1

Growth Airline Economic Analysis Oliver Wyman – January 2010 Bob Hazel, Aaron Taylor, Andrew Watterson

Introduction

Among the changes affecting growth airlines since last year,

three stand out:

First, the CASM gap between value carriers and network

carriers is the smallest we have seen over a six-year

period. However, when adjusted for stage-length and

aircraft type, value carriers still have a substantial cost

advantage.

Second, while nearly all carriers have reduced costs as a

result of fuel cost declines, CASMs ex-fuel have increased

for both network and value carriers from Q3 2008 to

Q3 2009.

Third, AirTran has solidified its cost leadership among

value carriers, while United has made the greatest

progress in reducing domestic costs among the network

carriers.

2

In this report, we cover the following topics:

A) Domestic unit cost and revenue comparisons for value versus

network carriers. Also, value and network carrier cost trends are

shown over time, providing insight into whether network

carriers are reducing their cost gap with value carriers, or

whether the gap is widening.

B) Cost comparisons for similar aircraft operated by different

carriers, including stage-length adjustments.

C) Latest developments in system-wide and spot fuel prices.

D) Cost comparisons between the smaller and larger

narrowbodies operated by selected value carriers.

E) Ranking of regional aircraft in terms of unit cost.

F) Cost comparisons between selected international carriers

showing differences between value and network carriers.

G) Ancillary revenue trends among network and value carriers

H) The changing composition of the U.S. market in terms of the

type of carriers providing air service, the fleet types used, and the

domestic versus international mix.

1. Carriers Included and Methodology

Five of the largest value carriers1 are included in this analysis, as

are the seven largest U.S. network carriers.

Our data sample—Value carriers (low-cost):

1. AirTran

2. Allegiant

3. JetBlue

1 Frontier requested confidential treatment in its 3Q 2009 filing; therefore it is not included in this year’s report which relies heavily on 3Q 2009 data.

3

4. Southwest

5. Spirit

Our data sample—Network carriers:

1. Alaska

2. American

3. Continental

4. Delta

5. Northwest

6. United

7. US Airways2

Most of the analysis is based on 3rd quarter 2009 data, which is

the most recent US DOT (Form 41) data available. DOT data was

used instead of SEC filings to permit comparisons of specific

equipment types and ensure that non-airline-related costs did

not dilute the specific focus on airline costs. Because unit costs

are rapidly changing, we have used data from a single quarter,

rather than a twelve-month period, supplemented with

additional historical perspective. For carriers outside the U.S., we

have used the most recent reporting period available on a

comparative basis.

Unless indicated otherwise, the costs provided are for mainline

domestic operations only. We have carefully removed the costs

associated with the carriers’ regional affiliates by correcting for

their transport-related costs; although, it is impossible to do so

with absolute precision.

2. Value versus Network Carrier RASM/CASM Comparison

Figure 1 shows the RASM and CASM comparison for network

versus value carriers for the third quarters of 2008 and 2009.

2 In making year-over-year comparisons for US Airways, the numbers presented for 2008 are based on the consolidated entity of US Airways and America West.

Figure 1. Comparison of RASM and CASM for Q3 2009/2008 (Excluding regional affiliates)

Our airline sample overall Average for network carriers (American, Delta,

Continental, Northwest, United, US Airways)

Average for value carriers (AirTran, Allegiant, JetBlue,

Southwest, Spirit)

12.512.0

10.9 10.910.4 10.1

10.9 11.1

14.6

11.4

13.5

12.0

0

2

4

6

8

10

12

14

16

RASM CASM RASM CASM RASM CASM RASM CASM RASM CASM RASM CASM

Cen

ts p

er A

SM

2008 2008 20082009 2009 2009

Labor Fuel Other

Our airline sample overall Average for network carriers (American, Delta,

Continental, Northwest, United, US Airways)

Average for value carriers (AirTran, Allegiant, JetBlue,

Southwest, Spirit)

12.512.0

10.9 10.910.4 10.1

10.9 11.1

14.6

11.4

13.5

12.0

0

2

4

6

8

10

12

14

16

RASM CASM RASM CASM RASM CASM RASM CASM RASM CASM RASM CASM

Cen

ts p

er A

SM

2008 2008 20082009 2009 2009

Labor Fuel OtherLaborLabor FuelFuel OtherOther

In the third quarter of 2009, the average CASM of our sample

airlines was 11.4¢, which was nearly 16 percent better than the

third quarter of 2008. For network carriers, the average CASM was

12.0¢, which was 19% better than the prior period. For value

carriers, the average CASM was 10.1¢, which was 7% better. From

Q3 2008 to Q3 2009, the network carrier CASM disadvantage to

the value carriers declined from 35% to 19%.

The airline groups also experienced RASM declines during this

period—although those declines were less than the declines in

CASM. The average RASM of our sample airlines was 10.9¢ in Q3

2009, which was 9.5% worse than in Q3 2008. For network

carriers, the average RASM was 11.1¢, which was 11% worse than

the prior period. For value carriers, the average RASM was 10.4¢,

which was 5% worse. From Q3 2008 to Q3 2009, the network

carrier RASM premium over the value carriers declined from 15%

to 7%.

4

Viewing the RASM and CASM changes together, we see that over

the one-year period the network carriers performed significantly

“less badly,” while the value carriers performed “somewhat

better.” For network carriers, this meant that the negative

margin between RASM and CASM narrowed from 14.5% to 7.3%.

For value carriers, the RASM/CASM margin increased from

breakeven to 2.7%.

Figure 2 shows the RASM/CASM margin for both groups over a

nearly 20-year period. From the earlier discussion around Figure

1, we know that the RASM/CASM gap between network and value

carriers narrowed significantly from Q3 2008 to Q3 2009. This

narrowing, however, may not be a long-term phenomenon.

Despite occasionally compressing near the peaks and valleys of

the airline business cycle, the gap does not appear to be

diminishing.

Figure 2. Historical RASM/CASM gap for all Network and Value carriers, 1991–Q3 2009 (Excluding regional affiliates)

-20%

-15%

-10%

-5%

0%

5%

10%

15%

1991 1993 1995 1997 1999 2001 2003 2005 2007 Q109 Q309

Network Value

Note: Carrier set differs from the 12 carriers in our study—for each year of the series, it includes all value and network carriers reporting under DOT Form 41.

5

3. Value versus Network Carrier CASM Comparison, Excluding Fuel

Given the volatility of fuel prices over the past several years, it is

important to look more closely at CASM changes excluding fuel

for the two carrier groups. Figure 3 shows network carrier CASM

with and without fuel since Q1 2007. CASM ex-fuel for the

network carriers increased 1.4% from Q3 2008 to Q3 2009 and has

been declining since a slight peak in Q4 2008. For the longer

period from Q1 2007 to Q3 2009, the average network carrier

CASM ex-fuel increased by less than 4% from 8.4¢ to 8.7¢.

Figure 3. Quarterly CASM and fuel CASM growth—sample Network carriers (Excluding regional affiliates)

0

2

4

6

8

10

12

14

16

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

Co

st p

er A

SM (c

ents

)

CASM–Excluding Fuel Fuel CASM

20092007 2008

0

2

4

6

8

10

12

14

16

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

Co

st p

er A

SM (c

ents

)

CASM–Excluding Fuel Fuel CASM

20092007 2008

For the value carriers, the corresponding CASM information is

shown in Figure 4. CASM ex-fuel for the value carriers has

increased by 7.8% from Q3 2008 to Q3 2009. This increase

accounts for a portion of the RASM/CASM gap reduction between

network and value carriers. For the longer period from Q1 2007 to

Q3 2009, the average value carrier CASM ex-fuel increased by 12%

from 6.3¢ to 7.0¢.

6

Figure 4. Quarterly CASM and fuel CASM growth—sample Value carriers (Excluding regional affiliates)

0

2

4

6

8

10

12

14

16

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

Co

st p

er A

SM (c

ents

)

20092007 2008

CASM–Excluding Fuel Fuel CASM

0

2

4

6

8

10

12

14

16

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

Co

st p

er A

SM (c

ents

)

20092007 2008

CASM–Excluding Fuel Fuel CASM

4. Long-term CASM Trends

Figure 5 shows the CASM differential between network and value

carriers broken into labor, fuel, and other for the 3rd quarter of

each year from 2003 through 2009.

Figure 5. Comparison of CASM between Network and Value carriers over time

∆Labor Fuel Other

2004 Q3 2005 Q3 2006 Q3 2007 Q3 2008 Q3 2009 Q3

Co

st p

er A

SM (c

ents

)

35% 31%29%32%28%30%37%38% 22% 26%

30% 31%

25% 31%

30%

30%31%27%

20%

19%

40%

40% 26%31%

1.8

3.7

2.92.62.9

2.9

38%

41%

38%

41%

40%

43%

43%

43%

38%

34%44%

39%8.0

11.0

7.6

10.4

8.8

11.4 11.8

10.1

12.0

10.9

8.9

14.6

0

2

4

6

8

10

12

14

16

Net

wor

k

Val

ue

Diff

.

Net

wor

k

Val

ue

Diff

.

Net

wor

k

Val

ue

Diff

.

Net

wor

k

Val

ue

Diff

.

Net

wor

k

Val

ue

Diff

.

Net

wor

k

Val

ue

Diff

.

∆∆Labor Fuel OtherLaborLabor FuelFuel OtherOther

2004 Q3 2005 Q3 2006 Q3 2007 Q3 2008 Q3 2009 Q3

Co

st p

er A

SM (c

ents

)

35% 31%29%32%28%30%37%38% 22% 26%

30% 31%

25% 31%

30%

30%31%27%

20%

19%

40%

40% 26%31%

1.8

3.7

2.92.62.9

2.9

38%

41%

38%

41%

40%

43%

43%

43%

38%

34%44%

39%8.0

11.0

7.6

10.4

8.8

11.4 11.8

10.1

12.0

10.9

8.9

14.6

0

2

4

6

8

10

12

14

16

Net

wor

k

Val

ue

Diff

.

Net

wor

k

Val

ue

Diff

.

Net

wor

k

Val

ue

Diff

.

Net

wor

k

Val

ue

Diff

.

Net

wor

k

Val

ue

Diff

.

Net

wor

k

Val

ue

Diff

.

2004 Q32004 Q3 2005 Q32005 Q3 2006 Q32006 Q3 2007 Q32007 Q3 2008 Q32008 Q3 2009 Q32009 Q3

Co

st p

er A

SM (c

ents

)

35% 31%29%32%28%30%37%38% 22% 26%

30% 31%

25% 31%

30%

30%31%27%

20%

19%

40%

40% 26%31%

1.8

3.7

2.92.62.9

2.9

38%

41%

38%

41%

40%

43%

43%

43%

38%

34%44%

39%8.0

11.0

7.6

10.4

8.8

11.4 11.8

10.1

12.0

10.9

8.9

14.6

0

2

4

6

8

10

12

14

16

Net

wor

k

Val

ue

Diff

.

Net

wor

k

Val

ue

Diff

.

Net

wor

k

Val

ue

Diff

.

Net

wor

k

Val

ue

Diff

.

Net

wor

k

Val

ue

Diff

.

Net

wor

k

Val

ue

Diff

.

*Frontier not included in 2008 and 2009 results; Allegiant and Spirit not included in results prior to 2008. Neither omission materially changes results.

7

8

Over the six-year period, the value carrier CASM has averaged

approximately 24% lower than that of the network carriers. As a

percentage, the cost gap has remained within a range of 22-27%

during five of the six measurement periods (Q3 of each year),

except for the most recent year when the cost gap declined to

16%. In other words, the network/value cost gap narrowed

considerably over the period Q3 2008/2009.

5. Individual Carrier CASMs and Recent Changes

Individual carrier results show significant CASM differences

between carriers, especially within the value carrier group.

Figure 6 shows the CASM for each value carrier in our sample for

Q3 2009 compared with Q3 2008. Of particular interest is the lack

of change in Southwest’s CASM over the period due in large part

to the loss of its fuel hedge benefit. Southwest’s large size means

that its results unfavorably impact the average value carrier

result. At the other extreme, Spirit’s CASM declined fully by

one-third over the period.

As measured by Q3 2009 CASM, Spirit ranks first with a CASM of

7.7¢, followed by Allegiant with a CASM of 8.3¢, AirTran with a

CASM of 9.1¢, JetBlue with a CASM of 10.0¢, and Southwest with a

CASM of 10.6¢. Note that Southwest’s position in the value carrier

rankings in Q3 2009 is the reverse of its position in Q2 2008, when

it had the lowest CASM. However, these are not stage-length

adjusted CASMs, and that adjustment will change the rankings.

Figure 6. Q3 2009/2008 CASM breakdown by airline—Value carriers (Excluding regional affiliates)

Spirit

2008 2009

Allegiant

2008 2009

AirTran

2008 2009

JetBlue

2008 2009

Southwest

2008 2009

11.6

7.7

11.5

8.3

11.6

9.1

10.810.0

10.6 10.6

0

5

10

15

Co

st p

er A

SM (c

ents

)

Labor Fuel Other

Spirit

2008 2009

Spirit

2008 2009

Allegiant

2008 2009

Allegiant

2008 2009

AirTran

2008 2009

AirTran

2008 2009

JetBlue

2008 2009

JetBlue

2008 2009

Southwest

2008 2009

Southwest

2008 2009

11.6

7.7

11.5

8.3

11.6

9.1

10.810.0

10.6 10.6

0

5

10

15

Co

st p

er A

SM (c

ents

)

Labor Fuel OtherLaborLabor FuelFuel OtherOther

Note: Allegiant 2008 Form 41 Data not available. Cost data derived from SEC 10Q report.

Most of the network carriers have substantially reduced their

CASM since Q3 2008. According to the Form 41 data, for example,

United, which reduced its CASM by 24 percent by lowering its

aircraft ownership and fuel costs, now has the second lowest

CASM for its domestic operation among the network carriers.

CASM reductions by the other network carriers range from 8% for

Delta (not combined with Northwest) to 30% for US Airways.

Figure 7 shows the CASM for each network airline in our sample

for the third quarter of 2009 compared with the third quarter of

2008.

9

Figure 7. Q3 2009/2008 CASM breakdown by airline—Network carriers (Excluding regional affiliates)

American

2008 2009

Northwest

2008 2009

Alaska

2008 2009

United

2008 2009

US Airways

2008 2009

Continental

2008 2009

Delta

2008 2009

12.7

10.6

14.6

11.1

16.5

11.5

14.4

11.6

13.1

12.0

14.0

12.5

13.8

16.9

0

2

4

6

8

10

12

14

16

18

Co

st p

er A

SM (c

ents

)

Labor Fuel Other

American

2008 2009

American

2008 2009

Northwest

2008 2009

Northwest

2008 2009

Alaska

2008 2009

Alaska

2008 2009

United

2008 2009

United

2008 2009

US Airways

2008 2009

US Airways

2008 2009

Continental

2008 2009

Continental

2008 2009

Delta

2008 2009

Delta

2008 2009

12.7

10.6

14.6

11.1

16.5

11.5

14.4

11.6

13.1

12.0

14.0

12.5

13.8

16.9

0

2

4

6

8

10

12

14

16

18

Co

st p

er A

SM (c

ents

)

Labor Fuel OtherLaborLabor FuelFuel OtherOther

6. Comparing CASM for Similar Aircraft Operated by Different Airlines

As the focus of this report is value carriers, we selected an

aircraft roughly comparable to Southwest’s most efficient

aircraft, the 737-700, for CASM analysis among different carriers.

For carriers that operate several aircraft types similar to the 737-

700, we chose the one closest in capacity to, but larger than,

Southwest’s. For example, United brackets Southwest’s 137-seat

737-700s with 120-seat A319s and 147-seat A320s. We chose the

A320.

In Figure 8, we set out the average stage-length for each of our

airline/aircraft combinations and their CASM at that stage-length.

Remember, these are costs for specific aircraft types and not for

the carriers’ total operations. A glance at the table shows that

AirTran’s 737-700 has the lowest unit costs, 23% lower than

JetBlue’s A320 despite JetBlue’s longer stage-length. The chart

also highlights the decline in CASM since Q3 2008 for many

carriers, with United having declined the most and Southwest

and JetBlue the least. 10

Figure 8. CASM per airlines for selected aircraft type at actual average stage-length Q3 2009 and Q3 2008 (Excluding regional affiliates)

6.5

7.78.3 8.4 8.8 9.3

9.7 9.8 9.8 9.9

11.512.2

0

2

4

6

8

10

12

14

16

AirTran Spirit Allegiant JetBlue Southwest United American Continental Delta US Airways Northwest Alaska

Aircraft

Stage length

737-700/LR

1,057

A320

1,247

A320

967

737-700/LR

691

737-800

1,302

737-800

1,116

A320

1,215

737-800

1,243

A320

1,057

A319

946

MD80

856

3Q 2008 CASM

737-700/LR

842

Co

st p

er A

SM (c

ents

)

3Q 2009 CASM

6.5

7.78.3 8.4 8.8 9.3

9.7 9.8 9.8 9.9

11.512.2

0

2

4

6

8

10

12

14

16

AirTran Spirit Allegiant JetBlue Southwest United American Continental Delta US Airways Northwest Alaska

Aircraft

Stage length

737-700/LR

1,057

A320

1,247

A320

967

737-700/LR

691

737-800

1,302

737-800

1,116

A320

1,215

737-800

1,243

A320

1,057

A319

946

MD80

856

3Q 2008 CASM

737-700/LR

842

Co

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SM (c

ents

)

3Q 2009 CASM

7. Adjusting for Stage-length

Since length of flight strongly affects unit costs—the longer the

flight, the lower the unit costs—it makes little sense to compare

unit costs without relating them to average stage-length.

As shown in Figure 9, Southwest has the highest CASM among

value carriers operating comparable aircraft, but it also has a

significantly shorter average stage-length (691 miles) than any of

the other carriers. AirTran’s average 737-700 stage-length is 53%

longer than Southwest’s, while JetBlue’s is 80% longer.

To help visualize the cost and stage-length differences among the

carriers, in Figure 9 we have plotted unit costs (Y axis) on a chart

against average stage-length (X axis) for our group of

carrier/aircraft combinations. To facilitate comparisons, we show

a distance-related cost curve for Southwest, and another one for

American. By visualizing additional curves drawn above and

below the Southwest and American curves, it is apparent that

Southwest’s CASM turns out to be very much in line with

Allegiant's and Spirit's. AirTran has lower costs, while JetBlue and

the network carriers have much higher costs. It is also apparent

11

that the value carriers, with the exception of JetBlue, generally

operate these narrowbody aircraft at shorter average stage-

lengths than the network carriers. Turning to the network

carriers, all have higher CASM than the value airlines when

adjusted for stage-length, except United which falls below the

other network carriers and on the same cost curve as JetBlue.

Figure 9. CASM per airlines for selected aircraft type plotted against average stage-length Q3 2009

Stage Length (miles)

Alaska 737-700/LR

Northwest A320

US Airways A320

Delta 737-800Continental 737-800

American737-800

UnitedA320

JetBlue A320

AirTran737-700/LR

SpiritA319

Southwest737-700/LR

Allegiant MD80

6

7

8

9

10

11

12

13

600 800 1000 1200 1400 1600 1800

Co

st p

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SM (c

ents

)

Stage Length (miles)

Alaska 737-700/LR

Northwest A320

US Airways A320

Delta 737-800Continental 737-800

American737-800

UnitedA320

JetBlue A320

AirTran737-700/LR

SpiritA319

Southwest737-700/LR

Allegiant MD80

6

7

8

9

10

11

12

13

600 800 1000 1200 1400 1600 1800

Co

st p

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SM (c

ents

)

Using an accepted stage-length adjustment method, we

recomputed the 2009 Q3 CASM for each carrier operating the

comparable aircraft based on a standardized stage-length of 1,000

miles. Figure 10 shows the results, which are useful in

understanding which carrier runs a more efficient operation.

12

Figure 10. Q3 2009 CASM at 1,000-mile stage-length for selected aircraft

6.6

7.6 7.8 7.9

9.0 9.2

10.110.5 10.6 10.6

11.5 11.7

0

2

4

6

8

10

12

AirTran Spirit Southwest Allegiant JetBlue United American Delta US Airways Continental Alaska Northwest

Co

st p

er A

SM (c

ents

)

6.6

7.6 7.8 7.9

9.0 9.2

10.110.5 10.6 10.6

11.5 11.7

0

2

4

6

8

10

12

AirTran Spirit Southwest Allegiant JetBlue United American Delta US Airways Continental Alaska Northwest

Co

st p

er A

SM (c

ents

)

As you can see in Figure 10, AirTran (6.6¢/ASM) is the low-cost

leader at stage-lengths of 1,000 miles. Spirit (7.6¢) is in second

place, closely followed by Southwest (7.8¢) and Allegiant (7.9¢).

JetBlue (9.0¢) has the highest CASM of the value carriers, 36%

higher than AirTran and only 2 percent below United. The carrier

with the highest CASM is Northwest at 11.7¢, which is 77% higher

than AirTran. Other network carriers American, Delta, US

Airways, and Continental are in line with each other and have

CASM differentials of no more than 5%.

Although the full cost benefits of the Delta/Northwest merger will

not be realized for quite some time, we can check on progress

based on Q3 2009 data. For that period, Delta’s stage-length

adjusted CASM of 10.5¢ is 35% higher than Southwest (and also

59% higher than AirTran). Therefore, even assuming that the

combined carrier is able to reduce the separately reported

Northwest A320 CASM of 11.7¢ (50% higher than Southwest), a

large cost gap remains between Delta’s CASM and Southwest

when the two carriers are viewed on an apples-to-apples basis.

13

8. Fuel Prices and Costs

Since the peak in July 2008 of approximately $3.80 per gallon, fuel

prices have fallen dramatically. Figure 11 shows the decline in

average fuel prices for our carrier/aircraft combinations between

Q3 2008 and Q3 2009. The declines range from 47-59% for most

carriers except for: Southwest, which experienced the smallest

decline in fuel prices of 17%; Delta, which experienced a 33%

decline; and JetBlue, which experienced a 40% decline.

Last year, we observed that it was unlikely that Southwest, or any

other carrier, could sustain a substantial advantage in fuel cost

over the long term. The table shows that the year-over-year fuel

price decline for each of our carriers. Southwest's fuel cost

declined by only 17 percent, the least of any carrier listed. As a

result, Southwest's historic fuel cost advantage has been

completely eliminated. In Q3 2008, for example, Southwest

enjoyed a fuel cost advantage of $1.04 per gallon over AirTran,

while in Q3 2009, AirTran has a fuel cost advantage of $.21 over

Southwest.

Figure 11. Average fuel price per gallon Q3 2009 vs. Q3 2008 & Q3 2007

Airline

DeltaSouthwestJetBlueUnitedSpiritAirTranNorthwestContinentalAlaskaAllegiantUS AirwaysAmerican

Aircraft

737-800737-700/LRA320A320A319737-700/LRA320737-800737-800MD80A320737-800

Q3 2007

$2.26 $1.70 $2.13 $2.19 $2.19 $2.14 $2.10 $2.13 $2.20 $2.32 $2.17 $2.12

Q3 2008

$3.50 $2.61 $3.42 $4.19 $4.02 $3.65 $4.69 $3.67 $3.71 $3.44 $3.63 $3.46

Q3 2009

$2.34 $2.16 $2.07 $2.03 $1.98 $1.95 $1.94 $1.89 $1.88 $1.87 $1.80 $1.79

Increase2009 over 2008

-33%-17%-40%-51%-51%-47%-59%-49%-49%-46%-51%-48%

Airline

DeltaSouthwestJetBlueUnitedSpiritAirTranNorthwestContinentalAlaskaAllegiantUS AirwaysAmerican

Aircraft

737-800737-700/LRA320A320A319737-700/LRA320737-800737-800MD80A320737-800

Q3 2007

$2.26 $1.70 $2.13 $2.19 $2.19 $2.14 $2.10 $2.13 $2.20 $2.32 $2.17 $2.12

Q3 2008

$3.50 $2.61 $3.42 $4.19 $4.02 $3.65 $4.69 $3.67 $3.71 $3.44 $3.63 $3.46

Q3 2009

$2.34 $2.16 $2.07 $2.03 $1.98 $1.95 $1.94 $1.89 $1.88 $1.87 $1.80 $1.79

Increase2009 over 2008

-33%-17%-40%-51%-51%-47%-59%-49%-49%-46%-51%-48%

Increase2009 over 2008

-33%-17%-40%-51%-51%-47%-59%-49%-49%-46%-51%-48%

14

Apart from the dramatic decline in fuel prices, one other

important change from last year is the drop in fuel price

volatility. As depicted in the following figure, the system average

fuel price has been reasonably flat for the past seven months,

and as a result, the spot price is now tracking the system average

price.

Figure 12. System average fuel price (U.S. carriers) and fuel spot price January 2001 through December 2009

0

50

100

150

200

250

300

350

400

450

Q1'01

Q3'01

Q1'02

Q3'02

Q1'03

Q3'03

Q1'04

Q3'04

Q1'05

Q3'05

Q1'06

Q3'06

Q1'07

Q3'07

Jan'08

Mar'08

May'08

Jul'08

Sep'08

Nov'08

Jan'09

Mar'09

May'09

Jul'09

Sep'09

Nov'09

System average fuel price

Fuel spot price

Price Stabilization

Carriers benefit from future buys. Carriers penalized

by future buys.

Cen

ts p

er G

allo

n

2001 2002 2003 2004 2005 2006 2007 2008 2009

0

50

100

150

200

250

300

350

400

450

Q1'01

Q3'01

Q1'02

Q3'02

Q1'03

Q3'03

Q1'04

Q3'04

Q1'05

Q3'05

Q1'06

Q3'06

Q1'07

Q3'07

Jan'08

Mar'08

May'08

Jul'08

Sep'08

Nov'08

Jan'09

Mar'09

May'09

Jul'09

Sep'09

Nov'09

System average fuel price

Fuel spot price

Price Stabilization

Carriers benefit from future buys. Carriers penalized

by future buys.

Cen

ts p

er G

allo

n

2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Air Transport Association.

9. CASMs for Smaller Aircraft In our airline sample, numerous carriers operate smaller aircraft.

Two value carriers in our sample, AirTran and JetBlue, buck the

conventional wisdom for value carriers and operate two different

narrowbody aircraft. Figure 13 illustrates how the smaller aircraft

compare in efficiency with the larger aircraft.

AirTran’s 737-700 is the champion of our overall study and of this

comparison with the lowest unit costs; its smaller 717 has the

second lowest costs. JetBlue’s much larger 150-seat A320 ranks

third on a unit basis. Last year, JetBlue’s A320 costs just about

matched AirTran’s 117-seat 717, but a gap has developed

between the two. Not surprisingly, JetBlue’s ERJ-190 has higher

costs than the A320, given its smaller seat count.

15

Figure 13. CASM plotted against average stage-length by aircraft type, actual fuel prices Q3 2009

5

6

7

8

9

10

11

12

13

14

400 600 800 1,000 1,200 1,400 1,600 1,800

B6 A320 B6 ERJ 190 FL 717-200 FL 737-700

Co

st p

er A

SM (c

ents

)

Stage length in miles

5

6

7

8

9

10

11

12

13

14

400 600 800 1,000 1,200 1,400 1,600 1,800

B6 A320 B6 ERJ 190 FL 717-200 FL 737-700

Co

st p

er A

SM (c

ents

)

Stage length in miles

The smaller jets operated by the regional carriers, ranging in size

from EMB 135s to ERJ 190s, sometimes complement and

sometimes compete with other aircraft operated by network and

value airlines. How do those aircraft compare in terms of unit

costs? Figure 14 depicts the CASMs for specific aircraft operated

by specific airlines.

Figure 14. Regional Carrier CASM plotted against average stage-length using actual fuel prices Q3 2009

1.3 2.2 2.4 2.7 2.9 3.0 3.6 3.6 4.0 4.5 4.6 4.8 6.38.6

1.3 1.1 1.7 1.8 1.6 0.92.5 1.2 0.3

1.7 1.4 2.4

3.6

3.2

1.9

5.82.0 1.6

3.5 3.4

3.8

1.9 2.1

6.34.0 2.0

1.1

5.9

0.1

4.0

1.4 1.4

4.03.3

0.1

4.8

5.2

1.70.0

10.0

0.24.6

13.0

7.5 7.4

12.010.6 9.8

6.8 6.6

17.215.2

10.9 11.0

27.7

0

5

10

15

20

25

30

SkyWest Comair SkyWest GoJet JetBlue AAEagle Pinnacle ASA ExpressJet Comair AAEagle SkyWest Republic Comair

Co

st p

er A

SM (c

ents

)

Aircraft

Stage Length

CRJ 900 CRJ 700CRJ700 CRJ 200 EMB 145 CRJ 200CRJ 700ERJ 190CRJ 900 EMB 145CRJ 700

834 697 535 487557 431490681692 423577

CRJ 700

592

CRJ 200

387

ERJ 170

540

Direct CASM2

Ownership CASM3

Indirect CASM

Fuel CASM

1.3 2.2 2.4 2.7 2.9 3.0 3.6 3.6 4.0 4.5 4.6 4.8 6.38.6

1.3 1.1 1.7 1.8 1.6 0.92.5 1.2 0.3

1.7 1.4 2.4

3.6

3.2

1.9

5.82.0 1.6

3.5 3.4

3.8

1.9 2.1

6.34.0 2.0

1.1

5.9

0.1

4.0

1.4 1.4

4.03.3

0.1

4.8

5.2

1.70.0

10.0

0.24.6

13.0

7.5 7.4

12.010.6 9.8

6.8 6.6

17.215.2

10.9 11.0

27.7

0

5

10

15

20

25

30

SkyWest Comair SkyWest GoJet JetBlue AAEagle Pinnacle ASA ExpressJet Comair AAEagle SkyWest Republic Comair

Co

st p

er A

SM (c

ents

)

Aircraft

Stage Length

CRJ 900 CRJ 700CRJ700 CRJ 200 EMB 145 CRJ 200CRJ 700ERJ 190CRJ 900 EMB 145CRJ 700

834 697 535 487557 431490681692 423577

CRJ 700

592

CRJ 200

387

ERJ 170

540

Direct CASM2

Ownership CASM3

Indirect CASM

Fuel CASM

1 Fuel cost allocation may differ significantly between individual airlines based on contractual setup with parent company/network carrier 2 Includes direct costs except Aircraft Ownership and Fuel & Oil costs 3 Includes Rent and Aircraft Depreciation & Amortization

16

17

Because regional carriers have different expense payment

arrangements in their Capacity Purchase Agreements with their

mainline partners, a more nuanced view of CASM is needed to

compare performance. In Figure 14 we have grouped the costs

into four buckets: Indirect costs, Fuel, Aircraft Ownership, and

Direct Costs (ex Fuel and Aircraft Ownership). The last bucket

includes cost items which are universally paid by the regional

airline and therefore represent the best measure of comparison.

Using that measure, the low-cost champion is the Skywest CRJ

900 with a Direct CASM of 1.3¢ per ASM, while its competitor

Comair reported a Direct CASM of 2.2¢ for the same aircraft (but

shorter stage-length). JetBlue’s slightly larger capacity ERJ-190 has

a Direct CASM of 2.9¢, 30% higher than the Comair aircraft. Notice

also the range of Direct CASMs for the four operators of the

CRJ700: Skywest 2.4¢, GoJet 2.7¢, AAEagle 3.0¢, ASA 3.6¢ and

Comair 4.5¢. Republic’s similarly sized ERJ 170 has a Direct CASM

of 6.3¢, 40% higher than the highest-cost CRJ 700. For the smaller

RJs (EMB 145 and CRJ 200) the efficiency of the Embraer or

Bombardier model depends on the operator. For the large RJs, the

more spacious Embraer models have universally higher operating

costs.

10. Europe, Asia, and South America Value Versus Network Carrier CASK Comparison

In Figure 15, CASKs (kilometers instead of miles) are provided on a

stage-length adjusted basis for selected European, Asian, and

South American carriers. Because of differences in time period

(e.g., fiscal years that end on different months) and other factors,

this CASK information is not directly comparable to that provided

for U.S. carriers. The cost comparison (expressed in U.S. Dollars),

however, is useful in showing the relative differences in CASK

between the carriers, especially since the results have been stage-

length adjusted. Full fiscal year 2008 data is used for all but two

of the carriers listed because of data issues with other-than

annual cost reports. The two exceptions are Ryanair and easyJet,

where we have used cost data for the six-month period ending

March 31, 2009 to make the comparison as close to “apples-to-

apples” as possible for these two competitors.

Despite the data limitations, we can see that the phenomenon of

value carriers having lower unit costs than their network carrier

rivals is global. CASM gap differences across regions reflect the

same variability that we see with U.S. carriers.

Figure 15. International carriers stage-length adjusted cost per ASK FY 2007 Cents per ASK, stage-length adjusted to 1,069 km (1,000 miles)

7.4 7.68.8

11.8

5.36.3

9.3

15.7

22.0

4.1

8.2

10.6

17.4

0.00

5.00

10.00

15.00

20.00

25.00

Gol Copa TAM Lan Ryanair easyJet airberlin BritishAirways

Lufthansa Airasia VirginBlue

Malaysian SingaporeAirlines

Cen

ts p

er A

SK

Latin America Europe Asia

7.4 7.68.8

11.8

5.36.3

9.3

15.7

22.0

4.1

8.2

10.6

17.4

0.00

5.00

10.00

15.00

20.00

25.00

Gol Copa TAM Lan Ryanair easyJet airberlin BritishAirways

Lufthansa Airasia VirginBlue

Malaysian SingaporeAirlines

Cen

ts p

er A

SK

Latin America Europe Asia

Note: RyanAir and easyJet figures are from 10/1/2008 through 3/31/2009. Average exchange rates for this period: 1.31347 USD / Euro, 1.54958 USD / GBP.

11. Baggage and Cancellation Fees Over the past several years, airlines have captured increasing

amounts of revenue for non-ticket charges such as baggage, buy-

on-board meals, in-flight entertainment, reservations, and

change fees; some of which are not included in DOT-reported

average airfares or passenger RASM. Figure 16 focuses on two of

these categories—baggage fees and cancellation fees—to show

the dramatic growth in both categories as well as the basic

differences in approach by the two carrier groups. Since Q3 2006,

the much publicized increase in baggage fees by the network

18

carriers is evident. Value carriers waited longer to apply those

fees, however, and with Southwest and JetBlue still not charging

for the first checked bag, they are collecting less revenue on

average.3

With regard to cancellation fees, the chart tells a different story

as the network carriers have continued to increase this revenue

source, while the value carriers have shunned it, viewing it as a

key product differentiator. As both network and value carriers are

putting more emphasis on creating and expanding their ancillary

offerings, the non-ticket revenue category is likely to continue to

grow.

Figure 16. Baggage and cancellation fees as a percentage of total operating revenue—Sample value and network carriers (Excluding regional affiliates)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

Excess Baggage - Value Cancellation Fees - ValueExcess Baggage - Network Cancellation Fees - Network

2006 2007 2008 2009

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

Excess Baggage - Value Cancellation Fees - ValueExcess Baggage - Network Cancellation Fees - Network

2006 2007 2008 2009

12. Changing Composition of the U.S. Market

During much of this decade, value carriers and regional carriers

experienced strong growth. Even as network carriers reduced

their mainline operations, regional carriers filled in. In last year’s

report we noted that network carriers had reduced domestic

capacity in 2008, while value and regional carriers kept their

capacity flat or had a slight increase.

19

3 The increase in excess baggage fees from the value carriers is the result of a DOT directive issued in 1Q 2009 clarifying the categorization of fee revenue.

What has happened more recently? As shown in Figure 17, since

January 2008 network carriers have continued to shrink domestic

capacity, while regional airlines and value carriers have

experienced more modest reductions. During 2009, domestic

network mainline ASMs declined by 9.2 percent, regional ASMs

by 5.5 percent, and value airline ASMs by 3.9 percent. Because

value airlines reduced capacity less than the mainline carriers,

they continued to gain capacity share even during these difficult

times.

Figure 17. Change in scheduled domestic U.S. ASMs Billions of seat miles

0

5

10

15

20

25

30

35

40

Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan

Network Regional Value

- 9.2% yoy

- 3.9% yoy

- 5.5% yoy

- 7.5% yoy

- 0.1% yoy

2.5% yoy

2008 2009 2010

0

5

10

15

20

25

30

35

40

Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan

Network Regional Value

- 9.2% yoy

- 3.9% yoy

- 5.5% yoy

- 7.5% yoy

- 0.1% yoy

2.5% yoy

2008 2009 2010

Another perspective on the changing composition of the U.S.

market is provided by the changing size and mix of the active

commercial airline fleet. Figure 18 shows that the number of

active aircraft used in domestic service shrank by 3.7 percent.

The only aircraft category which grew between Q3 2008 and Q3

2009 is the large regional jet, with a 21.1% increase in units during

the period. Looking back to Q3 2007, it is still the only category to

show unit growth except for the turboprop category. The number

of widebodies, narrowbodies, and small regional jets used in

domestic service all declined.

20

Figure 18. Distribution of U.S. carriers' domestic aircraft service 2007–2009 Aircraft operated during period

223 296 242

1,101 1,052 1,023

373 418 506

2,987 2,957 2,796

138 126103

4,822 4,849 4,670

0

1,000

2,000

3,000

4,000

5,000

Q3 07 Q3 08 Q3 09

Turbo

Small RJ

Large RJ

Narrowbody

Widebody

21.1%

-2.8%

-18.2%

-5.4%

% change2008-2009

-18.3%

-3.7%

223 296 242

1,101 1,052 1,023

373 418 506

2,987 2,957 2,796

138 126103

4,822 4,849 4,670

0

1,000

2,000

3,000

4,000

5,000

Q3 07 Q3 08 Q3 09

Turbo

Small RJ

Large RJ

Narrowbody

Widebody

21.1%

-2.8%

-18.2%

-5.4%

% change2008-2009

-18.3%

-3.7%

21.1%

-2.8%

-18.2%

-5.4%

% change2008-2009

-18.3%

-3.7%

While Figure 17 shows a decline of 5.5% year-over-year in

domestic ASM’s flown by regional jets, Figure 18 shows no

decline in the overall number of regional jets, but a change in mix

to a larger average gauge. This shows the changing needs of

network carriers and hints at the stress being placing on regional

carriers as they fly fewer seat miles per aircraft, thereby reducing

utilization, which is an important profit driver in Capacity

Purchase Agreements.

13. International versus Domestic Portion of U.S. Market

U.S. mainline carriers have continued to look overseas for

revenue opportunities, with their domestic operations

contributing less and less to their system revenue. As shown in

Figure 19, the long-term network carrier shift towards

international service is clear as the share of system revenue

contributed by domestic operations dropped by 13 points, from

72% to 59% between 2003 and 2009. At this rate, U.S. network

carriers will be generating more than half their revenue from

international markets in less than 5 years.

21

Figure 19. Source of all network carrier revenue operating revenue, mainline only

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

Domestic Atlantic Latin Pacific2003 2004 2005 2006 2007 2008 2009

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

Domestic Atlantic Latin Pacific2003 2004 2005 2006 2007 2008 2009

With overseas markets, especially the Atlantic suffering from

overcapacity and declining yields, network carriers have

rediscovered the benefits of the domestic markets in the short

term. But there is little reason to believe that this represents a

real break from the longer-term trend in which network carriers

continue to cede an increasing portion of the domestic market to

the value airlines.

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