Oliver Wyman's annual Airline Economic Analysis uses a fascinating seat density tool to demonstrate how US-based airlines managed to post their best margins yet. The tool also underlines the essential question on airlines' performance: can airlines sustain the impressive margins posted this year?
The report, available
here for download, emphasizes the many ways that airlines have pursued higher margins. One of the key components of this year's margin bonanza has been a focus on seat density.
Seat density isn't just ripping out old seats and installing the dreaded "park bench" slim-line seats that allow for higher density of seats overall. It's about a plane configuration that works for each airline, and then a configuration that is tailored for specific routes within a schedule to ensure that the highest-value seats are always available for the highest-value customers. And then for everyone else, the capacity is matched so tightly that there are little to no empty seats.
In an industry where traditionally only a few seats actually represent profit, this design engineering is essential to improving overall margins.
Alongside this report, a seat density tool allows users to visualize the trade offs made when calculating ideal seat density for effective yield management. The tool, which is also available on the
download page, is quite fun and illuminating, as it allows for various factors to be compared as far as impact on the passenger's fare.
Characteristics that can be tweaked for fare comparison include:
- Seat configuration of first and economy class seats.
- The load factor, or what percentage of the seats are occupied.
- Stage length, or the distance of the leg in miles.
- Direct costs per block hour, or how much it costs to directly operate the plane itself per hour in gate-to-gate aircraft time.
- Indirect costs per block hour, or how much it costs to support the infrastructure and ground operation.
- Margin, or how much money the airline makes in gross profit.
By tweaking the various metrics, the complexity of successful airline operation becomes crystal clear. New technologies and updated aircraft allow for lower overall operating costs, and more seats allows airlines to spread operating costs across more people. Each of these factors is important, and this interactive tool allows a deeper understanding at the factors in play.
The report itself is a deep dive into the various components of successful airline management, and explores the underlying question of whether the systematic improvements in the airline industry signals a shift from a "risky to regular" business.
By analyzing the Cost per Available Seat Mile (CASM), the authors deliver a comprehensive analysis of the legacy vs low-cost carriers, including the the effect of relatively stable fuel prices this past year on the overall cost structure.
By looking at the CASM figures across the domestic airlines, the comparisons between airlines also show how different carriers are coping with their cost structures - and how each carrier has its own unique cost structure underpinning its operational decisions.
The report truly is exhaustive, even diving into the varied cost structures of specific aircraft. This sort of data is essential to operational excellence, as certain aircraft are better suited to particular routes. By understanding how the CASM plays out with different aircraft and routings, airlines can continuously improve their overall operational efficiency - and thus continue to enjoy the incremental growth in margins seen this past year.
The report can be downloaded here.
NB: Airplane window image courtesy Shutterstock.