aviation economics chapter 3 passenger movement:

AVIATION ECONOMICSAVIATION ECONOMICSCHAPTER 3 PASSENGER CHAPTER 3 PASSENGER

MOVEMENT:MOVEMENT:

THE SIGNIFICANCE OF PASSENGER THE SIGNIFICANCE OF PASSENGER LOAD FACTORS & STRATEGY FOR LOAD FACTORS & STRATEGY FOR

PASSENGER MARKETINGPASSENGER MARKETING

In this chapter, we will look atIn this chapter, we will look at Load FactorLoad Factor Traffic Peaks and ValleysTraffic Peaks and Valleys Capacity vs. DemandCapacity vs. Demand Pricing in relation to load factorPricing in relation to load factor

Passenger MovementPassenger Movement

Airline traffic and Revenue Measure of “airline traffic” quantify the amount of

airline output that is actually consumed or sold. Traffic carried by airline consists of both

passengers and cargo. Passenger airline traffic can be measured in

terms of the number of passengers kilometer (RPK). 1 RPK = 1 paying passenger transported 1km Example:

A flight carrying 140 passengers over a distance of 1000km generates 140 000 RPK of airline traffice

Airline traffic and Revenue Yield is measure of the average fare paid by all

passengers per kilometer (km) flown, in a market, on a set of routes, or a region of operating for an airline.

Yield is calculated by dividing the total passenger revenues collected by number of RPK carried.

Example: If the flight carried 140 000 RPK generates RM16 000 of

total passenger revenue, its yield would be RM0.114 per RPK

(RM 16000/140 000) = RM 0.114

Airline Output and Operating Expense Similar to RPK, the most common measure

of airline output is an available seat kilometer, ASK.

Thus 1 ASK is defined as one available seat flown 1km.

Example: If our flight operates over a distance of

1000km with 200-seat aircraft, it generates 200 000 ASK of airline output.

Airline Output and Operating Expense Unit cost is defined as the total operating

expense divided by the ASK produced by an airline, for a route, region or total network.

Example: If the airline incurs RM 15 000 of expense to

operate a flight, the unit cost for this flight would be RM 0.075 per ASK

(RM 15 000/200 000 = RM0.075)

Load FactorLoad Factor

One of the most vital statistics in the One of the most vital statistics in the airline businessairline business

Load factor refers to the ratio of traffic to Load factor refers to the ratio of traffic to airline output, representing the proportion airline output, representing the proportion of airline output that is sold or consumed.of airline output that is sold or consumed.

It has a critical impact on the cost and It has a critical impact on the cost and quality of air transportation-Why?quality of air transportation-Why? 65% of airline’s costs are directly related to the 65% of airline’s costs are directly related to the

operation of the aircraft and are operation of the aircraft and are independent independent of the number of passengers on the aircraft. of the number of passengers on the aircraft.

Hence, a high load factor will allow the Hence, a high load factor will allow the allocation of these costs over a large allocation of these costs over a large number of passengersnumber of passengers


In the end, resulting in lower costs per passenger, In the end, resulting in lower costs per passenger, which allows for lower fares (i.e. lower ticket price)which allows for lower fares (i.e. lower ticket price)

Companies can determine a minimum load factor Companies can determine a minimum load factor they need to meet in order to break even they need to meet in order to break even financially. financially.

That is, once a company meets a certain load That is, once a company meets a certain load factor the revenues from doing so will cover the factor the revenues from doing so will cover the costs of providing their seat capacity.costs of providing their seat capacity.

If they are below this break-even load factor the If they are below this break-even load factor the company will be spending more than they are company will be spending more than they are earning and will lose money.earning and will lose money.


Load Factor calculation:Load Factor calculation:

Simple calculation : Capacity 100, passenger 90Simple calculation : Capacity 100, passenger 90

Load factor : 90/100 = 90%Load factor : 90/100 = 90%

Airliner calculation : Airliner calculation : The definition of load factor isn't necessarily The definition of load factor isn't necessarily tied to seats alone. We must also consider the distance flown in tied to seats alone. We must also consider the distance flown in order to measure the production of the airline.order to measure the production of the airline.

ASK = No. of seats/aircraft * No. of aircraft * ASK = No. of seats/aircraft * No. of aircraft *

aggregate distance flownaggregate distance flownRPK = Total Number of Passengers * Distance RPK = Total Number of Passengers * Distance

FlownFlown


Load Factor calculation, Airliner calculation : Load Factor calculation, Airliner calculation : Route: - ABC -> XYZRoute: - ABC -> XYZDistance = 200kmDistance = 200kmAircraft = 2Aircraft = 2Seats / Aircraft = 50Seats / Aircraft = 50Total Services per day = 8Total Services per day = 8

Available seat kilometers = 200 * 2 * 50 * 8 = 160000 kmAvailable seat kilometers = 200 * 2 * 50 * 8 = 160000 km

Assume on day 1 there were a total of 560 passengers travelling.Assume on day 1 there were a total of 560 passengers travelling.

Revenue Seat Kilometers = 560 * 200 = 112000 kmRevenue Seat Kilometers = 560 * 200 = 112000 km

Load Factor = 112000/160000 = 0.7 or 70%Load Factor = 112000/160000 = 0.7 or 70%

In reality an airline will then do this equation for each route to determine the route load In reality an airline will then do this equation for each route to determine the route load factor to help in route planning. The figures quoted in public are generally relating to the factor to help in route planning. The figures quoted in public are generally relating to the aggregate sums so it would represent total revenue seat kilometers / total available seat aggregate sums so it would represent total revenue seat kilometers / total available seat kilometers. kilometers.


Load Factor These five measure – traffic (RPK), yield,

capacity (ASK), unit cost and load factor are the most common measure of passenger airline performance.

Other measures such as cost efficiency, productivity and financial performance will be introduced in the relevant chapters.

Question: how to measures cargo air transportation?

Traffic Peaks and ValleysTraffic Peaks and Valleys

The idea is all transportation modes must The idea is all transportation modes must operate during the traffic peaks and valleys operate during the traffic peaks and valleys in order to meet the public needin order to meet the public need

Airline load factors are seasonalAirline load factors are seasonal Daily and hourly load factors fluctuate even Daily and hourly load factors fluctuate even

moremore Thus, airliner must make sure thereThus, airliner must make sure there

are sufficient flights during peak are sufficient flights during peak

hourshours

But sometimes, airline has to provide But sometimes, airline has to provide positioning flights to cater the load for positioning flights to cater the load for peak hourspeak hours

Positioning flights: Positioning flights: Aircraft has to flown Aircraft has to flown virtually empty from one city to another virtually empty from one city to another late at night or early in the morning to late at night or early in the morning to have the plane ready to meet rush-hour have the plane ready to meet rush-hour demand.demand.

Traffic Peaks and ValleysTraffic Peaks and Valleys

Capacity vs. DemandCapacity vs. Demand

Capacity is ability-What can airliner offer?Capacity is ability-What can airliner offer? While, demand is requirement-What is While, demand is requirement-What is

required from the airliner?required from the airliner? Demand for air transportation is Demand for air transportation is highly highly

cyclicalcyclical At micro level discretionary leisure traffic At micro level discretionary leisure traffic

picks up in the summer, so, airline enjoy picks up in the summer, so, airline enjoy higher load factor (seasonal)higher load factor (seasonal)

At macro level: stable vs. fluctuate At macro level: stable vs. fluctuate economic conditioneconomic condition

When the economy is stable and growingWhen the economy is stable and growing Consumer confidence is strongConsumer confidence is strong Demand growsDemand grows Load factor improveLoad factor improve

THUS, increase PROFITABILITY!THUS, increase PROFITABILITY! BUT…BUT… When economy faltersWhen economy falters

Unemployment increaseUnemployment increase Consumer confidence declinesConsumer confidence declines Individuals postpone discretionary travelIndividuals postpone discretionary travel

SO, PROFITS SUFFER!SO, PROFITS SUFFER!


Airline cannot fine-tune capacity to match Airline cannot fine-tune capacity to match demand-Why?demand-Why?

Aircraft itself inflexibleAircraft itself inflexible If 757 equipped with 160 seats, that seats If 757 equipped with 160 seats, that seats

supply on particular schedulesupply on particular schedule Can neither be shrunk nor expandedCan neither be shrunk nor expanded

Total number of flights offered by airline Total number of flights offered by airline on a given day variedon a given day varied


Depends on passenger demandDepends on passenger demand Weekdays vs. weekendsWeekdays vs. weekends Ordinary days vs. HolidaysOrdinary days vs. Holidays

BUT… other factors limit airline’s capacity BUT… other factors limit airline’s capacity to adjust daily seats to daily trafficto adjust daily seats to daily traffic Fix frequency of flight for certain route-to avoid Fix frequency of flight for certain route-to avoid

cancellationcancellation The day of week patter can’t usually vary in The day of week patter can’t usually vary in

precise and predictable mannerprecise and predictable manner


ANDAND Interrelation between two different routes Interrelation between two different routes

SO, flights seats usually UNIFORM and SO, flights seats usually UNIFORM and FIXEDFIXED


Aircraft In fleetAirbus A320-200 78

Boeing 737-300 10

Airbus A330-300 7

Airbus A340-300 2

Airbus A350-900 0

Total 97

AirAsia fleet


Aircraft Total Orders

Airbus A330-200 3 4

Airbus A330-300 9 15Airbus A380-800 0 6Boeing 737-400 37 —

Boeing 737-800 6 55

Boeing 747-400 10 —

Boeing 777-200ER 17 —

Malaysia Airlines Passenger Fleet

Pricing in Relation to Load FactorPricing in Relation to Load Factor

The idea is to increase load factor- that is to The idea is to increase load factor- that is to gain profit minimize cost with a reasonable gain profit minimize cost with a reasonable price offer to the passengerprice offer to the passenger

One approach utilize is One approach utilize is off-peak pricing,off-peak pricing, that that is..is.. Introduce promotional fare to attract passengers Introduce promotional fare to attract passengers

during slack periodduring slack period Slack period: Passenger demand Slack period: Passenger demand

declines/insufficientdeclines/insufficient Just like Just like off-peak night coach serviceoff-peak night coach service, low , low

fare ticket price is offered by airlinerfare ticket price is offered by airliner

Advantages: Advantages: Empty seats on low-traffic days are filled with Empty seats on low-traffic days are filled with

passengers who are willing to travel on those passengers who are willing to travel on those less popular days-Why ? less popular days-Why ? CHEAPER!CHEAPER!

Additional passengers add very little to the Additional passengers add very little to the cots (primarily meal service), BUT they add a cots (primarily meal service), BUT they add a great deal to the flight’s total profit!great deal to the flight’s total profit!


Disadvantages:Disadvantages: The timing of the peak varied from route to The timing of the peak varied from route to

routeroute Peak hours to go to Sabah might differs from Peak hours to go to Sabah might differs from

peak hours to go to Johor Bharu- So, it is quite peak hours to go to Johor Bharu- So, it is quite impossible to have off-peak pricing to all routesimpossible to have off-peak pricing to all routes

It injects complications into the pricing It injects complications into the pricing structure- Fluctuation of ticket pricestructure- Fluctuation of ticket price


Therefore, it is essential for airliner to Therefore, it is essential for airliner to estimate the accuracy of its demand estimate the accuracy of its demand (particularly passenger demand) (particularly passenger demand)

AND strategize its marketing (especially AND strategize its marketing (especially airline passenger marketing)airline passenger marketing)


Understand how airliners set their price

• Airline pricing is a complex, unpredictable Airline pricing is a complex, unpredictable factors driven by words: competition, demand, factors driven by words: competition, demand, and inventoryand inventory

• Airlines then change their prices based on Airlines then change their prices based on demand. If a certain flight is selling well, the demand. If a certain flight is selling well, the price will increase.price will increase.

• If another flight has no takers, the fare will drop If another flight has no takers, the fare will drop until the airline gets some. As a result, fares and until the airline gets some. As a result, fares and inventory are changing every minute.inventory are changing every minute.


• Demand explains why it is cheaper to fly on a weekday Demand explains why it is cheaper to fly on a weekday (when fewer people are travelling), at odd hours, or on (when fewer people are travelling), at odd hours, or on days other than major holidays.days other than major holidays.

• Airlines change their prices based on competition. If one Airlines change their prices based on competition. If one airline flying the Kl-KK route drops its rates by 20%, airline flying the Kl-KK route drops its rates by 20%, chances are all airlines will drop their rates, so as not to chances are all airlines will drop their rates, so as not to give the discounter a competitive advantage.give the discounter a competitive advantage.

• To complicate matters, all this happens at the speed of To complicate matters, all this happens at the speed of light. Prices for a specific flight can go up or down.light. Prices for a specific flight can go up or down.

• Airlines also use inventory to their advantage to decrease the price


• Airlines also use inventory to their advantage to decrease the price.

• Inventory brings us back to demand. If there is low availability and high demand, you will have to wait for a cheap fare.

• Sometimes airlines will change their fares or open up more discounted seats, depending on how sales are going.

• Because of all these factors (competition, inventory and demand), it is essential to look around and comparison shop.

The tricks• Start your search as early as possible (at least a month

in advance). While better rates may come along, it'll give you a starting point.

• Use the same airline for both directions. Since round trips are about the same as one-way tickets, it doesn't make sense not to.

• Keep checking. It’s impossible for airlines to have full planes, so they may add discount seats without warning.

• Use your age. Ask about senior discounts or student discounts.

The tricks

• Fly on a mid-weekday. Fridays and Mondays are the most expensive times to fly. And weekends are obviously in high demand. Tuesdays and Wednesdays are the cheapest days to fly.

• Try a consolidator. A consolidator is an intermediary company that buys tickets at a discount directly from the airline.

www.lowestfare.comwww.cheapseats.comwww.cheaptickets.com

• Keep checking. It’s impossible for airlines to have full planes, so they may add discount seats without warning.

• Use your age. Ask about senior discounts or student discounts.

Important Key termsImportant Key terms

Load factorLoad factor Capacity vs demandCapacity vs demand Positioning FlightsPositioning Flights Airline pricingAirline pricing

Question 1

The significant of passenger movement in aviation industry is very essential to maximize profits and ticket pricing strategies.

a)Describe in your own words the significance of passenger load factors.(6 marks)

b) Discuss in your own words the reason load factor has a critical impact on the cost and quality of air transportation (4 marks)

c) If your airline has to provide positioning flights due to rush-hour demand, discuss how can you gain profit and minimize cost based on your capacity vs. demand? (5 marks)

Question 2

The idea is all transportation modes must operate during the traffic peaks and valleys in order to meet the public demand.

a)Describe in your own words the significance of positioning flight.(5 marks)

b) Discuss in your own words how to optimize profit during travel peak and valley. (5 marks)

c) Why do you think it is difficult to prepare and offer the proper aircraft and correct flight capacity to the passengers? (5 marks)

Question 3

Airline pricing is a complex, unpredictable factor driven by three competition, demand, and inventory that involve timing and demand.

a)Describe in your own words the significance of load factor in relation to airline pricing.(5 marks)

b) Describe your understanding on how airlines set their prices in the first place. (5 marks)

c) From your opinion, how is the best way to obtain a cheap plane ticket? (5 marks)

Quiz 21. List three (3) characteristic of

Oligopolistic Economy.2. One of the airline special economy

characteristic is Government Financial Assistance. In your word, explain how the government played as major roles in this industry.

3. List all type of forecasting 4. Explain judgemental method and list 5

question survey related to airline services

Bonus How much Tony Fernadez buy Air Asia?

aviation economics chapter 3 passenger movement:

Documents

passenger airline traffic

airline businessload

proportion of airline

minimum load factor

certain load factor

high load factor

breakeven load factor

load factorone