends to vary widely over time from one route to another and from one airline to another because of differ- ences in average sector length flown, geographic territory covered, currency fluc- tuations, and other factors. Yield is thus a price index rather than a price, and it is sensitive to changes in the composition of traffic. As an index, it does not directly reflect demand because it does not reference the variation of quantity along with a variation of price; it is instead a derived statistic.
It is also important to know how much of a system’s total potential capacity for carriage is being used at any given time. Capacity would be determined by multiplying the number of seats by the distances flown. Load factors(LF) are a way of expressing the amount of potential capacity that is being sold. For most airlines on most routes, passenger load factors, taken as a percentage of total seats available, would generally have to average above 60 % for the flight to be profitable (Table2.3). For a whole system of routes, such load factors could also be arith- metically expressed in terms of available seat-miles (ASM) (i.e., the number of available seats times the number of miles flown on designated routes). In other words,
LF¼RPM=ASM:
Again, a similar measure for cargo operations would be the weight load factor—
ton-kilometers sold as a percentage of available ton-kilometers.
Table 2.3 Comparative yields and realized load percentages, selected sample of major airlines, 2000, 2010, and 2014
Yield (cents) Realized LF%
2000 2010 2014 2000 2010 2014
Alaska 13.50 12.75 13.58 69.2 83.3 85.7
American 14.06 13.36 17.04 72.4 81.9 82.0
Delta 13.86 14.11 17.22 72.9 83.0 84.7
JetBlue 10.12 12.07 14.13 73.2 82.4 84.0
Southwest 12.95 14.72 16.34 70.5 70.3 82.5
United 13.30 14.37 16.42 72.3 83.8 83.6
Source: Company reports
2.2 Operational Characteristics 61
Unit costs, unit revenues (yield), and load factors—all of which will immediately reflect competitive conditions on a local, if not a global basis—are the principal determinants of profits. Projected yields on routes are usually used to calculate breakeven load factors, although an airline might still find a route to be profitable if its low yield is in practice offset by a relatively high load factor. However, it is usually not practical to regularly raise load factors above 85 % without the risk of turning away (spilling) too much demand to other flights and other carriers.16As compared to their competitors, efficient carriers will by definition transport more passengers per employee, be profitable at lower load factors, and also find that increasing the load factor percentage by beyond 80 % is counterproductive.
All of these aforementioned elements are then used to arrive at abasic airline profit equationwhich takes revenues and subtracts operating expenses as follows:
Operating Profit¼ðRPMYieldÞ ðASMUnit CostÞ
The implication is that high yield is not desirable if the average load factor is too low and that a high average load factor may be the result of selling too many seats at relatively low fares.
Along with yield management (basically inventory control), airlines also increasingly employ mathematically sophisticateddynamic fleet managementstrat- egies, which enable capacity (i.e., the type of aircraft) to be quickly adjusted to demand so as to maximize load factors and to minimize spill either on a route or network basis.17 Such strategies are of further use in making fleet acquisition decisions. The main macroeconomic constraint, however, is that as of 2016, there were globally around 21,500 planes—many rather fuel-inefficient and ready for retirement—and only around 1,000 new ones built each year. In times of economic expansion, the cost of implementing fleet management strategies through buying or leasing will, of course, rise accordingly.
16In other words,spillis the difference between nominal demand from passengers who want to fly on a segment and the load (i.e., passengers who actually fly the segment). Spill has both an economic and opportunity cost, but it is not an accounting cost that is shown on an income statement. The greater the reliance on connecting traffic, the greater the probability of increased network spill costs. Load factors can sometimes be adjusted byupgauging, i.e., using a plane with more seats.
17On an industry-wide basis, experience has shown that in almost any year it is difficult to increase available seat capacity by more than 5 % without having to cut prices. Carriers with a larger-than- average capacity-share in a given market will often gain a greater-than-proportional share of the available revenue in that market and conversely, carriers with a smaller than average capacity- share will earn a smaller-than-proportional share of the total revenue in that market. This notion is known as theS-curve effect, where the S-curve is a plot of revenue share, the independent variable, against market share, the dependent variable and where the S-curve portrays the effect of dominance at a hub. As Berdy (2002) notes, in this context, a “share gapis the difference between traffic or revenue share compared to service share.” Data for such curves appear to indicate that high-fare passengers are attracted to those carriers providing the most service in a market. For more detail see Butler and Keller (1999, pp. 32 and 39), an article about dynamic fleet management by Skinner et al. (1999); Spill in Clark (2002), and Mouawad (2010). Operational problems from the consumer perspective are discussed in McGee (2012).
Other often-used terms in the industry are fairly obvious in meaning.Point-to-point (or city pairing) services are those with dedicated flights directly serving origin and destination (O&D) markets.Round-robin(triangular) flights fly in one direction, first to one point, then another, and finally back to the origin. Andhubsare the centers of the hub-and-spoke route networks that airlines operate out of a few important regional cities—e.g., United uses Chicago and San Francisco as hubs, American uses Dallas- Ft. Worth, and Delta, Atlanta. Also, throughcode-sharingarrangements, flights on one line use the same airline code-designation as that of another to feed passengers into the other line’s routes. A domestically based line might, for example, share its code with an international line, to the presumed benefit of both.