Biography for William Swan
Chief Economist, Seabury-Airline
Planning Group. AGIFORS Senior
Fellow. ATRG Senior Fellow.
Retired Chief Economist for Boeing
Commercial Aircraft 1996-2005
Previous to Boeing, worked at
American Airlines in Operations
Research and Strategic Planning
and United Airlines in Research and
Development. Areas of work
included Yield Management, Fleet
Planning, Aircraft Routing, and
Crew Scheduling. Also worked for
Hull Trading, a major market maker
in stock index options, and on the
staff at MIT’s Flight Transportation
Lab. Education: Master’s,
Engineer’s Degree, and Ph. D. at
MIT. Bachelor of Science in
Aeronautical Engineering at
Princeton. Likes dogs and dark
beer. (bill.swan@cyberswans.com)
© Scott Adams
Why Bypass?
The Cost Motivation for Adding
Nonstops
William M. Swan
Chief Economist
Boeing Commercial Airplane Marketing
Fall 2003
Most Markets are Small
16%
Too Small For Nonstop
12%
10%
8%
6%
4%
2%
Passengers per Day One Way
+
16
00
0
60
<1
00
<8
00
<4
00
<2
00
<1
0
<5
5
<2
5
2.
<1
5
.2
<6
.1
25
0%
<3
Share of ASKs
14%
Small Markets Need Hubs
• Half of Demand too Small for Nonstops
• Network builds loads in Hubs
• Feeders bring demand from small towns
– All the air travel to anywhere
• Hub distributes to major destinations
– All the major long-haul places to go
• Result: half of onboard loads connect
Small Airplanes are Expensive
2.0
Cost
Too
High
1.8
Cost Per Seat Trip
1.6
1.4
1.2
Hubs Built Loads for These Sizes
1.0
0.8
0.6
0.4
0.2
0.0
0
50
100
150
200
Seats
250
300
350
Hub Collects and Distributes
Smaller Feeder Stations
Larger and Farther
Destinations
Flight Costs are Linear with Seats
1.8
Cost Per Airplane Trip
1.6
Cost of Seats
(Slope)
1.4
1.2
1.0
0.8
0.6
0.4
Cost of
Frequency
0.2
0.0
0
50
100
150
200
Seats
250
300
350
Connecting Seats get Frequency
“Free”
• Cost of connection is
– Cost of extra seats origin-to-hub
• Includes “up and down cost” of departure cycle
– Cost of connecting activities at hub
• A matter of $20 for gate, luggage, and passenger
– Cost of extra seats hub-to-destination
• Includes “up and down cost” of departure cycle
• Notice cost of frequencies are not included
• Cost of seats (slope) is included
Bypass Flying Adds a Nonstop
Bypass Avoids One Departure Cycle
• Cost of Bypass is
– Cost of extra flight origin-to-destination
• Includes cost of extra frequency
– Cost of seats origin-to-destination
• Cost of seats (slope) is included
– Does not include
• Cost of second “up-and-down” cycle
• Cost of handling connecting bags and passengers
Cost Formulas: Connecting
• Cost for Connections for S seats:
= S * (Dist * 1.08 +2 * 722) * $0.02 + $20
Where
– Dist is nonstop Origin-Destination Km
– 1.08 indicates 8% circuity for connection
– 722 is the “up-and-down” cost, in Km
– 2 is because there are two “up-and-downs”
– $0.02 is the marginal cost per seat km
– $20 is the cost of handling a seat connection
Cost Formulas: Connecting
• Cost for bypass for S seats:
= (S + 104) * (Dist + 722) * $0.02
Where
– Dist is nonstop Origin-Destination Km
– 722 is the “up-and-down” cost, in Km
– $0.02 is the marginal cost per seat km
– 104 is the Frequency cost, in Seats
Bypass Trigger Point: Equal Cost
S * (Dist * 1.08 +2 * 722) * $0.02 + $20
=
(S + 104) * (Dist + 722) * $0.02
Solve for S:
S=
(104*(Dist+722)-20/0.02)/(0.08*Dist+722)
Bypass Trigger Rises With Distance
900
800
700
Area Where Bypass is Cheaper
Seats
600
500
400
300
Area Where Connections are Cheaper
200
100
0
0
1613
3226
4839
6452
8065
9678
11291
Distance in Km (marks at 1000mi steps)
12904
14517
Other Formulations
• Short-haul and long-haul cost functions are
different, giving different transition values
• Long-haul seat counts are around 72% of
short-haul counts—rescaling the Y-axis
• Connections can be costed as a short-haul
feed to a long-haul flight. Variable comfort.
• Some examples have used average seat cost
on connections, not marginal seat cost.
Bypass Seats are Sensitive only to
Departure and Frequency Costs
Base Case ($20 / 8% / 722 / 104 / $0.02)
252 seats
Seat-Km Costs @ $0.015 / $0.025
252 / 253
Connect cost @ $100 / $0
248 / 254
Circuity @ 15% / 0%
227 / 288
Departure costs @ 1200 / 400 km
198 / 347
Frequency costs @ 75 / 150 seats
182 / 365