How does an airline lower average cost per unit?

Question

im guessing average cost per unit would be average cost per seat. Name some ways they could lower average costs.

Would lowering advertising, and maintenance costs lower average cost per seat?

Also, how does offering more routes lower average costs.

Answer 1

You're close. The unit-cost in the airlines industry is called "CASM" (cost per available seat miles) in the US or "CASK" in other parts of the world (no points for guessing what it stands for).

CASM is the operating costs multiplied by ASM (seats available in a period multiplied by the distance flown). CASM is a great way to look at airlines because most costs in the airline are variable, so it is a neat way to compare airlines across geographies.

The ratio can go down because of several reasons. This can happen by increasing efficiency on fixed assets (more efficient planes/engines, more airtime), staff (better utilization of cabin crew/pilots) and other costs. The numerator can also go down by a shift in mix. For example, if you are doing more domestic flights, then you will have less international expenses (e.g. overflight, airport taxes) or if you have more long-haul flights, your unit-costs drop because it a 400 km flight is not twice as expensive to fly a little 200 km flight. The numerator can also go down because not all costs are variable. HQ and advertising costs (which is usually about 20%) tend to be fixed. As a result, expanding capacity tends to lead to dropping CASM (and visa versa when the cycle goes badly). The last reason why costs can go down is because of luck. CASM is going to be a volatile number and is going to change from month to month, quarter to quarter. Best to look at the long term.

Typical strategies to lower CASM:

1. E-tickets
2. More on-link bookings
3. Self-check in
4. Limits on baggage weight
5. More stringest frequent flyer miles
6. Thin out reserves for stand-by cabin crew/pilots
7. Reduce daily allowances for cabin crew/pilots
8. Make sure loops terminate in home cities
9. Less aggressive throttling on take-offs/landing (fuel)
10. More autopilot (fuel)
11. Hedge fuel (in an inflationary market)
12. Buy planes instead of wet-leasing
13. Keep uniform fleet (reduce # of SKUs on parts and increase purchasing power on fleet/engines/parts/maintenance contracts)
14. Do in house D-checks
15. Outsource meals

Addendum: Yes, lowering advertising and maintenance costs does lower CASM by lowering the numerator of the equation. This true provided that it doesn't end up in lower demand, which then leads to a necessary cut in capacity.

Adding additional routes also lowers the unit-cost, this time by affecting the denominator of CASM. By adding more routes, you get better economies of scale on variable costs (e.g. staff costs go up as you need more cabin crew and pilots, but you don't need proportionately more baggage handlers, ticket agents and back office people) as scaling on the fixed costs. That is, you still have only one headquarters, with the same building, same CEO, same accounting department, etc.).

Answer 2

The airline transportation is looking good for the future. The airlines recorded record sales over the past Thanksgiving break. As with the faster-Yes, the planes will be faster, how much faster I am not sure. I heard that engineers are currently developing a plane that actually goes into "outer space" and back into the atmosphere, which would make it faster. Less costly- Probably not. An airplane is a very complex and expensive machine. The price will continue to rise along with inflation. More comfortable-Most likely. There is a plane being developed that is bigger than the proposed Airbus A-380 and the bigger the plane means more space and results in more comfort. Hovering cars and vehicles are probably going to be developed, but those won't be around for my guess is around a century from now. Even when these are developed, people will still use airplanes, since it will still provide a faster mean of transportation.

Answer 3

by shortening legroom