Airline Revenue KPIs
Essential revenue metrics that all airline product designers & suppliers should know
Is it easier for airlines to save money or earn revenue? Many airlines are now asking their product designers and suppliers to demonstrate how using a certain product or service will contribute to revenue, suggesting that the latter is true. But while most designers and suppliers have significant expertise demonstrating and delivering cost efficiencies, revenue side is new ground. To help, I explain in this article how airlines measure revenue and profitability so that suppliers discussing revenue with their customers and designers seeking budgets can ensure that everyone is speaking the same language.
Route and network level
Airlines measure revenue in two ways. Adding together the value of all passenger tickets, excess baggage and ancillaries from flights between a pair of cities gives “route level” revenue. When passengers have a connecting ticket with more than one flight before they reach their destination, revenue is allocated between the two flights by a process called proration, typically by distance flown so that a longer flight takes a higher share.
The problem with this approach is that the allocation of revenue through proration is somewhat arbitrary. When route profitability is calculated by taking away costs, things get even harder as any allocation of the airline’s fixed costs like headquarters staff is completely arbitrary.
As a result some flights, especially short ones, may appear unprofitable at the route level even if they are worth operating because connecting passengers contribute to the success of longer flights. For this reason, airlines add together the un-prorated value of all revenues to calculate the so-called network level revenue of a flight.
In general the difference between route and network level can be summarised as:
Network level revenue > route level revenue
Sum of route level revenue = total airline revenue
Sum of network level revenue > total airline revenue
Golden rule: all flights should be profitable at the network level
Classical performance indicators
Available Seat Kilometres (ASK) – an airline’s output
When an airline flies an aircraft with a certain configuration between a certain pair of cities, the number of seats and distance is fixed by capacity and geography.
Number of seats x distance flown = ASK
Revenue Passenger Kilometres (RPK) – an airline’s utilisation
In the same way that an airline’s output is determined by the cumulative distances that each seat is flown, it’s utilisation can be measured by how far it carries passengers.
Number of passengers x distance flown = RPK
Remember that ASK > RPK
Seat Factor vs. Load Factor
Seat Factor = number of passengers / number of seats
Load Factor = RPK / ASK
At first glance they appear the same but in fact they are not. To see why, imagine an airline has one aircraft with 100 seats on. The aircraft flies one 1,000 kilometre flight with 100 passengers and then one 100 kilometre flight with 10 passengers:
Total seats = 200 and total passengers = 110, so Seat Factor = 110 / 200 = 55%
But ASK = ( 100 x 1,000 ) + ( 100 x 100 ) = 110,000
And RPK = (100 x 1,000 ) + ( 100 x 10 ) = 101,000
So Load Factor = 101,000 / 110,000 = 91.8%
This makes sense intuitively. Since all seats on the long flight are sold and only a few on the short flight are sold, it follows that most of the airline’s output has been utilised so the Load Factor should be high. In terms of performance and profitability, Load Factor offers deeper insight than the more trivial Seat Factor.
Unit Revenue vs. Yield vs. ATV
Airlines define Unit Revenue = Revenue / ASK (RASK)
And Yield = Revenue / RPK
And also Average Ticket Value = Revenue / number of passengers (ATV)
Note that Yield > Unit Revenue because ASK > RPK
RASK helps the airline see how well it’s output is being sold – higher RASK indicates either more seats being sold or higher ticket prices (or both). But because Yield is limited to seats that were actually sold, Yield shows the airline how well it’s commercial policies are performing.
In the same way that Load Factor offers deeper insights than Seat Factor, Yield is perhaps more powerful than ATV.
In practice airline managers often use Load Factor, Seat Factor, Yield, RASK and ATV interchangeably. They often consider Load Factor and Seat Factor the same, and unless they specifically talk about RASK, when they say Yield they probably mean ATV rather than Revenue / RPK.
As a product designer or supplier you should be careful to ensure that your metrics are precise so that a formal evaluation of your proposal is robust. But watch out for your customers and revenue specialists being less precise in meetings.
Metric vs. Imperial system
In all the above you can substitute miles (M) for kilometres (K), e.g. RASM rather than RASK – just remember to be consistent and always use either one or the other.
oliver AT ransonpricing DOT com