Airline business block 5
Week 1, lecture 1
Home airport potentials:
- Catchment area = O+D potential
o Population size
o Economic activity
o Wealth
o Accessibility
o Surface alternatives
o Surrounding airports
- Geographic location = HUB potential
o Airway routing
o Directionality
o Capacity
o Time zone
o Connecting airlines
Every airport has 2 potential forces (O+D potential & HUB potential) relevant for the airline.
Airline networks are designed for optimal utilization of either one of two of both forces.
Product definition:
Exploiting airport potential: from, to or via the home airport.
Exploitation Explaining
Via home product Exploiting the HUB quality of the home airport
To home product Exploiting the attractiveness of the home
airport
From home product Exploiting the catchment area of the home
airport
X Leisure market EVFR market Business market
Via home product
To home product
From home product
Which other airlines operate to/from the home airport?
- Home carriers
- Visiting carriers
Connecting airports is connecting potential forces. You need to connect the right airports to the right
markets.
Week 1, lecture 2
Italian markets are fragmented.
,Week 2, lecture 1
An airline produces many rotations operated by many aircraft.
Airline challenge: managing all these different costs.
Cost management:
- Cost allocation
- Cost control
Cost allocation:
- Management dashboard: where do we generate cost?
- Cost effectiveness: what do we get from those cost?
- Cost comparison: are we cost competitive?
𝑇𝑜𝑡𝑎𝑙 𝒇𝒊𝒙𝒆𝒅 𝑐𝑜𝑠𝑡 + 𝑡𝑜𝑡𝑎𝑙 𝒗𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝑐𝑜𝑠𝑡 + 𝑡𝑜𝑡𝑎𝑙 𝒊𝒏𝒅𝒊𝒓𝒆𝒄𝒕 𝑐𝑜𝑠𝑡 𝒑𝒆𝒓 𝒚𝒆𝒂𝒓
𝐶𝑎𝑠𝑘 (𝑢𝑛𝑖𝑡 𝑐𝑜𝑠𝑡) =
𝑻𝒐𝒕𝒂𝒍 𝒑𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒐𝒏 (𝑨𝑺𝑲′ 𝒔)
𝐶𝑜𝑠𝑡 𝑝𝑟 𝑓𝑙𝑖𝑔ℎ𝑡 = (𝑇𝑜𝑡𝑎𝑙 𝒇𝒊𝒙𝒆𝒅 𝑐𝑜𝑠𝑡 𝑤𝑖𝑑𝑒 𝑏𝑜𝑑𝑦 𝑓𝑙𝑒𝑒𝑡 𝑝𝑒𝑟 𝑓𝑙𝑖𝑔ℎ𝑡 ℎ𝑜𝑢𝑟 ∗ 𝑓𝑙𝑖𝑔ℎ𝑡 𝑡𝑖𝑚𝑒)
+ 𝑡𝑜𝑡𝑎𝑙 𝒗𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝑐𝑜𝑠𝑡 𝑓𝑜𝑟 𝑡ℎ𝑖𝑠 𝑓𝑙𝑖𝑔ℎ𝑡
𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
+ (𝑡𝑜𝑡𝑎𝑙 𝒊𝒏𝒅𝒊𝒓𝒆𝒄𝒕 𝑐𝑜𝑠𝑡 ( ) ∗ 𝐴𝑆𝑀 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 𝑏𝑦 𝑡ℎ𝑖𝑠 𝑓𝑙𝑖𝑔ℎ𝑡)
𝑡𝑜𝑡𝑎𝑙 𝐴𝑆𝑀
Cost per product (B to F)
𝒕𝒐𝒕𝒂𝒍 𝑐𝑜𝑠𝑡 𝑓𝑙𝑖𝑔ℎ𝑡 𝐵 𝑡𝑜 ℎ𝑜𝑚𝑒 𝒕𝒐𝒕𝒂𝒍 𝑐𝑜𝑠𝑡 𝑓𝑙𝑖𝑔ℎ𝑡 ℎ𝑜𝑚𝑒 𝑡𝑜 𝐹
𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 = +
𝑛𝑟. 𝑜𝑓 𝑠𝑒𝑎𝑡 𝑜𝑓 𝑛𝑎𝑟𝑟𝑜𝑤 𝑏𝑜𝑑𝑦 𝑛𝑟. 𝑜𝑓 𝑠𝑒𝑎𝑡𝑠 𝑤𝑖𝑑𝑒𝑏𝑜𝑑𝑦
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑐𝑜𝑛𝑛𝑒𝑐𝑡𝑖𝑣𝑖𝑡𝑦 = 𝒎𝒂𝒙𝒊𝒎𝒖𝒎 𝑢𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 − 𝒂𝒄𝒕𝒖𝒂𝒍 𝑢𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦
If this connectivity is by coincidence: no cost
If aircraft need to wait for this connectivity: cost
𝒕𝒐𝒕𝒂𝒍 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑐𝑜𝑠𝑡
𝐹𝑙𝑒𝑒𝑡 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝐴𝑆𝐾 =
𝐴𝑆𝐾 ′ 𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑
, Cost control:
- Cost allocation: identify real cost
- Cost effectiveness: do we need/can we sell what we get for the cost
- Cost comparison: are we cost competitive
Many (variable) costs are not directly manageable:
- Fuel costs
- User chargers
- Labour costs
Cost control: utilizing resources
Cost effectiveness: optimal utilization of production capacity
Airline planning: minimizing fixed cost per unit (ASK)
Fixed cost are fixed with time (cost per year, per month etc.)
Over time, fixed cost become variable:
- Over time we can change the fleet
- Over time we change the workforce
Cost control (2):
𝑇𝑜𝑡𝑎𝑙 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 (𝑇𝑂𝐶) = 𝑡𝑜𝑡𝑎𝑙 𝒇𝒊𝒙𝒆𝒅 𝑐𝑜𝑠𝑡 + 𝑡𝑜𝑡𝑎𝑙 𝒗𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝑐𝑜𝑠𝑡
- As output increases, total cost go up and unit cost go down
Total cost unit cost
Cost efficiency = optimal utilization of production capacity
Week 2, lecture 2
Cost efficiency = optimal utilization of fixed production capacity
Cost effectiveness = optimal use of fixes production capacity
When production goes up, cost per unit goes down
Main questions:
- Can we sell the units produced
- Can we sell at prices higher than the cost
- Which products contribute to profitability
Week 1, lecture 1
Home airport potentials:
- Catchment area = O+D potential
o Population size
o Economic activity
o Wealth
o Accessibility
o Surface alternatives
o Surrounding airports
- Geographic location = HUB potential
o Airway routing
o Directionality
o Capacity
o Time zone
o Connecting airlines
Every airport has 2 potential forces (O+D potential & HUB potential) relevant for the airline.
Airline networks are designed for optimal utilization of either one of two of both forces.
Product definition:
Exploiting airport potential: from, to or via the home airport.
Exploitation Explaining
Via home product Exploiting the HUB quality of the home airport
To home product Exploiting the attractiveness of the home
airport
From home product Exploiting the catchment area of the home
airport
X Leisure market EVFR market Business market
Via home product
To home product
From home product
Which other airlines operate to/from the home airport?
- Home carriers
- Visiting carriers
Connecting airports is connecting potential forces. You need to connect the right airports to the right
markets.
Week 1, lecture 2
Italian markets are fragmented.
,Week 2, lecture 1
An airline produces many rotations operated by many aircraft.
Airline challenge: managing all these different costs.
Cost management:
- Cost allocation
- Cost control
Cost allocation:
- Management dashboard: where do we generate cost?
- Cost effectiveness: what do we get from those cost?
- Cost comparison: are we cost competitive?
𝑇𝑜𝑡𝑎𝑙 𝒇𝒊𝒙𝒆𝒅 𝑐𝑜𝑠𝑡 + 𝑡𝑜𝑡𝑎𝑙 𝒗𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝑐𝑜𝑠𝑡 + 𝑡𝑜𝑡𝑎𝑙 𝒊𝒏𝒅𝒊𝒓𝒆𝒄𝒕 𝑐𝑜𝑠𝑡 𝒑𝒆𝒓 𝒚𝒆𝒂𝒓
𝐶𝑎𝑠𝑘 (𝑢𝑛𝑖𝑡 𝑐𝑜𝑠𝑡) =
𝑻𝒐𝒕𝒂𝒍 𝒑𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒐𝒏 (𝑨𝑺𝑲′ 𝒔)
𝐶𝑜𝑠𝑡 𝑝𝑟 𝑓𝑙𝑖𝑔ℎ𝑡 = (𝑇𝑜𝑡𝑎𝑙 𝒇𝒊𝒙𝒆𝒅 𝑐𝑜𝑠𝑡 𝑤𝑖𝑑𝑒 𝑏𝑜𝑑𝑦 𝑓𝑙𝑒𝑒𝑡 𝑝𝑒𝑟 𝑓𝑙𝑖𝑔ℎ𝑡 ℎ𝑜𝑢𝑟 ∗ 𝑓𝑙𝑖𝑔ℎ𝑡 𝑡𝑖𝑚𝑒)
+ 𝑡𝑜𝑡𝑎𝑙 𝒗𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝑐𝑜𝑠𝑡 𝑓𝑜𝑟 𝑡ℎ𝑖𝑠 𝑓𝑙𝑖𝑔ℎ𝑡
𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
+ (𝑡𝑜𝑡𝑎𝑙 𝒊𝒏𝒅𝒊𝒓𝒆𝒄𝒕 𝑐𝑜𝑠𝑡 ( ) ∗ 𝐴𝑆𝑀 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 𝑏𝑦 𝑡ℎ𝑖𝑠 𝑓𝑙𝑖𝑔ℎ𝑡)
𝑡𝑜𝑡𝑎𝑙 𝐴𝑆𝑀
Cost per product (B to F)
𝒕𝒐𝒕𝒂𝒍 𝑐𝑜𝑠𝑡 𝑓𝑙𝑖𝑔ℎ𝑡 𝐵 𝑡𝑜 ℎ𝑜𝑚𝑒 𝒕𝒐𝒕𝒂𝒍 𝑐𝑜𝑠𝑡 𝑓𝑙𝑖𝑔ℎ𝑡 ℎ𝑜𝑚𝑒 𝑡𝑜 𝐹
𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 = +
𝑛𝑟. 𝑜𝑓 𝑠𝑒𝑎𝑡 𝑜𝑓 𝑛𝑎𝑟𝑟𝑜𝑤 𝑏𝑜𝑑𝑦 𝑛𝑟. 𝑜𝑓 𝑠𝑒𝑎𝑡𝑠 𝑤𝑖𝑑𝑒𝑏𝑜𝑑𝑦
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑐𝑜𝑛𝑛𝑒𝑐𝑡𝑖𝑣𝑖𝑡𝑦 = 𝒎𝒂𝒙𝒊𝒎𝒖𝒎 𝑢𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 − 𝒂𝒄𝒕𝒖𝒂𝒍 𝑢𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦
If this connectivity is by coincidence: no cost
If aircraft need to wait for this connectivity: cost
𝒕𝒐𝒕𝒂𝒍 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑐𝑜𝑠𝑡
𝐹𝑙𝑒𝑒𝑡 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝐴𝑆𝐾 =
𝐴𝑆𝐾 ′ 𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑
, Cost control:
- Cost allocation: identify real cost
- Cost effectiveness: do we need/can we sell what we get for the cost
- Cost comparison: are we cost competitive
Many (variable) costs are not directly manageable:
- Fuel costs
- User chargers
- Labour costs
Cost control: utilizing resources
Cost effectiveness: optimal utilization of production capacity
Airline planning: minimizing fixed cost per unit (ASK)
Fixed cost are fixed with time (cost per year, per month etc.)
Over time, fixed cost become variable:
- Over time we can change the fleet
- Over time we change the workforce
Cost control (2):
𝑇𝑜𝑡𝑎𝑙 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 (𝑇𝑂𝐶) = 𝑡𝑜𝑡𝑎𝑙 𝒇𝒊𝒙𝒆𝒅 𝑐𝑜𝑠𝑡 + 𝑡𝑜𝑡𝑎𝑙 𝒗𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝑐𝑜𝑠𝑡
- As output increases, total cost go up and unit cost go down
Total cost unit cost
Cost efficiency = optimal utilization of production capacity
Week 2, lecture 2
Cost efficiency = optimal utilization of fixed production capacity
Cost effectiveness = optimal use of fixes production capacity
When production goes up, cost per unit goes down
Main questions:
- Can we sell the units produced
- Can we sell at prices higher than the cost
- Which products contribute to profitability
