Lakehighlands:Originally Posted by LakeHighlandsThese airlines are all publicly traded companies, and as such you or anyone else can freely access their information from their annual reports. If you look at their annual reports you will find all the information you need to see that CO far outperforms the other Legaciy carriers. The balance sheet contains much of the information you need.
Unfortunately in the airline industry this is not necessary true. It is a very complex industry that relies on a multitude of factors. You are talking about revenue passenger miles (RPM) flown. An airline can fly a ton of passenger miles and be a total failure.
The airlines depend on many things to make a profit. First airlines have fixed or sunk cost--means that the airplane is going to cost them so many dollars per flight and the airline has to fill so many seats to recoup cost. It flies regardless if seats are filled or not and cost is the one constant.
It is all about yield management/revenue management for the Legacy carriers. This is the way the airlines set ticket prices and eventually make money or in all these airlines cases lose the least amount of money. This is a very complex program that the airlines use. Yield management programs function is best described as a stochastic, non-linear, mixed-integer mathematical program that requires data such as passenger demand pattern, cancellations, cargo load, available seats, group reservations, and other estimates.
Some other things airlines must consider are
ASM- Available Seat Miles
Cost per ASM
Operating Revenue per ASM (RPM)
These are just the basics.
Let’s take AA for example since they are the World’s biggest airline. This means they have a lot of ASM. (Should Fly more people)
Lets also add WN (Southwest) and CO to this example. All 3 airlines have 100 seats in their planes and fly between the same cities on this 500 mile route.
(Using larger number with greater variance than in reality to make the example easier to understand. 15C stands for Cent.)
AA does 10 flights between the two cites, the most. It has the most available seat miles (ASM) on this route, so it can fly the most passengers. (Each airline uses revenue management to figure out what its break even point is on each flight.) Say AA figurers it needs a 90% load factor to break even on this route. AA the world’s largest airlines flies 840 people on this route.
Second part of the problem:
AA being a Legacy carrier with HIGH COST has a high cost per ASM on this flight 15C (Using random numbers).
CO is also on the same route, but flies 3 flight because they do not need to be the worlds largest and fly so many flights/people. CO is a legacy carrier and has a high Cost per ASM but less than AA at 13C. Its break even load factor is 79%. CO only flies 240 people on this route
Second part of the problem:
CO also charges more for an average fare than AA because CO has a better product, less flights, (or understands rev management better) it is able to ask a premium.
Now WN (Southwest). WN is new to this route and only has 2 flights. Because of WN low cost they figure they only need a 55% load factor to break even. WN fly less than CO and AA with only 130 people on this route.
Second Part of the problem:
WN being the savvy airline that they are has a Cost per ASM of 7.5C and charge a low fares.
Who made the most money?
Has to be AA, right, I mean they flew the most people? 840 people!
First you need to find the available seat miles (ASM).
"Available seat miles" represents the number of seats available for passengers multiplied by the number of miles the seats are flown.
(100 seats x 10 flights) = 1000
1000 seats x 500 miles = 500,000 is the ASM for AA
Next you need to find the Revenue Passenger Miles RPM.
"Revenue passenger miles" represents the number of miles flown by revenue passengers.
840 passengers x 500 miles = 420,000 RPM
Next you need to know what you load factor was.
"Load factor" represents the percentage of aircraft seating capacity that is actually utilized (revenue passenger miles divided by available passenger miles)
420,000RPM/500,000ASM= .84 or 84% load factor for AA
I’ll do CO and WN real quick
100 seats x 3 flights = 300 seats
300seats x 500 miles = 150,000 ASM
240 people x 500 miles = 120,000RPM
120,000RPM/150,000ASM = .80 or 80% load factor
100 seats x 2 flights = 200 seats
200 seats x 500 miles = 100,000 ASM
130 people x 500 miles = 65,000 ASM
65,000RPM/100,000ASM = .65 or 65% load factor
Who flew the most people?
AA of course with 10 flights 840 people and a load factor of 84%.
Who made the most money?
First glance you might want to say AA with an average load factor of 84% and 10 flights. Sure beats CO 3 flights with an 80% load factor and WN 2 flights with a 65% load factor. In reality WN made the most money on the route. WN break even was only 55%. CO made some money with a 79% break even load factor but AA lost money because it needs a 90% break even load factor only has 84%, but they flew the most people.
Let’s say we did not have the load factors but knew the operating revenue per ASM on this route after the flights took place.
AA Operating Revenue per ASM was 12C.
CO Operating Revenue per ASM was 13.5C.
WN Operating Revenue per ASM was 9.8C.
Now, who made the most money?
It’s not CO, which had the highest operating revenue per ASM, and it wasn’t AA. It was WN. WN with operating revenue of 9.8C beat both CO and AA who both had higher Operating revenue per ASM. Why?
You have to look at Cost per ASM. AA was15C so at an operating revenue per ASM of 12C they were losing money. (LOTS). CO cost per ASM was 13C, but their operating revenue was 13.5C. They made money on the route but not at much as WN.
WN cost per ASM was only 7.5C, but their operating revenue was 9.8C. Even thought they have lower operating revenue per ASM than AA and CO, WN operating revenue was considerable higher than their low Cost per ASM of 7.5C. WN can have lower revenue per ASM than CO, and AA, and still make money because their Cost per ASM is much less. This is why WN can charge lower fares and still make money while the Legacies like CO, AA will bleed if they keep fares at the level. No matter what the Legacies do they will never get their cost as low WN!
At the end of the day, you can fly more people than any other airline, but are losing massive amounts of money. What did you prove? Nothing. Just because you have fly a lot of people doesn’t mean jack. If the numbers are not working out, at the end of the day all you can claim is “I fly the most people and am the world’s biggest airline but lose a lot of money and have pissed off shareholders.
When you are a publicly held company shareholder value means a lot.
Let’s look at some real numbers AA vs. CO for 2003. Numbers came from their annual reports, links below. (I used 2003, because I could not find AA total passenger for 2004).
Passengers flown 88,241
Operating Revenue (Passengers) $14,332,000,000
Available Seat Miles 165,209,000
Revenue Passengers Mile 120,328,000
Load Factor 72.8
Cost per ASM 10.15 cent
Passenger revenue per ASM 8.67 cent
Passengers Flown 40,613
Operating Revenue (Passengers) $8,984,000,000
Available Seat Miles 78,385,000
Revenue Passengers Mile 59,165,000
Load Factor 75.5
Cost per ASM 9.36 cent
Passenger revenue per ASM 8.73 cent
Just by looking at these numbers I don’t need to see the “Net Income/Loss” to tell you both of these airlines lost money. I can also tell you CO did better than AA.
AA sure flew more people than CO (over twice as much) a whooping 47,628 more.
AA did not make twice as much in revenue. Take operating passenger rev/ by total passengers CO rate is $221,209.96 and AA is 162,418.83. If AA was at CO rate with 88,241 passengers AA would be looking at close to 19 billion in Operating passenger revenue.
Also AA load factor is less than CO, fly less people per plane. AA cost per ASM is much higher than CO.
Even with a higher cost AA passenger revenue per ASM is lower than CO. CO is losing less money that AA. A lot less!
That year CO made a net profit of $38 million while AA lost $1,228 BILLION!!
Something AA, UAL, DAL, NW, need to come to grip with is that they are not low cost carriers. Thy have high cost and need to charger higher fares to make money. Look at the losses below. WN can charge lower fares and make money because they have low cost. CO chose to go a different route. It cost are almost as high as all the Legacies, but they chose to take the high road and offer all services and charge for it. They are doing better that the others legacies.
Here is a look at the operating and net losses for the Legacy Carries from 2001-2004.
Information came from Annual Reports
If you look at this information ONE airline stands out from the rest. Out of all four years CO was the only airline to post operating income for two of the four years.
CO also had a net income of 38 million in 2003.
So how did the world’s biggest airline do? (Passengers miles flown)
Over four years AA lost $7,262,000,000 BILLION Dollars
2nd largest US Airline United lost $9,886,000,000 Billion Dollars
Delta lost $8,459,000,000 Billion Dollars
Northwest Airlines Lost $1,835,000,000 Billion Dollars
CO 5th largest US Airline lost $871,000,000 MILLION Dollars
US Airways lost $6,183,000,000 Billion Dollars
With the exception of AA, and CO, all of the other airlines filed Chapter 11 Bankruptcy within the time frame.
All of the airlines in a desperate move to save money cut back on all services, except CO. All of them stopped food, some removed pillows, blankets, charge for pretzels, drinks, got rid of in-flight reading material, and cut and cut and cut.
These are all Legacy Carries. But wait, CO did not do any of that. Yet, CO is performing better than the rest of the Legacies while offering a FULL Service. The airline refused to “damage its image”. CO spent a lot of time building up their image of Legacy Carrier and had no plans on giving that up.
Has it help CO?
Well their financial performance agrees with them. Something that is very important is employee moral. CO told their employees that they will not cut this and that and will not be like the other airlines. It worked. CO kept up its image, its employees are happy and the carrier is doing better than the other Legacies. CO has been voted one of Fortune 100 best companies to work for 6 years in a row and the only airline to do it. Look at the Annual Reports. The airlines are trying to save every penny they can and are producing plain annual reports, while CO produced a vivid regular color report.
Even though CO and the aviation industry are going through a hard time CO tried their best to insure employees and passenger that it will maintain the highest level of service in which both have become accustomed to.
You see CO know who they are, who their customers are and what they want to be. They want to be a Full Fare Legacy Carrier. At the present point in time, they are the only ones left. As times eventually get better in the airline industry, CO has already position itself as the top Legacy carrier. It is the “highest end” Legacy carrier in the US. CO will be able to attract the higher fare paying passengers thru its service and therefore make more money.
CO has their niche and will greatly prosper in the long run for setting themselves apart from the rest. The airline industry and retail industry follow the same format; you have to set yourself apart from you competition. CO has a premium product, hands down; all the awards and high remarks prove that. With a premium product comes a premium price. As things get better CO will have its passengers and the others will be left to fight over the rest.
The legacy carriers have got to figure out how to get their cost lowered or increse revenue. If they don't they will end up like Pan Am, Eastern, and Braniff.
I never said CO was cheap, if you want cheap no frills then CO might not be for you.
A quick search on fares from Dallas to various cities on 1/18/2005 to 1/25/2005.
For CO fares from DAL I used their website www.continental.com. I tried to use AA website to get fares, but couldn’t figure out how to get the lowest price or any price for that matter to show up. For AA I went to www.expedia.com and while there got CO fares from DFW. These are the cheapest fares flown only on AA or CO. Yellow lowest between AA and CO, Blue highest between AA and CO.
If you every want to find out anything about the airline/aviation industry and have some time, go to Embry-Riddle Aeronautical University Library in Daytona Beach, Fl. If something was written about the aviation industry you will find it there. They have every kind of report imaginable about the airlines and aviation. In addition to that, I was lucky to have had some great discussions with Dr. John Wensveen. He is one of the brightest people I know. He is also 1 of 5 people in the world to have a PhD in the Field of Aviation Business Administration.
You have blown me away with all that. Thanks for that info! I never realized how Continental performed better and the way you compared the operations makes perfect sense. AA has tons of flights but they end up loosing money while CO has less flights and either breaks even or makes money. Very interesting. I would love to see pre-9-11 numbers. I am very interested in the avaiation industry especially the way airlines and airports work. DFW airport's problems are a big deal to me and I hope the upper managment and our leaders can solve this Wright issue so our world class airport can flourish with new service from new airlines and passenger growth instead of decline. DFW is too good an airport to not have high growth and new carriers entering the market. Airlines pulling service while they are growing elsewhere is not a good sign. Hopefully the problem can be solved soon.