Friday, November 4, 2016

Airlines Searching For The "Seat Spot"

An Airline sets the seat count on a model of aircraft whether its single aisle or duo aisle. The first consideration is weighed well its about weight. A fully loaded aircraft with 17" across seats pack more sardine per cubic foot of cabin space. The ticket price is based on airline cost of both fixed and variable for each trip. The variable costing factor looks for a per unit or (seat) cost for any given trip going some distance. The longer the distance weight becomes a drain on its fuel capacity and distance traveled. The airline must determine seats sold and revenue obtained when sponsoring any given flight.

The airline madness begins with filling the airplane to max capacity and going the distance in the world market place. Variable costs would include fuel, operational services and in-flight support activities apportioned to ticket revenue. The fixed costs would include assets, staffing, and inventory acquisitions as exampled by this brief summary. Every ticket sold supports a contribution margin where the number of tickets sold with a certain price contributes towards reaching a break-even point and ultimately a profit for the airline. 

Cost accounting gives me a headache. Therefore computers come to the rescue with a liberal application of 17" wide seats having a 31" seat pitch. The term seat/mile refers to some variable costing indices. The airplane can fly so many miles with so many passengers weighing so much on a ticket configured for having some projected Beak-even point. An airplane holding a max 300 passengers could sell $200 dollar tickets and exceed break-even after the 133rd ticket is sold. However, if only 132 tickets are sold it would go into a loss position for that particular flight in this example. 

The unofficial example of Macro-costing for model 300 seats vs model 240 seats:

Fig 1.  comparing same model different passenger capacity.

FC=Fixed Costs
VC= Variable Costs
BE=Break-even point

The risk of going negative is often mitigated from ticket price or revenue required to fund a flight going its distance for the weight loaded. In a simple costing formula and a great deal of calculating from the accounting computer.  

The two examples above can factor in space additions without affecting the margin as it changes the variable costing element. A 300 seat 787-9 just crams in people where a more sensible 240 seat 787-9 makes a "big" difference in customer comfort on the long haul.

Successful Airlines run at a 80% Occupancy Rate.
  • Model 1 is at 66% occupied.
  • Model 2 is 83% occupied.

Here is the summary analysis:

·      The key component for this analysis is variable costing drops from $100 a unit to $80 dollars a unit from using less supplies, fuel and service for each passenger.
·      The second consideration no seat price has changed.
·      Seats sold no change
·      Fixed Costs no change
·      Break-even point in seats changes from 133 seats to 122, where having less passengers at maximum occupancy reduces operating costs and thus reduces the Break-even value. 

Airlines are now finding more room makes them more money than going for numbers at thin operating margins. Delta is configuring its airline for more convenience and space at the sacrifice of having more seats. Don't worry they will make a good deal of money hauling less passengers per airplane. The seat cramming paradigm has shifted to correctly configured aircraft. Boeing had this angle calculated long before it sold its first 787. However, the commercial customer couldn't resist overloading for more passengers now they are beginning to focus on value for its passenger customers.