Airline Operating Costs _ Airline Productivity by hcj

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									Airline Operating Costs
 & Airline Productivity
       - US Airways -



                   Seungwon Noh
                   (Apr. 09. 2012)
                        US Airways is a NLC.
         LCC’s Characteristics                                 US Airways
Single Aircraft type or
Single family of aircraft                   • Changing fleets to Airbus
Point-to-point ticketing,                    • Operate 3 hubs (Charlotte, Philadelphia,
no connecting hubs                       X   Phoenix) and 1 focus city (Washington D.C.)
No labor unions, Lower wage rates           • Low wage rates

Single cabin service, no premium class   X   • Provide different class seats
No seat assignments                      X   • Assign seats
Reduced frills for on-board service         • No free meals
No frequent-flyer loyalty program        X   • Have mileage program
Avoid global distribution systems        X   • Use GDS

 US Airways was a Network Legacy Carrier from the beginning.
       Try to be a LCC, but have other factors to incur cost a lot.
 US Airways has strong hub & spoke network.
       US Airways Express operates spoke network with contract.
          Terminology and Definition
 RPMs (Revenue Passenger Miles)
    Number of passenger-miles transported

   

 ASMs (Available Seat Miles)
    Number of seat-miles transported

   

 RASM (Revenue per ASM)
    Revenue received for each available seat mile
    Total Revenue / ASMs
          Terminology and Definition
CASM (Cost per ASM)
    Cost to operate each available seat mile
    Total Operating Cost / ASMs

Yield
    Average fare paid by passenger per mile flown
    Total Revenue / RPMs

PRASM (Passenger RASM)
    Passenger revenue received for each available seat mile
    Passenger Revenue / ASMs
         Terminology and Definition
Fuel consumed
   Number of gallons of fuel consumed

Fuel Costs per ASM
   Fuel cost to operate each available seat mile
   Total Fuel Cost / ASMs

Non-Fuel Costs per ASM
   Non-fuel cost to operate each available seat mile
   (Total Operating Cost – Fuel Cost) / ASMs
                                                 Airline Analysis
   Similar trend in ASM and RPM
              Decrease in 2001 (due to Sep. 11)
              Significant changes in 2005 (Bankruptcy and Merge with America West)
   L/F increased with seasonal fluctuation

(Millions)                                   Airline Traffic, Output and Performance
 35,000                                                                                                                                                        100%
                                                                 ASM               RPM                L/F
                                                                                                                                                               90%
 30,000
                                                                                                                                                               80%
 25,000                                                                                                                                                        70%

                                                                                                                                                               60%
 20,000
                                                                                                                                                               50%
 15,000
                                                                                                                                                               40%

 10,000                                                                                                                                                        30%

                                                                                                                                                               20%
  5,000
                                                                                                                                                               10%

      -                                                                                                                                                        0%
             1   2   3   4   1   2   3   4   1   2   3   4   1   2     3   4   2    3     4   1   2   3     4   1   2   3   4   1   2   3   4   1    2     3
                 2001            2002            2003             2004             2005           2006              2007            2008            2009
                                                 Airline Analysis
   Changes by the merging in revenue and expense trend
              Increase after decrease
              Significant decrease of revenue in 2001 (Sep. 11)
              Remarkable increase of expense in 2008 (Fuel price)
   Loss followed by profit after the merging
(Millions)                                   Total Operating Revenue & Expense
  $5,000
                         Total Operating Revnues                 Total Operating Expenses                   Income (Loss) Before Taxes
  $4,000


  $3,000


  $2,000


  $1,000


      $-
             1   2   3   4   1   2   3   4   1   2   3   4   1   2   3   4   2    3     4   1   2   3   4   1   2   3   4   1   2   3   4   1    2     3

 $(1,000)        2001            2002            2003            2004            2005           2006            2007            2008            2009


 $(2,000)
                                                   Airline Analysis
     Similar trends with total revenue and expense
               Increase after decrease
               Decrease of RASM, Yield, PRASM in 2001 (Sep. 11)
               Big increase of CASM in 2008 (Fuel price)
     Increase in profitability after merging
(Cents)                                    Operating Revenue & Cost per output
 19.00
                                       RASM                CASM                  Yield per RPM                    PRASM
 17.00

 15.00

 13.00

 11.00

  9.00

  7.00

  5.00
          1    2   3   4   1   2   3   4   1   2   3   4   1   2   3   4   2    3     4   1   2   3   4   1   2    3   4   1   2   3   4   1    2     3
               2001            2002            2003            2004            2005           2006            2007             2008            2009
                                                  Airline Analysis
    Expenditure on fuel increase
              Significant increase in 2005 (merging) and 2008 (increase of fuel price)
    Big difference by the merging in fuel consumption
              Consume fuel 3 times more than before merging


(Millions)                                       Fuel & Non-fuel Operating Expense                                                                (Gallons in Million)
 $4,000                                                                                                                                                     400
                         Aircraft Fuel Operating Expense                 Non-Fuel Operating Expense                         Fuel Consumed

 $3,000                                                                                                                                                     300




 $2,000                                                                                                                                                     200




 $1,000                                                                                                                                                     100




     $-                                                                                                                                                     0
             1   2   3   4   1   2   3   4   1   2   3   4   1   2   3   4   2    3     4   1   2   3   4   1   2   3   4    1   2   3   4   1    2     3
                 2001            2002             2003           2004            2005           2006            2007             2008            2009
                                                  Airline Analysis
    Significant increase of jet fuel price
               Reached at $3.50 per gallon in 2008
    Gradual increase in fuel expense per ASM
    Decrease of non-fuel expense

(Cents)                                   Unit Fuel & Non-fuel Operating Expense                                                                     (Per Gallon)
 20.00                                                                                                                                                   $4.00
                  Aircraft Fuel Expense per ASM                   Non-Fuel Operating Expense per ASM                      Average Jet Fuel Price
                                                                                                                                                         $3.50
 16.00
                                                                                                                                                         $3.00

                                                                                                                                                         $2.50
 12.00

                                                                                                                                                         $2.00

  8.00
                                                                                                                                                         $1.50

                                                                                                                                                         $1.00
  4.00
                                                                                                                                                         $0.50

  0.00                                                                                                                                                   $-
          1   2   3   4   1   2   3   4   1   2   3   4   1   2    3   4   2    3     4   1   2   3   4   1   2   3   4   1   2   3   4   1    2     3
              2001            2002            2003            2004             2005           2006            2007            2008            2009
                  Effects of Fuel Prices
 Airline Expenses
    Proportion of fuel expense to total expense highly depends on
    fuel price.
                  Coefficient   t-statics   Significant Level Adjusted R2
    Constant         .048        4.207           .000
                                                                0.898
    Fuel Price       .114        17.058          .000

    As fuel price increases, total operating expenses increases.

 Airline Finance
    The higher fuel price, the worse airline finance.

 Airline Network Structure
    No direct effects of fuel price
                          Summary
 US Airways is considered a NLC.
    Strong Hub & Spoke Network, High Operating Cost
 US Airways experienced three big changes of Operating
 Cost and Productivity between 2001 and 2009.
    Traffic, Output and Revenue decreased in 2001 due to Sep. 11.
    Most significant decrease and increase of all data in 2005
    (Bankrupt and Merge with America West)
    Big jump of Fuel prices in 2008
 Fuel Prices affect the airline’s operating expenses and
 finance significantly.

								
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