Aeronautical

Bachelor
Airlines
Cost & revenue structures

Revenue management
21st / 22nd March 2022
CONTENTS
1. Reminder: Key airline metrics
What are the typical metrics that can be found in a business plan?
How is airline production measured?
How is airline performance measured?

2. Airline cost structure

How to measure airlines costs?
What are airline main cost drivers? How do these costs evolve?
What are the differences between FSCs and LCCs cost structures? Between regions?
What is the cost of launching a startup airline?

3. Focus on cost-reduction opportunities

What is the best way to increase airlines’ productivity?
How fuel and labour costs can be lowered?
What kind of cost-reduction strategies can be developed?
CONTENTS (Cont’d)
4. Airline revenue sources
How to measure airline revenue?
What are airlines main revenue sources?
What are the differences between FSCs and LCCs revenue structures?

5. Airline revenue sources : ticketing & revenue management principle

What is airline revenue management? What are revenue management missions and objectives?
How to forecast passenger demand?
How to maximize revenue from a flight?

6. Other revenue sources : ancillary revenues

How airlines have developed ancillary revenue opportunities?
Why ancillary revenue strategic importance is growing? How come Frequent Flyer Programs worth so
much?
What are airlines’ opportunities for developing new ancillary products?

7. Other revenue sources : cargo

8. Conclusion

9. Activity
 1. Key airline metrics

© Thomas Pougheon (flickr)

REMINDER: AIRLINES USE ASK TO MEASURE THEIR OFFER

ASK = Number of Seat Available * Number of Kilometers flown

Example on a TLS-HAN flight operated by A350-900

Unit Value Available Seat Kilometers corresponds to

every single seat that can be potentially
Seat capacity fixed 300 sold multiplied by each kilometer flown.

Flight distance (km) change when fly 9,500 It gives information on the passenger
carrying capacity of an airline.
Available Seat Kilometer (ASK) 2,850,000
BASIC AIRLINES PRODUCTIVITY METRICS

Standard production metrics

Fleet size (active A/C) Up to 881 aircraft (American Airlines) *

Pax load factor (%) Up to 96% (Ryanair)
Seat offered Up to 408 B ASK in 2019 (United Airlines)
Passengers Up to 215 M (American Airlines)
Trips Up to 1.4 M (Southwest Airlines)
Flight Hours Up to 216 M (American Airlines)
Average aircraft utilization (FH) SH Average: 8.5 FH/day LH Average: 11.5 FH/day
Average Sector Length (FH) SH Average: 1.8 LH Average: 5.5
Average Sector Length (km) From 513 km (Air Corsica) to 8,752 km (FrenchBee) **
Available Seat Kilometer - ASK (seat.km) Up to 408 B (United Airlines)

Cost per ASK - CASK (US$ cents) Average: 7.40

CASK excl. Fuel (US$ cents) Average: 5.57
Sources: Airbus data, Sabre, OAG, IATA, Ascend
* 2021 metrics, 2019 otherwise (prior COVID-19 crisis)
** Excluding airlines average capacity < 100 seats
BASIC AIRLINES PRODUCTIVITY METRICS

Standard performance metrics

RPK (pax.km) Up to 350 B (Delta Airlines)

CTK (cargo tonnes.km) Up to 19.7 M (FedEx)

RASK (All revenue streams)(USc) Average range from 3 to 10 (Ex: Air Asia: 3.8)
Yield (USc/km) Average range from 3 to 10 (Ex: Air Asia: 4.5)
Break-even load factor (%) Average standard > 75%

Total revenue per pax (USD) 230 (Delta Airlines)

Average Pax Fare (USD) Domestic average: 275 / Int’l average: 800 (round trip)
Total operating cost per FH (USD) Average standard: 11 631

Total revenue (USD) 47 Billion (Delta Airlines)

Operating margin (% revenue) Average standard 5%

Sources: Airbus data, Sabre, OAG, IATA, Ascend

* 2021 metrics, 2019 otherwise (prior COVID-19 crisis)
 2. Airlines cost structure

© Thomas Pougheon (flickr)

CASK IS THE INDUSTRY STANDARD TO MEASURE AIRLINES’ UNIT COST

CASK computation Cost per Available Seat Kilometer shows

- Icelandair & easyJet examples (2019) costs to operate each seat kilometer
Total operating costs offered, whether booked or empty.
/ Total ASK (M)
(USD M)
𝑇𝑜𝑡𝑎𝑙 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑐𝑜𝑠𝑡𝑠
CASK =𝑇𝑜𝑡𝑎𝑙 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑆𝑒𝑎𝑡 𝐾𝑖𝑙𝑜𝑚𝑒𝑡𝑒𝑟
7 662 116 056

Available Seat Kilometer shows airline’s

1 574 16 822 supply.
Icelandair easyJet Icelandair easyJet ASK = number of seats available * number
kilometers flown

Total CASK (USD cent / ASK) CASK is not the only metric allowing to
measure airlines’ financial performance and
detect potential cost-cutting opportunities.
9.4 For a more comprehensive approach, CASK
6.6
has to be combined with a close
monitoring of each cost-driver, routes’
Icelandair easyJet contribution to profit and staff and aircraft
productivity.
Sources: The Airline Analyst
OUR EXAMPLE SHOWS HOW THIN OPERATING MARGINS ARE

Unit margins
- Icelandair & easyJet examples (2019)

CASK, RASK & Unit margin (USD cents) Icelandairs’ generate more revenue per ASK
than easyJet, which suggests a higher yield,
CASK RASK Unit margin and, given their different model, a higher
FI operating U2 operating average ticket fare.
margin = -6% margin = 7% Yet, while easyJet had a positive unit margin
in 2019, Icelandair did not. EasyJet’s more
efficient cost structure and a higher load-
factor may explain the difference.
A deeper analysis of Icelandair’s cost
9.4 8.9 structure and revenue model could be
6.6 7.1 required to understand the root cause of the
airlines’ losses, the potential revenue
optimization and potential costs cutting
actions.
-0.5 0.5
To understand airlines’ financial performance,
several metrics have to be combined.
Icelandair easyJet
WHAT’S BEHIND OPERATING COSTS? AIRLINE TYPICAL COST STRUCTURE

IATA airline typical cost structure (2019) Fuel & oil is airlines’ main cost item. Although it has
been decreasing over the past years thanks to fuel
1% Other
5% management improvements and more efficient
6% Air Navigation Charges aircraft, the current economic and geopolitical context
4% might impact strongly airlines’ cost structure – and
4% Cabin Attendants
ultimately, airfares.
khấu hao
11% Costs related to aircraft: tài sản cố định
Passenger Service tài sản k cố định

7%
Ownership costs: Depreciation & amortization
Airport Charges
(owned aircraft), aircraft rentals (leased aircraft)
9% Aircraft maintenance
Flight Deck Crew
7% Flight crew costs: pilots and cabin crew
Station and Ground Flight and passengers costs:
10%
General and Administrative Airport charges & navigation charges
Ground and pax handling
12% Reservation, Ticketing, Sales, Promotion Passenger services (insurances, catering, flight
Maintenance and Overhaul cancellation)
Reservation, ticketing, sales and promotion (travel
25% Aircraft Ownership agencies, internet, GDS)
Fuel and Oil General & administration costs (procurement,
finances, HR…)
Sources: IATA
WHAT’S BEHIND OPERATING COSTS? DIFFERENT CATEGORIES OF COST
IATA airline typical cost structure (2019) Cost behavior

Total cost amount

Variable cost

Fixed cost

Level of activity

Variable cost: total amount of the cost fluctuate depending upon the level of activity (number of flights,
distance flown…). It is critical to forecast the level of activity to estimate this amount.
Semi-fixed cost: a portion of the cost will remain stable over time while another portion will fluctuate
depending on the level of activity. This is often the case for B2B contracts (maintenance, distribution…)
Fixed cost: Total amount of fixed cost do not fluctuate depending on the level of activity. They are
incompressible and have to be paid by the airline whether fleet is active or grounded.
Sources: IATA, covid-19 cash burn analysis
SIMILARLY TO RASK, CASK DECREASES WITH AVERAGE SECTOR LENGTH
CASK / Average sector length
12
CASKK (USD cents)

FSCs
10

LCCs

0
0 1000 2000 3000 4000 5000 6000
Average sector length (km)
AIRLINE COST STRUCTURE VARIES SIGNIFICANTLY FROM ONE BUSINESS MODEL TO
ANOTHER…
FSC vs LCC cost structure
- Icelandair & easyJet examples (2019)
LCCs’ CASK is To reduce operating costs, LCCs use the following
approx. 1/3 lower
than FSCs leverages:
Other
9.4 Personnel costs reduction:
USD cts / ASK  Minimum number of cabin crew / flight
Commercial &
8%  Crews handle multiple tasks (cabin clean up for
distribution
12%
6.6
instance)
8% USD cts / ASK Air nav charges
phí của air nav services  Support & crew offshoring
6%  Limited number of ground personnel
15% 3%
Aircraft ownership  High A/C utilization  increased crew productivity
38% Focus on direct distribution: web & app are favored
31% Personnel costs to lower distribution costs ko mất phí cho bên trung gian
thuê ngoài
9% Outsourcing of non-core activities (maintenance,
15% ground ops…)
5% Maintenance
5% Proportionately, share of fuel & oil costs is higher
20% 24%
Fuel & oil

Icelandair easyJet
Sources: The Airline Analyst, airlines annual report
 …AND FROM ONE REGION TO ANOTHER

Indian vs European airlines cost structure

- Air India vs Icelendair examples (2019)
Fuel and oil Employee Costs
Aircraft costs Maintenance, materials & engineering
Landing fees, en route & other variable charges Selling & distribution charges
Other expenses

Icelandair % 21% 31% 15% 5% 8% 12% 8%

Air India % 30% 9% 27% 11% 15% 6% 3%

Regardless airlines’ business model, operating costs structure may significantly vary from one region to
another, depending on the political, economical and demographic context.
Globally, labour cost is, after fuel, airlines’ second most important cost. Emerging countries’ operators
like Air India may generally benefit from lower wage costs than airlines based in developed countries.
Proportionately, share of fuel & oil costs and aircraft costs are inevitably higher.
Navigation fees and airport charges may also vary from one region to another
Market maturity and habits can affect airlines’ cost structure. In India for instance, most air passengers
book their flight tickets via physical travel agencies, which increases distribution charges for Indian
passengers. This trend is expected to reverse in the upcoming years.
Thị trường đã đạt tới mức bão hoà (market saturation) khi tốc độ tăng trưởng của thị trường giảm dần và tăng trưởng của các doanh nghiệp trong thị trường cũng
Đây là một
giảm dần. Sources: dấu hiệu
The Airline cho thấy thị trường đã đạt tới giới hạn về khả năng tăng trưởng và phát triển.
Analyst
Khi thị trường đạt tới mức bão hoà, sự cạnh tranh giữa các doanh nghiệp trở nên khốc liệt hơn, doanh số bán hàng giảm và các doanh nghiệp phải tìm cách để
giảm chi phí và tăng cường hiệu quả sản xuất để có thể tiếp tục duy trì mức lợi nhuận.
THE COST OF LAUNCHING A STARTUP AIRLINE
Being highly regulated, capital intensive and subject to macroeconomics changing conditions, launching a
startup airline is a complex, long and costly journey. Project owners have to convince investors, authorities
and suppliers of their reliability in terms of costs and revenue forecasts and in terms of safety.
The typical timeline for airline startup is 12-14 months and requires a minimum upfront investment of 6 million
USD to cover pre-operating expenses, startup launch and reserves and can go up to dozens million USD.

“ If you want to be a Millionaire, start with a Typical pre-entry into service activities
billion dollars and launch a new airline.
AOC Application Operating licence application
Sir Richard Branson

”
Founder and Chairman,
Virgin Group
A/C sourcing Commercial

Office rental & furniture Crew recruitment & training

Route application

Deposits (fuel, airport, tools…)

PSS selection & implementation

 3. Focus on cost-reduction opportunities

© Thomas Pougheon (flickr)

TO COMPENSATE LONG TERM DECLINE IN RASK, AIRLINES’ COMMON CHALLENGE IS TO
CUT CASK

From the 1960s to the 2015s, average global

RASK decreased by 51%, resulting mainly from
deregulation and increased competition.

In this context, unit revenue (RASK) increase is

not a viable long-term strategy for airlines
willing to increase their profit margin. Air
transport has become a “common good” in
most developed countries.

Reducing CASK is hence airlines’ only long-

term option to increase their profit margin –
or at least avoid losses. Since the 1960s,
airlines managed to decrease global average
CASK by 54%, thanks to thin operating,
commercial and financial strategies as well as
significant A/C performance improvements.
FUEL PRICE VOLATILTY HAS ALWAYS BEEN A THREAT TO AIRLINES’ PROFITABILITY

Jet fuel price developments – IATA February Jet fuel is kerosene-based and therefore derived from
2022 petroleum. Cost of jet fuel tracks crude oil prices.

Airlines’ main cost driver is highly variable. After a

significant – but temporary - drop in March 2020, jet
fuel prices are surging above pre-pandemic levels and
threatening airlines’ recovery plans.

According to Delta Airlines CFO Dan Janki, “Each 5-

cent increase in fuel represents $40 million of
expense”.

On top of concerning increase in jet fuel prices, public

policies are increasingly pushing airlines to use SAF
(Sustainable Aviation Fuel). In the UE, Fit for 55
proposes additional fuel taxes and a mandate to
increase SAF utilization to 2% of jet fuel use by 2025
IATA estimates a 70.6 USD B impact of jet fuel price and to at least 5% by 2030. Yet, because of insufficient
developments on 2022's industry total fuel bill
supply, SAF is 3 to 4 times more expensive than
Sources: IATA Jet fuel Price monitor conventional fuel.
HOW AIRLINES CAN PROTECT THEMSELVES FROM JET FUEL PRICE SPIKES?

Fleet choice & a/c Operating modern, fuel-efficient aircraft, retiring old aircraft => May
improvements require strong upfront investment cost.

Fuel hedging Fuel hedging was a very popular practice before the pandemic crisis. It
is an agreement set in advance on constant price for a period of time.
It can be used to create a partial buffer between the price of oil and its
effect on airlines’ expenditure. Hedging has shown its limit during the
Fuel cost
crisis, as most airlines suffered huge losses, being hold by contracts for
mitigation
delivery way above 2020 prices. Ryanair reported a loss of 1.1 billion
strategies
USD because of fuel hedges.
khoản phụ phí bù cho việc tăng giá dầu -> airline tăng giá vé lên (bao gồm phí đó) để tránh lỗ từ tiền fuel (nhưng tăng có tính toán)

Fuel surcharge Introducing fuel surcharge or increasing ticket base fare is a way to
pass the fuel price rise on passengers. Yet in the given traffic recovery
context, this strategy may not be viable on the long term.

Fuel efficiency
policy The growing environmental concern, the proven impact of fuel price
on airlines’ profitability and digitalization leads carriers to implement
company-wide policies to optimize fuel consumptions at every stage,
from flight ops to marketing, including ground ops and maintenance.
Sources: Reuters, Ryanair to scale back fuel hedging policy
HOW TO REDUCE LABOUR COSTS: A GLIMPSE INTO LCCs STRATEGIES
ASK: khả năng cung ứng ghế của một hãng hàng không -> ASK càng lớn -> airlines đó càng
có khả năng cung ứng được nhiều ghế hơn cho khách -> vận chuyển đc nhiều khách hơn

FSCs vs LCCs employee performance

LCCs’ recipe: Less employees, more

productivity
số lg nhân viên tg đg đầy đủ time làm vc
Number of FTE / ASK (million)
aircraft / FTE
190
8.4

58
2.2

Vietnam Vietjet Vietnam Vietjet

Variable %/Annual salary 11% 26% Airlines Air Airlines Air

Globally, despite wages variation from one country to another, employee cost is airlines’ second most
important cost-driver.
LCCs have become champions in optimizing employee costs and increasing employees productivity, via the
combination of several mechanisms like outsourcing, minimum number of cabin attendants and incentive
pay.
Sources: McKinsey, A better approach to airline costs, The Airline Analyst, annual reports
FTE = Full-Time Equivalent
OUTSOURCING ALLOWS AIRLINES TO FOCUS ON VALUE ADDED EFFORTS, IMPROVE
EFFICIENCY OF COSTS & EXPEDITE ENTRY INTO SERVICE
Typical outsourcing decision path Yes No
Is this activity required?

No Is the activity in-line with the Yes

company strategy?

Is the activity critical for Yes Is making it in-house cost- Yes

operations? competitive?
No
Yes No No
Are suppliers available on the Is there a strong business case Is the capacity available in-
market? for making in-house? house?
No Yes Yes

Invest to Redefine or
Outsource Insource
insource eliminate

From ground ops to distribution, all non-core function of an airline can be outsourced. The benefits are:
Cost-reduction: no investment, hiring & training required
Redirection of company resources to invest in areas of the core business that are more strategic to
Chuyển hướng các nguồn lực của công ty để đầu tư vào các lĩnh vực kinh doanh cốt lõi mang tính chiến lược hơn đối với
the operator nhà điều hành, thay vì quan tâm vào non-core function
Risk mitigation of exploring new markets, by shifting exposure and general liability cost to suppliers
Enhanced performance, by benefiting from suppliers’ expertise and local market knowledge.
 HOW TO REDUCE UNIT COSTS ? INCREASE AIRCRAFT PRODUCTIVITY

Average daily flight hours A higher aircraft utilization allows to produce more ASKs
(2019- Single-aisle A/C)
per aircraft, and ultimately to reduce overall costs per ASK
(particularly fixed costs)

Major 1 6.5
Several parameters affect airlines’ average daily aircraft
utilization:
Major 2 6.5 FSCs
Network: flight distance, frequencies, hub or P2P
Averagge network structure
+60% FH/day
Major 3 6.8 Operations: Turn-around time are optimized and
shorten by LCCs:
Ryanair 9.1 Refueling & catering optimization
Cabin cleaning
Easyjet 10.9 Staff productivity monitoring
Boarding / disembarking through several doors
LCCs
Small hand-luggage
Wizz Air 12.0
Scheduled and unscheduled maintenance:
optimizing ADOS by reducing unscheduled
AirAsia 13.0 maintenance events and streamlining planned
maintenance activities.
Sources: Airlines annual reports, The Airline Analyst, Airbus
HOW TO REDUCE UNIT COSTS ? IMPLEMENT LEAN MANAGEMENT IN THE AIRLINE
OPERATIONS
Example : Walk optimization during
Implementing lean techniques allows airlines to maintenance tasks
reduce waste, increase their productivity and
improve customer experience.
Eliminate waste (walk, breakdowns…)
Reduce unnecessary stocks (low utilization
rate, overcapacity…)
Limit variability (Tasks standardization)

Lean techniques can be implemented to all airlines

operations and their suppliers:
Turn-around processes
Maintenance
Passenger handling
Baggage handling
Pilot trainings
…
 4. Airlines revenue sources

© Thomas Pougheon (flickr)

RASK IS THE INDUSTRY STANDARD TO MEASURE AIRLINES’ OPERATING REVENUE PER UNIT

RASK computation
- Icelandair & easyJet examples (2019) Revenue per Available Seat Kilometer
Total operating shows revenue generated by each seat-
revenue (USD M)
/ Total ASK (M)
kilometer offered, whether booked or
empty.

𝑇𝑜𝑡𝑎𝑙 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑟𝑒𝑣𝑒𝑛𝑢𝑒

8 182 116 056
RASK =𝑇𝑜𝑡𝑎𝑙 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑆𝑒𝑎𝑡 𝐾𝑖𝑙𝑜𝑚𝑒𝑡𝑒𝑟

1 502 16 822
Available Seat Kilometer shows airline’s
Icelandair easyJet Icelandair easyJet supply.
ASK = number of seats available *
number kilometers flown
Total RASK (USD cent / ASK)
RASK includes both passenger and non-
passenger revenues.
8.9
7.1 To fine-tune airlines’ performance
analysis, network, revenue and finance
teams combine RASK with other metrics
Icelandair easyJet
like yield, average fare and load factors.
Sources: The Airline Analyst
HOW PASSENGER AIRLINES EARN MONEY?

Ticketing revenue Revenue generated from the sale of tickets to

passengers.

bán đồ trên máy bay, phí đóng gói kí gửi hành lý, phí chọn chỗ ngồi,...

Ancillary Revenue beyond the sale of tickets that is

generated by direct sales to passengers or
Airlines indirectly as part of the travel experience.
revenue
sources
Cargo Revenue generated from transporting freight or
mail in addition to passengers.

Other non-ticketing Revenue generated from other air-transport

activities
related activities like ACMI.
 REVENUE BREAKDOWN VARIES SIGNIFICANTLY DEPENDING ON THE AIRLINE’S BUSINESS
MODEL
2019 revenue breakdown
(% of total revenue)
Passenger revenue Ancillary revenue Cargo revenue Other revenues

Ryanair 45.4% 34.5% 20.1%

(LCC)

Icelandair 66.9% 6.4% 3.9% 22.8%

(FSC)

Traditionally, FSCs like Icelandair generate higher incomes per ticket sale but struggle to clear high ancillary
incomes.
LCCs like Ryanair aim at displaying the lowest base fares of the market. Low revenues generated by ticket sales
are compensated by the diversification of ancillary sources.
While LCCs tend to focus on their core business – transporting air passengers – FSCs generate revenue from
cargo – either flown in the belly of passenger aircrafts (so-called belly cargo) or in dedicated cargo aircraft.
Other revenues may be derived from aircraft rental incomes
Whether they apply a FSC or an LCC business model, airlines are increasingly looking for revenue diversification
opportunities.
Sources: Ideaworks, The Airline Analyst
REVENUE PER UNIT AND AVERAGE SECTOR LENGTH ARE CORRELATED
RASK / Average sector length
RASKK (USD cents)

Revenue per ASK decreases with average sector length.

Sources: The Airline Analyst, Airbus Consulting analysis – Based on latest annual reports available
 5. Airline revenue sources:
Ticketing & revenue management principles

© Thomas Pougheon (flickr)

THE REVENUE MANAGEMENT MANTRA
Selling
Revenue management can be defined as the strategy and
systems set by an airline with the intention of The right PRODUCT
maximizing its revenues.
To
This is usually achieved by predicting customer behavior,
and then optimizing pricing, product availability and The right CUSTOMER
distribution to generate the highest possible revenue.
at
The practice relies heavily on the collection of data and
the use of analytics to identify patterns and forecast The right TIME
levels of demand.
at
In practice, Revenue Management is different from yield
management, but these techniques are often mixed up. The right PRICE
at
Yield management focuses on the maximization of seat
revenue while revenue management has a wider scope.
The Right PLACE
MISSIONS OF REVENUE MANAGEMENT

By creating and managing fare classes, revenue Airline revenue management lies on basic law
management teams’ missions are: of supply and demand

In the mid-term: optimizing revenue of all the

Price
airline’s flights.

In the short-term:
Compensate losses due to cancellations Supply surplus
Compensate losses due to no show thanks
to overbooking Equilibrium
Equilibrium
price
Optimize load factor
Optimize average pax fare
Supply shortage
Optimize revenues of the flight by:
Securing last minute booking
opportunities (higher yield)
Compensating low demand periods Equilibrium Quantity
with attractive fares. quantity
ONE OF THE OBJECTIVE IS TO FAVOR HIGH-YIELD PASSENGERS’ BOOKINGS LIKE
BUSINESS CLASS TRAVELERS

Premium-classes contribution Premium-classes are a crucial source of airlines’ profit, especially

to airlines’ business on the international market.
khách cao cấp ít quan tâm đến giá cả và thời điểm đi hơn so với hành khách phổ thông -> khách cao cấp
Premium-classes Other trở thành nguồn thu nhập ổn định hơn cho các hãng hàng không vì nhu cầu của họ ít biến động.
High-end passengers travelling in premium classes are less price &
season-sensitive than economy-travelers. This makes them a more
stable source of revenue for airlines (demand is less fluctuating).

On average, premium-classes account for 5% of international

traffic but can reach 30% of revenues. These shares have been
stable over the past years.
đặt chỗ với giá vé cao hơn, thường là các hạng ghế đặc biệt
hoặc hạng thương gia
30% In essence, the average high-yield booking produces 3 to 5 times
5% more revenue than a typical leisure booking in economy class.
Nb of int'l pax Amount of int'l First-class can go up to 7 to 8 times the economy-class yield.
revenue

 Premium classes remain a crucial source of airlines’ revenue, especially on the international market
Sources: IATA, Oliver Wymae, Airbus
PASSENGER DEMAND MAY BE AFFECTED BY…

Market potential at departure and arrival

Passenger segments
Geographic features Macroeconomic &
Sociologic features exogenous factors
Economic features
Special events (sport events, concerts, religious events…)

Day of week, date

Hour of the day Airline offer: time, price,
Fare distribution
Ease of booking

Air competition cạnh tranh giữa các hãng với nhau

Alternative air products, air fares and air schedules Competition
Alternative means of transport
 FORECASTING DEMAND COMBINES AUTOMATED & HUMAN ANALYSES OF…

Historic traffic Airline’s + competition + other means of transport, when available

(internal data, airport data, MIDT, IATA, tourism offices, immigration…)
Past

Historic planning
Airline’s + competition (internal data)

Historic revenues Airline’s + competition (internal data + fare’s competition)

Fare evolutions Fare adjustments & potential impact on demand

Future

External context Economic growth, inflation, exchange rates…

Events Upcoming events that have not been taken into account in historic
data but may affect demand
TO MAXIMIZE REVENUE, PRODUCT AND PRICING AVAILABILITY ARE THEN ADJUSTED

Price 1 Market segment 1

Product 1 Price 2 Market segment 2
Price 3 Market segment 3
Price 4 Market segment 4
Product 2 Price 5 Market segment 5
Price 6 Market segment 6
Price 7 Market segment 7
Product 3 Price 8 Market segment 8
Price 9 Market segment 9
Product differentiation Price segmentation Different market segments

Vertical differentiation: Differences in the prices paid by With different price sensitivity
quality variations two customers that are not at different booking times
Horizontal differentiation: justified by the costs differences
differences in the product of supplying the service
Or both Sự khác biệt về giá thanh toán bởi hai khách hàng
không chứng minh bằng sự khác biệt về chi phí của việc cung cấp dịch vụ

 Each airlines offer is designated by a booking class. It provides airlines with a means for controlling fare
prices in order to best leverage available capacity.
 Revenue managers, backed by strong data analytical tools, decide how many of these fare classes to open
in order to cater to the optimal amount of demand potential.
TYPICAL PRODUCT DIFFERENTIATION STRATEGY
Emirates’ Economy branded fares SalamAir’s branded fares

Features are comparable at a glance thanks to green ticks Each category differentiates by a mix of both tangible and flexible
Branded fares details can be combined with invitation to features
upgrade

Airlines’ branded fare are based on the Good-better-best tariff model.

The base fare provides minimal amenities. tiện nghi tối thiểu
Amenities provided in each fare should be comparable at-a-glance by passengers.
Ticket flexibility is key price driver

Sources: airlines’ website

SIMPLE EXAMPLE OF REVENUE MANAGEMENT PRINCIPLE

400 SEATS AIRCRAFT Scenario 1 Scenario 2 Scenario 3

Ticket price:
80 pax 230 pax 200 pax
1000 USD

Ticket price:
300 pax 80 pax 150 pax
600 USD

Load factor 95 % 78% 88%

Revenue per passenger 684 897 829

Total revenue 260 000 USD 278 000 USD 290 000 USD

 This simplified example highlights the difference between load factor optimization, revenue per
passenger optimization and total revenue optimization.
 DUE TO THE PERISHABLE NATURE OF AIRLINE PRODUCTS, AIRLINES HAVE DEVELOPED
SOPHISTICATED PRODUCTS & SYSTEMS TO INCREASE THEIR OFFER ATTRACTIVENESS
Offer management at a given time =
1 Offer = 1 Product combined to 1 Fare Revenue Management

Products x Fares = Offer

Airlines’ product is not just a Up to 26 different fares for Up to 9 identical offers available in
seat in an aircraft! the same product real time

Revenue management teams use

Airlines product combines: Each product can be sold at
algorithms to stimulate demand
- Origin and destination different fares, depending on:
for seats that would otherwise
- Schedule - Estimated demanded
fly empty thanks to dynamic
- Cabin class - Booking time
offer. Airlines’ inventory
- On-board comfort - Competition positioning
management combines the use
- Airport & onboard services - Passengers segments’ price
of past data, present data and
- Ticket flexibility sensitivity
the analysis of trends…

hàng hoá dễ hư hỏng nhập kho bán

 Airlines product is a perishable commodity that cannot be warehoused or sold another day. An empty
seat is a missed opportunity to generate revenue but will burn cash anyway.
Điều này có nghĩa là hãng hàng không hoặc công ty vận chuyển vẫn phải chịu chi phí ngay cả khi ghế không được bán hoặc sử dụng. "Burn" ở đây thường ám
chỉ đến những chi phí mà công ty phải trả, chẳng hạn như nhiên liệu, bảo dưỡng, nhân sự và các chi phí hoạt động khác, bất kể chỗ ngồi có được điền đầy hay
không. Do đó, càng lâu chỗ ngồi càng trống thì chi phí mà công ty phải chịu càng lớn mà không có tương ứng với doanh thu tạo ra, vì vậy công ty sẽ tiêu tốn "
tiền mặt" nhiều hơn.
 6. Airline revenue sources:
Ancillary revenue

© Thomas Pougheon (flickr)

 doanh thu phụ

REVENUE MANAGEMENT SPECIALISTS HAVE DEVELOPED ANCILLARY REVENUE

STRATEGY FAR BEYOND SEAT SELECTION AND CHECKED BAGGAGES FEES
A la Carte Features
Consist of the amenities consumers can add to
their air travel experience. The list continues to
grow and the following are typical activities:
1) onboard sales,
2) checking of baggage and excess baggage,
3) assigned seats or better seats, Commission-Based Products
4) call center support for reservations,
Commissions earned by airlines on the sale of hotel
5) Payment options, including fees charged for
accommodations, car rentals and travel insurance.
purchases made with credit or debit cards,
6) priority check-in and screening, early boarding The commission-based category primarily involves
benefits, the airline‘s website, but it can include the sale of
7) onboard entertainment systems, duty-free and consumer products onboard aircraft.
8) Booking holds,
9) wireless internet access.
10) Airport services

Advertising Sold by the Airline

This category includes any advertising initiative
linked to passenger travel. The following are typical Frequent Flyer Programs*
activities: consists of the sale of miles or points to program
1) revenue generated from the inflight magazine, partners such as hotel chains and car rental
2) advertising messages sold in or on aircraft, companies, co-branded credit cards, online malls,
loading bridges, gate areas, and airport lounges, retailers, and communication services. Miles or
3) Fee-based placement of consumer products points sold directly to program members also
and samples. qualify.
Sources: Ideaworks
* Not recognized as ancillary revenue by all airlines
TOP “A LA CARTE” ANCILLARIES ARE MOSTLY LINKED TO COMFORT UPGRADES

From FSCs to ULCCs, baggage fees are top revenue-

Typical A la carte items revenue breakdown drivers
Typical A la carte items revenue breakdown

8%
Onboard retail & other
12%

Seating options
37%

Passenger use fees

42%
Baggage fees

Spirit

Sources: McKinsey, Leading from the front line how airlines can boost ancillary revenues, airline annual report
Passenger use fees are Spirit’s convenience fee for booking online.
ANCILLARY REVENUE PLAYED A KEY ROLE FOR OPERATORS DURING THE PANDEMIC

Top 10 Airlines as a percentage of total revenue (2020)

Ranking airlines by “ancillary revenue as a percentage of total

Ancillary revenue grew in financial
revenue", highlights ancillary revenue best strategists. Ancillary
importance and effectiveness during the
played a key role in reducing airlines’ overall net losses.
pandemic, especially for LCCs and hybrid
carriers. 60% Spirit
Wizz Air
In 2020 and for the first time, ancillary Viva Aerobus Allegiant

% of total revenue
revenue was the primary revenue source 50% Frontier
for Allegiant, Spirit, Viva Aerobus, and
Wizz Air as they passed the 50% Volaris
40%
threshold. Ryanair
Group
Pegasus
Over all, ancillary revenue as a 30% Vietjet Air
percentage of total airline revenue was Southwest
12.2 percent for 2019 and increased to
13.6% of total revenue in 2020. 20%
0 20 40 60 80
Ancillary revenue per passenger (USD)
Sources: Ideaworks
FREQUENT FLYER PROGRAMS ARE CRUCIAL SOURCES OF REVENUE WHEN ASSOCIATED
TO CO-BRANDED CREDIT CARDS
FFPs increase loyalty and are a great source of consumer data. But in 2020 and 2021, they were even more
góp phần hạn chế tổn thất
crucial to airlines associated to large programs. FFPs contributed to limit airlines’ losses, especially in the US.
When FFPs are associated with co-branded credit cards, they are not only directly linked with traffic demand
but with everyday consumer spending, which was less impacted by the pandemic.

Contribution of FFPs & Commission to ancillary How does it work? United Mileage Plus
revenue per airline type Program pricing and cash flow mechanics

United
purchase miles at
the best fare
Travel
revenue Banks & 3rd parties
71%
purchase miles
28% Marketing
5% 6%
revenue
Td'l airlines US Majors Ancillary LCCs
Champs
FFP & Commission based A la Carte
While FFP revenue is significant for FSCs carriers, especially in
the US, it is still a marginal activity for LCCs and hybrids.
MileagePlus
Sources: Forbes, How airlines make billions from monetizing FFP, Ideaworks, Cartrawler redeem miles
 ON-BOARD INTERNET CONNECTIVY CREATES NEW ANCILLARY REVENUE STREAMS FOR
AIRLINES
Freemium connectivity Data collection Sponsored access Brand activations E-Commerce

Internet connectivity is B2B partnerships: B2B partnerships:

increasingly offered Improve customer Telco’s (roaming), credit Immfly x Iberia Express:
Internet connectivity
free of charge experience card companies (perk)… Red Bull, Oreos, Volvo
Take-up rate là tỷ lệ số lượng khách hàng thực sự sử dụng một sản phẩm hoặc dịch vụ so với
portal as retailing
số lượng khách hàng có thể tiềm năng sử dụng sản phẩm hoặc dịch vụ đó platform
Free internet connectivity sees average take-up rates of around 30-40%.
Given the low take-up rate for paid connectivity, it has moved to a freemium model: airlines allow passengers
to message for free, and hope some will upgrade to a faster tier (social media, email, browsing, streaming).
kiếm tiền
Brand partnerships are key to monetize internet-connectivity: Sponsored access is often used as promotion to
Trong lĩnh vực hàng không, brand partnership
introduce internet connectivity (mostly financial services and telco brands). thường là một hợp đồng giữa hai thương hiệu
khác nhau để tăng cường hiệu quả quảng cáo,
Advertising and product placement have been recently growing. tăng doanh số và mở rộng thị trường tiềm năng.
tiềm năng sinh lợi
E-commerce is seen as potentially lucrative: cross-selling (airport transfer, destination content), shopping (incl
duty free, groceries), partnerships.
Sources: Airbus, AirlineTrends
 7. Airline revenue sources:
Cargo

© Thomas Pougheon (flickr)

CARGO IS ALSO AN ENABLER TO REVENUE DIVERSIFICATION BUT REQUIRES ADAPTED
FACILITIES
Contribution of cargo to global airlines revenue Before the crisis, cargo contributed to 14% of global
(% total revenue) airlines revenue. 50% of global air cargo was transported
in belly cargo on passenger aircraft.

2021 was a record-year for airline cargo revenue, with 175

44% billion USD generated by the transport for goods. This can
41% be explained by a resilient demand for goods, need for
14%
rapid e-commerce shipments, transport of personal
protective equipment (PPE) and medicines. The lack of
2019 2020 2021 belly cargo capacity combined to a strong demand put
Contribution of cargo to Korean Air revenue significant pressures on air freight rates, which benefited
(% total revenue) to cargo carriers.

Pandemic crisis has arouse interest of LCCs like Scoot or

Spicejet. They both temporarily converted passenger
aircraft into freighters to meet the surge in demand.
56%
In 2020, Korean Air derived more than half of its revenue
20% from cargo activities. As cargo capacity is expected to
recover slower than demand, this emphasize the
2019 2020 relevance of airlines’ revenue diversification.
Sources: IATA
 8. Conclusion

© Thomas Pougheon (flickr)

CONCLUSION

RASK & CASK are respectively used to calculate airlines revenue and costs per unit. These metrics are the
basis for airline performance analyses when combined with monitoring of each cost-driver and routes’
profitability.
Airlines’ main operating items are fuel and employee costs. Airlines’ expenses comprise variable (like fuel or
navigation charges), semi-fixed (like distribution costs) and fixed costs (like aircraft ownership costs). Aircraft
size and flying distance will have a direct impact on CASK: CASK reduces when average sector length
increases.
Airline cost and revenue structure vary significantly from one business model to another and from one
region to another.
With the long-term decline in RASK, airlines have developed several strategies to reduce their operating costs
like fuel cost mitigation strategies or increase of aircraft productivity.
Commercial airlines revenue sources are mainly ticketing, ancillary, cargo & other non-ticketing activities.
Revenue management objective is to sell the right product to the right customer at the right time and place
by managing fare classes. It combines product and price differentiation techniques to target different
market segments.
Ancillary revenue sources are made of A la Carte amenities, Commission based products, advertisement and
FFPs. Like cargo, they are key to revenue diversification.
USEFUL SOURCES

Global organization & leading market intelligence sources:

ICAO: https://www.icao.int/sustainability/Pages/economic-analysis.aspx
IATA economics: https://www.iata.org/en/publications/economics/
ACI: https://aci.aero/category/press-releases/
CAPA: https://centreforaviation.com/
Airbus GMF: https://www.airbus.com/en/products-services/commercial-aircraft/market/global-market-forecast
Ideaworks: https://ideaworkscompany.com/reports/

Consultancy firms & other dedicated blogs:

McKinsey: https://www.mckinsey.com/industries/travel-logistics-and-infrastructure/our-insights
Oliver Wyman: https://www.oliverwyman.com/our-expertise/industries/transportation/aviation.html
Aviation Week: https://aviationweek.com/
Runway Girl Network: https://runwaygirlnetwork.com/
Simple Flying: https://simpleflying.com/
OAG: https://www.oag.com/insights
Amadeus: https://amadeus.com/en/insights/blog