Introduction: Airline Industry Overview

Dr. Peter Belobaba

Istanbul Technical University Network, Fleet and Schedule
Air Transportation Management  Strategic Planning
M.Sc. Program  Module 1:   10  March 2014
 Lecture Outline

 Course Syllabus and Requirements

 Airline Terminology and Measures

 Historical Trends in Industry Growth

 Global Deregulation and Liberalization

 Impacts on Airline Competition
 Evolution of LCC Business Models

 Overview of World Airlines

 Largest Global Airlines

2
 Airline Terminology and Measures

 Airline Demand
RPK = Revenue Passenger Kilometer
 One paying passenger transported 1 kilometer
Yield = Revenue per RPK
 Average fare paid by passengers, per kilometer flown

 Airline Supply
ASK = Available Seat Kilometer
 One aircraft seat flown 1 kilometer
Unit Cost = Operating Expense per ASK (“CASK”)
 Average operating cost per unit of output

 Load Factor = RPK / ASK

 Unit Revenue = Revenue/ASK (“RASK”)

3
 Example: Airline Measures

 A 200-seat aircraft flies 1000 kilometers, with 140

passengers:
RPK = 140 passengers X 1000 kilometers = 140,000
ASK = 200 seats X 1000 kilometers = 200,000
 Assume total revenue = $16,000; total operating
expense = $15,000:
Yield = $16,000 / 140,000 RPK = $0.114 per RPK
Unit Cost = $15,000 / 200,000 ASK = $0.075 per ASK
Unit Revenue = $16,000 / 200,000 ASK = $0.080 per ASK
 Load Factor = RPK / ASK
LF = 140,000 / 200,000 = 70.0%
 For single flight, also defined as passengers / seats

4
 Additional Measures for Air Cargo

 Freight Tonne Kilometer (FTK)

Measure of freight traffic carried
= freight tonnes carried X kilometers flown

 Available Tonne Kilometer (ATK)

Measure of freight capacity available
= freight tonne capacity X kilometers flown

 Cargo Load Factor = FTK / ATK

 % of freight capacity utilized

5
 Airline Traffic (RPK) Growth 1986-2012

6000000

5000000

Non-US Airlines
4000000

US Airlines
(millions)

3000000

2000000

1000000

6
 Annual % RPK Growth 1987-2012

15%

10%

5%

US Airlines
Non-US Airlines

0%

-5%

-10%

7
 Average Load Factors 1986-2012

85%

80%

75%

US Airlines
70%
World Airlines

65%

60%

55%

8
 Yield vs. Distance Relationship

Yield vs. Distance -- Top 50 O+D Markets

70

60

50
Yield (cents/RPM)

40

30

20

10

0
0 500 1000 1500 2000 2500 3000
O-D Market Distance (miles)

9
 Additional Airline Measures

 Average Stage Length

 Average non-stop flight distance
 Aircraft Miles Flown / Aircraft Departures
 Longer average stage lengths associated with lower yields and
lower unit costs (in theory)
 Average Passenger Trip Length
 Average distance flown from origin to destination
 Revenue Passenger Miles (RPMs) / Passengers
 Typically greater than average stage length, since some
proportion of passengers will take more than one flight
(connections)
 Average Number of Seats per Flight Departure
 Available Seat Miles / Aircraft Miles Flown
 Higher average seats per flight associated with lower unit costs
(in theory)

10
 Competition Under Deregulation

 The removal of economic regulations added several

new dimensions to airline competitive strategies:
 Cost cutting and productivity improvement
 Economies of scale in operations to reduce unit costs
 Price competition and revenue management to increase
revenues
 New marketing and distribution programs
 Increased network coverage and market dominance

 Airline managers now actually have to make

management decisions and trade-offs:
 In contrast to regulated times when government control ensured
price increases to cover increased operating costs.

11
 The LCC “Business Model”

 LCCs are assumed to use common strategies

designed to reduce unit costs:
 Single aircraft type or family of aircraft
 Point-to-point vs. hub network structure
 No connecting tickets (only point-to-point) local passengers
 No labor unions, low wage rates
 Single cabin service, no “premium” classes on board
 No seat assignment (in advance and/or at the airport)
 Reduced “frills” and seating space on board
 No frequent flyer loyalty programs
 No distribution through Global Distribution Systems (GDS)

 With LCC evolution, very few large LCCs actually fit

this assumed LCC “business model” today…

12
 Evolution of LCC Business Models

Southwest JetBlue AirTran WestJet EasyJet RyanAir

Single aircraft type or single
family of aircraft      
Point-to-point ticketing, no
connecting hubs      
No labor unions, lower wage
rates      
Single cabin service, no
premium class      
No seat assignments
     
Reduced frills for on-board
service (vs. legacy)      
No frequent flyer loyalty
program      
Avoid Global Distribution
Systems (GDS)      
13
 The Global Airline Industry:
A Tale of Three Sectors

 Network Legacy Carriers

 For some, bankruptcies and consolidation reduced excess
capacity, allowed for labor cost and productivity improvements
 But European legacy carriers still struggling with high costs
 Low Cost Carriers
 LCC share of US domestic passengers has leveled off at 33%
 LCCs continue to grow rapidly in other world regions
 But unit cost advantages of new entrants tend to disappear as both
aircraft and employees mature
 Emerging Global Carriers
 Large hub networks based in Middle East, South America and Asia
 Examples: Emirates, Etihad, Qatar, Turkish, LAN/TAM, China
Southern, China Eastern

14
 Top 25 World Airlines – Ranked by
Passenger Traffic (RPK) 2012
350,000

300,000

250,000
RPK (million)

200,000

150,000

100,000

50,000

Source: Airline Business Top 200 Airlines Traffic 2012

15
 Top 25 World Airlines – Annual Growth
in Passenger Traffic (RPK) 2012
30.0 

25.0 

20.0 
% Change in RPK

15.0 

10.0 

5.0 

0.0 

‐5.0 

Source: Airline Business Top 200 Airlines Traffic 2012

16
 Passengers Enplaned (million)

0
20
40
60
80
100
120
140
160
Southwest
Ryanair
easyJet
GOL 
Air Berlin
Lion Air
JetBlue
AirAsia

Source: Airline Business Top 50 LCCs 2012

Norwegian
WestJet
IndiGo
Jetstar
Vueling
Cebu Pacific 
Pegasus
Wizz Air
SpiceJet
Frontier
Spirit
Azul
Spring
2012 World LCC Rank by Passengers

Thai AirAsia
Germanwings
Interjet
Anadolu Jet
Volaris
Allegiant 
17
 Annual Percent Change in Passengers Enplaned

0
5

‐5
10
15
20
25
30
35

‐10
Southwest
Ryanair
easyJet
GOL 
Air Berlin
Lion Air
JetBlue
AirAsia

Source: Airline Business Top 50 LCCs 2012

Norwegian
WestJet
IndiGo
Jetstar
Vueling
Cebu Pacific 
Pegasus
Wizz Air
SpiceJet
Frontier
Spirit
Azul
Spring
2012 LCC Passenger Growth Rates

Thai AirAsia
Germanwings
Interjet
Anadolu Jet
Volaris
Allegiant 
18
 Emerging Global Carriers

 A group of 4 airlines based in Turkey and the Middle

East that have experienced rapid growth

Etihad Emirates Qatar Turkish

Passengers 16.26% 12.65% 15.83% 13.62%
2007
ASKs 18.66% 14.19% 20.41% 18.30%
-
2012 RPKs 21.84% 14.37% 19.28% 18.20%
Fleet Size 11.50% 11.68% 16.42% 15.30%

 Very important customers for both Airbus and

Boeing
 Fleets composed mostly of wide-body aircraft

Source: Airline Annual Reports 19