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Case study facts Flashcards
US population
331 million
Uk population
67 million (Same as france)
Germany population
83 million
Croatia population
4 million
Life expectancy america
77 years
Life expectancy UK
80 Years
Assuming same number of people in each age group in UK. How many people is that?
0.8 million people
Population of London
8.9 million
Population of europe
750 million
Airline industry revenue
800B+
Airline Industry Total number of flights per year
30M
Number of passengers at World’s busiest airport
94M passengers
Metric tonne of cargo
~60M
Which aeroplanes have impacted the airline industry
Newer aircraft models, such as the Boeing 787 Dreamliner and the Airbus A350, have improved fuel efficiency, increased range, and enhanced passenger comfort, allowing airlines to expand their networks and reduce operating costs.
What is the primary source of revenue for airlines
Passenger revenue: Passenger revenue is the primary source of income for airlines. Passenger revenue is influenced by factors such as passenger demand, pricing strategies, seat capacity and load factor.
What are other revenues in airline industry besides passenger
Cargo revenue: Cargo revenue is generated from the transportation of goods and cargo by air. Cargo revenue can be an important source of income for airlines, especially for those with dedicated cargo operations. It is influenced by factors such as global trade volumes, cargo capacity, demand for express or specialized cargo services, and freight rates.
Ancillary revenue: Ancillary revenue refers to the additional revenue generated from non-ticket sources, such as baggage fees, onboard sales, seat upgrades, loyalty programs - basically all the little items that can make flying feel like being “nickeled and dimed”. Ancillary revenue has become an increasingly important revenue driver for airlines, as it provides opportunities to generate additional income beyond the basic fare, and allows airlines to tailor services to individual passenger preferences.
Codeshare and interline agreements: Codeshare and interline agreements are partnerships between airlines that allow them to sell tickets on each other’s flights, extend their route networks, and access new markets. These agreements can be a significant source of revenue for airlines by leveraging the strengths and networks of partner airlines, and increasing the reach and connectivity of their services. An example of a codeshare agreement is the partnership between Delta Air Lines and KLM Royal Dutch Airlines. Delta and KLM have a codeshare agreement that allows them to sell tickets on each other’s flights and extend their networks.
Loyalty programs: Loyalty programs, such as frequent flyer programs, are designed to incentivize repeat business from passengers and encourage brand loyalty. These programs generate revenue through membership fees, mileage sales, and partnerships with hotels, car rental companies, and other service providers. Loyalty programs can also drive repeat bookings, increase customer retention, and stimulate demand for premium services.
Premium and business class services: Premium and business class services, such as premium cabins, premium seating options, enhanced inflight services, and premium ground services, can generate higher revenue per passenger compared to economy class. These premium services are typically priced at a premium and can be an important source of revenue for airlines, especially for long-haul and international flights.
What are cost drivers for airlines. Name 6
Fuel: Fuel costs are often one of the largest expenses for airlines, as jet fuel is a significant input in airline operations. Fluctuations in global oil prices can have a significant impact on airline fuel costs, and airlines often use fuel hedging strategies to manage fuel price risks.
Labor: Labor costs, including wages, salaries, benefits, and other labor-related expenses, are a significant cost driver for airlines. Labor costs vary depending on labor regulations, workforce composition, and union contracts.
Example #1: Delta recently reached a new agreement with its Pilot union. It incurred $800M+ of one-time costs when it signed this agreement as well as agreeing to higher ongoing rates and wages. Other airlines have faced strikes from the various unions they work with and, in some cases, have even led to the airline grounding their planes until resolved.
Aircraft operations and maintenance: Aircraft operations and maintenance costs, including lease or purchase payments, aircraft maintenance, repairs, and overhaul (MRO), and aircraft depreciation, are significant costs for airlines. The type, age, and utilization rates of aircraft, as well as lease or purchase agreements and maintenance contracts, can impact these costs.
Airport and navigation fees: Airlines are subject to various fees and charges levied by airports and air navigation service providers, such as landing fees, parking fees, air traffic control charges, security fees, and other charges related to airport and navigation services. These fees can vary depending on the location, size, and services provided by airports, as well as the air traffic control and regulatory environment of the region.
Distribution and marketing: Distribution and marketing costs, including expenses related to sales and marketing activities, GDS fees, OTA commissions, and other distribution-related expenses, can be significant for airlines. The distribution channels used by airlines, marketing strategies, and the competitive landscape of the airline industry can impact these costs.
Other costs: Other costs, including aircraft insurance, aircraft rentals, IT systems, depreciation, and other administrative expenses, can also be significant for airlines. The size, scale, and complexity of airline operations, as well as the regulatory environment, can impact these costs.
Revenue Passenger Kilometers (RPK):
RPK is a key metric used to measure an airline’s passenger traffic. It represents the total number of paying passengers flown by an airline multiplied by the distance they have traveled (in kilometers). RPK is a critical indicator of an airline’s business volume and demand for its services.
Available Seat Kilometers (ASK):
ASK is a measure of an airline’s passenger carrying capacity. It represents the total number of seats available for sale on an airline’s flights multiplied by the distance traveled (in kilometers). ASK is used to assess an airline’s capacity utilization and operational efficiency.
Essentially, it’s the total number of seats available on all flights operated by an airline, multiplied by the number of kilometers those seats are flown.
For example, if an airline operates a flight with 100 seats on a route that is 500 kilometers long, that single flight represents 50,000 seat kilometers (100 seats x 500 kilometers). The ASK for the airline over a given period is the sum of such calculations for all its flights during that period.
Why is ASK Important?
Capacity Measurement: ASK provides a clear picture of the airline’s capacity to generate revenue. It shows how much “product” (in this case, seats) the airline has available to sell.
Performance Evaluation: By comparing ASK with actual passenger kilometers flown (Revenue Passenger Kilometers or RPK), airlines can gauge their load factor, which is a measure of how efficiently they are filling seats. A high load factor indicates good utilization of capacity.
Strategic Planning: Airlines use ASK to make strategic decisions about routes, fleet size, and types of aircraft. For instance, if certain routes have consistently low load factors, the airline might reduce the frequency of flights or use smaller aircraft on those routes.
Industry Comparison: ASK allows for benchmarking and comparison among airlines. It’s a standard metric, so it’s useful when comparing the capacity and scale of different airlines.
Financial Health Indicator: Investors and analysts often look at ASK in conjunction with other financial metrics to assess the health and efficiency of an airline. Changes in ASK can indicate expansion or contraction in the airline’s operations.
Load Factor:
Load Factor: Load factor is the ratio of RPK to ASK, expressed as a percentage. It indicates the percentage of available seats that are filled with paying passengers. Load factor is a key metric used to measure an airline’s operational efficiency and profitability, with higher load factors generally indicating better performance.
Load Factor is a critical metric in the airline industry that measures the efficiency with which an airline fills seats and generates revenue from its available capacity. It is expressed as a percentage and calculated by dividing Revenue Passenger Kilometers (RPK) by Available Seat Kilometers (ASK).
Here’s how it works:
Revenue Passenger Kilometers (RPK): This metric represents the total number of kilometers flown by paying passengers. It’s calculated by multiplying the number of paying passengers by the distance flown. For example, if an airline flies 100 passengers over a distance of 500 kilometers, the RPK would be 50,000 (100 passengers x 500 kilometers).
Available Seat Kilometers (ASK): As previously explained, ASK measures the total seat capacity available for sale by an airline and the distance those seats are flown.
Load Factor Calculation: The load factor is the RPK divided by the ASK, often expressed as a percentage. For instance, if an airline has an ASK of 100,000 and an RPK of 75,000, the load factor is 75% (75,000 RPK ÷ 100,000 ASK).
Revenue per Available Seat Kilometer (RASK)
RASK is a measure of an airline’s revenue generation per unit of capacity. It is calculated by dividing an airline’s passenger revenue by its ASK. RASK is used to assess an airline’s revenue performance and pricing strategy.
Cost per Available Seat Kilometer (CASK)
CASK is a measure of an airline’s operating costs per unit of capacity. It is calculated by dividing an airline’s operating costs by its ASK. CASK is used to assess an airline’s cost efficiency and operational effectiveness.
On-Time Performance (OTP)
OTP is a measure of an airline’s punctuality and reliability. It is typically expressed as the percentage of flights that depart and arrive on time, usually defined as within 15 minutes of the scheduled departure or arrival time. OTP is an important metric for customer satisfaction and operational performance.
Retail advertising in airlines
Hyper-specific ads could be coming to a reclined seat near you. United Airlines is said to be considering ramping up its advertising biz with a little help from the troves of data it collects on its 148M annual passengers. If it ultimately does roll out targeted ads, it would join a handful of major companies raking in revenue through “retail media,” ads sold based on customer data by a company whose main biz isn’t advertising.
Prepare for marketing: United’s targeted ads could pop up on your seat back (picture: a Disney World commercial en route to Orlando) or appear while you’re booking a flight.
Thank tech: Privacy changes by Apple and Google blocked certain types of tracking, leaving advertisers without an easy way to target customers. Enter: companies like airlines and hotels, which handle tons of customer data
Personalization comes at a cost… More than 37% of customers say they hate targeted ads, leaving companies like United with a dilemma: lose out on millions of $$ or alienate millions of customers. But if travelers see personalized ads on every leg of their trip, they may simply get used to them (hate or no).
Name 4 second order drivers for market
- Size and growth of the market
- Geographies of the market
- Customer segments
- Distribution channels
Size and growth of market are important but can you segment it by geography and customer segments.
For example you check EV market size and growth. You could then check how this size and growth varies by geography and region (this helps deciding if you should enter in a certain region with more supportive regulation).
The EV market can be broken into customer demographics. Understanding their needs will help tailor the product.
Then you can look at the distribution channels for EV (dealerships, direct to customers, online) and work out effectiveness of each
Name 4 second order drivers for industry
- Competitors
- Profitability
- Key success factor
- Barriers to entry
For instance in FMCG you need strong marketing, strong innovation and good distribution capabilities
In outsourcing business you need to be good at managing large groups of people
Delve into consolidated markets
Few players with the majority of market share.
Formed generally because of high barriers to entry
High barriers can be natural (economies of scale or network effect), or if too many players it collapses. Or regulatory (government created monopolies).
Cons are you will have to spend a lot of money and time, risky. You will get bullied by existing players. Steep hill to climb to get to a consolidated position.
However if you can win here, you’re a monopoly, oligopoly so you have control of market and you face low risk of new entrants.
When you enter, it’s likely that these players are weak because they have been in this space for a while and they have gotten complacent. Amazon and apple are not complacent/weak however an industry like oil and gas or aerospace is weak and complacent.
Example of GOOD consolidated: Aerospace (if you can get past the upfront costs you can replace complacent companies ie governments - SpaceX
Another good example - Taxi companies in a given city. Ride sharing apps have created a new market. Margins are slim but consolidated and easy to disrupt.
Media is another good one. Netflix and Hulu. Slightly creating a new market, you ousted incumbents (cable) and you’ve taken over.
Bad examples - Airline industry (small margins, upfront cost high and there is immense loyalty for existing airlines because of loyalty programs. Also they have specific routes for them.
Oil and gas is another bad example - huge upfront cost and infrastructure takes decades to be build in mostly questionable countries with states that don’t work well with businesses and also it’s a declining consolidated industry.
Fragmented market
It means lots of players and usually not difficult to enter. No one player dominates and pushes you to a corner.
No unfair advantage (setting prices, or buyer/supplier power)
Opportunity to grow. Gain market share. But is the lifecycle of this market. For example restaurants that never consolidated or nascent industry like AV/EV where over time you reach consolidated state.
A new market will initially always be fragmented.
But it will be very competitive. A lot of price wars. Margins will be tight. Customers will move around. Always new entrants threat. You are bound by the prices of supply and demand.
Examples: Apple market place (low barriers to entry, and very attractive if you win). Another example is EV/AV space (over time it will become consolidated, so if you win you’ll have economies of scale AND Once you have sw you have the sw).
Bad example is restaurants: You don’t have buyer/seller power. If you win it’ll be temporary.
