Operations Buzz

Does Filling up a Plane make the Airline Money?

January 18th, 2011

by

I recently flew Southwest from Baltimore to LaGuardia to meet up with a few friends in Queens, NY (the little less than the $100 for a one-way fare was cheaper, and the 40-minute flight faster than the Acela). The flight was barely half full. I was convinced Southwest was losing money on this flight especially with the cabin seemingly full of tourists likely paying “web only” $100 fares like myself. Really? What my research uncovered surprised me.

How much does it cost the world’s major airlines to fly a passenger a mile? How much money do they make from that passenger? How full are their planes? Read on…

A little primer on airline economics.

Available Seat Miles (ASM): It is simply the number of seats multiplied by the distance they travel. So in a sense this is the capacity of the airline. The ASM on Southwest’s 137-seat Boeing 737 aircraft from Baltimore (BWI) to LaGuardia (LGA) – a 185-mile distance – is 137 x 185  = 25,345 seat-miles.

Revenue Passenger Miles (RPM): It is the number of passengers multiplied by the distance. For the BWI-LGA leg above if 100 people traveled on the leg, then the RPM for the flight is 100 x 185 = 18,500 passenger miles.

Load Factor: It is the ratio of RPM to ASM – on average tells you how “full” the planes are. For the BWI-LGA leg example above, the load factor is 18,500/25,345 = 72.9%.

Airlines typically report these operating numbers on a yearly basis. Southwest in 2009 had a capacity of 98,001.55 million seat-miles and a RPM of 74,456.71 million passenger miles, yielding a load factor of 76%.

The following graphic plots the profit/loss of the airline against the load-factor (See Note 1).  Its interactive – mouse over/click on the graph to learn more.

…more text after the graphic

Surprise! Surprise! Seems like airlines are equally likely to make a profit or a loss even if they are flying with high load factors. One way to think about this is to compute the cost and revenue of moving a seat a mile. The Cost per ASM (CASM) is simply the operating costs divided by the total ASM. Total Revenue per ASM (TRASM or RASM) is the revenue of moving a seat a mile – the total revenue divided by the total ASM. If TRASM is greater than CASM, the airline is making money moving a seat a mile. The graphic above also shows the TRASM and CASM of some of the major airlines in the world. “The Gap” is the difference between the TRASM and the CASM. If it is negative, the airline is making a loss.

Filling the gap

For a given route network, increasing revenue comes down to increasing RPM (or load factor) and increasing “passenger yield” or the revenue per RPM (See Note 2). Easier said than done – it involves the difficult task of managing the complex relationship between price, demand, capacity (ASM), and customer ticket-buying behavior. For example, on the BWI-LGA flight, the lowest price  (three weeks out) I could find on Southwest 5015 was a “Wanna Get Away” fare of $64, or about 34.59 cents to a mile. Southwest spends 10.29 cents a mile to move a seat so they are making 24.30 cents a mile even on a passenger paying the lowest fare. Even if everybody on the plane paid $64, they only have to fill a third of the plane to breakeven.  With many of its passengers paying the $178 “Anytime” fare and the $193 “Business Select” fare, an average 76% full flight is doing very well.

On the other hand, the cheapest fare on Southwest 3701 from Providence (PVD) to Las Vegas (LAV), a distance of 2363 miles, was $169 or 7.15 cents a mile. Southwest is actually losing 3.13 cents on each mile this passenger travels.  Even on a full flight, Southwest needs one in three passengers to pay the  $469 “Anytime” fare or the $493 “Business Select” fare just to breakeven. So managing yield is a delicate dance between passenger demand, how much passengers are paying, how far they are travelling, and how full the aircraft is.

The other side of the profit equation is cost containment. The airline business has high fixed costs – you have to lease planes, secure landing rights, pay the crew, etc. Revenue is generated only when planes are in the air so the strategy to reduce the cost per seat mile is to run a “lean” and efficient airline without compromising service or safety. Allegiant Air’s cheap but profitable strategy is to run infrequent flights from small towns to big tourist destinations in easy to maintain MD-80 aircraft. Southwest’s quick turnaround times – as much as 30 minutes faster than other airlines –saves them from leasing extra planes (See Note 3). We have all seen the self-check kiosks, vanishing leg-room (=more seats), and the lack of food service even on certain long-haul flights — all trying to bring down CASM.

Next time you fly, find out how much you are paying per mile and compare it how much it costs the airline to fly you a mile to see if you have got yourself a deal. My $100 flight from BWI-LGA was not much of a deal was it? That $169 fare on Southwest 3701 – a killer deal, I’d say.

Contact: Ram Ganeshan via ram.ganeshan[at]mason.wm.edu or @RamGaneshan on Twitter

Shoumya Pradhan contributed to research for this post.

Notes:

1. Data Sources: Company 10K, 20F, Annual reports; BTS; World Airline Report. Data is from 2009.

2. In addition to increasing traffic (RPM) and managing yield, there are other – often maligned — revenue streams called “ancillary fees” like change of reservation or baggage fees (Delta raked in $681 million in fees just in the 2nd Quarter of 2010!) that will increase the revenue per passenger on any flight.

3. In 2009, Southwest had 2546 turnarounds everyday. 30 minutes saved on one of them is 1723 hours of extra flight time per day compared to other “legacy” airlines. Means fewer planes, more money.

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Comments

  1. Joe

    May 10th, 2012

    As an airline economist, and someone who regularly takes that flight, I would like to state that airlines like high load factors. It means they have pricing power in the market.

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