## May 6, 2010

### RASM, Seat load factor and %

RASM and what does it mean?

This is a continuation of my first post where I talked about CASM, ASM, and DOC.

RASM is the Revenue Available Seat Mile is the available Revenue (cents) over each available seat mile. In other words, RASM = CASM + Variable cost + Other expenses. In my previous post, I explained about CASM and how it's calculated. Unlike real life scenarios, in theory, it's a lil complicated to determine how much your RASM will be. Going back to the total ASM which was 26,180 and CASM of \$0.19, I will calculate what the RASM is.

RASM  =      Revenue (CASM + Variable cost + Other expenses)
Total Available Seat Mile

For instance, assuming that SWA revenue analyst forecast a that they want to achieve at least \$8,000 as total revenues (keep in mind that not all tickets will be purchased at the same price), therefore their RASM will be

RASM   =    \$8,000   = \$0.31
26,180

Note: The Seat-Load Factor plays an important role in the revenue recognition, however, in the event of a low factor due to unforeseen or unknown circumstances, the airline is like to default automatically into the usual increase of tickets for various tiers (Economy, Business and First Class). The \$8,000 is assuming a 100% load factor AND standard ticket pricing

Now that I've calculated the RASM to be \$0.31, to get what a standard ticket price will be is;

Revenue Available Seat Mile  x Distance of Travel

\$0.31 x 187miles = \$57.14.

.:  Revenue per seat is \$57.14 assuming a 100% Load Factor.

In addition, airlines are likely to maximize their revenue potential by last minute flyers who want something quick and fast. Some Airlines utilize what I call the Bucket System -  a system where fares (revenues) are split into tiers and monitored closely to maximize the greatest potential. Airlines are likely to split Revenues into buckets such as a) One week out, b) Three days out, c)Same day and last minute tickets. Tickets are more likely to increase to the day or hour of the scheduled flight approaches. Also, when they are split into buckets, a certain % is applied to each bucket. For instance

A. One week out has about 40 to 50 (%) of the Revenue Bucket. Assuming it's an average of 45%, that bucket must achieve at least 45% of \$8,000 (\$3,600 or more) in sales.This translates into 63 seats if tickets are sold for standard price of \$57.14

B. Three days out (quite crucial), has about 35% of sales (\$2,800 or more). There usually a small bump in price at this stage for about \$6 to \$20. Let's take an average of \$13, that's a ticket price of \$70.14. That's still a fair price, at this price, they have to sell 40 seats to make \$2,800.

Keep in mind at this stage, the airline has broken-even on it's \$5,000 cost which is very important and achieved a revenue of \$1,400.

C.  Same day and last-minute tickets take up the rest of 20% of \$8,000(\$1,600 or more). This is where the % of the cost to revenue is grater; the real revenue per mile is generated. Ticket prices can rise from \$80 to \$110 depending on the time (morning or evening), day of the week (weekday, weekends or holidays) etc of travel. Assuming that the airline decides to charge \$80, \$85, and \$90 for all these seats, at \$80, they only need to sell 20 seats, however, if they chose to sell in the order of 10, 6 and 4,

@ \$80, they will make \$800
@ \$85, they will make \$510
@ \$90, they will make \$360

This totals up to \$1,670 against \$1,600 although I will acknowledge that they sold up most of their seats. Their total seats include 63+40+20 = 123seats against 140 seats. That's a variance of 17seats empty (12%) unloaded which means that the airline achieved 88% load factor. Fortunately, these seats can be billed back or carried over to a later time (probably holidays, rush hour, etc) when tickets are astronomically expensive.

However, airlines may also use a one-type system where are all tickets are likely sold for same price. For instance, SWA may decide to sell tickets at a base price of \$65, if 123 tickets are sold, SWA breaks-even on the Revenue (\$8,000). If taking into average (\$76) bucket cost of all tickets, for123 seats, SWA makes \$9,404 as revenues, however, should it decide to stick to \$8,000, it will need to sell 105 seats, 18 seats less than the other type of system. What this means is that there is room for more potential revenues even up to the last minute of flight.

Seat-Load Factor and what it means

Seat load factor is the number of seats that an airline can sell over the number of seats available. It's often expressed in %. Also, another important term is the break-even seat-load factor; this is the number of seats that an airline has to sell given a standard ticket pricing, required to break-even of their their DOC, although, this break-even can be applied to Revenue. In addition, The load factor doesn't really express how profitable an airline is, however, it does say a lot about it's operational efficiency.

Seat-Load Factor =   Total number of seats sold
Total number of available seats

Calculating the load factor is simply determining what your variables are. Unfortunately, unless if an aircraft has sold out tickets, it's highly impossible to determine what you total seats sold is although you can track it, but it likely to decline as well due to consumer changes. Therefore, in my opinion, seat-load factor is calculated "after the fact" to determine it's load efficiency.

Going back to the example above, an 88% load factor we achieved was by calculating

Seat-Load Factor =   123   = 0.88, multiply by 100, it is 88%
140
However, reverse is the case if SWA wants to achieve a desired load factor, thus, making the number of seats unknown. This is calculated by reversing the equation;

Total number of seats  = Seat-Load factor  x Total number of seats

Assuming a 90% load factor, this will be;

Total number of seats = 90% x 140 = 126 seats.

## May 5, 2010

### Airline Economics - What is CASM, ASM, DOC, and how to calculate them

I like aviation; although I'm no actual pilot, however, I fly virtual (Simulator) airline on Microsoft Flight Simulator. I took an interesting, YET, educating class in Economics of Air Transportation at Embry Riddle Aeronautical University. A friend from Youngentrepreneur.com asked me how airlines calculated most of their numbers.This was a challenging question, although I was glad to explain some of the commonly used terms.

To the common passenger, this might seem unimportant (though it affects them in reality), however, this terms and figures are VERY IMPORTANT to airlines for revenue and income actualization. Most importantly, my buddy was interested in knowing how airlines calculated their Cost Available Seat Mile often called CASM.

CASM, as often called, is an aviation term expressed in cents, is the associated cost utilized to operate a single passenger seat per mile on a given trip. This is an "efficiency performance" metrics used to measure the route performance of an airline. More so, this number determines how airlines discern quickly if they are making profits on a trip or not. Generally, the lower the CASM, the more profitable (likely) and efficient the airline.

CASM   = Direct Operating Cost (DOC)
Available Seat Mile

As a standard calculation, you need several other variables in order to obtain its resulting figures. To calculate CASM, you must know what the;

A. Direct Operating Cost (DOC),

B. Available Seat Mile (ASM)

Direct Operating Cost: This is the cost directly associated in operating a particular flight. Many airlines calculates their DOC differently, although the numbers are more likely to be in the same range if its the same aircraft. Ina addition, the fixed components of the DOC never changes. Starting from the ground, prior to taking off, cruising, and then landing. Here are some of the important ones, they are;

• Depreciation, Insurance and Interest - Most likely to contribute about 5% of the cost.
• Fuel; the most contributing factor that accounts between 25% to 40% of the cost.
• Station and Ground Services; services vary but account for about 11% of the cost
• Flight and Cabin crew; accounts for about 10% to 14% of the cost
• Airframe and Power-plant  Maintenance - This accounts for about 7% -15%
Please keep in mind that the quoted % differ and is debatable.

Available Seat Mile (ASM): ASM is the entire number of seats for the entire trip in miles. ASM is expressed as a number, to get this number, you calculate;

ASM =  Total number of seats on aircraft    x    Distance of trip (Nautical Miles)

Example: Southwest Airline operates a Boeing 737-700 with a seating capacity of 140 passengers(pax) from Baltimore Washington International (KBWI) to LaGuardia Airport International (KLGA). The Total ASM is

ASM =  140 pax  x 187miles   = 26,180

.: Southwest has a total of 26, 180 miles on this particular aircraft for this trip.

For the purpose of simplicity, I'll assume that it supposedly cost SWA \$5,000 to operate this aircraft from BWI to LGA, therefore, given the calculation above; CASM  = Direct Operating Cost / Available Seat Miles, the CASM will be

CASM    =      \$5,000     =  \$0.19
26,180

Now that I know that the CASM for this trip is \$0.19, I will calculate the cost per ticket. Remember, the distance is 187miles, therefore, at 19cents per seat mile, the cost per seat is \$0.19 x 187miles = \$35.53.

What this number says is, it will cost SWA \$35.53 to operate one seat to New York LGA; this number is the same regardless of whether the airline has a 0 or 100% load factor, and or 0 or 100% revenue factor, the cost will ALWAYS remain the same.