Economic Analysis

Critical analysis of basic economic markers can be very revealing of an airline’s financial health. For this assignment, research an airline’s most-current financial data, analyze the data, and report your findings.

Most airlines are public companies (as compared to private companies) and, usually, public companies are required by securities regulators to make financial information available to the public. This gives students and other researchers open access to audited information via annual and other reports. This information is generally available from the airline’s website; look for “About Us” or “Investor Relations” links in your research. For U.S. companies, look for the most recent SEC Reports. An annual SEC report (called a 10K report) is an audited report containing all of the company’s financial data.

For this discussion, select a public airline, find its most current annual financial information, and look for some of the key terms discussed in Activity 5.1. Then, in an essay of 200–300 words, analyze the figures you found, noting trends and relationships. For example, you might find a company with high costs (CASM) and low fares (yield), resulting in a very high BLF (near 1.0). A high BLF will put pressure on marketing to keep seats filled. Another company might have PRASM less than CASM; meaning ancillary revenue (like baggage fees) will be very important to maintaining a profit.

Aviation Economic Terms 

Available Seat-Mile

One seat flown one mile (also called capacity available).
A 100-seat aircraft that flies a 100-mile flight produces 10,000 ASMs.

Total annual ASMs represent the airline’s total production or capacity. ASMs are what the airline produces; as an analogy, if shoe factories produce shoes, airlines produce ASMs.

Total annual ASMs are expressed in very large numbers, usually billions for a large airline or cargo carriers. 

Cargo carriers use a similar term: Available ton-miles. An available ton-mile (ATM) equates to a ton of carrying capacity multiplied by miles traveled.

RPM

Revenue Passenger-Mile

One paying passenger flown one mile (also called capacity used or traffic)
A 100-seat aircraft that flies a 100-mile flight with 90 people onboard produces 9,000 RPMs.

RPMs represent the amount of production the airline sells. RPMs are the airline’s “demand.”

Total annual RPMs are expressed in very large numbers, usually billions for a large airline or cargo carriers.

The cargo carriers’ term is RTM, or revenue ton-mile. The RTM equates to a ton of actual cargo multiplied by miles traveled.

LF

Load Factor

RPM divided by ASM (also called capacity utilization).
It’s simply the percent of the carrier’s seats that are filled.

Load factor can be thought of as capacity used (RPM) divided by capacity produced (ASM). 

Another associated term is “Breakeven” Load Factor (BLF). Breakeven Load Factor is the percentage of seats the airline has to fill to break even. It’s calculated by dividing CASM by Yield. (An airline that has a breakeven load factor above 1.0 will lose money even if they sell every seat on every flight unless they have ancillary sources of revenue other than passenger fares.)

Cutting capacity by halting some unpopular (low load factor) flights will usually result in an overall load factor increase. (Taking low-load factors out of the total will increase the average.)

Load Factor is expressed as a percentage.

RASM

Revenue per Available Seat-Mile

Operating (total) revenue divided by ASM (also called unit revenue)
It’s the amount of revenue the airline earns for each seat they produce.

Sometimes airlines report Passenger RASM (called PRASM), which is passenger revenue divided by ASM. This accounting term helps the company distinguish between passenger and cargo/ancillary economic trends. (PRASM can also be calculated as yield x load factor.)

RASM is expressed in cents.

CASM

Cost per Available Seat-Mile

Cost divided by ASM (considered the unit cost of production)
It’s the cost incurred to produce one unit of production and indicative of the production efficiency.

A sub-unit of CASM sometimes reported is “CASM Ex-Fuel.” Airlines often consider fuel expenses beyond their control, so they report CASM Ex-Fuel to identify trends in “controllable” expenses.

Consider the CASM – ASM relationship. If an airline increases capacity (ASM), total costs will also go up, so you would think CASM would stay about the same. However, fixed costs will be spread out among more ASMs and the result might be a slight reduction in CASM.

CASM is expressed in cents.

Yield

Yield

Passenger revenue divided by RPM

Yield equates to the average revenue per unit of demand (in other words, the average amount a passenger pays per mile flown). Yield and Load Factor usually vary inversely – if yield goes up, load factor usually goes down. (A better indication of an airline’s true revenue situation is PRASM which is the product of yield and load factor.)  

High yield means the airline is getting the most for their sold seats. However, yield says nothing about how many seats the airline sells, so yield, alone, tells nothing about the company’s profitability.

Yield is expressed in cents