Airline Production Cost
The objective of this activity is to develop a deeper insight into airline production costs. The general concepts, however, extend beyond the airline industry being applicable in many other industries. Companies collect an immense amount of data. The ability to obtain and analyze relevant data and draw implications for business tactical and strategic decision-making is a valuable skill. This exercise provides another opportunity to analyze real-world data.
The standard measure of an airline unit of production (Q) is the available seat mile (ASM or ASK for available seat kilometers). It is defined as one seat flown one mile (or kilometer) regardless of whether the seat is occupied. An airline’s total annual ASMs is a huge number in the billions for a large airline. Similarly, the average total cost (ATC), or unit cost, is the cost per available seat mile (CASM or CASK) or the total cost to produce one seat flown one mile. CASM is calculated by dividing the total cost by the total available seat miles (total cost ÷ ASM). CASM is usually computed in cents per mile.
Using cost data from Airline Monitor, determine how CASM varies with airline and aircraft size. These are different aspects of economies of scale.
First, consider whether CASM decreases with airline scale as measured by ASMs. Economies of scale are present if long-run average and marginal costs decrease with an increase in the size of an operating unit (a factory or plant, for example). For example, if the K and L are both doubled, but Q more than doubles, that’s economy of scale. Go to Airline Monitor (Hunt Library databases) “Traffic, Fleet & Financial Data for Leading 80 Airlines of the World.” For each of the US airlines, obtain the total ASMs and CASMs for the most current year and enter these data into an Excel spreadsheet. Sort the airlines from smallest to largest based on ASMs. The Excel Data/Sort feature can do this sort for you. Then develop a scatter chart with CASM on the Y-axis and ASM on the X-axis. Insert the regression equation. If you are so inspired, use Data/Data Analysis tool to obtain the full regression statistics.
Next, determine if unit costs measured in CASM decrease with aircraft size. Obtain the data from Airline Monitor “Block Hour Operating Costs for the year” (most current year available). Data are available for all US airlines in the T pages. The US Big-3 (American, Delta, and United) all operate the Airbus A319, one of the smallest mainline aircraft, and the Boeing B-777, one of the largest. For each of the Big-3 airlines, enter the total block hour costs and the CASM for both aircraft types. Does the larger aircraft have lower CASM?
Present your findings and conclusions in a short report. Be sure to include the data and analysis. Although shorter and less formal, this is similar to the memorandum you wrote for WestJet. Attach your report to your posting.