[Solution]Airline Economics and the Metric System used in Airline Economics

  (20 points) Know Your Metrics   This table shows data for four fictitious airlines:   Metric Air Covid Air Ebola Air Dengue Air Rabies…

 

(20 points) Know Your Metrics

 
This table shows data for four fictitious airlines:
 

Metric
Air Covid
Air Ebola
Air Dengue
Air Rabies

Number of Aircraft
50
85
100
45

Seats per Aircraft
150
125
180
230

Flight Segments per Day
3.4
2.6
4.4
1.8

Avg Hours per Flight
2.8
3.4
2.2
6.9

Load Factor
85%
82%
87%
80%

Avg Ticket Price
$120
$98
$95
$139

Ancillary Revenue per Pax
$15
$20
$50
$5

CASM (cents)
9.82
8.46
10.10
12.54

Stage Length (miles)
895
1,056
1,247
698

 
Using these data, you can answer each of the following 10 questions:

 
 

1/2.  Airline with the highest RASM:
 
        And that RASM is:

3/4.  Airline with highest daily aircraft utilization:
 
        And that utilization is:

5/6.  Airline with most annual passengers:
 
        And that number is:

7/8.  Airline with the lowest margin:
 
        And that margin is:

9/10.  Airline with the highest absolute annual profit:         And that profit is:

 
 
 

(5 points) State the three categories of passenger ticket prices and write a short explanation of how each one is used

 

(10 points) Many people, even those who work at airlines, don’t understand Revenue Management well. But you do! Listed below are myths often believed. State in a short sentence or two for each why every myth below is false:

 
Revenue Management:
 

Raises an airline’s yield
Sets airline prices
Is mostly a computer system
Is used only by airlines
Only works when demand exceeds supply
Is based on the Revenue Opportunity Model
Causes all airline oversales
Is complicated no matter how simple or complicated the airline is
Was initially developed during World War II
Is required for an airline to be profitable

 
 

(5 points) Describe the concept of a pricing “fence”, and give an example of one in an airline context. Then, state example of a pricing fence used in a context outside the airline industry.

 
 

(5 points) Describe a hub and spoke network design, and state one very positive aspect of this approach and one very negative aspect of this approach.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

(25 points) You are starting an airline and need to provide your potential investors with a planned schedule. The schedule needs to meet both economic and operational requirements in order to win the investors’ confidence. Here are the constraints:

 

Cities to be served and distance between them (in flight hours). “S” means a small city, you can guess what “L” means I bet!

 

Cities
UVE (S)
VIE (S)
WOW (S)
XAP (L)
YAM (L)
ZOO (L)

UVE (S)

1.5
4.5
3.0
1.5
6.0

VIE (S)
1.5

2.0
4.0
1.0
5.0

WOW (S)
4.5
2.0

1.0
3.5
4.0

XAP (L)
3.0
4.0
1.0

2.5
3.0

YAM (L)
1.5
1.0
3.5
2.5

2.0

ZOO (L)
6.0
5.0
4.0
3.0
2.0

 

Five aircraft each capable of a six-hour fully loaded trip
Maintenance needs the airplanes at least six continuous hours every day
Operations needs a 40-minute turn time minimum (time between flights)
Large to Large (L-L) flights can support up to three daily trips and be profitable
Large to Small (L-S) flights can support up to two trips per day profitably
Small to Small (S-S) flights can support no more than one flight per day
Note that maintenance done at night has lower opportunity cost than daylight

 
Schedule this airline to meet all profit and maintenance constraints and show:
 

The flight line for each aircraft (meaning exactly where, and at what time, the airplane is at every hour of the day). For example, here is one way you could show a partial day for one airplane:

 
0600        1030       1110              1210  1250 1550
UVE            WOW    WOW             XAP XAP ZOO
 
Note that this uses the times from the table above for the flights and leaves 40 minutes on ground time in each station. To complete the day, you’d have to be sure the aircraft gets its maintenance time and keep track of the cities being served to stay profitable. Since this plane starts its day in UVE, at least one of your five planes better end its day in UVE so you can run this schedule again the next day.
 

The daily utilization of the fleet (hours per day), but no less than eight hours per day. Bonus of +1 on this exam if you can get 13 hours or more per day per aircraft while keeping all flights profitable. Remember, utilization is only the time flying.

 

The name of each O&D served by your schedule

 
Please remember that where a plane ends its day is where it must begin the next morning! Violating this reality takes 10 points off this answer!
 
 

(5 points) Describe the concept of the Revenue Opportunity Model, including but not limited to: how it used, what are its features, why is it used

 

(5 points) In the years immediately after de-regulation of airlines in the U.S., we discussed four innovations that have each become common. Describe any two of them and explain, beyond just their name, what these are.

 
 

(10 points) Frequent Flier programs are an important part of an airline’s marketing.

 
Regarding these programs:
 

Describe the multiple ways that these programs improve airline revenues

 

Why are these programs more valuable to airlines from smaller cities than large hubs?
Explain the role that a credit card plays in the frequent flier program’s economics and the customers’ loyalty

 
 
 

(5 points) Your airline offers a frequent flier program, and overwhelmingly your customers like to use their rewards to fly you to Hawaii. Describe for me a specific formula or approach you would ask your revenue management team to take to value a “free ticket” to Hawaii from a frequent flier member who earned enough reward for this.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

(5 points) Here is a table from a recent Air Travel Consumer Report, published by the U.S. Department of Transportation:

 
 
 
 
Using this chart, tell:
 

Why do you think refunds are such a large amount of the complaints right now? What do you think the airlines with single digits in this category are doing differently, or is there another reason?

 

This report defines “Customer Service Complaints” as:

Customer Service: Rude or unhelpful employees, inadequate meals or cabin service, treatment of delayed passengers, unsatisfactory seat assignment (non-disability), problems with family seating.
Note that American has more than double every other airline for these kinds of complaints. What would you do if you ran American Airlines given this (the answer could be nothing, but for any answer please explain your reasoning)
 

Tell me whether this chart would make you consider trying or avoiding any specific airlines, and why

 

Assignment status: Solved by our experts

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