AVIATION ECONOMICS CHAPTER 3 PASSENGER MOVEMENT:

1. AVIATION ECONOMICSCHAPTER 3 PASSENGER MOVEMENT: THE SIGNIFICANCE OF PASSENGER LOAD FACTORS & STRATEGY FOR PASSENGER MARKETING

2. Passenger Movement • In this chapter, we will look at • Load Factor • Traffic Peaks and Valleys • Capacity vs. Demand • Pricing in relation to load factor

3. Airline traffic and Revenue • Measure of “airline traffic” quantify the amount of airline output that is actually consumed or sold. • Traffic carried by airline consists of both passengers and cargo. • Passenger airline traffic can be measured in terms of the number of passengers kilometer (RPK). • 1 RPK = 1 paying passenger transported 1km • Example: • A flight carrying 140 passengers over a distance of 1000km generates 140 000 RPK of airline traffice

4. Airline traffic and Revenue • Yield is measure of the average fare paid by all passengers per kilometer (km) flown, in a market, on a set of routes, or a region of operating for an airline. • Yield is calculated by dividing the total passenger revenues collected by number of RPK carried. • Example: • If the flight carried 140 000 RPK generates RM16 000 of total passenger revenue, its yield would be RM0.114 per RPK • (RM 16000/140 000) = RM 0.114

5. Airline Output and Operating Expense • Similar to RPK, the most common measure of airline output is an available seat kilometer, ASK. • Thus 1 ASK is defined as one available seat flown 1km. • Example: • If our flight operates over a distance of 1000km with 200-seat aircraft, it generates 200 000 ASK of airline output.

6. Airline Output and Operating Expense • Unit cost is defined as the total operating expense divided by the ASK produced by an airline, for a route, region or total network. • Example: • If the airline incurs RM 15 000 of expense to operate a flight, the unit cost for this flight would be RM 0.075 per ASK • (RM 15 000/200 000 = RM0.075)

7. Load Factor • One of the most vital statistics in the airline business • Load factor refers to the ratio of traffic to airline output, representing the proportion of airline output that is sold or consumed.

8. Load Factor • It has a critical impact on the cost and quality of air transportation-Why? • 65% of airline’s costs are directly related to the operation of the aircraft and are independent of the number of passengers on the aircraft. • Hence, a high load factor will allow the allocation of these costs over a large number of passengers

9. Load Factor In the end, resulting in lower costs per passenger, which allows for lower fares (i.e. lower ticket price) Companies can determine a minimum load factor they need to meet in order to break even financially. That is, once a company meets a certain load factor the revenues from doing so will cover the costs of providing their seat capacity. If they are below this break-even load factor the company will be spending more than they are earning and will lose money.

10. Load Factor Load Factor calculation: Simple calculation : Capacity 100, passenger 90 Load factor : 90/100 = 90% Airliner calculation : The definition of load factor isn't necessarily tied to seats alone. We must also consider the distance flown in order to measure the production of the airline.ASK = No. of seats/aircraft * No. of aircraft * aggregate distance flownRPK = Total Number of Passengers * Distance Flown

11. Load Factor Load Factor calculation, Airliner calculation : Route: - ABC -> XYZDistance = 200kmAircraft = 2Seats / Aircraft = 50Total Services per day = 8Available seat kilometers = 200 * 2 * 50 * 8 = 160000 kmAssume on day 1 there were a total of 560 passengers travelling.Revenue Seat Kilometers = 560 * 200 = 112000 kmLoad Factor = 112000/160000 = 0.7 or 70% In reality an airline will then do this equation for each route to determine the route load factor to help in route planning. The figures quoted in public are generally relating to the aggregate sums so it would represent total revenue seat kilometers / total available seat kilometers.

12. Load Factor • These five measure – traffic (RPK), yield, capacity (ASK), unit cost and load factor are the most common measure of passenger airline performance. • Other measures such as cost efficiency, productivity and financial performance will be introduced in the relevant chapters. • Question: how to measures cargo air transportation?

13. Traffic Peaks and Valleys The idea is all transportation modes must operate during the traffic peaks and valleys in order to meet the public need Airline load factors are seasonal Daily and hourly load factors fluctuate even more Thus, airliner must make sure there are sufficient flights during peak hours

14. Traffic Peaks and Valleys But sometimes, airline has to provide positioning flights to cater the load for peak hours Positioning flights: Aircraft has to flown virtually empty from one city to another late at night or early in the morning to have the plane ready to meet rush-hour demand.

15. Capacity vs. Demand Capacity is ability-What can airliner offer? While, demand is requirement-What is required from the airliner? Demand for air transportation is highly cyclical At micro level discretionary leisure traffic picks up in the summer, so, airline enjoy higher load factor (seasonal) At macro level: stable vs. fluctuate economic condition

16. Capacity vs. Demand • When the economy is stable and growing • Consumer confidence is strong • Demand grows • Load factor improve • THUS, increase PROFITABILITY! • BUT… • When economy falters • Unemployment increase • Consumer confidence declines • Individuals postpone discretionary travel • SO, PROFITS SUFFER!

17. Capacity vs. Demand • Airline cannot fine-tune capacity to match demand-Why? • Aircraft itself inflexible • If 757 equipped with 160 seats, that seats supply on particular schedule • Can neither be shrunk nor expanded • Total number of flights offered by airline on a given day varied

18. Capacity vs. Demand • Depends on passenger demand • Weekdays vs. weekends • Ordinary days vs. Holidays • BUT… other factors limit airline’s capacity to adjust daily seats to daily traffic • Fix frequency of flight for certain route-to avoid cancellation • The day of week patter can’t usually vary in precise and predictable manner

19. Capacity vs. Demand AirAsia fleet • AND • Interrelation between two different routes • SO, flights seats usually UNIFORM and FIXED

20. Capacity vs. Demand Malaysia Airlines Passenger Fleet

21. Pricing in Relation to Load Factor • The idea is to increase load factor- that is to gain profit minimize cost with a reasonable price offer to the passenger • One approach utilize is off-peak pricing, that is.. • Introduce promotional fare to attract passengers during slack period • Slack period: Passenger demand declines/insufficient • Just like off-peak night coach service, low fare ticket price is offered by airliner

22. Pricing in Relation to Load Factor • Advantages: • Empty seats on low-traffic days are filled with passengers who are willing to travel on those less popular days-Why ? CHEAPER! • Additional passengers add very little to the cots (primarily meal service), BUT they add a great deal to the flight’s total profit!

23. Pricing in Relation to Load Factor • Disadvantages: • The timing of the peak varied from route to route • Peak hours to go to Sabah might differs from peak hours to go to Johor Bharu- So, it is quite impossible to have off-peak pricing to all routes • It injects complications into the pricing structure- Fluctuation of ticket price

24. Pricing in Relation to Load Factor Therefore, it is essential for airliner to estimate the accuracy of its demand (particularly passenger demand) AND strategize its marketing (especially airline passenger marketing)

25. Understand how airliners set their price • Airline pricing is a complex, unpredictable factors driven by words: competition, demand, and inventory • Airlines then change their prices based on demand. If a certain flight is selling well, the price will increase. • If another flight has no takers, the fare will drop until the airline gets some. As a result, fares and inventory are changing every minute.

26. Understand how airliners set their price • Demand explains why it is cheaper to fly on a weekday (when fewer people are travelling), at odd hours, or on days other than major holidays. • Airlines change their prices based on competition. If one airline flying the Kl-KK route drops its rates by 20%, chances are all airlines will drop their rates, so as not to give the discounter a competitive advantage. • To complicate matters, all this happens at the speed of light. Prices for a specific flight can go up or down. • Airlines also use inventory to their advantage to decrease the price

27. Understand how airliners set their price • Airlines also use inventory to their advantage to decrease the price. • Inventory brings us back to demand. If there is low availability and high demand, you will have to wait for a cheap fare. • Sometimes airlines will change their fares or open up more discounted seats, depending on how sales are going. • Because of all these factors (competition, inventory and demand), it is essential to look around and comparison shop.

28. The tricks • Start your search as early as possible (at least a month in advance). While better rates may come along, it'll give you a starting point. • Use the same airline for both directions. Since round trips are about the same as one-way tickets, it doesn't make sense not to. • Keep checking. It’s impossible for airlines to have full planes, so they may add discount seats without warning. • Use your age. Ask about senior discounts or student discounts.

29. The tricks • Fly on a mid-weekday. Fridays and Mondays are the most expensive times to fly. And weekends are obviously in high demand. Tuesdays and Wednesdays are the cheapest days to fly. • Try a consolidator. A consolidator is an intermediary company that buys tickets at a discount directly from the airline. • www.lowestfare.com • www.cheapseats.com • www.cheaptickets.com • Keep checking. It’s impossible for airlines to have full planes, so they may add discount seats without warning. • Use your age. Ask about senior discounts or student discounts.

30. Important Key terms Load factor Capacity vs demand Positioning Flights Airline pricing

31. Question 1 • The significant of passenger movement in aviation industry is very essential to maximize profits and ticket pricing strategies. • Describe in your own words the significance of passenger load factors.(6 marks) • b) Discuss in your own words the reason load factor has a critical impact on the cost and quality of air transportation • (4 marks) • c) If your airline has to provide positioning flights due to rush-hour demand, discuss how can you gain profit and minimize cost based on your capacity vs. demand? • (5 marks)

32. Question 2 • The idea is all transportation modes must operate during the traffic peaks and valleys in order to meet the public demand. • Describe in your own words the significance of positioning flight.(5 marks) • b) Discuss in your own words how to optimize profit during travel peak and valley. (5 marks) • c) Why do you think it is difficult to prepare and offer the proper aircraft and correct flight capacity to the passengers? • (5 marks)

33. Question 3 • Airline pricing is a complex, unpredictable factor driven by three competition, demand, and inventory that involve timing and demand. • Describe in your own words the significance of load factor in relation to airline pricing.(5 marks) • b) Describe your understanding on how airlines set their prices in the first place. (5 marks) • c) From your opinion, how is the best way to obtain a cheap plane ticket? (5 marks)

34. Quiz 2 • List three (3) characteristic of Oligopolistic Economy. • One of the airline special economy characteristic is Government Financial Assistance. In your word, explain how the government played as major roles in this industry. • List all type of forecasting • Explain judgemental method and list 5 question survey related to airline services

35. Bonus • How much Tony Fernadez buy Air Asia?