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 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

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. 

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