SYS-461 Alaska Airlines Operating costs and Productivity

Daric Megersa

Airline Business Model

• Is an airline based in the Seattle suburb of SeaTac, Washington

• Major, low-fare U.S. carrier

• Seventh-largest U.S. carrier

• Founded: 1932, in Anchorage, Alaska

• Hubs: Seattle (main hub); Anchorage, Alaska; Los Angeles; Portland, Ore.

Term Definitions

• RPMs = revenue passenger miles – ∑(number of passengers per flight i)(distance flown by flight i)

• ASMs = available seat miles – ∑(number of seats per flight i)(distance flown by flight i)

• RASM = revenue per available seat mile or unit revenue – (total revenue)/ASM

• CASM = cost per available seat mile or unit cost – (total operating expenses)/ASM

• Yield = average fare paid per passenger per mile – (passenger airfare revenue)/RPM

• PRASM = passenger revenue per available seat mile or passenger unit revenue – (passenger revenue)/ASM

Term Definitions

• Fuel Consumed = amount of fuel consumed over some time t – e.g., gallons/quarter, pounds/hour

• Fuel Costs per ASM = cost of fuel per available seat mile – (total fuel cost)/ASM

• Non-Fuel Costs per ASM = non-fuel cost per available seat mile – Wages, salaries, etc.

– Other rentals and landing fees

– Depreciation and amortization

– Maintenance materials and repairs

– Commissions, booking fees, credit card expense

– Aircraft rentals

– Food service

– Other operating expenses/special charges/grants

RPM, ASM and LF

0

10

20

30

40

50

60

70

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90

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0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

Load

Fac

tor

RP

M,A

SM a

nd

r

Year and Quarter

RPM

ASM

LF

RPM ASM and LF

Observations from Chart 1

– ASM is always greater than RPM (load factor is less than 100%); logical as the number of enplaned passengers cannot exceed the number of available seats.

– Seasonal correlation; business appears to improve during the months of April through September; logical as many people take vacations during this time period and students are available to travel.

– Load factor appears to improve steadily over time

Operating Expenses and Income chart

-200000

0

200000

400000

600000

800000

1000000

1200000

1400000

2006 2007 2008 2009 2010 2011 2012

$M

illio

ns

Year and Quarter

OP-REV, OP-Exp and Income

OP_REVENUES

OP_EXPENSES

INCOME_PRE_TAX

Observations from Chart2

– Total operating revenue minus total operating expenses = operating income (different parameter in data file). Income before taxes includes the following:

• Operating income

• Interest income, interest expense, interest capitalized and some other costs

• The trend shows that Alaska airlines has shown significant improvement in showing profitable quarters

• Alaska has shown some positive gains in income compared with the early years on the graph such as 2006-2008

RASM, CASM, Yield and PRASM

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

2006 2007 2008 2009 2010 2011 2012

$ p

er

ASM

(0

r R

PM

)

Year

RASM, CASM, Yield and PRASM

PRASM

Yiel/RPM

CASM

RASM

Observations from chart 3

• Cost per available seat mile CASM) tends to exceed revenue per available seat mile (RASM)

• The overall trend shows that the Yield per RPM has increased since 2006 which shows the increase in fares and the cost exceeding the revenue

• CASM > RASM

Fuel and Non-fuel related expenses

0

20000000

40000000

60000000

80000000

100000000

120000000

140000000

160000000

180000000

2006 2007 2008 2009 2010 2011 2012

Op

era

tin

g Ex

pe

.

Year

Operating Expence (fuel and nonfuel)

OP_EXPENSES

SDOMT_COST

SDOMT_GALLONS

Observations from chart4

• Overall, Non operating fuel expenses shows fluctuation

• However, fuel related cost which covers the large amount for airlines, has shown an increase starting from 2006

• fuel operating expenses continued to climb significantly increasing total operating expenses

Fuel Related Costs

0

0.5

1

1.5

2

2.5

3

3.5

4

0

0.01

0.02

0.03

0.04

0.05

0.06

0.07

2006 2007 2008 2009 2010 2011 2012

Fue

l pri

ce /

g

$p

er

ASM

Year

Fuel related costs /ASM

FuelOpEXp/ASM

NONFUELOpExp/ASM

Q3 fuel cost/g

Observation form that chart Non-fuel expenses per ASM tend to remain fairly stable; fuel operating expenses per ASM tend to continuously increase

• Effects of fuel prices

• Charts 3,4,5 have shown that the operating expenses, CASM and aircraft operating cost related with fuel prices shown increase through the years

• Airlines Finance

• Chart two indicated that Alaska Airlie's net income before related with operating expense and revenue has show an increased since 2006. This is an indication that the Alaska is in the making the right decisions to make improvements for profit maximization.

• Airline Network structure

• Increased load factor can result from use of smaller aircraft (less seats available for some given passenger demand) or reduction of number of flights