2011 Airline Economic Analysis PDF

Airline Economic Analysis
for the Raymond James Global Airline Conference

By:
Bob Hazel
Aaron Taylor
Andrew Watterson
Introduction
In our annual economic analysis, five changes affecting US
airlines stand out since last year (Q3 2009 Q3 2010):
First, the CASM gap between value carriers and network carriers is
the smallest we have seen over a seven-year period. When adjusted
for stage length and aircraft type, the sharp line that has divided
value carriers and network carriers is becoming blurred.
Second, both value and network carriers have maintained strong

cost discipline. On a system basis, overall CASM increases totaled
about 2.3% from Q3 2009 to Q3 2010. Value carrier CASM increased
4.9% while network carrier CASM increased by only 1.7%. Excluding
fuel, CASM declined by 1.7% for network carriers and increased by
2.4% for value carriers.
Third, after the dramatic decline from 2008 to 2009, fuel costs have
been increasing but with less volatility.
Fourth, both network and value carriers have experienced solid

RASM growth year-over-year. Consistent with past cycles, network
carriers have experienced stronger RASM growth during this recovery than value carriers.
Fifth, capacity discipline has strongly supported the recent increase

in RASM as load factors have leveled off.
Primarily because recent cost and revenue data is available on a

comparative basis for US carriers, this report focuses most heavily
on developments at those carriers. However, it also contains limited
coverage of international carriers. In this report, we cover the following topics:
US Carriers
1. Carriers Included and Methodology
2. Value Versus Network Carrier RASM/CASM Comparison
3. Value Versus Network Carrier CASM Comparison,

Excluding Fuel
4. Long-term CASM Trends
5. Individual Carrier CASMs and Recent Changes
10
6. Comparing CASM for Similar Aircraft Operated by

Different Airlines
12
7. Adjusting for Stage Length
14

Different AirlinesWidebodies
15
9. Fuel Prices
17
10. CASMs for Smaller Aircraft
18
11. Changes in Revenue over Time
20
12. Carrier Unit Revenue Performance
20
13. Baggage and Cancellation Fees
21
14. Changing Capacity and Fleet Composition in the

US Market
24
15. International Versus Domestic Portion of US Market
26
16. Revenue Drivers
26
International Carriers
17. Air Service Provided by Value Carriers Around the World
29
18. Stage Length Adjusted RASK and CASK
31
Copyright 2011 Oliver Wyman
US Carriers
1. Carriers Included and Methodology
The largest US value carriers are included in this analysis, as are the
largest US network carriers. The carriers selected represent more than
85% of US carrier ASMs.1
Our data sampleValue carriers (low-cost):
1. AirTran
2. Allegiant
3. Frontier2
4. JetBlue
5. Southwest
6. Spirit
7. Virgin America2
Our data sampleNetwork carriers:
1. Alaska
2. American
3. Continental
4. Delta
5. Hawaiian2
6. Northwest3
7. United
8. US Airways
Most of the analysis is based on third quarter 2010 data, which is
the most recent US DOT (Form 41) data available. DOT data was used
instead of SEC filings to permit comparisons of specific equipment
types and ensure that non-airline-related costs did not dilute the
specific focus on airline costs. In situations where unit costs changed
materially from quarter to quarter, we used longer time periods and
noted the applicable period in the exhibits. For carriers outside the
US, we have used the most recent reporting period available on a
comparative basis.
1
The primary category not included is regional carriers, although some cost analysis is included for that sector as well.
Carriers not included in last years study.
3
Northwest data is prior to 2010.
2
Unless indicated otherwise, the revenues and costs provided are for
mainline domestic operations only. We have removed the revenues
and costs associated with the carriers regional affiliates by correcting for their transport-related revenues and costs; although, it is
impossible to do so with absolute precision. We caution the reader
that weve included more carriers in this years report, so historical
numbers may not match last years report.
2. Value Versus Network Carrier RASM/CASM Comparison

The large international component of the network carriers systems
means that for some comparisons between network and value carriers, a system-to-system comparison is useful, while for others a
domestic-to-domestic comparison is useful. A system-to-system
comparison is most useful in determining the relative success of each
business modelare the network carriers becoming more successful
over time as measured by their RASM/CASM differential in comparison to the value carriers? A domestic-to-domestic comparison is most
useful in determining whether the network carriers are able to compete with value carriers in markets where they fly head-to-head. Both
comparisons are discussed below.
Exhibit 1 shows the RASM and CASM comparison for network versus
value carriers for the third quarters of 2009 and 2010. This initial
comparison is on a system basis, including international service (but
excluding transport-related revenue and cost).
Exhibit 1: Comparison of System RASM and CASM for Q3 2009/2010
(Excluding regional affiliates)
16
14
Cents per ASM
12
12.3
10.6
11.1
11.3
11.4
12.5
11.6
11.5
10.8
10.2
10
9.9
10.3
8
6
4
2
0
RASM CASM RASM CASM

2009
2010
Our airline sample overall
RASM CASM RASM CASM

2009
RASM CASM RASM CASM
2010
2009
Average for network carriers

(Alaska, American, Continental, Delta,
Hawaiian, Northwest, United,
US Airways)
Labor
Fuel
2010
Average for value carriers

(AirTran, Allegiant, Frontier, JetBlue,
Southwest, Spirit, Virgin America)
Other
Source: PlaneStats.com for Q3 2009 and Q3 2010. Mainline operations only, excludes transport-related revenue
and cost (regionals).
In Q3 2010, the average CASM of our sample airlines was 11.3, which
was 2.3% higher than in Q3 2009. For network carriers, the average
CASM was 11.6, which was 1.7% higher than the prior period. For
value carriers, the average CASM was 10.3, which was 4.9% higher.
The average RASM of our sample airlines was 12.3 in Q3 2010, which
was 15.7% better than in Q3 2009. For network carriers, the average
RASM was 12.5, which was 16.3% better than the prior period, while
for value carriers, the average RASM was 11.5, which was 13.3%
better. From Q3 2009 to Q3 2010, the network carrier RASM premium
over the value carriers increased from 6.0% to 8.8%.
Viewing the RASM and CASM changes together, we see that over the
one-year period, both value and network carriers performed much
better on a system basis. For network carriers, the margin between
RASM and CASM, which was negative 5.9% in Q3 2009, increased to a
positive 7.7% in Q3 2010. For value carriers, the RASM/CASM margin
increased from 3.1% to 11.3%.
Exhibit 2 shows the RASM/CASM margin for both groups over a nearly
20-year period on a yearly basis, and then for each of the last three
quarters. On a system basis, the network carriers have been operating their businesses more successfully over the past year both in
absolute terms and in relation to the value carriers.
Exhibit 2: Historical System RASM/CASM gap for all network and value
carriers,1991 through Q3 2010 (Excluding regional affiliates)
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
1993
1995
1997
1999
2001
Network
2003
2005
2007
2009
2010Q2
Value
Source: PlaneStats.com year-end to 2009 and quarterly 2010. Mainline operations only, excludes transport-related
revenue and cost (regionals). Carrier set differs from the 15 carriers in our studyfor each year of the series, it
includes all value and network carriers reporting DOT Form 41.
Exhibit 3 shows another RASM and CASM comparison for network versus value carriers. This comparison is for domestic service only (again
excluding transport-related revenue and cost).
Exhibit 3: Comparison of Domestic RASM and CASM (Q3 2009/2010)
16
14
Cents per ASM
12
10.9
11.3
12.1
11.6
11.9
12.3
12.1
11.6
11.1
10.3
10
10.0
10.4
8
6
4
2
0
RASM CASM RASM CASM

2009
2010
Our airline sample overall
RASM CASM RASM CASM

2009
RASM CASM RASM CASM
2010
2009
Average for network carriers

(Alaska, American, Continental, Delta,
Hawaiian, Northwest, United,
US Airways)
Labor
Fuel
2010
Average for value carriers

(AirTran, Allegiant, Frontier, JetBlue,
Southwest, Spirit, Virgin America)
Other
Source: PlaneStats.com. Mainline operations only, excludes transport-related revenue and cost (regionals).
In Q3 2010, the average domestic CASM of our sample airlines was

11.6, which was 2.0% higher than in Q3 2009. For network carriers,
the average domestic CASM was 12.1, which was 1.0% higher than
the prior period. For value carriers, the average CASM was 10.4,
which was 4.3% higher.
From Q3 2009 to Q3 2010, the value carrier CASM advantage over network carriers declined 2 percentage points to 14%. This cost advantage is smaller than the gaps of previous years.
The average RASM of our sample airlines was 12.1 in Q3 2010, which
was 11.1% better than in Q3 2009. For network carriers, the average
RASM was 12.3, which was 10.5% better than the prior period, while
for value carriers, the average RASM was 11.6, which was 12.5%
better. From Q3 2009 to Q3 2010, the network carrier RASM premium
over the value carriers decreased from 8.0% to 6.1%.
Viewing the domestic RASM and CASM changes together, we see that
over the one-year period, both value and network carriers performed
much better. For network carriers, this meant that the margin between domestic RASM and CASM, which was negative 7.0% in Q3
2009, increased to a positive 1.8% in Q3 2010. For value carriers, the

domestic RASM/CASM margin increased from 2.8% to 10.9%.
Exhibit 4 shows the domestic RASM/CASM margin for both groups
over a nearly 20-year period on a yearly basis, and then for each
of the last three quarters. During Q2 and Q3 2010, RASM exceeded
CASM for the network carriers, but for Q1 it did not. Unless network
carriers find a way to operate their domestic systems more profitably,
they are likely to increasingly serve as feeders to the network carriers international operations.
Exhibit 4: Historical Domestic RASM/CASM gap for all network and value
carriers, 1991 through Q3 2010 (Excluding regional affiliates)
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
1993
1995
1997
1999
2001
Network
2003
2005
2007
2009
2010Q2
Value
Source: PlaneStats.com year-end to 2009 and quarterly 2010. Mainline operations only, excludes transportrelated revenue and cost (regionals). Carrier set differs from the 15 carriers in our studyfor each year of the
series, it includes all value and network carriers reporting DOT Form 41.
Costs
3. Value Versus Network Carrier CASM Comparison
Excluding Fuel
Given the volatility of fuel prices and the impact of hedging over the
past several years, it is important to look more closely at CASM changes excluding fuel for the two carrier groups. Exhibit 5 shows network
carrier CASM with and without fuel since Q1 2007. CASM ex-fuel for
the network carriers increased during the second half of 2009, peaked
in Q4, and has been declining since then. From Q3 2009 to Q3 2010,
CASM ex-fuel for the network carriers decreased by 1.7%. Over the lon-
ger period from Q1 2007 to Q3 2010, the average network carrier CASM
ex-fuel increased by only 2.4%, from 8.5 to 8.7.
Exhibit 5: Domestic CASM and fuel CASM growthsample network carriers
(Excluding regional affiliates)
16
Cost per ASM (cents)
14
12
10
5.9
3.1
3.1
2.9
3.4
8
6
4
8.8
8.7
8.5
9.9
8.7
2
0
Q1
Q2
Q3
2007
Q4
Q1
Q2
Q3
Q4
Q1
Q2
2008
CASM ex Fuel
Q3
2009
Q4
Q1
Q2
Q3
2010
Fuel CASM
For the value carriers, the corresponding CASM information is shown

in Exhibit 6. From Q3 2009 to Q3 2010, CASM ex-fuel for the value
carriers increased by 2.4%. Value carriers incurred greater fuel cost
increases than network carriers during this period, primarily because
of network carriers increased fuel efficiency. Over the longer period
from Q1 2007 to Q3 2010, the average value carrier CASM ex-fuel
increased by 13.6%, from 6.3 to 7.1.
Because Southwest flies 54% of value carrier domestic ASMs, changes
in its CASM are the primary driver of value carrier CASM changes.
Southwests high labor CASM is well known, and 68% higher than
the average labor CASM of the other value carriers. The average value
carrier labor CASM is 3.0; Southwests is 3.7 while the average of the
other value carriers is only 2.2 for YEQ3 2010.
Exhibit 6: Quarterly Domestic CASM and fuel CASM growthsample

value carriers (Excluding regional affiliates)
16
14
12
10
8
4.5
2.5
3.1
3.1
3.3
6.9
7.2
7.1
Q3
Q4
6
4
6.9
6.3
2
0
Q1
Q2
Q3
Q4
Q1
Q2
2007
Q3
Q4
Q1
Q2
2008
Q1
2009
CASM ex Fuel
Q2
Q3
2010
Fuel CASM
4. Long-term CASM Trends

Exhibit 7 shows the domestic CASM differential between network and
value carriers broken into labor, fuel, and other for the 3rd quarter of
each year from 2004 through 2010.
Exhibit 7: Comparison of Domestic CASM between network and value
carriers over time
16
14.6
42%
2.8
41%
10.4 1.6
39%
40%
39%
28%
31%
30% 32%
31%
25%
2004 Q3
2005 Q3
Labor
Fuel
2007 Q3
Other
Value
29%
Difference
Value
2009 Q3
Network
29%
30%
Difference
Value
Difference
2008 Q3
Network
29%
21% 25%
30%
Value
Value
2006 Q3
Network
28%
27% 31%
30% 34%
Difference
20%
Value
42%
43%
312%
30%
36%
Network
10.0 1.9
36%
9.1 2.7
39%
32%
Network
41%
39%
29%
Value
37%
2.5
12.1
11.9
41%
20%
8.9
8.1
44%
40%
Network
7.6
2.8
3.2
11.4
Difference
43%
Difference
10
10.4
36%
11.7
11.3
10.9
Network
12
Difference
14
2010 Q3
Difference
Over the seven-year period, the difference in CASM between network and value carriers has declined substantially, particularly in
the past two years. Looking at Q3 data each year, we see that in 2004
and 2005, the value carrier CASM was approximately 26% lower than
the network carrier CASM. The cost gap declined slightly to 2123%
between 2006 and 2008, and then dropped to an average of about 15%
over the past two years.
5. Individual Carrier CASMs and Recent Changes

With the exception of JetBlue, the value carriers experienced CASM
increases over the one-year term between Q3 2009 and Q3 2010, ranging from 0.4 to 1.0. See Exhibit 8. In general, these changes are less
than in recent years when the industry experienced higher volatility
as a result of changing fuel prices; and the value carrier cost order
rankings therefore changed less than in the recent past. Before adjusting for stage length, Spirit had the lowest CASM at 8.2, followed
by Allegiant with a CASM of 8.9, Virgin America with a CASM of 9.3,
JetBlue with a CASM of 9.8, AirTran with a CASM of 10.0, Frontier
with a CASM of 10.3, and Southwest with a CASM of 11.1. However,
these are not stage length adjusted CASMs, and that adjustment
changes the rankings.
Exhibit 8: Q3 2009/2010 Domestic CASM breakdown by airlinevalue
carriers (Excluding regional affiliates)
15
10.0
10
7.7
8.2
8.3
8.9
8.5
9.3
9.8
10.3
10.0
9.1
10.6
11.1
9.2
0
2009 2010
2009 2010
2009 2010
2009 2010
2009 2010
2009 2010
2009 2010
Spirit
Allegiant
Virgin
America
JetBlue
AirTran
Frontier
Southwest
Labor
Fuel
Other
and cost (regionals).
10
The network carriers experienced CASM increases in the same range

as the value carriers. Exhibit 9 shows the CASM for each network
airline in our sample for Q3 2009 compared with Q3 2010. Before
adjusting for stage length, Alaska had the lowest CASM at 10.6, followed by Hawaiian with a CASM of 11.5, Continental with a CASM of
11.8, US Airways with a CASM of 12.1, United with a CASM of 12.1,
American with a CASM of 12.5, and Delta with a CASM of 12.6. As
with the value carriers, these are not stage length adjusted CASMs,
and that adjustment changes the rankings.
Exhibit 9: Q3 2009/2010 Domestic CASM breakdown by airline
network carriers (Excluding regional affiliates)
15
13.8
10.6 10.6
11.1
11.5
11.6 11.8
11.5
12.1
12.1
11.9
12.5
12.0
12.6
11.1
10
0
2009 2010
2009 2010
2009 2010
2009 2010
Alaska
Hawaiian
Continental
US Airways
Labor
2009 2010
Fuel
United
2009 2010
American
2009 2010
Delta
2009
Northwest
Other
and cost (regionals). 2010 Northwest data is included in 2010 Delta data.
In Exhibit 10, we stage length adjust the Q3 2010 unit costs for both
groups of carriers to find which carriers have the lowest costs. After
doing so, Spirit and Allegiant remain the lowest and second lowest cost value carriers respectively with Air Tran and Southwest
following.
Among the network carriers, Hawaiian and Alaska have the lowest
costs, respectively. Hawaiians costs equal the median of the value
carrier group and Alaska is on par with the high end of that group.
11
Exhibit 10: Domestic CASM by airlinestage length adjusted to

1,000 miles Q3 2010 (Excluding regional affiliates)
14
12.2
SLA Cost per ASM (cents)
12
10
10.9
10.8
8.0
8.6
9.1
9.6
9.5
10.0
12.8
12.3
12.8
11.5
10.1
Spirit
AirTran
Allegiant
Southwest
Hawaiian
Frontier
JetBlue
Alaska
Virgin America
American
US Airways
Continental
Delta
United
Source: PlaneStats.com for Q3 2010. Mainline operations only, excludes transport-related revenue and cost
(regionals). 2010 Northwest data is included in 2010 Delta data.

Different Airlines
All things being equal, larger aircraft tend to have lower unit costs
than smaller aircraft. This can impact airline-to-airline comparisons
if they operate different sized aircraft. To best compare the operating cost efficiency of value and network carriers, we selected an
aircraft in each carriers fleet roughly comparable to Southwests
most efficient aircraft, the 737-700. For carriers that operate several
aircraft types similar to the 737-700, we chose the one closest in
capacity to, but larger than, Southwests. For example, United brackets Southwests 137-seat 737-700s with 120-seat A319s and 147-seat
A320s. We chose the A320. Delta is represented by two aircraftthe
737-800 originally flown by Delta and the A320 originally flown by
Northwestbecause Delta was two separate companies during the
previous year.
In Exhibit 11, we plotted the average stage length for each of our airline/aircraft combinations and the direct cost per available seat mile
at that stage length. These are based on the direct operating costs
reported by the carriers on DOT Form 41 for each aircraft type. Indirect costs, in contrast, are not reported by aircraft type and may be
allocated differently depending on individual carrier methods. Direct
costs are frequently used by carriers to help analyze individual route
contributions to the system. This exhibit does not present a complete
picture of each airlines costs even for the particular aircraft type, but
it does provide insight into the core operating cost of the aircraft, as
12
it includes pilots, fuel, aircraft ownership, maintenance, and insurance. To smooth out quarterly variations caused primarily by maintenance requirements, the data is for the full year ending Q3 2010
and Q3 2009. In addition, we stress that these costs are for specific
aircraft types, not for the carriers total operations.
A glance at the table shows that Americans 737-800 has the lowest
direct operating CASM, 22% lower than Deltas 737-800, which has
approximately the same stage length. The chart also highlights the
changes in CASM since Q3 2009 for many carriers.
Exhibit 11: Direct CASM for selected aircraft type at actual average
stage length (YEQ3 2009 and YEQ3 2010)
YEQ3 2009 CASM
YEQ3 2010 CASM
10
8.5
9
8
7
6
6.4
5.7
5.8
5.8
6.0
6.0
AirTran
Allegiant
Frontier
Continental
Spirit
Delta
A320
737700/LR
MD80
A319
737800
A319
A320
737700/LR
1556
1001
913
947
1273
931
1124
705
5.2
5.3
5.3
5.3
American
JetBlue
Virgin
America
Aircraft
737800
A320
Stage
Length
1122
1293
6.7
6.7
6.9
5
4
3
2
1
0
Southwest US Airways
Delta
United
Alaska
A320
737800
A320
737700/LR
1112
1180
995
963
Seats
152.7
150.0
149.0
137.0
149.2
136.0
158.6
145.0
148.0
137.0
150.0
160.0
141.8
124.0
Fleet %*
18.4%
72.8%
64.3%
37.8%
100.0%
77.1%
32.7%
92.2%
9.3%
63.3%
20.2%
11.1%
27.0%
10.7%
*Fleet type as percentage of total fleet.

Source: PlaneStats.com for YEQ3 2009 and 2010. Mainline operations only. Costs include direct aircraft operating
expenses. Direct costs include pilots, fuel, aircraft ownership, maintenance and insurance. Indirect expenses
not reported by aircraft type. Q2 2010 AirTran data used. 2010 Northwest data is included in 2010 Delta data.
Americans success in bringing down the cost of operating the 737800 is the result of three important changes in its 737-800 fleet. First,
over the last two years American increased the 737-800 fleet by 91%,
from 77 to 147 aircraft, and as the fleet has grown rapidly, its Direct
CASM has decreased. A higher proportion of lower seniority pilots
are likely flying the aircraft; the newest aircraft have no maintenance
cost yet; and over 50% of the fleet have the newest, most fuel efficient engines. Second, American is retrofitting the 737-800 fleet and
adding an average of 12 seats per aircraft. Finally, American changed
the mission of the 737-800 fleet, deploying the aircraft in longer haul
markets, which increased the stage length 11%. The combined power
of these levers is well known and traditionally used by value carriers
in their growth phase, but rare among network carriers.
13
7. Adjusting for Stage Length

Since length of flight strongly affects unit coststhe longer the flight,
the lower the unit costsit makes sense to compare unit costs in
relation to average stage length.
To help visualize the cost and stage length differences among the
carriers, in Exhibit 12 we have plotted unit costs (Y axis) on a chart
against average stage length (X axis) for our group of carrier/aircraft
combinations. To facilitate comparisons, we show an industry average
distance-related cost curve. By visualizing additional curves drawn
above and below the curve, it is apparent that the two lowest cost
aircraft in terms of direct operating costs are AirTrans 737-700 and
Americans 737-800. It is also apparent that the value carriers, with
the exceptions of JetBlue and Virgin America, generally operate their
narrowbody aircraft at shorter stage lengths than the network carriers. Turning to the network carriers, all have higher Direct CASMs
than the value airlines when adjusted for stage length, except American, whose 737-800 performance is discussed in the previous section.
Exhibit 12: Direct CASM per airline for selected narrowbody aircraft type

plotted against average stage length (YE Q3 2010)
9.0
8.5
Alaska 737-700
8.0
7.5
7.0
United
A320
6.5
6.0
Southwest 737-700
US Airways
A320
Delta 737-800
Delta A320
Spirit A319
Continental 737-800
Frontier A319
5.5
Allegiant MD80
AirTran 737-700
5.0
American 737-800
JetBlue A320
Virgin America A320
4.5
4.0
600
700
800
900
1,000
1,100
1,200
1,300
1,400
1,500
1,600
Stage Length (miles)

Source: PlaneStats.com for YEQ3 2010. Mainline operations only. Costs include direct aircraft operating
expenses. Direct costs include pilots, fuel, aircraft ownership, maintenance and insurance. Indirect expenses
not reported by aircraft type. Q2 2010 AirTran data used. 2010 Northwest data is included in 2010 Delta data.
Using an accepted stage length adjustment method, we recomputed

the YEQ3 2010 Direct CASM for each aircraft type based on a standardized stage length of 1,000 miles. Exhibit 13 shows the results, which
are useful in understanding which carriers operate most efficiently.
14
Exhibit 13: Direct CASM at 1,000 mile stage length for selected aircraft
(YEQ3 2010)
9
8.4
8
6.9
7
6
5.3
5.4
5.5
5.7
5.7
5.8
5.8
6.1
6.2
6.9
7.1
6.3
5
4
3
2
1
0
AirTran
Allegiant
Frontier
737-700LR
MD80
A319
American
Southwest
JetBlue
737-800
737-700LR
A320
Spirit
Delta
US Airways
Delta
A319
A320
A320
737-800
Virgin America
Continental
United
Alaska
A320
737-800
A320
737-700LR
Source: PlaneStats.com for YEQ3 2010. Mainline operations only. Costs include direct aircraft operating expenses.
Direct costs include pilots, fuel, aircraft ownership, maintenance and insurance. Indirect expenses not reported
by aircraft type. Q2 2010 AirTran data used. 2010 Northwest data is included in 2010 Delta data.
As you can see in Exhibit 13, AirTran (5.3/Direct CASM) is the lowcost leader at stage lengths of 1,000 miles. American (5.4) is in
second place, closely followed by Allegiant (5.5) and Southwest
and Frontier (5.7). Alaska (8.4) has the highest Direct CASM of the
sample carriers, 58% higher than AirTran. (Alaskas 737-700 has 124
seats versus 137 for AirTran.) We stress that the chart shows direct
costs only, and that the inclusion of indirect costs would change
the results somewhat as the network carriers tend to have higher
indirect costs. Even as presented, the carriers with the highest direct
CASMs are all network carriers. However, the difference between
some of the network carriers and the value carriers is slight.

Different AirlinesWidebodies
We conducted the same type of analysis for widebodies operated
by multiple US network carriers to see what trends are evident, and
found widely varying results. See Exhibit 14, which shows Direct
CASM per airline for selected widebody aircraft types plotted against
average stage length.
This variation is not surprising since there is a larger range of seating configuration choices among the carriers than is the case with
narrowbody aircraft. In particular, the choice of two-class, three-
15
class, or even four-class service and the installation of fully lie-flat

premium seats can reduce the number of seats over which the costs
are allocated. For example, Hawaiian installs 27% more seats in its
767-300 than United, while Continental has almost 15% more seats
in its 777-200 than American. In principle, the lower seat configurations that result in higher unit costs should also result in higher
unit revenues. While the available data do not permit us to explicitly
model this here, we will examine overall carrier revenue performance.
The 777, generally used for longer range flights with premium configurations, has the highest direct operating costs, with Americans
777 having the highest costs of all. A330 direct operating costs tend
towards the lower end, although Deltas 330-200, with a lower seat
configuration, has very high direct operating costs.
Exhibit 14: Direct CASM per airline for selected widebody aircraft types
plotted against average stage length (YEQ3 2010)
9.0
American 777 (246)
8.0
Delta 330-200 (243)
American
767-300ER
(211)
7.0
6.0
Delta 767-300ER (243)

Delta 777 (275)
United 777 (266)

Delta 767-400 (243)
United 767-300ER (205)

Hawaiian 767-300ER (261)
5.0
US
Airways
330-200
(279)
United 747-400 (373)
Continental 777 (282)
Continental 767-400 (238)

Delta 747-400 (403)
4.0
Delta 330-300 (298)
3.0
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500
6,000
6,500
Stage Length (miles)

Direct costs include pilots, fuel, aircraft ownership, maintenance and insurance. Indirect expenses not reported by
aircraft type.
These conclusions are shown more clearly in Exhibit 15, which adjusts direct operating costs for a standardized stage length of 4,000
miles.
16
Exhibit 15: Direct CASM at 4,000 mile stage length for selected aircraft
(YEQ3 2010)
9
8.3
8
7.2
4.7
5.1
5.3
5.4
6.2
6.1
6.0
6.3
7.2
7.4
6.5
5.5
4.0
4
3
2
1
0
Delta
A330-300
Hawaiian
US Airways
Delta
United
Delta
Delta
American
767-300ER
A330-200
767-400
777
767-300ER
777
777
Delta
Continental
United
American
United
Continental
Delta
747-400
767-400
767-300ER
767-300ER
747-400
777
A330-200
Direct costs include pilots, aircraft ownership, maintenance and insurance. Indirect expenses not reported by
aircraft type. 2010 Northwest data is included in 2010 Delta data.
9. Fuel Prices
As shown in Exhibit 16, fuel prices fell dramatically following the peak in
July 2008 of approximately $3.80 per gallon. Since bottoming out in the
first quarter of 2009, fuel prices have increased, although with less volatility. From Q3 2009 to Q3 2010, fuel CASM increased by 8.7%, with spot
prices up another 13% during Q4 2010. As of Q3 2010, fuel accounted
for 28.5% of CASM for our airline sample. For value carriers, the figure
was higher, at 31.8%, and for network carriers lower, at 27.8%. Experts
have pointed out that the fuel price increases of the past quarter are the
steepest since 2007.
Exhibit 16: System average fuel price (US carriers) and fuel spot price
(January 2001 through December 2010)
400
Carriers penalized
by future buys
Carriers benefit from

future buys
350
Cents per Gallon
300
250
200
ation
Stabiliz
150
100
50
System average fuel price
Fuel spot price
0
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: Oliver Wyman research based on US DOT (Form 41) Fuel Cost and Consumption Report and US Energy
Information Administration data.
17
10. CASMs for Smaller Aircraft

Traditionally, value carriers have operated with a single aircraft type,
although that model has changed over time. Three value carriers in
our sampleAirTran, JetBlue, and Frontiercurrently operate two
different narrowbody aircraft. With Southwests acquisition of AirTran,
the combined carrier will inherit those two aircraft types. Exhibit 17 illustrates how the smaller aircraft compare in efficiency with the larger
aircraft.
Exhibit 17: Direct CASM plotted against average stage length by aircraft
type, actual fuel prices (YEQ2 2010)
10
Direct CASM
JetBlue
E190 (100 seats)
AirTran
717-200 (117 seats)
7
Frontier
A320 (162 seats)
Southwest
737-700/LR (137 seats)
Frontier
A318 (120 seats)
4
400
500
600
700
800
JetBlue
A320 (150 seats)
AirTran
737-700/LR (137 seats)
900
1,000
1,100
1,200
1,300
1,400
Stage Length
Direct costs include pilots, aircraft ownership, maintenance and insurance. Indirect expenses not reported by
aircraft type.
AirTrans 737-700 has the lowest unit costs measured on a Direct

CASM basis when its stage length is taken into account, lower than
Southwests 737-700. Also, AirTrans 117-seat 717 has lower costs than
JetBlues 100-seat E190. Frontiers A318 has lower stage length adjusted
costs than its larger A320.
The smaller jets operated by the regional carriers, ranging in size from
ERJ 135s to E190s, sometimes complement and sometimes compete
with other aircraft operated by network and value airlines. How do
those aircraft compare in terms of unit costs? Exhibit 18 depicts the
CASMs for specific aircraft operated by specific airlines.
Regional carriers have different expense payment arrangements in
their Capacity Purchase Agreements (CPAs) with their mainline partners. The number of expense categories paid directly by mainlines,
and not appearing in the regional carriers costs, has increased over
18
time. Fuel and aircraft ownership were among the first to be directly
paid in some CPAs; more recently some mainlines have taken over
payment for ground handling and engine maintenance. As a result,
measuring total CASM across regional carriers and aircraft is misleading. Instead, a more segmented view of CASM is needed to compare
performance. In Exhibit 18 we have grouped the costs into four buckets:
defined specifically for this regional carrier analysis: Indirect costs
(including ground handling), Fuel, Other (including engine maintenance
and aircraft ownership), and Modified Direct CASM (including pilots,
pilot training, airframe maintenance, maintenance burden, and other
direct costs, but NOT aircraft ownership, engine maintenance, and fuel
& oil costs). The last bucket includes cost items that are universally paid
for by the regional airline and therefore represent the best measure of
comparison. While a small portion of the regionals total costs, it is on
the basis of these costs that regional carriers tend to compete for new
flying from mainline partners.
Exhibit 18: Regional carrier CASM plotted against average stage length
using actual fuel prices (Q2 2010)
20
16.3
15
10.0
5.7
10
11.3
10.7
0.0
2.1
3.7
4.6
3.1
5.5
4.0
2.3
4.5
2.1
3.5
12.4
12.7
3.9
4.2
2.3
2.0
1.5
0.0
12.0
3.2
4.0
0.3
4.1
3.2
Other CASM
Indirect CASM
Fuel CASM
8.6
6.8
`
4.4
2.8
Modified Direct CASM
1.0
1.6
3.1
2.9
6.8
0.2
2.0
8.0
3.3
6.0
1.7
2.0
1.7
0.0
2.2
2.3
1.8
1.2
1.9
2.9
2.7
2.2
2.1
ASA
Comair
GoJet
1.1
0
Comair AA Eagle Comair
Pinnacle SkyWest AA Eagle JetBlue ExpressJet
5.3
0.0
2.3
2.2
1.4
1.5
SkyWest SkyWest
Aircraft
CRJ 200
ERJ 145
CRJ 700
CRJ 200
CRJ 200
CRJ 700
E190
ERJ 145
CRJ 700
CRJ 900
CRJ 700
CRJ 700
CRJ 900
Stage
Length
422
494
557
390
450
621
664
560
542
658
608
701
715
Notes: Fuel allocation may differ significantly between airlines based on contractual setup with parent
company/network carrier.
Direct CASM Includes direct costs except aircraft ownership, engine maintenance, and fuel & oil costs.
Other CASM includes rent and aircraft depreciation & amortization and engine maintenance.
Source: PlaneStats.com for YEQ2 2010.
Using Modified Direct CASM (MDC) as the measure, the low-cost champion is the Skywest CRJ 900 with an MDC of 1.5 per ASM, while its
competitor Comair has an MDC of 2.2 for the same aircraft (but shorter
stage length). JetBlues slightly larger capacity E190 has an MDC of 2.9,
32% higher than the Comair aircraft. Notice also the range of MDCs for
the four operators of the CRJ 700: Skywest 1.8, GoJet 2.1, ASA 2.7, AA
Eagle 3.1, and Comair 3.5. The two aircraft with the highest MDCs are
the CRJ 200, at 5.5 for Comair, and ERJ 145 at 4.5 for AA Eagle.
19
Revenue
11. Changes in Revenue over Time
Exhibit 19 shows US airline revenue over the past 10 years, including revenue from cargo, regional carriers (transport revenue), and change fees.
All US carriers are included in the chart. Peak revenue for the decade
occurred during YEQ3 2008. Revenue declined sharply the following year
and has recovered to about the YEQ3 2007 level. Despite all the public
discussion of fees and charges collected beyond the ticket price, they
remain a small percentage of airline revenue. A more detailed discussion of the sources and drivers of airline revenue follows.
Exhibit 19: Operating revenue, all reporting carriers, including transport
revenue (YEQ3 2001 YEQ3 2010)
$200
$180
Res Change Fees

Miscellaneous
Baggage Fees
Charter
Cargo
Operating Revenue (billions)
$160
$140
Transport Revenue
$120
$100
$80
Passenger Revenue
$60
$40
$20
$0
YEQ32001
YEQ32002
YEQ32003
YEQ32004
YEQ32005
YEQ32006
YEQ32007
YEQ32008
YEQ32009
YEQ32010
Source: PlaneStats.com advanced query > income statement for all reporting carriers.
12. Carrier Unit Revenue Performance

Exhibit 20 shows the stage length adjusted domestic RASM for all carriers in the study, similar to the CASM ranking in the cost section. The
gap between the highest and lowest unit revenue performance is 36%,
which is about the same as the 37% gap between the highest and lowest
cost performance. Continental and United rank 1st and 3rd highest in
RASM while United and Continental rank 1st and 2nd highest in CASM.
Not surprisingly, the value carriers tend to have a lower RASM than
the network carriers. Among the value carriers, Virgin America has
the highest RASM, overlapping the lower end of the network range.
Allegiant has the lowest RASM, which is consistent with its ancillary
revenue-focused business model.
20
Exhibit 20: Domestic RASM by airline stage length adjusted to 1,000 miles
Q3 2010 (Excluding regional affiliates)
14
11.5
SLA Cost per ASM (cents)
12
9.9
10
8.3
10.4
10.8
11.6
12.0
12.6
12.1
13.0
12.8
12.9
United
Alaska
Continental
10.8
8.9
0
Allegiant
Spirit
AirTran
Southwest
US Airways
Virgin America
Hawaiian
JetBlue
Frontier
American
Delta
Source: PlaneStats.com for Q3 2010. Mainline operations only, excludes transport-related revenue and cost
(regionals). 2010 Northwest data is included in 2010 Delta data.
13. Baggage and Cancellation Fees

Over the past several years, airlines have captured increasing amounts
of revenue for non-ticket charges such as baggage, buy-on-board
meals, in-flight entertainment, reservations, and change fees; some of
which are not included in DOT-reported average airfares or passenger
RASM. Exhibit 21 focuses on two of these categoriesbaggage fees and
cancellation feesto show the growth to date in both categories.
Exhibit 21: Baggage and reservation change fees
(YEQ3 2001 YEQ3 2010)
$6
Service Fees (billions)
$5
$4
Reservation
Change Fees
+1.3%
$3
+55.5%
$2
Baggage Fees
$1
+33.2%
+63.0%
+222.0%
+68.8%
$0
YEQ32002
YEQ32003
YEQ32004
YEQ32005
YEQ32006
YEQ32007
YEQ32008
YEQ32009
YEQ32010
21
These service fees generated $5.6 billion in YEQ3 2010, with bag fees
generating the larger share, $3.3 billion, and reservation change fees
generating $2.3 billion. While baggage fees have continued to grow
over the past two years, reservation change fees have reached a plateau, increasing only 1.3% from YEQ3 2009 to YEQ3 2010. The unanswered question is whether baggage fee revenue, which increased by
33.2% from YEQ3 2009 to YEQ3 2010, will also plateau.
The two carrier groups fundamentally differ in their approach to
these fees, and value carriers generate much less absolute revenue
from them. For example, JetBlue does not charge for the first bag, and
Southwest does not charge for the first two checked bags. Southwest
also does not charge a change fee, and JetBlues change fee is less
than that charged by the network carriers. However, value carriers
Spirit and Allegiant lead the pack in terms of per passenger service
fees as a percentage of revenue. (See Exhibit 24).
The different approaches are illustrated in Exhibits 22 and 23, which
show the revenue generated by individual carriers from reservation
changes and baggage fees. Because of their large size, the network
carriers generate far more absolute revenue from these sources, accounting for 85% of baggage fees and 89% of change fees. Among the
value carriers, JetBlue generates the most revenue from reservation
change fees, and AirTran generates the most from baggage fees.
Exhibit 22: Reservation change fees by carrier (YEQ3 2010)
$700
Reservation Change Fees (millions)
637
Network Carriers
$600
$500
Value Carriers
457
$400
314
$300
249
234
$200
115
91
$100
53
52
19
23
17
17
NK
VX
F9
G4
$0
DL
AA
UA
US
CO
NW
AS
HA
B6
FL
22
WN
Other
Total Reservation Change Fees $2.3B

22
Exhibit 23: Baggage fees by carrier (YEQ3 2010)

$1,000
$900
864
Network Carriers
Value Carriers
Baggage Fees (millions)
$800
$700
$600
561
511
$500
$400
328
$300
304
$200
103
$100
147
80
70
52
58
57
53
F9
B6
G4
34
29
VX
WN
60
$0
DL
AA
US
CO
UA
AS
NW
HA
FL
NK
Other
Total Baggage Fees $3.3B

Although these fees contribute much needed revenue to the carriers,

the average revenue generated from each passenger is smaller than
many passenger anecdotes would suggest. The amount of money collected in fares and fees from each segment passenger is broken out
for selected carriers in Exhibit 24.4 Excluding Southwest and JetBlue,
the average fees collected per segment passenger range from $10 for
Allegiant and United to $14 for Spirit. This stands in contrast to the
much larger range of average ticket revenue collected per segment
passenger, which ranges from $75 for Allegiant to $196 for United.
At first glance, Exhibit 24 suggests that carriers who charge for bags
do not suffer a comparative penalty in ticket prices paid by passengers. In other words, higher average ticket prices may also be accompanied by significant incremental fee revenue. A definitive view
of the price and passenger volume impact, however, would require
a more detailed analysis than this study permits. Past analyses by
Oliver Wyman have found that incremental fee policies have market
share impacts.
A segment passenger is a passenger traveling on one segment of what may be a multi-segment itinerary. The long-term average number
of segments per one-way itinerary is 1.4. Segment passengers are used here instead of O&D passengers based on the available data at this
time.
23
Exhibit 24: Service fees by carrier (YEQ3 2010)

$250
5.2%
Revenue per Segment Passenger
Baggage Fees
Reservation Change Fees
Ticketed Revenue
6.2%
$200
8.2%
$150
8.2%
6.2%
10.4%
5.2%
7.9%
$100
8.6%
16.7%
13.2%
0.3%
6.3%
$50
$0
Spirit
Allegiant
US
Airways
AirTran
Virgin
America
Delta
Frontier Hawaiian American
Alaska
JetBlue
CO/UA Southwest
Carriers Ranked by Fees as a Percent of Revenue per Passenger

Source: PlaneStats.com advanced query > income statement.
14. Changing Capacity and Fleet Composition in the

US Market
Recently, capacity discipline has been an important driver of improved
airline RASM and profitability. During much of the decade, value carriers and regional carriers grew rapidly. Even as network carriers reduced
their mainline operations, regional carriers filled in. Then in 2009, the
industry reduced capacity. As shown in Exhibit 25, during 2009, domestic
network mainline ASMs declined by 9.2%, regional ASMs by 5.5%, and
value airline ASMs by 3.9%. Because value airlines reduced capacity less
than the mainline carriers, they continued to gain capacity share even
during these difficult times.
In 2010, capacity remained tight. Domestic network carrier ASMs
declined slightly by 1.2%; regional ASMs were basically flat at positive 0.1%; and the value carriers grew by only 1.8%still resulting
in a small capacity share gain for the value carriers.
24
Exhibit 25: Change in scheduled domestic US ASMs

(January 2009 January 2011)
40
35
Seat Miles (billions)
30
-9.2% yoy
-1.2% yoy
-3.9% yoy
+1.8% yoy
-5.5% yoy
+0.1% yoy
25
20
15
10
5
0
Jan
Mar
May
Jul
Sept
Nov
Jan
Mar
May
2009
Jul
Sept
Nov
2010
Network
Value
Regional
Jan
2011
Other
Source: PlaneStats.com schedule data for all carriers.
Another perspective on capacity in the US market is provided by

the changing size and mix of the active commercial airline fleet.
Exhibit 26 shows that the number of active aircraft used in domestic service declined by 3.4% from Q2 2009 to Q2 1010, which follows
a 2.5% decrease during the previous year. Surprisingly, the only
aircraft category that grew between Q2 2009 and Q2 2010 is the
widebody aircraft used in domestic service, with an 8.1% increase
over a small base. The narrowbody fleet declined by 4.6%, and the
aging turboprop fleet declined by 6.4% during this period.
Exhibit 26: Distribution of US carriers aircraft (operated during period)
in domestic service (2008 2010)
5,000
4,812
4,693
245
4,000
4,535
% change
2009-2010
229
-6.4%
1,019
-0.9%
483
-2.7%
2,684
-4.6%
+8.1%
245
1,064
1,028
396
497
3,000
2,000
2,986
2,813
1,000
122
111
120
2008Q2
2009Q2
2010Q2
Widebody
Narrowbody
Large RJ
Small RJ
Turbo
Source: PlaneStats.com advanced query > traffic report for all reporting passenger carriers.
25
15. International Versus Domestic Portion of US Market

US mainline carriers have continued to look overseas for revenue opportunities, with their domestic operations contributing less and less
to their system revenue. Exhibit 27 illustrates the long-term network
carrier shift toward international service. The share of system revenue
contributed by domestic operations dropped by 13 points between
Q3 2001 and Q3 2010, from 73.6% to 60.3%. The trend continued this
past year, as domestic revenue dropped from 62.3% to 60.3% of total
network carrier revenue between Q3 2009 to Q3 2010. Total domestic
and international revenue grew during this period, but international
revenue grew much more rapidly.
Exhibit 27: US network carrier operating revenue by geographic area
100%
Pacific
Share of Operating Revenue
Latin
80%
Atlantic
60%
Domestic
Revenue Share
40%
YE3Q 2001
20%
Change
YE3Q 2010
Pacific
7.9%
10.0%
+2.1 points
Latin
6.6%
10.3%
+3.7 points
Atlantic
11.9%
19.4%
+7.5 points
Domestic
73.6%
60.3%
-13.3 points
0%
YE3Q2001
YEQ32002
YEQ32003
YEQ32004
YEQ32005
YEQ32006
YEQ32007
YEQ32008
YEQ32009
YEQ32010
Source: PlaneStats.com advanced query > income statement for network carriers, mainline operations only.
Value carriers also are growing internationally, with the focus so far on
Latin America. Although their share of ASMs devoted to domestic service remains very high at 95.5%, their share devoted to Latin America
has grown from 1.7% in YEQ3 2008 to 2.9% the following year, and to
4.5% in YEQ3 2010. This trend is likely to continue and accelerate as
Southwest, the largest US value carrier, acquires AirTrans international routes and develops its own international capabilities.
16. Revenue Drivers

The charts in Exhibits 28, 29, and 30 show the relationship between
capacity changes, load factor, yield, and RASM over the past decade. In
the basic micro-economic context of air travel, demand is very tightly
linked with Gross Domestic Product growth. When airlines reduce
capacity (supply) in the face of a downturn, or restrain capacity in the
26
face of even modest economic growth, they effectively push up load

factors and/or yields.
The charts set the capacity index at a value of 100% when capacity is
at its highest point. For the combined domestic network carrier and
value carrier system-wide markets, that point occurred in YEQ1 2008,
and compares to a value of about 93.1% for the YEQ1 2000. Exhibit 28
below shows that domestic capacity bounced back from the post 9/11
recession to new highs by the middle of the decade and stayed on a
plateau until 2008 before capacity dropped back to 2002 levels. Value
carrier load factors have increased somewhat over the decade, particularly in the last three years as they finally reached the 80% mark
for YEQ3 2010. RASM excluding transport revenue (labeled RASMxt),
which excludes regionals, has increased significantly during the past
year primarily as a result of increasing yield.
Exhibit 28: US value carriers system revenue drivers
Total Domestic Capacity
(Indexed to 100% at Q308)
100%
90%
Yield and RASM (cents)
13
Yield
80%
12
11
10
Load Factor
70%
60%
RASMxt
50%
40%
30%
7
Q100 Q300 Q101 Q301 Q202 Q302 Q103 Q303 Q104 Q304 Q105 Q305 Q106 Q306 Q107 Q307 Q108 Q308 Q109 Q309 Q110 Q310
Source: PlaneStats.com advanced query > income statement for value carriers, systemwide, mainline
operations only. Capacity based on total US domestic traffic.
Exhibit 29 shows network carriers with the same capacity line. It hides
the dramatic 24.7% reduction of network carrier total domestic capacity
over the past decade, which the value carriers largely backfilled. This
capacity reduction by the network carriers has helped increase network
carrier load factor from 71% to nearly 84% over the decade. Almost all of
this load factor increase, however, occurred prior to 2008. Recent RASM
increases have been supported by strict capacity controls, which have
made yield increases possible.
An interesting phenomenon is the compression of the RASM and yield
lines for network carriers. Traditionally, RASM equals yield times load
factor, so the yield and RASM lines converge when load factor is 100%
(generally considered impossible). Recently, the network carrier lines
27
Capacity and Load Factor
14
have been compressing despite flat load factors because of other revenue such as fees. In a sense, as load factor has approached its theoretical maximum, fees have replaced it as a source of revenue growth.
Exhibit 29: US Network carriers domestic revenue drivers
100%
Total Domestic Capacity

(Indexed to 100% at Q308)
15
14
95%
Yield
90%
13
12
85%
RASM
80%
11
75%
10
9
70%
Load Factor
16
65%
8
7
60%
operations only. Capacity based total US domestic traffic.
The network carriers have added substantial capacity for international service over the past decade, as seen in Exhibit 30. Load factors remained consistently high for most of the decade, while yields
increased at a healthy rate, far in excess of domestic yields until late
2008. The subsequent drop in yields was accompanied by almost an
equivalent drop in RASM during 2009. Flat to low capacity growth
since the economic bottom has led to a nearly complete recovery in
RASM by YEQ3 2010. With sufficient capacity discipline, airlines can
have a V shaped recovery in prices and ultimately profits even if
the economy doesnt.
Exhibit 30: US Network carriers international revenue drivers
14
100%
12
90%
Capacity (Indexed to 100% at Q408)

85%
11
80%
10
Yield
75%
Load Factor
9
70%
RASMxt
8
65%
60%
operations only. Capacity US carrier international traffic.
28
95%
13
Both the capacity discipline-driven price increases and dramatic increases in fee revenue have been credited for the rebound in airline
revenue and profits. To identify the role played by each, we conducted a
price and volume variance analysis to quantify the sources of revenue
growth from Q3 2009 to Q3 2010, while controlling for changes in activity levels.
Exhibit 31 shows that the largest contributor to revenue growth over the
past year has been the improvement in yield which accounts for 94% of
revenue growth, while increased baggage fees account for 29%. The rest
of the categories actually make a net negative contribution to bring the
total back down to 100%.
Exhibit 31: Domestic Mainline revenue increaseprice and volume drivers
(YEQ3 2009 to YEQ3 2010)
$49.0
$48.0
$2.4B
Mainline Revenue (billions)
$47.0
$46.0
$45.0
$44.0
$43.0
$42.0
$41.0
$40.0
YEQ32009
Load Factor
Impact
Yield Impact
Fewer Seats
Baggage Fees
Res Change
Fee
Miscellaneous
YEQ32010
Source: PlaneStats.com advanced query > income statement for network carriers, domestic, mainline
operations only. Excludes transport revenue (regionals) and public service revenue.
International
17. Air Service Provided by Value Carriers Around
the World
In the early years of the value carriers success in the US, it was common
for pundits to say the model wouldnt work outside of the region. Today
the penetration of value carriers varies by region, but there are value
carriers firmly established in every single region. In Exhibit 32, we provide a comparison of the percentage of originating ASMs in each region
provided by different carrier types (not just those provided by carriers
based there).
29
As shown, the highest percentage of air service provided by value carriers is in Oceania, home to Virgin Blue, where 30.9% of ASMs are flown by
value carriers. Central America, home to Volaris and Interjet, is second
with 22.6% of ASMs flown by value carriers. The US follows at 20.0%,
with Canada at 18.7% and Europe at 15.8%. The Middle East (4.2%) and
South America (5.3%) have the lowest percentage of service provided by
value carriers.
Exhibit 32: ASMs by airline type and country origin
(December 17, 2010)
Network
Value
Scheduled
Charter
Other*
Asia
86.0%
9.7%
0.7%
3.6%
US
79.6%
20.0%
0.2%
0.3%
Europe
76.4%
15.8%
2.7%
5.0%
Middle East
86.3%
4.2%
1.2%
8.2%
Oceania
64.0%
30.9%
0.1%
5.0%
S. America
87.7%
5.3%
0.7%
6.1%
Africa
80.7%
9.2%
1.8%
8.3%
Canada
75.8%
18.7%
1.5%
4.0%
C. America
70.3%
22.6%
3.4%
3.7%
Caribbean
76.3%
10.1%
10.4%
3.1%
Other
96.5%
3.5%
* Small regionally focused airlines that operate independently, as opposed to other, typically larger regionals
included within the network carrier category
Exhibit 33 gives additional perspective on the size of air service markets and the top regions served from those markets. It lists the largest
regions by originating ASMs, beginning with Asia, and then the largest
regional destinations from each market. For example, in Asia, roughly
60% of originating ASMs are devoted to service to other points in Asia,
15% for service to Europe, and 8% to the US. In most regions, the largest regional destination is within the same region. In the Middle East,
Africa, and the Caribbean, the largest regional destination for each is
Europe.
The size and linkages between regions provide some insight into the
potentially different strategic context and challenges for airlines of the
same business model but based in different regions. For example, notwithstanding some long-haul innovators like Air Asia X, value carriers
tend to fly narrowbody aircraft on short and medium-haul routes with
an origin and a destination in the same region. So when a region has
itself as the largest, concentrated destination, airlines in that region are
30
likely to have a large portion of their revenue exposed to value carrier

pricing pressure. Exhibit 33 shows that the US is the destination for 68%
of capacity originating in the US, whereas Europe is the destination
for 44% of capacity originating in Europe. Based on these differences,
it is easy to see that value carriers represent a much larger threat to
US-based network carriers than they do for network carriers based in
Europe.
Likewise, Asia is the destination for 18% of capacity originating in
Europe and 8% of US capacity. Apart from the numerical differences in
capacity flowing to Asia, there are also important differences in the intermediate markets. While the US is separated from Asia by the Pacific
Ocean, Europe is separated from Asia by the Middle East, whose largest
destinations are Europe and Asia. In addition, Middle East carriers have
potential connecting capacity equal to 50% of Europe-to-Asia capacity.
In this situation, one can see how some European network carriers view
the Middle Eastern carriers as a strategic threat, whereas they are more
of a curiosity to network carriers in the US.
Exhibit 33: Regional distribution of originating ASMs
(December 110, 2010)
Largest Destinations
Total Originating
ASMs (billions)
1st
% of
Total ASMs
2nd
% of
Total ASMs
3rd
% of
Total ASMs
Asia
US
20.5
Asia
62%
Europe
18.7
US
68%
Europe
15%
US
8%
13%
Asia
Europe
17.3
Europe
44%
8%
Asia
18%
US
14%
Middle East
5.0
Asia
Oceania
3.9
Oceania
29%
Europe
27%
Middle East
21%
54%
Asia
30%
US
S. America
3.6
7%
S. America
59%
Europe
20%
US
13%
Africa
Canada
2.9
Europe
42%
Africa
32%
Middle East
14%
1.6
Canada
36%
US
18%
Europe
18%
C. America
1.2
C. America
36%
US
33%
Europe
15%
Carribean
Other
0.7
3.3
Europe
Europe
54%
67%
US
Other
29%
31%
Canada
Canada
6%
2%
Origin
18. Stage Length Adjusted RASK and CASK for

International Carriers
In Exhibit 34, RASK (kilometers instead of miles) and CASK are provided on a stage length adjusted basis for selected European, Asian, and
South American carriers. The blue line shows the average stage length
for each carrier. Because of differences in time period (e.g., fiscal years
that end on different months), financial reporting conventions (group
level vs. airline level), and other factors, this information is not directly comparable to that provided for US carriers. However, the cost
31
comparison (expressed in US Dollars converted at the end of each

airlines reporting period) is useful in showing the relative differences
in RASK/CASK between the carriers. Despite the data limitations,
we can see that the phenomenon of value carriers having lower unit
costs than their network carrier rivals is global. CASK gap differences
across regions reflect the same variability that we see with US carriers. As in the past, Air Asia and Ryanair have by far the lowest CASK
of any of the carriers. Additionally, as we see in the US, value carriers
tend to have shorter stage lengths compared to the network carriers
in their geography. This trend may begin to diminish as value carriers
in Europe and Asia such as airberlin, Air Asia, and JetStar offer more
widebody, long-haul operations.
The chart also illustrates a range of cost performances among value
carriers, such as between Ryanair, easyJet, and airberlin in Europe, and
Air Asia and Virgin Blue in Australasia. This is similar to the range of
cost performance among US value carriers noted in section 5. While
the European and Asian network carriers have much higher unit costs
than their value carrier competitors, they all have a unit revenue premium that exceeds their cost base. This is remarkable given the high
level of value carrier penetration in those regions. The smallest cost
gap between head to head value and network carriers is between
Virgin Blue and Qantas. Those carriers appear to be migrating their
business models towards each other with Virgin Blue launching multiclass, long-haul widebody service under the V Australia brand and
Qantas operating short and long-haul value carrier operations under
the JetStar brand.
Exhibit 34: RASK/CASK for International carriers
stage length adjusted to 1,609 km (1,000 miles)
20
6,000
CASK
18
Stage Length
16
5,000
ASK (cents)
14
4,000
12
10
3,000
8
2,000
6
4
1,000
2
0
0
Copa
TAM
GOL
LAN
Avianca
easyJet
Ryanair
Air France- Lufthansa Virgin Blue

KLM German Airlines
airberlin
British Airways
AirAsia
Malaysia
Qantas/
JetStar
Cathay
Pacific
Singapore
Airlines
Air Canada
WestJet
Note: Group level revenues and costs used for Avianca, LAN, AirFrance-KLM, British Airways, Malaysia Airlines,
Cathay Pacific, and Singapore Airlines.
Source: McGraw-Hill Aviation Week Intelligence Network (AWIN)
32
Stage Length (kilometers)
RASK
Conclusion
Airline performance in 2010 has far exceeded predictions made at the
beginning of year. It has also provided support for those who have said
that capacity discipline is the answer to many of the industrys economic woes. Flat to low capacity growth since the economic bottom
has led to a nearly complete recovery in RASM by YEQ3 2010, showing
that with sufficient capacity discipline, airlines can have a V shaped
recovery in prices and, ultimately profits even if the economy doesnt.
The recent success of this sustained level of capacity discipline, along
with tight cost control, is likely to encourage airline executives to
maintain this approach in the coming months.
See how airlines stack up to each other

Visit PlaneStats.com to compare
key performance statistics for the
US airlines in this report.
The dynamic and interactive web
tool allows users to quickly view
passenger yield, passenger load
factor, RASM and CASM data for
the current period and highlight
statistics of specific carriers.
For access please go to:
www.PlaneStats.com
33
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For more information on this report, please contact:

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Airline Economic Analysis

for the Raymond James Global Airline Conference

Second, both value and network carriers have maintained strong

Fourth, both network and value carriers have experienced solid

Fifth, capacity discipline has strongly supported the recent increase

Primarily because recent cost and revenue data is available on a

2. Value Versus Network Carrier RASM/CASM Comparison

3. Value Versus Network Carrier CASM Comparison,

4. Long-term CASM Trends

5. Individual Carrier CASMs and Recent Changes

6. Comparing CASM for Similar Aircraft Operated by

7. Adjusting for Stage Length

8. Comparing CASM for Similar Aircraft Operated by

10. CASMs for Smaller Aircraft

11. Changes in Revenue over Time

12. Carrier Unit Revenue Performance

13. Baggage and Cancellation Fees

14. Changing Capacity and Fleet Composition in the

15. International Versus Domestic Portion of US Market

16. Revenue Drivers

18. Stage Length Adjusted RASK and CASK

Copyright 2011 Oliver Wyman

Copyright 2011 Oliver Wyman

2. Value Versus Network Carrier RASM/CASM Comparison

Cents per ASM

RASM CASM RASM CASM

Our airline sample overall

RASM CASM RASM CASM

RASM CASM RASM CASM

Average for network carriers

Average for value carriers

Copyright 2011 Oliver Wyman

Copyright 2011 Oliver Wyman

Cents per ASM

RASM CASM RASM CASM

Our airline sample overall

RASM CASM RASM CASM

RASM CASM RASM CASM

Average for network carriers

Average for value carriers

In Q3 2010, the average domestic CASM of our sample airlines was

Copyright 2011 Oliver Wyman

2009, increased to a positive 1.8% in Q3 2010. For value carriers, the

Copyright 2011 Oliver Wyman

Cost per ASM (cents)

For the value carriers, the corresponding CASM information is shown

Copyright 2011 Oliver Wyman

Exhibit 6: Quarterly Domestic CASM and fuel CASM growthsample

Cost per ASM (cents)

4. Long-term CASM Trends

Cost per ASM (cents)

Copyright 2011 Oliver Wyman

5. Individual Carrier CASMs and Recent Changes

Cost per ASM (cents)

Copyright 2011 Oliver Wyman

The network carriers experienced CASM increases in the same range

Cost per ASM (cents)

Copyright 2011 Oliver Wyman

Exhibit 10: Domestic CASM by airlinestage length adjusted to

SLA Cost per ASM (cents)

6. Comparing CASM for Similar Aircraft Operated by

Copyright 2011 Oliver Wyman

YEQ3 2010 CASM