Chapter 5
Lesson 4
Sources:
The Global Airline Industry
Peter Belobaba, Amedeo Odoni, Cynthia Barnhart, MIT, Library of Flight Series
Published by John Wiley & Sons, © 2009, 520 pages, Hardback http://ocw.mit.edu/OcwWeb/Aeronautics-and-Astronautics/16-75JSpring-2006/CourseHome/index.htm
1

Operating Profit = RPM x Yield – ASM x Unit Cost
(Revenue) – (Operating Expenses)
Spill
RPM
RPM
RPM
QOS
# Flights
Yield
Revenue
Airline
Profit
QOS
ASM
Unit Cost
Unit Cost
Economies
Of Scale
Operating Expense
2

400
300
200
100
0
250
Overbooking
AU =CAP /(1‐NSR + 1.645 STD)
200
700
IAD-DEN Demand vs. Price ($50 buckets)
150
IAD-DEN Demand vs. Price ($5 buckets)
Price Discrimination vs.
Product Differentiation
600
100
500
50
0
Price
D=MxF a xT b
Price

Spill
RPM
RPM
RPM
Revenue
LCC Strategies
QOS
# Flights
Yield
No Frequent Flyer
Single Cabin
No Frills
QOS
Unit Cost
System
ASM
Economies
No Travel Agencies
Of Scale
Point-Point/ less connect
No Commisions
Ground
Fuel/ Hedging
Labor/ No Unions Lower Wages
Maint/ Commonality
FOC
Unit Cost
Unit Cost
Unit Cost
Operating Expense
Airline
Profit
4

Inputs
$
Passengers
Controls
Safety
Policies
Strategies
LCC Strategies
Spill
RPM
RPM
RPM
Revenue
QOS
# Flights
Yield
No Frequent Flyer
Single Cabin
No Frills
QOS
Unit Cost
System
ASM
Economies
No Travel Agencies Of Scale
Point-Point/ less connect
No Commisions
Ground
Fuel/ Hedging
Labor/ No Unions Lower Wages
Maint/ Commonality
FOC
Unit Cost
Unit Cost
Unit Cost
Operating Expense
Airline
Profit
Outputs
$
Passengers
Feedback
Aircraft Productivity
Aircraft Utilization (block-hours /day)
ASMs /Aircraft /Day
Average Stage Length #of Departures /Day
Aircraft Capacity (seats /aircraft)
Employee Productivity
ASMs /Employee ASMs /Labor $
Revenue /Employee Revenue /Labor $
5

• Airline Cost Categorization
– Administrative vs. Functional
– Cost Drivers
• Operating Expense Comparisons
– Percentage Breakdown
– Legacy vs. Low-Cost Airlines
– Flight Operating Costs
• Comparison of Airline Unit Costs
– Total Operating Cost vs. Unit Costs
– Legacy vs. Low-Cost Airlines Unit Costs
– Comparisons in Europe, Asia, and Worldwide
• Measures of Airline Productivity
– Aircraft Productivity
– Labor Productivity
• Delay Costs
• Impacts of Frequency of Service and Aircraft Gauge
• Airline Profit Model
• Review: Market Analysis
6

7

• Form 41 contains traffic, financial, and operating cost data reported to the DOT by US Major airlines
– Data is reported and published quarterly for most tables
– Detail of reporting differs for different expense categories
• Aircraft operating expenses by aircraft type and region of operation
• Other expenses more difficult to allocate by aircraft type
• DOT Form 41 includes the following schedules:
– P12 : Profit and Loss statement
– P52 : Aircraft Operating Expenses
– P6 : Operating Expenses by Objective Groupings
– P7 : Operating Expenses by Functional Groupings
– P10 : Employment Statistics
– B1 : Balance Sheet
8

Administrative Cost Categories
• Administrative Cost Categories
– Salaries and related fringe benefits for all personnel (general management, flight personnel, maintenance labor, other personnel)
– Materials Purchased (fuel & oil, parts, passenger food, other materials)
– Services Purchased (advertising & promotions, communications, insurance, maintenance, commissions, other services)
– Landing Fees, Rentals, Depreciation, other Expenses
• Although consistent with general accounting principals,
Administrative Cost Categorization does not allow for more detailed analysis of the specific activities that comprise the airline operation and contribute to airline costs
– “Salaries & Benefits” does not allow one to separate out important subsets of this category, aircraft crew cost
9

10

Functional Cost Categories
• Functional Cost Categories –allocates costs to the different functions within the airline’s operation
– Flight operating costs/ Direct operating costs
• Flying operations – Flight crew, Fuel costs
• Maintenance – routine maintenance, extensive major checks, “labor & parts”
Form 41 reports maintenance for direct airframe, direct engine and overhead/ burden
• Depreciation & Amortization
– Ground operating costs
• Aircraft servicing – handling aircraft on ground, landing fees
• Traffic servicing – processing passengers, baggage and cargo at airports
• Promotion and sales – airline reservation centers, ticketing offices, travel agency commissions, and distribution system fees
– System operating costs
• Passenger Service – meals, flight attendants, in-flight services
• Advertising and Publicity
• General and Administrative – can’t be associated to a particular activity
• Transport-related – costs associated with the generation of transport related revenues. Fees paid to regional airline partners, extra baggage expense, and other misc overhead
11

12

Cost Drivers by Functional Category
• Flight operating costs
– Per Block Hour (for example, $3415 for 185-seat B757-200 in 2003)
• Aircraft Servicing Costs
– Per Aircraft Departure (average $1135 in 2003)
• Traffic Servicing Costs
– Per Enplaned Passenger (average $18)
• Passenger Servicing Costs
– Per RPM (average $0.015)
• Promotion and Sales Costs
– % of Total Revenue (average 10%)
• Other Indirect and System Overhead Costs
– % of Total Operating Expense (average 12%)
13

14

• Adapted from Form 41
FLIGHT (DIRECT) OPERATING COSTS (DOC) = 53.1%
– All costs related to aircraft flying operations
– Include pilots, fuel, maintenance, and aircraft ownership
– Varies primarily because of fuel price
GROUND OPERATING COSTS = 20.5%
– Servicing of passengers and aircraft at airport stations (14.2%)
– Promotion and reservations/sales charges (6.3%)
– Dropped from a high around 30%, because of major reductions in promotions and sales costs
SYSTEM OPERATING COSTS = 26.4%
– Passenger Service (6.7%)
– General and Administrative (5.9%)
– Transport-Related expenses (13.7%)
– The growth in Transport-Related expenses can be attributed to changes in reporting rules and a higher reliance on regional partners as feeder airlines
15

• Flight operating costs (FOC) by aircraft type:
– Reflect an average allocation of system-wide costs per block hour, as reported by airlines for each aircraft type
– Can be affected by specific airline network or operational patterns
– Collected by US DOT as Form 41 operating data from airlines
• Typical breakdown of FOC for US carrier:
CREW: Pilot wages and benefits
FUEL: Easiest to allocate and most clearly variable cost
MAINTENANCE: Direct airframe and engine maintenance cost, plus “burden” or overhead (hangars and spare parts inventory)
OWNERSHIP: Depreciation, leasing costs and insurance
16

• Network Legacy Carriers (NLCs)
– More Traditional Airlines
– Operate large hub-and-spoke networks
– Regional, Domestic and International Service
– Big Six (American, United, Delta, Northwest,
Continental, US Airways/ America West)
• Low-Cost Carriers (LCCs)
– Operate smaller networks
– High proportion of point-to-point or non-hub
– Reduced levels of service and low fares
– Southwest, AirTran, Frontier, ATA, JetBlue, Spirit
17

• Characteristics of all or at least most LCCs
– Fleet Commonality – reduces the costs of spare parts, maintenance and crew training
– Point-to-Point instead of connecting hub networks – reduces costs of handling connecting passengers and improves productivity of both aircraft and crews
– No labor unions and lower wages – higher productivity due to less restrictive work rules
– Single cabin/ class service – reduces complexity and costs
– Open seating – less time processing passengers and no boarding passes, improves productivity and reduces costs
– Reduced Frills – less seating space, no food and no beverages , increases ASM and reduces passenger service cost
– No frequent-flyer programs – reduces administrative costs
– Avoids traditional distribution channels – no travel agencies, no commissions, tickets directly from airline (website or phone)
18

Comparison of Major LCC Characteristics
Single Aircraft Type or Family
Point-to-point no hubs
No labor unions/ lower wages
Single cabin/ class
Open seating
Reduced Frills
No frequent flyer program
Avoid global distribution systems
South West JetBlue AirTran West Jet Easy Jet Ryan Air
X X X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
19

• Flying Operations (Figure 5.7)
– Costs doubled between 1995 to 2007
– NLCs 50% higher than LCCs
• Maintenance (Figure 5.8/5.9)
– From 2000 – 2005 NLCs spent 60% more than LCCs
– By 2007 NLCs spent 100% more than LCCs
– Positive relationship between the average age of an airline’s fleet and maintenance costs per block hour?
(NextGen?)
• Passenger Service (Figure 5.10)
– NLCs spend twice the amount LCCs spend per RPM on
Passenger Service until 2001
– Gap has narrowed to 50% by 2007
20

• Aircraft and Traffic Services (Figure 5.11/5.12)
– Steady increase, especially with security related expenses after 9/11
– NLC costs double the costs of LCCs (larger aircraft, longer distances)
– NLC traffic servicing expenses 2-3 times the LCC costs
• Promotion and Sales (Figure 5.13/5.14)
– Gap has closed between NLC and LCC Costs per RPM
– NLC costs double LCC costs per enplanement
21

• Flight Operating Costs (FOC) can differ
– Across different aircraft types
– Across different airlines for the same aircraft
• Four Components of FOC
– Crew – all wages and benefits paid to pilots
– Fuel – most variable cost element in FOC
– Maintenance – Direct and Overhead
– Ownership – Depreciation, Leasing, Taxes and
Insurance
22

• Cost per block-hour of operations (avg. 149 seats)
– Crew $ 477
– Fuel/Oil
– Maintenance
– Ownership
– Total
$2413
$ 523
$ 730
$4143
• Based on 1135 mile average stage length and
11.2 block-hr daily utilization
23
* Aviation Daily Quarterly Reports

Example (Cont.): A320 FOC (2008 US data*)
Airline
Overall
JetBlue
United
Crew Fuel/Oil Maintanance Ownership Total
$
$
$
477
449
486
US Airways
Northwest
$
$
470
543
USA 3000 Airlines $ 372
$
$
$
$
$
$
2,413
2,235
2,482
2,501
2,480
2,919
$
$
$
$
$
$
523
264
589
916
446
670
$
$
$
$
$
$
730
575
784
934
670
1,002
$
$
$
$
$
$
4,143
3,523
4,341
4,821
4,139
4,963
Airline2
Overall
JetBlue
United
US Airways
Northwest
USA 3000 Airlines
# Aircraft Stage Length Seats/Dept. Block Hours RPMs ASMs Load Factors
360 1135 149 11.2
525,380 639,919 0.821
105
97
1282
1116
150
147
13.1
10.7
610,284
498,479
760,446
604,783
0.803
0.824
75
73
10
1151
917
1168
150
148
168
11.1
9.6
10
529,099
432,923
543,231
640,100
508,483
675,119
0.827
0.851
0.805
24
* Aviation Daily Quarterly Reports

Airline Crew Fuel Maintenance Ownership Total
Northwest
United
JetBlue
$ 543
(-12%)
$ 486
(7%)
$ 449
(15%)
$ 2,480
(53%)
$ 2,482
(52%)
$ 2,235
(43%)
2008 cost per block hour
% change from 2006
$ 446
(17%)
$ 589
(25%)
$ 264
(14%)
$ 670
(2%)
$ 784
(16%)
$ 575
(-1%)
$ 4,139
(26%)
$ 4,341
(34%)
$ 3,523
(27%)
25
* Aviation Daily Quarterly Reports

Type of Aircraft FOC $ per hr Seats
777 $10,272 262
747-400
757-200
$14,300
$5,307
367
180
A330-200
A319
737-300
CRJ 100/200
$8,378
$3,854
$3,880
$1,702
281
128
132
50
FOC $ per seat-hr Stage Length Block Hours
$39 4444 13.2
$39
$29
4751
1433
12.5
10.5
$30
$30
$29
$34
3686
908
596
425
13.4
10.8
9.5
8.9
26
* Aviation Daily Quarterly Reports

27

28
Figure 5.18

• Unit cost comparisons should not be made between airlines unless differences in their average stage length are taken into account
• Differences in unit costs between NLCs and
LCCs in 2003 were significant, even when we account for stage length
29

30

Unit Costs by Functional Category 2004
31

• Fuel expenses are compared under assumptions all airlines are subject to the same fuel price environment (They are not)
– Fuel price hedging
• Both NLC and LCC experienced a drop in unit costs after 2001 and a rise in unit costs after 2004
– NLC’s drop reflects cost-cutting strategies put in place after 9/11 (employee layoffs and passenger service cutbacks)
– NLC’s rise in costs primarily due to fuel prices
– LCC’s rise in costs tempered by their capacity growth during the same period
32

Unit Cost and Ave Stage Length 2000-2004
33

34

35

• Measured in ASMs generated per aircraft per day:
= (# departures) X (average stage length) X (# seats)
• Aircraft “utilization” measured in block-hours/day:
– Block hours begin at door close (blocks away from wheels) to door open (blocks under wheels)
– Gate-to-gate time, including ground taxi times
• Increased aircraft productivity achieved with:
– More flight departures per day, either through shorter turnaround (ground) times or off-peak departure times
– Longer stage lengths (average stage length is positively correlated with increased aircraft utilization = block hours per day)
– More seats in same aircraft type (no first class seating and/or tighter “seat pitch”)
36

37

(ASMs per day)
38

39

40

Example: B737-500 FOC per Block Hour
41

42

• Measured in ASMsper employee per period
• As with aircraft, employee productivity should be higher with:
– Longer stage lengths (amount of aircraft and traffic servicing for each flight departure not proportional to stage length)
– Larger aircraft sizes (economies of scale in labor required per seat for each flight departure)
– Increased aircraft productivity due to shorter turnaround times (more ASMs generated by aircraft contribute to positive employee productivity measures)
• Yet, network airlines with long stage lengths and large aircraft have lower employee productivity rates
43

Legacy carrier employment down by 25% since 2000, a loss of over 100,000 jobs
44

Average Salary+Benefits per Employee$
45

Lowfare carrier salaries/benefits per employee
25% lower than legacy carriers
Salaries and Benefits per Employee$
46

ASMs/employee vs. Average Stage Length
47

ASMs/employee and Average A/C Size
48

Employee Productivity Up 30% From 2002
49
* ATA

50

Annual Operating Revenue per Employee
51

Annual ASM per Dollar Salaries & Benefits
52

Operating Revenue per Salary/Benefit Dollar
53

Summary: Airline Productivity Measures
• Aircraft Productivity
– Aircraft Utilization (block-hours per day)
– ASMs per Aircraft per Day
• Average Stage Length
• Number of Departures per Day
• Aircraft Capacity (seats per aircraft)
• Employee Productivity
– ASMs per Employee
– ASMs per Labor Dollar
– Revenue per Employee,
– Revenue per Labor Dollar
54

55

• To modify the model for the US data and for all aircrafts
ICAO Engine Emissions
• Taxi Fuel Burn Rate
General Model
BTS P52
• Maintenance
Cost
• Fuel prices
• Crew Costs
• Airborne Fuel
Burn Rate
Cost of Delay
Factors from the
US data
PAX delay cost for the US airlines is 0, since airlines do not have to compensate the passengers as they do in Europe.
Additionally the maintenance coefficient was found to be ~ 0.
56

• Gate Delay Costs – other costs = $.21/min
C gate_delay
= c crew
*crew cost + c other
C gate_delay_15
= .03*crew cost + $.21
C gate_delay_65
= .46*crew cost + $.21
• Taxi Delay Costs – other costs = $.12/min
.46
.03
15
C taxi_delay
= c fuel
*taxi burn rate*fuel price + c crew
*crew cost + c other
C taxi_delay_15
= 1*taxi burn rate*fuel price + .00*crew cost + $.12
C taxi_delay_65
= 1*taxi burn rate*fuel price + .43*crew cost + $.12
• Airborne Delay Costs – other costs = $.10/min
C air_delay
= c fuel
* burn rate*fuel price + c crew
*crew cost + c other
C air_delay_15
= 1* burn rate*fuel price + .01*crew cost + $.10
C air_delay_65
= 1* burn rate*fuel price + .46*crew cost + $.10
Gate Delay
65
57

July 2007 Delay costs
Delay cost per flight
Delay minutes
Delay cost per minute
Gate Delay Taxi out Delay Airborne Delay Taxi in Delay
$ 8,492,145
$ 30.26
4,022,321
$ 2.11
$ 10,754,556
$ 38.33
2,276,214
$ 4.72
$ 41,441,667
$ 147.69
1,052,131
$ 39.39
$ 3,110,810
$ 11.09
728,188
$ 4.27
Total Delay
$ 63,799,178
$ 227.37
$ 8,078,854
$ 7.90
July 2007 Departure delays by segment of flight for selected airports (New York, San Francisco, Washington, Boston, Philadelphia, and Dallas)
Airline american southwest delta us airlines united continental jet blue northwest american eagle air tran air wisconsin com air
ExpressJet
Republic Airlines
Gate Delay Taxi out Delay Airborne Delay Taxi in Delay Total Delay # Flights $ per flight
$ 1,272,838 $ 1,828,159 $ 5,859,727 $ 873,476 $ 9,834,200 38,399 $ 256.11
$ 581,768
$ 727,080
$
$
581,715
1,215,887
$
$
6,201,624
3,079,572
$
$
229,303
290,221
$
$
7,594,410
5,312,760
28,722
13,233
$
$
264.41
401.48
$ 416,258
$ 550,133
$ 885,487
$ 626,087
$
$
$
$
892,844
1,030,883
1,111,575
1,001,468
$
$
$
$
3,764,669
2,945,020
2,341,061
2,048,026
$
$
$
$
196,096
254,389
218,211
183,966
$
$
$
$
5,269,868
4,780,425
4,556,335
3,859,548
15,129
19,015
14,387
14,752
$
$
$
$
348.33
251.40
316.70
261.63
$ 184,893
$ 423,625
$ 393,055
$ 204,604
$ 223,066
$ 321,204
$ 131,820
$
$
$
$
$
$
364,349
376,629
287,737
133,906
337,824
348,175
$ 75,043
$
$
$
$
1,536,632
1,204,321
$
$
$
851,741
927,879
939,059
586,765
886,370
$
$
$
$
$
$
$
99,053
142,279
103,138
28,433
69,319
51,283
16,935
$
$
$
$
$
$
$
2,184,927
1,794,274
1,711,810
1,571,264
1,569,268
1,307,427
1,110,167
7,048
24,508
7,670
12,259
8,556
11,211
5,147
$
$
$
$
$
$
310.01
$ 73.21
223.18
128.17
183.41
116.62
215.69
July 2007 Departure delays for airlines exceeding $1M in delay costs
58

E145
MD88
E170
B735
MD83
E190
E135
Aircraft Gate Delay Taxi out Delay Airborne Delay Taxi in Delay Total Delay # Flights $ per flight
B752
B737
MD82
$
$
$
794,859
602,399
619,102
$ 1,435,696
$
$
582,814
895,085
$
$
$
3,691,511
4,649,791
3,230,645
$
$
$
444,658
204,566
455,587
$
$
$
6,366,725
6,039,570
5,200,419
18,662
22,570
20,840
$
$
$
341.16
267.59
249.54
A320
B733
A319
CRJ2
B738
$
$
$
$
$
666,428
574,161
308,906
333,964
523,472
$ 1,315,475
$
$
$
$
618,854
603,246
333,642
683,996
$
$
$
$
$
2,594,288
3,464,556
2,826,820
2,528,964
1,764,857
$
$
$
$
294,020
181,687
145,379
$ 78,126
190,269
$
$
$
$
$
4,870,211
4,839,259
3,884,352
3,274,695
3,162,595
20,241
19,561
14,650
22,824
12,479
$
$
$
$
$
240.61
247.39
265.14
143.48
253.43
$
$
$
$
$
$
$
542,696
295,444
189,513
355,881
187,480
211,808
256,153
$
$
$
$
$
$
$
422,478
503,327
119,199
430,128
233,817
228,699
276,426
$
$
$
$
$
$
1,808,727
1,659,392
1,321,926
$
741,454
1,015,068
1,021,585
711,110
$ 109,635
$
$
$
$
$
$
98,798
29,081
79,724
119,692
31,092
63,297
$
$
$
$
$
$
$
2,883,536
2,556,961
1,659,718
1,607,188
1,556,057
1,493,185
1,306,986
23,464
6,142
7,637
6,102
5,900
4,694
13,355
$
$
$
$
$
$
122.89
416.31
217.33
263.39
263.74
318.11
$ 97.86
B712
CRJ1
B734
$ 262,947
$ 177,892
$ 120,198
$ 197,903
$ 252,791
$ 213,059
$ 700,814
$ 732,486
$ 819,107
$ 71,115
$ 54,852
$ 54,217
$ 1,232,779
$ 1,218,021
$ 1,206,580
6,894
6,498
4,268
$ 178.82
$ 187.45
$ 282.70
July 2007 Departure delays for aircraft exceeding $1M in delay costs
59

Airport Gate Delay Taxi out Delay Airborne Delay Taxi in Delay Total Delay # Flights $ per flight Total Delay $ per min delay per flight
DFW
JFK
PHL
LGA
EWR
BOS
SFO
DCA
IAD
BWI
OAK
SJC
$
$
$
$
$
$
$
$
$
$
959,984
701,569
505,110
409,444
594,332
416,529
262,320
214,479
244,891
264,315
$
$
96,497
66,585
$
$
$
$
$
1,819,817
1,006,537
1,035,883
1,093,532
$
$
$
$
$
881,398
475,273
328,623
322,695
356,161
264,049
$
$
95,769
44,986
$
$
$
$
$
$
$
$
$
$
$
$
2,674,620
1,929,810
2,147,482
1,895,051
1,296,275
2,035,500
1,933,248
1,838,970
1,575,527
1,585,187
1,227,613
1,049,198
$
$
$
$
$
$
$
213,078
132,221
127,386
119,169
115,202
147,260
151,861
$
$
$
$
$
90,158
87,773
99,819
64,249
55,618
$
$
$
$
$
$
$
$
$
$
$
$
4,729,080
4,583,418
3,786,516
3,459,548
3,099,341
3,074,561
2,676,051
2,466,301
2,264,352
2,213,370
1,484,127
1,216,387
26,013
12,594
17,089
14,760
13,075
11,680
12,782
11,087
11,246
10,248
6,875
5,843
$
$
$
$
$
$
$
$
$
$
$
$
181.80
363.94
221.58
234.39
237.04
263.23
209.36
222.45
201.35
215.98
215.87
208.18
715,435
675,469
585,909
533,884
535,720
367,926
280,038
266,938
292,379
242,499
125,457
89,718
$
$
$
$
$
$
$
$
$
$
$
$
6.61
6.79
6.46
6.48
5.79
8.36
9.56
9.24
7.74
9.13
11.83
13.56
27.50
53.63
34.29
36.17
40.97
31.50
21.91
24.08
26.00
23.66
18.25
15.35
July 2007 Departure delay costs and delays for departures from 12 selected airports
60

• Daily Cost = # flights * (landing Fee + avg hrs *
(DOC less fuel
/hr + Burn Rate * fuel price))/days
• Profit = itineraries
(passengers*airfare)*10/days
2007
2007
2007
2007
2007
2007
Year QUARTER Fleet Seats Burn Rate DOC-Fuel/Hr landing fees ATL hrs # flights
2007 3 1 25 $ 202 $ 640 $ 112 2.18
0
2007 3 2 50 $ 435 $ 854 $ 137 2.48
36
2007
2007
2007
2007
2007
3
3
3
3
3
3
4
5
6
7
75
100
125
150
175
$
$
$
$
$
458
854
844
963
1,252
$
$
$
$
$
779
1,154
1,074
1,150
1,277
$
$
$
$
$
218
330
356
367
686
2.50
2.62
2.55
2.48
2.58
58
0
1
136
0
3
3
3
3
3
3
9
10
11
12 275
15 300
17
200
225
250
325
$
$
$
$
$
$
1,428
1,723
1,942
2,236
3,125
3,471
$
$
$
$
$
$
649
1,786
1,842
1,377
3,084
3,301
$
$
$
$
$
$
546
945
904
904
904
904
2.33
2.53
2.52
2.52
2.52
2.52
84
0
1
1
61 cost
28 daily cost cost
$ -
$ 159,118
$ 258,354
$ -
$ 7,399
$ 1,088,990
$ -
$ 732,629
$ -
$ 15,312
$ 15,624
$ 1,488,084
$ 747,105
$ 4,512,616
$ 49,589
61

• JFK-ATL
– Average 4.5 flights per day
– Average 656 passengers per day
– $137 Average Fare
– $89.9K of Revenue per day
– $49.6K of Operational Cost per day
– Profit ~$89.9K-$49.6K = $40.3K per day
• Profit Margin = Profit/Revenue = 44.8%
62

• JFK-ATL Delays
– Profit ~$89.9K-$49.6K = $40.3K per day
– Average Daily Gate Delay costs = $11.2K
– Average Daily Taxi out Delay costs = $19.2K
– Average Daily Airborne Delay costs = $9.4K
– Profit = $40.3K - $11.2K - $19.2K - $9.4K = $0.7K
• Adjusted Profit Margin = .8%

64

JFK-ATL WTP Curve
500
400
300
200
700
600
100
0
0 cum demand
Expon. (cum … y = 1529e -0.007x
R² = 0.9895
200 400 600 800
Average Airfare
1000 1200 1400
65

• Demand = M * exp(Price*Coeff)
• Ln(Demand) = Ln(M) + Price*Coeff
• Price = (Ln(Demand) - Ln(M) )/Coeff
• Rev = Demand*Price
= Demand*(Ln(Demand) - Ln(M) )/Coeff
JFK-ATL WTP Curve
700
600
500
400
300
200
100
0
0 cum demand
Expon. (cum … y = 1529e -0.007x
R² = 0.9895
200 400 600 800
Average Airfare
1000 1200 1400
D
P
Average Airfare
R=D*P
D
Demand
66

• Cost = # flights * (landing Fee + avg hrs *
(DOC less fuel
/hr + Burn Rate * fuel price))
• Demand = # flights * Aircraft Size * LF
225
250
275
300
325
Seats
25
50
75
100
125
150
175
200
.8 load factor Burn Rate DOC-Fuel/Hr fuel price landing fees ATL hrs Cost per flight seat cost per flight
20
40
60
201.871063 639.5336063
435.416042 853.9040381
457.862811 778.9684357
$2
$2
$2
111.90723
136.854702 2.483333333
217.636991
2.183333333
2.5
$2,389.73
$4,419.95
$4,454.37
$95.59
$88.40
$59.39
80
100
120
140
160
854.052282 1153.857825
844.192546 1073.760104
963.060289 1150.468386
1252.49704 1276.665393
1427.53677 648.8347814
$2
$2
$2
$2
$2
330.257006 2.616666667
355.917262
2.55
545.993237 2.333333333
$7,819.06
$7,399.39
367.084226 2.483333333
$8,007.28
686.174268 2.583333333
$10,455.46
$8,721.78
$78.19
$59.20
$53.38
$59.75
$43.61
180
200
220
240
260
1723.4391
3125.1471
1786.161585
1941.70643 1841.879827
2235.88571 1377.113204
3083.879418
3471.22935 3300.659972
$2
$2
$2
$2
$2
945.152783 2.533333333
903.811259 2.516666667
903.811259 2.516666667
903.811259 2.516666667
903.811259 2.516666667
$14,202.19
$15,312.46
$15,623.50
$24,394.81
$26,682.33
$63.12
$61.25
$56.81
$81.32
$82.10
67

Seats
25
50
75
100
225
250
275
300
325
125
150
175
200
$140,000
JFK-ATL Profit analysis for 4 Flights per day LF=.8
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
$cost rev profit
80 160 240 320 400 480 560 640 720 800 880 960 1040
$(20,000)
$(40,000) ATL hrs 4 flights airfare
20 201.871063 639.5336063
111.90723 2.183333
80 $ 421.48
160 $ 322.46
60 457.862811 778.9684357 217.6369908
2.5
240 $ 264.53
100 844.192546 1073.760104 355.9172622
120 963.060289 1150.468386 367.0842257 2.483333
320 $ 223.44
Aircraft Size
$ 191.56
480 $ 165.51
140 1252.49704 1276.665393 686.1742678 2.583333
160 1427.53677 648.8347814 545.9932367 2.333333
180 1723.4391 1786.161585
945.152783 2.533333
200 1941.70643 1841.879827 903.8112586 2.516667
220 2235.88571 1377.113204 903.8112586 2.516667
240 3125.1471 3083.879418 903.8112586 2.516667
260 3471.22935 3300.659972 903.8112586 2.516667
560 $ 143.49
640 $ 124.41
720 $ 107.59
800 $ 92.54
880 $ 78.92
960 $ 66.49
1040 $ 55.06
cost
$ 10,089
$ 18,492
$ 19,123
$ 33,412
$ 31,804
$ 34,207
$ 46,168
$ 37,799
$ 62,606
$ 66,733
$ 67,977
$ 103,062
$ 112,212 rev
$ 33,718
$ 51,593
$ 63,488
$ 71,499
$ 76,623
$ 79,446
$ 80,355
$ 79,625
$ 77,464
$ 74,029
$ 69,451
$ 63,831
$ 57,258 profit
$ 23,630
$ 33,101
$ 44,365
$ 38,087
$ 44,819
$ 45,239
$ 34,187
$ 41,826
$ 14,858
$ 7,296
$ 1,473
$ (39,231)
$
68
Avg Airfare = $137

Down Gauging
$200,000
JFK-ATL Profit analysis for 6 Flights per day LF=.8
$150,000
$100,000 cost rev profit
$50,000
$-
120 240 360 480 600 720 840 960 1080 1200 1320 1440 1560
$(50,000)
More Flights would increase delay costs
$(100,000)
Seats
25
50
75
100
225
250
275
300
325
125
150
175
200
.8 load factor Burn Rate DOC-Fuel/Hr landing fees ATL hrs 6 flights airfare
$(150,000)
111.90723 2.183333
40 435.416042 853.9040381 136.8547016 2.483333
120 $ 363.55
240 $ 264.53
60 457.862811 778.9684357 217.6369908
2.5
360 $ 206.61
100 844.192546 1073.760104 355.9172622
120 963.060289 1150.468386 367.0842257 2.483333
480 $ 165.51
Aircraft Size
$ 133.63
720 $ 107.59
140 1252.49704 1276.665393 686.1742678 2.583333
160 1427.53677 648.8347814 545.9932367 2.333333
180 1723.4391 1786.161585
945.152783 2.533333
200 1941.70643 1841.879827 903.8112586 2.516667
220 2235.88571 1377.113204 903.8112586 2.516667
240 3125.1471 3083.879418 903.8112586 2.516667
260 3471.22935 3300.659972 903.8112586 2.516667
840 $ 85.57
960 $ 66.49
1080 $ 49.66
1200 $ 34.61
1320 $ 21.00
1440 $ 8.57
1560 $ (2.87) cost
$ 15,133
$ 27,738
$ 28,685
$ 50,118
$ 47,706
$ 51,311
$ 69,251
$ 56,699
$ 93,909
$ 100,099
$ 101,966
$ 154,594
$ 168,319 rev
$ 43,626
$ 63,488
$ 74,379
$ 79,446
$ 80,181
$ 77,464
$ 71,876
$ 63,831
$ 53,638
$ 41,536
$ 27,717
$ 12,337
$ (4,473) profit
$ 28,494
$ 35,750
$ 45,694
$ 29,328
$ 32,474
$ 26,153
$ 2,625
$ 7,133
$ (40,271)
$ (58,564)
$ (74,249)
$ (142,257)
$
69
Historic Actual Avg Airfare = $137

Upgauging
$90,000
JFK-ATL Profit analysis for 2 Flights per day LF=.8
$80,000
$70,000 cost rev profit
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$-
40 80 120
Less Flights would decrease delay costs
160 200 240 280 320
Aircraft Size
360 400 440 480 520
Seats
25
50
75
100
225
250
275
300
325
125
150
175
200
.8 load factor Burn Rate DOC-Fuel/Hr landing fees ATL hrs 2 flights airfare
20 201.871063 639.5336063
111.90723 2.183333
40 435.416042 853.9040381 136.8547016 2.483333
40
80
$
$
520.50
421.48
60 457.862811 778.9684357 217.6369908
2.5
80 854.052282 1153.857825 330.2570056 2.616667
100 844.192546 1073.760104 355.9172622
2.55
120 963.060289 1150.468386 367.0842257 2.483333
120
160
200
240
$
$
$
$
363.55
322.46
290.58
264.53
140 1252.49704 1276.665393 686.1742678 2.583333
160 1427.53677 648.8347814 545.9932367 2.333333
180 1723.4391 1786.161585
945.152783 2.533333
200 1941.70643 1841.879827 903.8112586 2.516667
220 2235.88571 1377.113204 903.8112586 2.516667
240 3125.1471 3083.879418 903.8112586 2.516667
260 3471.22935 3300.659972 903.8112586 2.516667
280
320
360
400
440
480
520
$
$
$
$
$
$
$
242.51
223.44
206.61
191.56
177.94
165.51
154.08
cost
$ 5,044
$ 9,246
$ 9,562
$ 16,706
$ 15,902
$ 17,104
$ 23,084
$ 18,900
$ 31,303
$ 33,366
$ 33,989
$ 51,531
$ 56,106 rev
$ 20,820
$ 33,718
$ 43,626
$ 51,593
$ 58,116
$ 63,488
$ 67,903
$ 71,499
$ 74,379
$ 76,623
$ 78,295
$ 79,446
$ 80,120 profit
$ 15,776
$ 24,472
$ 34,065
$ 34,887
$ 42,214
$ 46,384
$ 44,819
$ 52,600
$ 43,077
$ 43,257
$ 44,306
$ 27,915
$
70
Avg Airfare = $137

JFK-ATL Daily Profit analysis LF=.8
$100,000
$50,000
$-
25 50 75 100 125 150 175 200 225 250 275 300 325
$(50,000)
$(100,000)
4 Flights profit
2 Flights profit
6 Flights profit
Avg Airfare = $165
Avg Airfare = $223
Avg Airfare = $206
$(150,000)
$(200,000)
Aircraft Size
71

72

Revenue per Passenger Direct Cost (per segment)
– Airfare
• Fuel
• Labor
• Ticket (-7.5%) 1
• Maintenance
• Segment Tax (-$3.60) 1
• Other
• PFC (-$3.63) 2
–
• 911 (-$2.50) 1
Gauge
Freight/ Mail (+2.4%) 3
• Landing Fees (BTS) 5
– Per Landing (+$306.69)
– Per Klbs (+$2.85)
– Fees (+$10.17) 4 4QTR09 Revenue 3
Passenger $18,513 70.0%
BTS Reports 4
Ancillary Fees*
Bags
2008**
$ 7.50
$ 2.09
$
2009
10.17
Cancel $ 2.20
$ 3.08
* Bags, Cancel/Change, Pets, Freq Flyer
** Based on 3rd & 4th Quarter
$ 3.54
New Airfare = .949(Airfare) + $.44
Regional Affiliates $5,337 20.2%
Cargo $633 2.4%
Other Revenues $1,964 7.4%
3- Aviation Daily Airline Revenue (4QTR09)
4- BTS Airline Revenue Reports (2008-2009)
5- BTS Airline Cost Reports (2007) and BTS T-
100 (2007)
1- http://www.airlines.org/Economics/Taxes/Pages/GovTaxesandFeesonAirlineTravel.aspx
2- http://www.faa.gov/airports/pfc/monthly_reports/
73

74

Market Itinerary
Segment
/ Leg
Airline Seats PAX Connecti ng PAX
O-D
Traffic
%
Connecting
IAD-BOS IAD-BOS IAD-BOS Airline 1 100
IAD-BOS IAD-PHL-BOS IAD-PHL Airline 1 150
IAD-PHL-BOS PHL-BOS Airline 1 100
IAD-BOS IAD-JFK-BOS IAD-JFK Airline 2 200
IAD-JFK-BOS JFK-BOS Airline 2 100
IAD-BOS IAD-BOS IAD-BOS Airline 2 100
IAD-PIT IAD-BOS-PIT IAD-BOS Airline 2 200
IAD-BOS-PIT BOS-PIT Airline 2 150
50 N/A
100 75
75 N/A
150 50
50 N/A
75 N/A
100 25
75 N/A
50
25
75
100
50
75
75
75
N/A
75%
N/A
50%
N/A
N/A
50%
N/A
Load
Factor
.5
.67
.75
.75
.5
.75
.5
.5
 For this example no additional passengers are boarding at the connection
• Frequency Share for IAD-BOS –
– Airline 1 = 2/6 = 33%,Airline 2 = 4/6 = 67%
• Market Share for IAD-BOS –
– Airline 1 = ((2x50)+(4x75))/ ((2x50)+(4x75)+(2x50)+(3x75)+(1x75)) = 50%
• “Market” O-D Traffic for IAD-BOS =
((2x50)+(4x75)+(2x50)+(3x75)+(1x25)) = 750
• “Segment” or “Leg” O-D Supply for IAD-BOS =
((2x100)+(3x100)+(1x200)) = 700
4
2
2
2
4
3
1
1
Daily
Freq
75

Market Itinerary
Segment
/ Leg
Airline Seats PAX Connecti ng PAX
O-D
Traffic
%
Connecting
IAD-BOS IAD-BOS IAD-BOS Airline 1 100
IAD-BOS IAD-PHL-BOS IAD-PHL Airline 1 150
IAD-PHL-BOS PHL-BOS Airline 1 100
IAD-BOS IAD-JFK-BOS IAD-JFK Airline 2 200
IAD-JFK-BOS JFK-BOS Airline 2 100
IAD-BOS IAD-BOS IAD-BOS Airline 2 100
IAD-PIT IAD-BOS-PIT IAD-BOS Airline 2 200
IAD-BOS-PIT BOS-PIT Airline 2 150
50 N/A
100 75
75 N/A
150 50
50 N/A
75 N/A
100 25
75 N/A
50
25
75
100
50
75
75
75
N/A
75%
N/A
50%
N/A
N/A
50%
N/A
Load
Factor
.5
.67
.75
.75
.5
.75
.5
.5
 For this example no additional passengers are boarding at the connection
• RPM = (2x50x1)+(4x100x1)+(4x75x1)+(2x150x1)+(2x50x1)+(3x75x1)+
(1x100x1)+(1x75x1) =1600
• ASM = (2x100x1)+(4x150x1)+(4x100x1)+(2x200x1)+(2x100x1)+
(3x100x1)+(1x200x1)+(1x150x1) = 2450
• ALLF for IAD-BOS = (2x.5)+(3x.75)+(1x.5)/6 = .625
• ALF for this network – for this example all flight legs are 1 unit of distance
= RPM/ASM = 1600/2450 = .653
4
2
2
2
4
3
1
1
Daily
Freq
76