Airline Ticket Prices Explained

Start with yield

Revenue yield is a terrific measurement to compare airlines, corporate travel programs, prices, cost structures, and traveler behavior. It’s widely known that two travelers on the same flight may have very different profit or loss profiles. The first passenger might generate 7¢ per mile, while the second spends over $1.00 per mile on the same flight. Still another passenger who shelled out 9¢ per mile on a long-haul in coach, might have contributed to an operating loss for the same carrier when they connected to a 200 mile flight on a regional jet that needs to generate 40¢ per mile to break even. It’s important to avoid comparing the margins against each other, but instead, travel managers and analysts should group flights by trip distance, cabin choice, advance purchase and price paid to develop skills to separate good deals from expensive ones.

Automobile financials and operating statistics are similar to airlines on a smaller scale. They provide a framework for readers who are less familiar with airline data. Edmunds.com hosts a terrific tool that allows you to determine the “True Cost to Own” any vehicle with specific options you select. This feature provides a breakdown of the factors used to calculate ownership costs including: Depreciation, Taxes and Fees, Financing, Fuel, Insurance, Maintenance and Repairs. When you know the cost over a five year period, you can divide that by the number of miles you drive to find the Cost Per Mile. Edmunds’ formula for a top seller reveals that a 2012 Camry XLE will cost about $44,000 to own for five years and drive 75,000 miles. This means the owner will spend 59¢ per mile and this yield is an apples to apples comparison to the cost to fly.

The Edmunds values make sense especially when you compare them to the IRS mileage reimbursement rate currently 55.5¢ per mile.

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Let’s expand the personal auto example and add airline-like overhead. Consider the revenue per mile Yellow Taxi generates from customers in Chicago, Illinois. They use a two-part pricing model that combines an “access fee” $3.25 for the first 1/9th mile, with 20¢ for each 1/9th mile after that (ignore the other add-ons for this). A one mile ride costs $4.85, but that drops down to $2.41 per mile by the fifth mile. We already know that 55¢ is a reasonable estimate for Yellow Taxi’s operating cost, but that excludes a taxi license, communications expenses and the driver’s wages – it’s not a stretch to imagine that a taxi company’s expenses could top $1.00 per mile and double that when you consider mileage without a passenger. Drivers and taxi permits are major expenses that dramatically increase the cost to operate a taxi company in any city and “repositioning” costs are not insignificant and analogous to airlines’ costs for terminals and flight crews. Airlines can carry passengers far below the $2.00 per mile Taxi’s need, and they do it a thousand percent faster.

A refresher about the cost of personal transportation is a great segue into the world of airline finance and passenger yields. I’ve written about Form 41 data before, here, but want to point out a few excellent resources for airline data – the Global Airline Industry Program at MIT and their Airline Data Project. Additionally, Bill Swelbar’s blog, Swelblog, houses his opinions and analysis of current industry trends. Those sites along with select annual reports provided the data for my analysis.

As fuel prices continue to have an outsized impact on airline operating expenses it’s important to understand what’s going on behind the scenes to make predictions about how prices may change in the future. I modeled an airline’s cost structure first; I’ll  describe a few assumptions through a discussion about aircraft operations that allowed me to calculate the variable and fully allocated costs of each seat mile.

Begin with a short haul flight between Boston and LaGuardia, a 186 mile flight scheduled to operate over 113 minutes – only 31 minutes in the air. The balance of that time is used to taxi, park, load and unload. Short flights are burdened with higher costs for low aircraft utilization, gate expenses, ground handling and other costs that cannot be sprayed very far when you only have 186 miles to generate revenue. A fifty seat regional jet would create 9,300 Available Seat Miles. The flight will consume more than 230 gallons of Jet A priced at $2.80 per gallon and the crew salaries and benefits will be about $437. That gives us a variable cost near 11¢ per seat mile, while adding ownership costs, maintenance expenses, landing fees and other SG&A drives the cost per available seat mile up to around 37¢ per mile. The flight needs to generate more than $3,500 to break even.

On the other end of this model: Chicago -> Hong Kong, with a three cabin Boeing 777-200 with generous cabin space and 245 passengers. Current fuel prices demand this flight generate more than $290,000 over the 7,800 miles between these two cities. The fuel expense alone is more than $100,000.

Gate time incurs agent expense and airport rent, while taxi time drives full pay for the cabin crew and burns fuel. Wheels-up time is actual flying time (high fuel burn). Block time is literally the sum of minutes the plane isn’t parked with wheel chock blocks in place. Each phase of the commercial operation has a different expense profile – the key takeaway is that flying is only a fraction of the cost. Click on the table for a detailed view.

block times

Now that you know something about the time demands based on stage length, you can combine that with expense ratios to predict how much revenue an airline must generate for each seat. Airline expenses are captured in the following categories in predictable ratios starting with fuel expenses (38% of revenue), crew costs (30%), aircraft ownership (10%), maintenance  (10%), SG&A (12% – includes airport leases, landing fees, and other selling, general and administrative). Fuel, Maintenance and Crew costs are cash expenses an airline can avoid when they reduce their schedules, but rent, leases, ownership and overhead will continue to be paid and those costs will rise in the short term as capacity declines.

Break-even Yield data is available and fare information is easy to find – they can be used to construct a simple excel model to allow “goalseek” and other “what-if” scenario tools to apply simple rules and ratios to predict fares by cabin on a few routes. In the table below Cash Cost is the direct cost of operating the trip including crew salaries and benefits and fuel; VCASM means Variable Cost Per Available Seat Mile, CASM is the fully allocated Cost Per Available Seat Mile, blended CASM is the average Cost Per Available Seat Mile and combines costs for coach and other premium cabin seats.

trip costs

Predictive pricing models

Since fuel, crews and maintenance account for 70% of airlines’ total passenger revenue (at break-even margins), a leisure fare, marketed directly, is unlikely to sell for less than the variable cost of the seat; variable costs put a floor under the model’s leisure price (consolidator’s frequently have access to fares that just cover the fuel cost). I modeled a few variables to see how this assumption holds up and to determine if a simple model could predict industry pricing.

Divide fares into Leisure, Full Y (full fare coach), then F/J (domestic first, or business class), assume Leisure fares are 150% of the variable cost of fuel and crew expenses, then full Y is 300% of the leisure fare, and First class is double the full Y fare. Those assumptions produce results that look very similar to ticket prices customers are paying. Click for detail.

trip cost assumptions

I changed the previous assumptions to take a deeper look at a three class, long haul trip. Starting with the $295,000 breakeven revenue required from passengers on a 245 seat flight to Hong Kong, I used “goalseek” to find the coach ticket price required if you assume Business Class is three times more than coach, and First Class is three times more than Business Class? The result is below.

Expected Fares by Cabin

Business Class yield stands out – it’s very low compared to what most corporations are paying. Few customers actually pay 77¢ per mile in First Class, and a number of Coach passengers have a better price than shown above – that puts the burden squarely on the shoulders of the bread-and-butter Business Class travelers to make up revenue deficits in other cabins.

This back of the envelope analysis suggests that airlines that operate two-cabin aircraft on International routes actually have enhanced pricing power vs. airlines that operate three cabins. Two-cabin aircraft can dedicate more floorspace to business class and offer all travelers a price point below their three-class competition, while generating higher average revenue. Additionally, more business class seats allow an airline greater flexibility to upgrade coach customers and eliminate expectations that business class customers will be upgraded. Furthermore many airlines use the upgrade waterfall to eliminate overbookings in Coach by closing business class before it sells out, but First remains available. They protect oversales by moving travelers from business to first, and from coach to business. This reduces their First Class revenue and creates disappointment for top-tier, premium travelers when the waterfall doesn’t work out for them.

Both models offer you a framework to bin ticket prices by distance and cabin to help you develop your own cost ratios. That information can become the basis for a deeper analysis on your travelers’ buying patterns and will help uncover ways you can change behavior to drive cost savings and negotiate with suppliers.

For more articles about airline operating costs check out: The Secret Behind Airline Fuel Surcharges.

Aviation Travel Management

Strategic Travel Managers Know Chemistry

Imagine a dashboard that could show you how much carbon dioxide your travelers generate every day. It’s actually a straight-forward problem and one I’ll try to solve for you today. Information about aviation fuel economy isn’t very accessible, but there are good clues and accurate data is easy to capture. Your frequent flyer account will keep track of the miles you’ve flown, but it’s impossible for most people to connect the dots to determine what their trips cost. Not in dollars, but in fuel, or in CO2 emissions. In a previous article I calculated “mileage” rates for aircraft by cabin and type of plane (single aisle or twin aisle) “The Secret Behind Airline Fuel Surcharges.”

In this report I’ll show you how much Carbon Dioxide a particular flight created and give you a quick, easy-to-use grid to provide travelers with information about the carbon footprint their choices make.

No need to remember anything about High School chemistry since I’ll lay out the chemistry and math to solve this problem.

First, Jet Fuel, or Jet A, contains a blend of different carbon-based molecules that combine with Oxygen to generate heat and pressure that jet engines convert to thrust. For simplicity, I’ll ignore the blend, and assume that “Octane”, a string-like molecule that contains a backbone with eight carbon atoms, and eighteen Hydrogen atoms along the sides and endcaps, is a good proxy for everything else in the gas tank. During the combustion reaction, each carbon atom combines with two Oxygen atoms to form Carbon Dioxide (CO2), while Hydrogen will also combine with Oxygen, but their marriage yields water (H20). The reaction balances when two Octane molecules react with twenty-five Oxygen molecules (O2) which contain two Oxygen atoms captured from the air passing through the engine. The exhaust product contains sixteen Carbon Dioxide molecules and eighteen water molecules. Here’s the equation: 2 C8H18 + 25 O2 -> 16 CO2 +18 H20.

This detail isn’t useful until we convert molecular weights and ratios into terms that people are more familiar with. In this case, jet fuel weighs about 6.5lbs per gallon, and that mass is 81% carbon. We already know that our Octane molecule will split to form water and CO2, but the result most people struggle with is the conversion to weight. Specifically, Oxygen is heavy, about a third heavier than Carbon, so when each Carbon atom combines with two Oxygen atoms, the resulting molecule, CO2 is four times heavier than the Carbon atom by itself. This means each gallon of jet fuel (6.5lbs) carried by the aircraft will combine with 23lbs of Oxygen from the air during the journey and turn into twenty pounds of CO2, and just over nine pounds of water!

How much CO2 does a Boeing 777-200 create on a flight between Chicago and Hong Kong? Let’s work through it – fuel is a liquid, and measured in gallons, but the exhaust is a gas, that’s why we use weight rather than volume to describe the output. I calculated the 777-200’s gas mileage in a previous post here. At .1836 miles per gallon, a 7,821 mile flight needs 42,000 gallons. The flight would generate 851,000lbs of CO2. That’s 30% more than the maximum takeoff weight on departure, including the plane, fuel, passengers and cargo. The table below contains a comparison among cabins and shows passengers, fuel burn and CO2 emissions.

CO2 per flight

Now that you have information about how to calculate the CO2 emissions for an entire flight, we need to add more information to break this down to the seat level. Previously I calculated the fuel burn per seat to provide a table that shows how much the fuel costs per mile for each cabin and at various price points for fuel. That’s a good starting point, but this time the data table will display how much CO2 an international flight would create for different distances and cabin. See below.

C02 per seat 777-200

The Boeing 777-200 offers a useful snapshot of the likely performance other aircraft could achieve. It’s a good benchmark because it’s currently in production and it’s flown on transatlantic, transpacific and intra-Asia flights.  However, the design requirements for long-haul international flying require twin aisles, more lavatories, large galleys, more storage space, life rafts and a host of other overhead not needed for shorter hops. These factors make it useful to perform a similar calculation to offer information about CO2 production from more efficient single aisle aircraft in use on short hauls and for domestic US flying. In this case, the 189 seat, all coach, 737-800.

CO2 per flight 737

A comparison between the 737 and 777 coach emissions level demonstrate that the smaller aircraft is more than 55% more fuel efficient when using numbers normalized for total seats. When you measure efficiency on a blended basis across all cabins the total difference is higher, that’s why it’s important to have separate tables. These tables offer you a quick resource to answer questions about the carbon footprint your travelers leave behind each trip. For more information about aircraft efficiency and comparisons among different modes of transportation, check out these posts about commercial aircraft fuel economy:

The Secret Behind Airline Fuel Surcharges

Boeing 737 vs. Toyota Prius (this might surprise you)

Aviation Travel Management