Operating performance in the airline industry
The airline industry uses the following unique metrics to measure operating performance.
- Revenue passenger miles, or RPM: This is the number of revenue passengers multiplied by the distance these passengers travel in the reporting period. It’s also called “traffic.” This metric defines the demand for air travel and is influenced by macro factors like GDP growth, per-capita income, and disposable income.
- Passenger mile yield: This metric is calculated as passenger revenue divided by the RPM. If we can consider the RPM as volume, we can consider yield as the average price.
- Average seat mile, or ASM: This is a measure of capacity calculated as the number of seats available multiplied by the distance traveled during a period. Capacity can be increased by increasing the number of flights, adding new routes, or increasing the frequency of flights.
- Load factor: This is a measure of capacity utilization and it’s calculated as the number of seats occupied divided by the total number of seats.
- Passenger revenue per available seat mile, or PRASM: This is called the “unit revenue” and it’s calculated as the passenger revenue divided by the ASM.
- Cost per available seat mile, or CASM: This is the operating cost per ASM.
High yield drives revenue and profitability
Delta’s Operating revenue grew at a five-year CAGR (compound annual growth rate) of 6.1% from 2009 to 2013, mainly driven by a 6% growth in passenger mile yield, a 0.6% growth in RPM, and a load factor of more than 80%. The PRASM has increased at a five-year CAGR of 6.5%. These improvements have been possible because of various joint ventures and alliance agreements undertaken to improve network efficiency and investments in major airports for better infrastructure. Capacity, measured by ASM, increased 1% in 2013, and CASM decreased to 14.8 cents in 2013 from 15 cents in 2012, as the company adopted fleet restructuring and fuel cost reduction initiatives to reduce costs. However, costs remain higher compared to 2009’s 12.3 cents.
Each of Delta’s competitors (UAL, AAL, LUV, and JBLU) differ in yield. Mainline carriers like Delta (DAL), United (UAL), and American Airlines (AAL) have higher yields compared to low-cost carriers like Southwest (LUV) and Jet Blue (JBLU), whose primary objective is to reduce prices.