The traditional approach of using load factor (the % of seats sold) as a measure of route performance does not work for low cost airlines. The evidence shows that when an airline is stimulating a market through price discounting, the average fare is a much better measure of route profitability. Our Apex airline fare data module enables quick and easy analysis of these average fares across complete airline networks.
The low cost airline model is to discount fares to stimulate the market to fill the aircraft capacity:
Adding capacity (beyond the market demand) will lead to a drop in ticket prices, stimulating demand until the load factor recovers. This occurs on an individual route basis but also at the aggregate network level. This is the classic 'load factor active - yield passive' low cost airline strategy.
We can look at this for a real airline, using network-level Apex data:
This chart shows the capacity, load factor and our average fare data for a large European low cost airline, indexed to January 2013. These are the levers that the airline can control to achieve the desired output – profit, shown here in the blue columns.
Total network capacity, the grey line, is flexed on a seasonal basis with the full fleet used in the peak summer months and about a third of the fleet parked or grounded in the winter. Load factor, the blue line, does not vary much throughout the year. The real volatility is the average fare, the yellow line, which can be two or three times higher in the summer than the winter.
The average network fare is the main driver of the profitability of the airline. In the winter months, capacity is reduced and fares decline to match the lower market demand, with the objective of more or less breaking even. In the summer the airline is running at full capacity, filling the aircraft, with the passengers paying much higher fares.
Our fare data can tell airports, airlines and financial analysts which airlines are making money, and on which routes. It is impossible to analyse low cost airline route performance without having an understanding of average fares. Apex unlocks this data, enabling both top-level and detailed, route-by-route analysis.
This story originally appeared on the RDC website.
By Mark Scourse Connect on LinkedIn