Right-Sizing: The Right Move T in the Airline Business H C · 2019-09-18 · 3 3 6 6 9 12 11 25 15...
Transcript of Right-Sizing: The Right Move T in the Airline Business H C · 2019-09-18 · 3 3 6 6 9 12 11 25 15...
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George W. Hamlin
Hamlin Transportation Consulting
Fairfax, Virginia
Right-Sizing: The Right Move
in the Airline Business
December 11, 2012
Northwestern University
Icarus Society
HTCHTCTC 1
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Fundamental Airline Economics
Which is more important?
• Unit Costs
• Yields
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Two Ways to Make Money
COMMODITY:
Sell a large quantity at a low margin
DIFFERENTIATED PRODUCT:
Sell a small quantity at a high margin
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RASM CASM RASM CASM
MARGIN
Two Ways to Make Money:
Unit Profitability
COMMODITY
DIFFERENTIATED PRODUCT
MARGIN
¢/ASM
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In the Airline Business
The Love of Capacity
Is the Root of All Evil
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U.S. Airline Net Profits 1947-2010
Source: ATA Data
$(30,000)
$(25,000)
$(20,000)
$(15,000)
$(10,000)
$(5,000)
$-
$5,000
$10,000
$15,000
$20,000
$25,000 1
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U.S. Airline Profitability ($M)
Net Income
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U.S. Airline Net Profit: Regulated Era
Source: ATA Data
$(400)
$(200)
$-
$200
$400
$600
$800
$1,000
$1,200
$1,400 19
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U.S. Airline Profitability ($M)
Net Income
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What Caused the 1970 Losses?
8 Photo © George Hamlin
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One Thing that Caused the 1970 Losses
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1969197119731975197719791981198319851987198919911993199519971999200120032005200720092011
747 Deliveries
9 Source: The Airline Monitor, May 2012
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An Extraordinary Chunk of Capacity
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747 Deliveries as a Percent of Total
10 Source: The Airline Monitor, May 2012
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U.S. Airline Net Profit: Post-Deregulation
Source: ATA Data
-$30,000
-$25,000
-$20,000
-$15,000
-$10,000
-$5,000
$0
$5,000
$10,000
$15,000
$20,000
$25,0001
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U.S. Airline Profitability ($M)
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1980s Right-Sizing: Problem
12 Photo © George Hamlin
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1980s Right-Sizing: Solution
13 Photo © George Hamlin
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Long-Haul, 1980s-Style
Transatlantic Transpacific
14 Photos © George Hamlin
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Long-Haul, 1990s-Style
15 Photos © George Hamlin
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The 1990s: Heyday of the RJ
16 Photos © George Hamlin
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Long-Haul, 2000s-Style
17 Photos © George Hamlin
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The Intercontinental A319
18 Photo © George Hamlin
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And the First of Two Game-Changing
Aircraft is Now in Service
19 Photos © George Hamlin
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Once, Pricing was Fairly Uniform,
and was Available in Print
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In 1971, Fares were More Uniform
Market Class Fare Notes
NYC-LAX F 205.00$
Y 163.00$
YN 130.00$ One-stop
EX 142.00$ Except Fri/Sun; Saturday night
stay; 30 day max
Market Class Fare Notes
NYC-LON F 782.00$
Y 452.00$
YH 552.00$
T 412.00$ One-stop; turboprop
TH 502.00$ One-stop; turboprop
EX4 141.00$ 17-28 day; low season
EX5 191.00$ 17-28 day; high season
EX12 134.00$ 29-45 day; low season
EX13 164.00$ 29-45 day; high season
Source: July 1971 OAGs
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Preparing for the pricing challenge of
deregulation
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9% of United’s passengers
produce 41% of the revenue.
Source: Gerald Greenwald, Former United CEO, in a speech at The Washington, D.C. Aero Club May 27, 1999
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Effective Yield Management Can
Enhance Profitability
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CR7 B737
Pas
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pe
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ay
Sample Short-Haul Market: CR7 vs. B737 by Onboard Passenger Yield Band
> 50¢ 40¢ - 50¢ 30¢ - 40¢ 20¢ - 30¢ < 20¢
22.4¢ avg.
29.4¢ avg.
24 Source: Airline data
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Higher-Yield Passengers are More
Valuable than Lower-Yield Traffic
Yield Band 737-800 CRJ 700
% of Passengers % of Revenue % of Passengers % of Revenue
< 20¢ 51.6% 28.5% 34.1% 14.4%
20¢ - 30¢ 26.5% 28.9% 26.4% 22.7%
30¢ - 40¢ 12.7% 19.5% 19.7% 22.8%
40¢ - 50¢ 6.3% 12.7% 13.9% 21.2%
> 50¢ 3.0% 10.4% 6.0% 18.9%
Total 100.0% 100.0% 100.0% 100.0%
Avg Yield 0.224$ 0.294$
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Sometimes Less (Passengers) is
More (Higher Yield)
Type Passengers Yield
737-800 95 0.224$
CRJ 700 43 0.294$
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Direct Operating Cost by Type
$-
$0.0200
$0.0400
$0.0600
$0.0800
$0.1000
$0.1200
$0.1400
$0.1600
$0.1800
$0.2000
737-800 CRJ 700 CRJ 1/200
Direct Cost per ASM: 350 Miles(Stage Length Adjusted)
Cost per ASM
27 Source: The Airline Monitor, August 2012
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DOC Indexed to the 737
100%
113%
140%
0%
20%
40%
60%
80%
100%
120%
140%
160%
737-800 CRJ 700 CRJ 1/200
Direct Cost per ASM: 350 Miles Indexed to 737(Stage Length Adjusted)
Cost per ASM
28 Source: The Airline Monitor, August 2012
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CRJ 700, Margin Improvement
CRJ 1/200, FAIL
100%
113%
140%
100%
131% 131%
0%
20%
40%
60%
80%
100%
120%
140%
160%
737-800 CRJ 700 CRJ 1/200
Revnue & Cost per ASM: 350 Miles Indexed to 737
(Cost Stage Length Adjusted)
Cost per ASM Revenue per ASM
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All travelers are not
equal, from a
revenue perspective;
some should get left
behind
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Airline Economics 101
Frequency
Share of High-Yield Traffic
Greater Profitability
Higher Return on Investment
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Not Being Able to Right-Size Can
Limit Market Opportunities
Carrier 70/90 125 150 175
AA LIMITED NO YES YES
DL YES YES YES YES
UA YES YES YES YES
US YES YES YES YES
Size Category (Seats)
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At the Other End of the Size
Spectrum
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Body Count vs. Revenue
Class
Seats
Load
Factor
Pax
Yield
Rev/
ASM
Rev/
Mile
Prem
125 70% 88 $0.40 $0.28 $35.00
Econ 430 70% 301 $0.10 $0.07 $30.10
Total 555 70% 389 $0.168 $0.117 $65.10
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Body Count vs. Revenue
Class
Seats
Load
Factor
Pax
Yield
Rev/
ASM
Rev/
Mile
Prem
0 0% 0 $0.40 $0.00 $ 0.00
Econ 800 70% 560 $0.10 $0.07 $56.00
Total 800 70% 560 $0.10 $0.07 $56.00
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Body Count vs. Revenue
Class
Seats
Load
Factor
Pax
Yield
Rev/
ASM
Rev/
Mile
Econ
400 70% 280 $0.10 $0.07 $28.00
Econ 400 70% 280 $0.05 $0.035 $14.00
Total 800 70% 560 $0.075 $0.053 $42.00
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If it Were a Beer, it Might be Hard to
Sell… (Even a Kellogg Grad Might
Have a Difficult Time with This One)
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More Filling…Less Taste
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F/C/Y Y-Current Y-Realistic
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RASM Rev per Mile
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Very Large is Currently a Small Niche
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747, A380 Deliveries as a Percent of Total747 747 & A380
39 Source: The Airline Monitor, May 2012
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He who dies with the
most market share…
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He who dies with the
most market share…
Dies
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British Airways “New Strategic Model”
• More capital-efficient aircraft
• Improved mix of traffic
• Short-haul network structured to
maximize returns rather than feed
• Profitability, not size
Source: British Airways Presentation at Merrill Lynch Conference, June 8, 1999
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Wonder which one has the higher
average yield…
Lufthansa’s 747-8 Intercontinentals
have about the same number of
premium seats as on the airline’s
A380 fleet: eight first class and 80
business, compared to eight and 98
on the Airbus double-decker.
However, in LH service the A380 has
considerably more economy seats:
420 versus 298 on the 747-8.
Source: Airways, August 2012, page 19 43
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More Recently
Turkish Airlines said it’s close to
ordering 100 planes to provide short-
haul links from Istanbul while scrapping
plans to buy the biggest jumbo jets in
favor of more modestly sized wide-body
planes.
Source: Bloomberg November 28, 2012 “Turkish Air Seeks 100 Narrow-Body Jets After Ditching Jumbos
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A Key Consideration
“Our biggest problem is the capacity and
the frequency,” the [Turkish] CEO said.
“We want to go to higher frequencies.
The 777 is big enough.” Possible plans
include switching daily services to cities
including Chicago and Hong Kong to
double-daily, he said.
Source: Bloomberg November 28, 2012 “Turkish Air Seeks 100 Narrow-Body Jets After Ditching Jumbos
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Fundamental Airline Economics
Which is more important?
• Unit Costs
• Yields
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Fundamental Airline Economics
The Answer:
• Neither
• What is most important:
Maximizing the difference
between total revenues
and total costs.
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Critical Mass Size
Is Necessarily Better?
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Big is not necessarily better
49 Photo © George Hamlin
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Extremism in the Defense of Market
Share is No Virtue…
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Summary & Conclusions
• Appropriate frequency enhances
profits
• Utilize the right aircraft size for the
market
– Too large can reduce yields
– Too small can increase unit costs
– Right-sizing benefits are largely
independent of competitive response
• Don’t follow the herd; optimize carrier
profitability, not market share
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George W. Hamlin
Hamlin Transportation Consulting
Fairfax, Virginia
Right-Sizing: The Right Move
in the Airline Business
December 11, 2012
Northwestern University
Icarus Society
HTCHTCTC 52
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Go Cats!
Beat
Mississippi
State 53
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