Understanding Airline Metrics
A brief introduction to the most common airline metrics.
Munich Airport in Germany.
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Key Takeaways:
One of the most important aspects in every industry is to establish appropriate metrics to accurately measure performance and make sure that all the fundamentals are kept under control.
Measuring Output – Available Seat Miles (ASM)
While in the manufacturing sector it is relatively easy to measure the output of a company by simply counting the units of the specific good that are produced, the airline industry had to create a specific metric that quantifies the output of an airline and standardizes to allow comparisons among various companies.
The most commonly used metric to measure the output of an airline is ASM, which stands for “Available Seat Miles.” One ASM is one seat flown for a distance of one mile.
Airlines in the U.S. generally use miles as a measurement for distance; however, in the rest of the world, it is usually preferred to use the SI system (the International System of Units), and therefore, they will measure distances in kilometers. Their corresponding metric for output would be the ASK, i.e., one seat flown for a distance of one kilometer.
For example, if an airline flies an Airbus A321 with 190 seats from New York-JFK to Los Angeles, considering that the great circle distance between the two airports is 2,475 miles, that flight will generate:
2,475 x 190 = 470,250 ASMs
If we used the SI system, the distance between the two airports would be
2,475 x 1.609 = 3,983 kilometers
Therefore, the output generated by that flight will be:
3,983 x 190 = 756,770 ASKs
For simplicity, from now on, the metrics described in this article will use miles as a measure for distance, but it is possible to generate similar metrics using kilometers.
Total Output – Available Tonne Miles (ATM)
The ASM metrics only take into account passengers carried, but if an airline has a significant cargo operation, it is possible to create a metric that combines passengers and cargo traffic, converting passengers into a standard weight (usually including their baggage allowance).
In the example above, if we convert every seat into 100 kg, the passenger component of the output for that flight would be
190 x 100 = 19,000 kg = 19 tonnes
If we assume that the aircraft can carry an extra five tonnes of cargo, the output generated for that flight would be:
(19 + 5) tonnes x 2,475 miles = 59,400 ATM
From now on, we will focus only on passenger metrics.
Measuring Revenue Generation – RPM and Load Factor
The ASM metric measures all the units of output produced by the airline that, at some point, have been available for sale. However, it is quite common for flights to have at least some empty seats, and once a flight has departed, those seats cannot be sold any longer. This is called “spoilage.”
In order to account for how many of the seats produced have been able to generate some revenue for the airline, another metric has been created. This metric is called Revenue Passenger Miles (RPM). One RPM is one revenue passenger being flown for one mile.
The concept of “revenue passenger” excludes those seats that have been occupied by passengers who provide little or no revenue for the airline, such as airline employees flying on concessionary fares, free tickets provided for promotional activities, etc.
In the example above, if we assume that the A321 performed the flight from JFK to Los Angeles with 10 empty seats. Then the RPM generated by that flight would be:
2,475 x (190-10) = 2,475 x 180 = 445,500 RPM
If we divide the number of seats on the flights generating revenue by the total number of seats, we obtain the seat factor (SF). Sometimes this metric is referred to as “load factor” (LF), however, formally, the load factor is calculated by dividing the RPM by the number of ASM.
Of course, on a single flight basis, the SF and the LF coincide. However, since these metrics can be calculated by aggregating a large number of different flights, in that case, the two metrics will differ since longer flights will have a higher weight in the calculation of the load factor.
In the case of the flight above, the seat factor and the load factor of the flight will be:
Measuring Cost Per Unit – CASM
So far, we have been constructing metrics that may be perceived as rather abstract because they have been created to evaluate the somewhat elusive concept of the output of an airline. Now it’s time to see how all of this is converted into revenue and profits, which is the ultimate goal of every business.
Once we have established the total output for an airline by adding all the ASM generated by every flight in a given timespan (a month, a quarter, or a year), it is possible to calculate how much it costs the airline to produce one single unit of output simply by dividing the Total Operating Costs by the total number of ASM. This metric is called Cost per Available Seat Mile (CASM):
Generally speaking, this amount is measured in U.S. cents. The airlines with the lowest CASM are low-cost airlines (that’s where the name comes from). The “champions” in this category are the two largest European low-cost carriers, Ryanair and Wizzair, which have a CASM of just below eight cents per ASM (or five cents per ASK). Pan-Asian carrier AirAsia, IndiGo from India, and Pegasus Airlines from Turkey have similar CASM.
People queuing while boarding a Ryanair aircraft
While U.S. low-cost airlines Spirit (before bankruptcy) and Frontier manage to remain below 10 cents per ASM, the majority of network carriers in North America and Europe (Delta, American, United, Air France-KLM, Lufthansa, British Airways) have a cost ranging between 16 and 20 cents.
Measuring Revenue Per Unit – RASM and Yield
After measuring output and costs, it is important to understand how much revenue can be generated with the output produced.
The revenue correspondent of the CASM is the Revenue per Available Seat Mile, or RASM:
If we focus only on passenger revenue, it is interesting to calculate the PRASM, Passenger Revenue per Available Seat Mile, which only takes into account the revenue generated by passengers.
However, while it is quite easy to split the revenues generated by passengers from those generated by cargo, the same cannot be said for costs; therefore, if we want to calculate this metric to evaluate how revenues are performing compared to costs, it is more appropriate to use RASM instead of PRASM.
Finally, if we want to focus more on the airline’s revenue-generating efficiency, it is interesting to calculate the Yield for the carrier:
This metric focuses on how much revenue is being produced only from those units of output that have been effectively sold, without considering spoilage. It is a metric that is usually evaluated together with the LF: if yield is relatively high but LF is low, the airline might evaluate the opportunity to reduce capacity, if that doesn’t affect its CASM, or to increase its sales effort to sell the capacity being spoiled.
The airline may also decide to adopt different pricing strategies, which may decrease the yield, but may also increase the LF so that the overall total revenue is increased.
