Some Interesting Statistics

[mweiss]

Thanks, KT. I really appreciate your sentiment. I was on vacation and that vacation included a respite from USaviation.

RWerksman, I can break down a little bit of information by hub, but nowhere near enough to be useful. Mostly I can uncover a sense of revenue on any city pair (though I would be unable to differentiate between one that goes through PIT vs. PHL vs. CLT). That's about the extent of what I can get without having access to US's internal data warehouse.

 

[RowUnderDCA]

Thanks for the words of encouragement. It's tough because there has been little contribution of ideas about the meaning behind the numbers. Part of the reason I haven't been putting a story in the numbers posts is that I don't want to just post numbers that match any theories I might have. Rather, I want to see if we can begin a dialog that examines the numbers and derives some possible conclusions.

Better yet, I'd love to see some suggestions as to how to improve them.

I'm still especially intrigued by US's RASM. It's by far the highest in the industry. Does US have more monopoly markets than anyone else? Might that be the cause? Any other suggestions?

Speaking of which, I have picked up market numbers from the US DOT BTS, and am trying to do some analysis of them. It's hard, though, since the data for each quarter takes about 600MB. I'd like to look at entire years at a time, but Access limits me to 2GB, so I'm working to consolidate the data some.

I think there are economists at the DOT that do this stuff all day long.

 

[LaBradford22]

mweiss,

Thanks for keeping this good, constructive discussion going. Throwing in my two cents on a couple of items:

Well, I checked my RASM and CASM numbers against WN's 2003 annual report and got the same results, so I'm assuming that RASM is based on Total Operating Income and CASM is based on Total Operating Cost.

That's correct - although there are potentially two RASM numbers: passenger RASM, and total RASM (which would include such things as cargo revenue and other miscellaneous revenue items such as contract services - i.e. training or maintenance work done for a third party). On the CASM side, CASM is based on total operating expenses. Before moving on to net income, there are also non-operating costs to consider - interest income, interest expense, capitalized interest, and other items such as bank transaction fees and gains/losses on foreign currencies.

In a graph of RASM against CASM, the airlines are all relatively near the break-even line, as one might expect. But what's rather interesting is how they fall into three very neat clusters. In the 6-8 CASM range is a cluster of LCCs, with B6 doing the best and F9 doing the worst (F9 was the only carrier on the "loss" side of that line). HP is in this cluster. The second cluster is in the 10.5-11.5 range, and contains AS and all but one of the legacies. Only CO sits above the break-even line. Then, all alone, sits US with a 13.8 CASM and 13.3 RASM.

There are five reasons for the CASM difference between the LCCs and the legacy airlines:
1. Lower wage rates. Although that's not always the case. For example, WN's wage rates in many cases are actually higher than some legacy airlines.
2. Less rich work rules. These drive considerable efficiencies at the LCCs relative to the majors - the most obvious example being that LCCs can contractually get more credit hours per month out of their pilots and FAs than legacy airlines. Again, this is not always the case - for example, WN's package of duty rigs for its pilots and FAs is actually industry-leading. However, because of WN's operation (quick turns, short trips, etc), rich duty rigs don't drive that much cost for WN.
3. Less rich benefit plans. Legacy carriers typically have defined benefit pensions (some also have defined contribution pensions), whereas the LCCs typically have only a defined contribution plan (usually a relatively lean one). Legacy carriers typically pay a much greater share of active medical insurance costs than LCCs. And, significantly, legacy carriers typically pay retiree medical costs for retirees with a certain number of years of credit, whereas no LCCs take on this cost for their employees.
4. Lower seniority. Particularly in the case of B6, but also in the case of some of the others that have grown substantially in recent years (FL, F9, TZ, etc). For example, at almost all legacy carriers, there is no Captain with less than maximum seniority, and the average First Officer has something like 6 to 8 years of seniority. At B6, there is no pilot with more than 5 years of seniority right now. An average Captain at B6 has about 3 years, and an average First Officer is at roughly 1 year. Also, older and more senior employees at legacy airlines drive higher health benefit costs, higher pension costs, higher sick rates, and more vacation coverage.
5. Operational efficiencies. This is most true for WN. The legacy carriers have always built their schedules and their operations around optimizing revenue. That's the whole idea of the hub-and-spoke model. Hub-and-spoke generates more O&D city pairs than point-to-point can, hence, it creates a lot more revenue opportunities. However, it is very costly to operate a hub. It drives all sorts of staffing and scheduling inefficiencies. WN is a different paradigm. Their schedule and operation is built around minimizing cost: a single fleet type, quick turns at cheaper and less congested airports, point-to-point flying to maximize productivity of both assets and people. B6, FL, and the other LCCs do some of these things, and the legacy carriers have moved in the direction of some of these things as well (and will probably continue to do so out of necessity).

Naturally, one can attribute some of US's high CASM to the short stage length. US's stage length, while having risen by 50% since 1990, remains below that of all of the other airlines except WN and FL. However, in looking at the relationship between stage length and CASM, I noticed that the airlines fall into two distinct bands, with three outliers. The low-cost band contains, as you might expect: FL, WN, F9, HP, and TZ. The high-cost band contains no surprises either: DL, NW, AA, CO, and UA. The lowest-cost airline, even accounting for the stage-length effect, is B6. They do better than the other LCCs in this metric. Similarly, AS does far better than the legacies here; they're roughly halfway between the legacy band and the LCC band. Once again, US sits by itself, well above the legacy band. In other words, even taking out the stage-length effect, US still has the highest cost of any airline in the industry. If US were on the legacy band, CASM would be about 1.5 cents lower.

The thing about this is that the relationship between stage-length and RASM or CASM is not a linear one. It is actually quadratic: at very short stage-lengths, the slope of the line is very steep. As stage-length increases, the slope decreases. In other words, going from a 200 mile stage-length to a 250-mile stage-length has a much bigger impact on RASM and CASM than going from an 1100 mile stage-length to an 1150 mile stage-length. So, I would say that you are probably underestimating the impact of a very short stage-length on US's RASM and CASM. The airline that I work for has a model that we use to stage length adjust, but I don't think my boss would approve of me sharing that in this forum - sorry!

- UA has the largest chunk of revenue handed to labor; 50 cents of each dollar they get goes to wages and benefits

Really? Even after restructuring? I'm surprised by that. Of course, a lot of that could have to do with benefits expenses - UA has been a very big airline for a long time, and thus they may very well have the oldest employee population of any airline (which is likely a big reason why they were pushing harder than anyone for the pension relief which was recently passed).

- Among the legacies, US has the second-lowest percentage of revenue devoted to labor costs at 39%. Only CO is lower (34.5%), and WN is comparable to US (37.5%).

I'm not surprised by that. US has already cut their labor costs considerably. The problem with US is that their current business model is not viable. They are stuck in the middle. They are not big enough to compete with the legacy carriers on the basis of network breadth or frequent-flyer programs or anything like that, but they are still a traditional hub-and-spoke, so they are not efficient enough to compete with the LCCs on price. The end result is that the only way for them to compete is for them to pay their labor less than a market rate, which, in this industry, spells disaster. This is a service business, and your service is only as good as your labor wants it to be.

- Labor's contribution to CASM at US is 5.16 cents. Only DL is higher at 5.27. The lowest are B6 and TZ at 1.95 and 1.96 cents, respectively.

Again, I imagine if you stage-length adjusted US, you would find their labor contribution to CASM is lower. I'm not surprised by DL - their pilot rates are simply way out of whack with the rest of the industry right now. I am a bit surprised that TZ is so low.

- US has the smallest percentage of revenues devoted to fuel of any airline: 9%. The next-lowest is WN at 14%.

Again, stage-length is the player here. Short stage-length allows US to generate a higher unadjusted RASM. So, more revenue, less distance flown = small % of revenue devoted to fuel. WN doesn't surprise me, as they have a relatively young (and fuel efficient) fleet, as well as a shorter stage-length than any of the other legacy carriers.

- Even looking based on ASM, US's fuel costs aren't out of line at all. US spends 1.2 cents per ASM, very close to WN's 1.15 cents. The best is B6 at 1.08; the worst is FL at 1.77 (though NW is mighty close behind at 1.74).

Again, not surprising. B6 has a very young fleet of fuel efficient A320s. I believe FL is still operating some old DC9s, and NW has the oldest fleet in the business.

Good stuff, keep it coming...

 

[mweiss]

LaBradford22,

Thanks for your reply and insight. I have a couple of comments in response.

First, I am aware that the stage-length effect is not linear, but rather quadratic. The hard part is that the particular shape of the curve differs depending on the fixed/variable cost mix of each airline. I have roughly approximated the industry average curve based on analysis Unisys has done.

Second, I agree about the factors differentiating the CASM for the two categories. I was intrigued to find AS in the legacy cluster with HP in the LCC cluster. I was especially surprised to find HP in the LCC cluster even in the early 90s.

Regarding UA's labor costs, I've been basing my analysis on full calendar year data, so the most recent I have is CY2003. This wouldn't show their restructuring, so I would not be at all surprised to find that they've improved considerably since then.

Your suggestion to stage-length adjust the labor component of CASM is a good idea. I'll try to run that and report what I find.

NW's fuel numbers didn't surprise me, given the quantity of -9s and -10s in their fleet (and don't they still fly a couple of 747-200s?). FL surprised me, since I thought they had eliminated their -9s altogether. I sure haven't seen one in a loooong time. And while one would expect to find that B6 was one of the better ones, I still would have expected CO do outperform them, simply because of the larger newish aircraft which tend to be more fuel efficient on an ASM basis.

 

[ITRADE]

You should remember that AS had a really tough year a couple years back owing to the AS crash off Ventura. Otherwise, their margin would have been higher and average profits would have been higher.

HP was a dreadful airline for many years - with plans of expanding to Japan and flying 747s. That was a white elephant if there ever was one.

One should remember that a good hunk of the huge revenues and profits that pushed up the average yields and margins was the successes of the majors during the period 1997 - 2000. Only the bottom, bottom airlines could not make money (TWA) and everybody else was basically printing money.

 

[mweiss]

AS's RASM has remained relatively constant from 1990 to 2003, averaging 10.4c. Their toughest years were 1994 to 1996, which I would suspect is related to the changes they were undergoing in competitive response to WN's entry to the west coast. During that same period, they dropped their CASM from about 11c to under 9c, a remarkable change when compared to, say US's increase from 12.1 to 13.4 over the same period.

2000 was a rough year for AS's CASM, not their RASM. I suspect this is the Pt. Mugu effect.

Sure, HP's been pretty awful in many respects, but they kept their CASM down in the 7c zone for the all of the 1990s. That's pretty respectable for a full-service airline.

The "gravy" years were 1995-1999. How quickly we forget. Of the airlines that are still in significant existence, only four airlines had any operating losses during those years:
1) NW, who had a rough year in 1998
2) FL, who naturally had some troubles from 1996-1999 (they turned profitable in 2000, though)
3) TZ, who had a loss in 1996 (anyone know why?)
4) F9, who had typical startup losses through 1998