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AVIATION ECONOMICS
CHAPTER 3 PASSENGER
MOVEMENT:
THE SIGNIFICANCE OF PASSENGER
LOAD FACTORS & STRATEGY FOR
PASSENGER MARKETING
Passenger Movement
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In this chapter, we will look at
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Load Factor
Traffic Peaks and Valleys
Capacity vs. Demand
Pricing in relation to load factor
Airline traffic and Revenue
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Measure of “airline traffic” quantify the amount of
airline output that is actually consumed or sold.
Traffic carried by airline consists of both
passengers and cargo.
Passenger airline traffic can be measured in
terms of the number of passengers kilometer
(RPK).
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1 RPK = 1 paying passenger transported 1km
Example:
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A flight carrying 140 passengers over a distance of 1000km
generates 140 000 RPK of airline traffice
Airline traffic and Revenue
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Yield is measure of the average fare paid by all
passengers per kilometer (km) flown, in a
market, on a set of routes, or a region of
operating for an airline.
Yield is calculated by dividing the total passenger
revenues collected by number of RPK carried.
Example:
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If the flight carried 140 000 RPK generates RM16 000 of
total passenger revenue, its yield would be RM0.114 per
RPK
(RM 16000/140 000) = RM 0.114
Airline Output and Operating Expense
Similar to RPK, the most common
measure of airline output is an available
seat kilometer, ASK.
 Thus 1 ASK is defined as one available
seat flown 1km.
 Example:
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If our flight operates over a distance of
1000km with 200-seat aircraft, it generates
200 000 ASK of airline output.
Airline Output and Operating Expense
Unit cost is defined as the total operating
expense divided by the ASK produced by
an airline, for a route, region or total
network.
 Example:
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If the airline incurs RM 15 000 of expense to
operate a flight, the unit cost for this flight
would be RM 0.075 per ASK
(RM 15 000/200 000 = RM0.075)
Load Factor
One of the most vital statistics in the
airline business
 Load factor refers to the ratio of traffic to
airline output, representing the proportion
of airline output that is sold or consumed.
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Load Factor
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It has a critical impact on the cost and
quality of air transportation-Why?
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65% of airline’s costs are directly related to
the operation of the aircraft and are
independent of the number of passengers on
the aircraft.
Hence, a high load factor will allow the
allocation of these costs over a large
number of passengers
Load Factor
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In the end, resulting in lower costs per
passenger, which allows for lower fares (i.e. lower
ticket price)
Companies can determine a minimum load factor
they need to meet in order to break even
financially.
That is, once a company meets a certain load
factor the revenues from doing so will cover the
costs of providing their seat capacity.
If they are below this break-even load factor the
company will be spending more than they are
earning and will lose money.
Load Factor
Load Factor calculation:
Simple calculation : Capacity 100, passenger 90
Load factor : 90/100 = 90%
Airliner calculation : The definition of load factor
isn't necessarily tied to seats alone. We must also
consider the distance flown in order to measure
the production of the airline.
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ASK = No. of seats/aircraft * No. of aircraft *
aggregate distance flown
RPK = Total Number of Passengers * Distance
Flown
Load Factor
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Load Factor calculation, Airliner calculation :
Route: - ABC -> XYZ
Distance = 200km
Aircraft = 2
Seats / Aircraft = 50
Total Services per day = 8
Available seat kilometers = 200 * 2 * 50 * 8 = 160000 km
Assume on day 1 there were a total of 560 passengers travelling.
Revenue Seat Kilometers = 560 * 200 = 112000 km
Load Factor = 112000/160000 = 0.7 or 70%
In reality an airline will then do this equation for each route to determine
the route load factor to help in route planning. The figures quoted in public
are generally relating to the aggregate sums so it would represent total
revenue seat kilometers / total available seat kilometers.
Load Factor
These five measure – traffic (RPK), yield,
capacity (ASK), unit cost and load factor
are the most common measure of
passenger airline performance.
 Other measures such as cost efficiency,
productivity and financial performance will
be introduced in the relevant chapters.
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Question: how to measures cargo air
transportation?
Traffic Peaks and Valleys
The idea is all transportation modes must
operate during the traffic peaks and valleys
in order to meet the public need
 Airline load factors are seasonal
 Daily and hourly load factors fluctuate even
more
 Thus, airliner must make sure there
are sufficient flights during peak
hours
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Traffic Peaks and Valleys
But sometimes, airline has to provide
positioning flights to cater the load for
peak hours
 Positioning flights: Aircraft has to flown
virtually empty from one city to another
late at night or early in the morning to
have the plane ready to meet rush-hour
demand.
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Capacity vs. Demand
Capacity is ability-What can airliner offer?
 While, demand is requirement-What is
required from the airliner?
 Demand for air transportation is highly
cyclical
 At micro level discretionary leisure traffic
picks up in the summer, so, airline enjoy
higher load factor (seasonal)
 At macro level: stable vs. fluctuate
economic condition
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Capacity vs. Demand
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When the economy is stable and growing
 Consumer confidence is strong
 Demand grows
 Load factor improve
 THUS, increase PROFITABILITY!
BUT…
When economy falters
 Unemployment increase
 Consumer confidence declines
 Individuals postpone discretionary travel
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SO, PROFITS SUFFER!
Capacity vs. Demand
Airline cannot fine-tune capacity to match
demand-Why?
 Aircraft itself inflexible
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If 757 equipped with 160 seats, that seats
supply on particular schedule
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Can neither be shrunk nor expanded
Total number of flights offered by airline
on a given day varied
Capacity vs. Demand
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Depends on passenger demand
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Weekdays vs. weekends
Ordinary days vs. Holidays
BUT… other factors limit airline’s capacity
to adjust daily seats to daily traffic
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Fix frequency of flight for certain route-to
avoid cancellation
The day of week patter can’t usually vary in
precise and predictable manner
Capacity vs. Demand
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AND
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Interrelation between two different routes
SO, flights seats usually UNIFORM and
FIXED
AirAsia fleet
Aircraft
Airbus A320-200
In fleet
78
Boeing 737-300
10
Airbus A330-300
Airbus A340-300
7
2
Airbus A350-900
Total
0
97
Capacity vs. Demand
Malaysia Airlines Passenger Fleet
Aircraft
Total
Orders
Airbus A330-200
Airbus A330-300
Airbus A380-800
Boeing 737-400
3
9
0
37
4
15
6
—
Boeing 737-800
6
55
Boeing 747-400
Boeing 777-200ER
10
17
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Pricing in Relation to Load Factor
The idea is to increase load factor- that is
to gain profit minimize cost with a
reasonable price offer to the passenger
 One approach utilize is off-peak pricing,
that is..
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Introduce promotional fare to attract
passengers during slack period
Slack period: Passenger demand
declines/insufficient
Just like off-peak night coach service, low
fare ticket price is offered by airliner
Pricing in Relation to Load Factor
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Advantages:
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Empty seats on low-traffic days are filled with
passengers who are willing to travel on those
less popular days-Why ? CHEAPER!
Additional passengers add very little to the
cots (primarily meal service), BUT they add a
great deal to the flight’s total profit!
Pricing in Relation to Load Factor
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Disadvantages:
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The timing of the peak varied from route to
route
Peak hours to go to Sabah might differs from
peak hours to go to Johor Bharu- So, it is quite
impossible to have off-peak pricing to all
routes
It injects complications into the pricing
structure- Fluctuation of ticket price
Pricing in Relation to Load Factor
Therefore, it is essential for airliner to
estimate the accuracy of its demand
(particularly passenger demand)
 AND strategize its marketing (especially
airline passenger marketing)
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Understand how airliners set their price
• Airline pricing is a complex, unpredictable
factors driven by words: competition,
demand, and inventory
• Airlines then change their prices based on
demand. If a certain flight is selling well,
the price will increase.
• If another flight has no takers, the fare
will drop until the airline gets some. As a
result, fares and inventory are changing
every minute.
Understand how airliners set their price
• Demand explains why it is cheaper to fly on a
weekday (when fewer people are travelling), at
odd hours, or on days other than major holidays.
• Airlines change their prices based on competition.
If one airline flying the Kl-KK route drops its
rates by 20%, chances are all airlines will drop
their rates, so as not to give the discounter a
competitive advantage.
• To complicate matters, all this happens at the speed of
light. Prices for a specific flight can go up or down.
• Airlines also use inventory to their advantage to
decrease the price
Understand how airliners set their price
• Airlines also use inventory to their advantage to
decrease the price.
• Inventory brings us back to demand. If there is low
availability and high demand, you will have to wait for a
cheap fare.
• Sometimes airlines will change their fares or open up
more discounted seats, depending on how sales are
going.
• Because of all these factors (competition,
inventory and demand), it is essential to look
around and comparison shop.
The tricks
• Start your search as early as possible (at least a month
in advance). While better rates may come along, it'll give
you a starting point.
• Use the same airline for both directions. Since round
trips are about the same as one-way tickets, it doesn't
make sense not to.
• Keep checking. It’s impossible for airlines to have full
planes, so they may add discount seats without warning.
• Use your age. Ask about senior discounts or
student discounts.
The tricks
• Fly on a mid-weekday. Fridays and Mondays are the
most expensive times to fly. And weekends are obviously
in high demand. Tuesdays and Wednesdays are the
cheapest days to fly.
• Try a consolidator. A consolidator is an intermediary
company that buys tickets at a discount directly from the
airline.
www.lowestfare.com
www.cheapseats.com
www.cheaptickets.com
Important Key terms
Load factor
 Capacity vs demand
 Positioning Flights
 Airline pricing
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Question 1
The significant of passenger movement in aviation
industry is very essential to maximize profits and ticket
pricing strategies.
a) Describe in your own words the significance of passenger
load factors.(6 marks)
b) Discuss in your own words the reason load factor has a
critical impact on the cost and quality of air transportation
(4 marks)
c) If your airline has to provide positioning flights due to rushhour demand, discuss how can you gain profit and minimize
cost based on your capacity vs. demand?
(5 marks)
Question 2
The idea is all transportation modes must operate during
the traffic peaks and valleys in order to meet the public
demand.
a) Describe in your own words the significance of positioning
flight.(5 marks)
b) Discuss in your own words how to optimize profit during
travel peak and valley. (5 marks)
c) Why do you think it is difficult to prepare and offer the
proper aircraft and correct flight capacity to the passengers?
(5 marks)
Question 3
Airline pricing is a complex, unpredictable factor driven by three
competition, demand, and inventory that involve timing and
demand.
a) Describe in your own words the significance of load factor in
relation to airline pricing.(5 marks)
b) Describe your understanding on how airlines set their prices
in the first place. (5 marks)
c) From your opinion, how is the best way to obtain a cheap
plane ticket? (5 marks)
Quiz 2
1.
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4.
List three (3) characteristic of
Oligopolistic Economy.
One of the airline special economy
characteristic is Government Financial
Assistance. In your word, explain how
the government played as major roles in
this industry.
List all type of forecasting
Explain judgemental method and list 5
question survey related to airline services
Bonus
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How much Tony Fernadez buy Air Asia?