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lect2 - MIT MIT ICAT Airline Economics Review Dr Peter P...

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MIT ICAT ICAT Airline Economics Review Dr. Peter P. Belobaba 16.75J/1.234J Airline Management February 13, 2006
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MIT ICAT ICAT Lecture Outline 1. Basic Airline Profit Model 2. Air Travel Markets Origin-Destination Market Demand Dichotomy of Airline Demand and Supply 3. Demand Models 4. Airline Competition Market Share/Frequency Share Model 5. Airline Pricing Practices Differential Pricing Strategies
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MIT ICAT ICAT 1. Basic Airline Profit Model Operating Profit = Revenues - Operating Expense Operating Profit = RPM x Yield - ASM x Unit Cost The use of individual terms in this profit equation to measure airline success can be misleading: High Yield is not desirable if ALF is too low; in general, Yield is a poor indicator of airline profitability Low Unit Cost is of little value if Revenues are weak Even ALF on its own tells us little about profitability, as high ALF could be the result of extremely low fares (yields) Airline profit maximizing strategy is to increase revenues, decrease costs, but the above terms are interrelated.
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MIT ICAT ICAT Yield vs. Distance -- Top 50 O+D Markets 0 10 20 30 40 50 60 70 0 500 1000 1500 2000 2500 3000 O-D Market Distance (miles) Yield (cents/RPM)
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MIT ICAT ICAT Additional Airline Measures Average Stage Length Average non-stop flight distance Aircraft Miles Flown / Aircraft Departures Longer average stage lengths associated with lower yields and lower unit costs (in theory) Average Passenger Trip Length Average distance flown from origin to destination Revenue Passenger Miles (RPMS) / Passengers Typically greater than average stage length, since some proportion of passengers will take more than one flight (connections) Average Number of Seats per Flight Departure Available Seat Miles / Aircraft Miles Flown Higher average seats per flight associated with lower unit costs (in theory)
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MIT ICAT ICAT 2. Air Travel Markets City-pair market Demand for air travel between Boston and Chicago Airport-pair market City-pair demand disaggregated to different airports BOS-O’Hare and BOS-Midway Parallel air travel markets Region-pair market Demand between entire Boston metropolitan area and Chicago metropolitan area Additional parallel airport-pair markets including Providence and Manchester to O’Hare and Midway
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MIT ICAT ICAT Distinct and Separate O-D Markets
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MIT ICAT ICAT Origin-Destination Market Demand Air travel demand is defined for an origin-destination market , not a flight leg in an airline network: Number of persons wishing to travel from origin A to destination B during a given time period (e.g., per day) Includes both passengers starting their trip at A and those completing their travel by returning home to B (opposite markets) Typically, volume of travel measured in one-way passenger trips between A and B, perhaps summed over both directions Airline networks create complications for analysis of market demand and supply:
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