Route Profitability and Aircraft Right sizing

Anyone who’s taken a commercial flight since COVID restrictions were reduced might have been surprised by how full all the flights seemed. They might be further surprised to hear airlines raising concerns about their profitability. “How can you be making losses?” They might ask. “Every time I fly you the planes are full. So if you’re saying you’re losing money it’s because you’re doing something wrong!” The truth is, however, that it’s not that simple. There are multiple factors that drive profitability and we’ll examine some of them here.

Airlines measure profitability in several ways:

1. At an operating level (which can be route profitability or network profitability)

2. At a net level – the so called “bottom line” that also factors in overheads, financing costs and taxation

For this post, we’ll focus on Route Profitability (network profitability can be examined at a later date). Whether or not a route is profitable is dependent on Demand (how many people want to fly on the route), Fares (how much people will pay to fly on the route) and Cost (how much it costs the airline to operate on that route).

Demand

Demand is generally measured in PDEWs – Passengers per Day Each Way. This is simply how many passengers want to fly in each direction between two places, every day. It could be as few as none 😊 or as many as over 20,000 (on one particular route in South Korea). If, for example, there are 200 PDEWs, an airline might have a choice to make – “Do we fly a 100 seater plane twice a day? Or a 200 seater plane once a day?” If, however, there are only 50 PDEWs on a route – and the airline has a 100 seater aircraft – then perhaps the airline might choose to fly once every two days.

Fares

How much an airline should charge is a more complicated question. If an airline offers a fare of $50 from JFK in New York to London Heathrow, they might sell out in a few minutes and fill the aircraft. However, just because the aircraft is full doesn’t mean it’s flying profitably. In contrast, if they charge $50,000 per seat, they would easily be profitable – but unlikely to get many passengers, and therefore, also unlikely to be profitable. The balance is found somewhere in between.

Different types of passengers will be willing to pay different amounts. While a businesswoman trying to close an urgent, million-dollar deal might be willing to pay $5000 one way, a student going home on holiday might be limited to maybe $250. So the airline needs to do comprehensive market research to understand the make up of their passengers on the route and what they’re willing to pay. (Also, the addition of competitor airlines charging lower fares changes the dynamic)

Cost

The cost to operate is driven in part by the metrics of a given aircraft (ownership cost, fuel burn, maintenance etc.) and some operational items beyond the metal (such as ground handling, passenger handling or navigation costs). Typically, the selection of the aircraft for a particular route is also nuanced, as the metrics may contrast in different aircraft. For example, a 737-800 (which would now be an older aircraft) may cost less on the ownership metric. However, a 737-8 – a new model of the same type – will cost more to own but save you money on fuel burn.

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To become profitable, and remain so, an airline must balance and optimise for each of the above factors. This is where Aircraft Right Sizing comes in. Aircraft are designed with different capabilities in mind. Narrowbodies (like B737s, A320s or E190s) are typically for relatively short, regional flights (~500-3000km) carrying 90-200 passengers. Widebodies (like B787s, A330s, A350s or B777s) may carry anywhere from 200-400 passengers and travel even 11,000km.

The widebodies are optimised for long flights – which makes them sub-optimal for short flights where the operating costs become too high. So in a situation where the demand on a 500km route might be 300 PDEWs, it would likely be more cost effective to fly 2 x daily flights with 150 seater 737s or 3 x daily flights with 100 seater E190s than 1 daily flight with a 300 seater 777.

Competition can also affect right sizing. In the Demand segment above, let’s say the airline (XYZ Wings) opted to fly a 200 seater aircraft 1 x daily on the 200 PDEW route. They would be doing fine until a competitor started operating the route. If the competitor ‘takes away’ 50% market share, then all of a sudden XYZ Wings will have to either i) Reduce their number of weekly flights, ii) Reduce their fares to attract the passengers back (a negative sum game as the competitor could do the same) or iii)They could right size by changing the aircraft they operate on the route – perhaps by switching to a 100 seater aircraft.

Changes in these factors happen frequently – and airlines have to manage and adjust for them. This happens across multiple routes (sometimes with overlapping impacts) requiring input from several disciplines in the airline to maintain profitability.

So in summary and conclusion, just because an aircraft is full, doesn’t (necessarily) mean it’s profitable. Profitability at a route level is a complex dynamic requiring consistent monitoring, adjustment and, sometimes, the best way to maintain it is to make the structural change to right size the aircraft you operate.