AVIATION ECONOMICS CHAPTER 3 PASSENGER MOVEMENT: THE SIGNIFICANCE OF PASSENGER LOAD FACTORS & STRATEGY FOR PASSENGER MARKETING

In this chapter, we will look atIn this chapter, we will look at –Load Factor and RPM –Traffic Peaks and Valleys –Capacity vs. Demand –Pricing in relation to load factor –Passenger marketing 2

Load Factor One of the most vital statistics in the airline businessOne of the most vital statistics in the airline business One of measure of equipment utilization- Revenue Passenger Load Factor (RPM- Load Factor)One of measure of equipment utilization- Revenue Passenger Load Factor (RPM- Load Factor) Figures of RPM expresses the relationship betweenFigures of RPM expresses the relationship between –Available seats-miles AND –RPM realized

It has a critical impact on the cost and quality of air transportation-Why?It has a critical impact on the cost and quality of air transportation-Why? –65% of airline’s costs are directly related to the operation of the aircraft and are independent of the number of passengers on the aircraft. Hence, a high load factor will allow the allocation of these costs over a large number of passengersHence, a high load factor will allow the allocation of these costs over a large number of passengers

In the end, resulting in lower costs per passenger, which allows for lower fares (i.e. lower ticket price)In the end, resulting in lower costs per passenger, which allows for lower fares (i.e. lower ticket price)

Traffic Peaks and Valleys The idea is all transportation modes must operate during the traffic peaks and valleys in order to meet the public needThe idea is all transportation modes must operate during the traffic peaks and valleys in order to meet the public need Airline load factors are seasonalAirline load factors are seasonal Daily and hourly load factors fluctuate even moreDaily and hourly load factors fluctuate even more Thus, airliner must make sure there are sufficient flights during peak hoursThus, airliner must make sure there are sufficient flights during peak hours

But sometimes, airline has to provide positioning flights to cater the load for peak hoursBut sometimes, airline has to provide positioning flights to cater the load for peak hours Positioning flights: Aircraft has to flown virtually empty from one city to another late at night or early in the morning to have the plane ready to meet rush-hour demand.Positioning flights: Aircraft has to flown virtually empty from one city to another late at night or early in the morning to have the plane ready to meet rush-hour demand.

Capacity vs. Demand Capacity is ability-What can airliner offer?Capacity is ability-What can airliner offer? While, demand is requirement-What is required from the airliner?While, demand is requirement-What is required from the airliner? Demand for air transportation is highly cylicalDemand for air transportation is highly cylical At micro level discretionary leisure traffic picks up in the summer, so, airline enjoy higher load factor (seasonal)At micro level discretionary leisure traffic picks up in the summer, so, airline enjoy higher load factor (seasonal) At macro level: stable vs. fluctuate economic conditionAt macro level: stable vs. fluctuate economic condition

When the economy is stable and growingWhen the economy is stable and growing –Consumer confidence is strong –Demand grows –Load factor improve THUS, increase PROFITABILITY!THUS, increase PROFITABILITY! BUT…BUT… When economy faltersWhen economy falters –Unemployment increase –Consumer confidence declines –Individuals postpone discretionary travel SO, PROFITS SUFFER!SO, PROFITS SUFFER!

Airline cannot fine-tune capacity to match demand-Why?Airline cannot fine-tune capacity to match demand-Why? Aircraft itself inflexibleAircraft itself inflexible –If 757 equipped with 160 seats, that seats supply on particular schedule Can neither be shrunk nor expandedCan neither be shrunk nor expanded Total number of flights offered by airline on a given day variedTotal number of flights offered by airline on a given day varied

Depends on passenger demandDepends on passenger demand –Weekdays vs. weekends –Ordinary days vs. Holidays BUT… other factors limit airline’s capacity to adjust daily seats to daily trafficBUT… other factors limit airline’s capacity to adjust daily seats to daily traffic –Fix frequency of flight for certain route-to avoid cancellation –The day of week patter can’t usually vary in precise and predictable manner

ANDAND –Interrelation between two different routes SO, flights seats usually UNIFORM and FIXEDSO, flights seats usually UNIFORM and FIXED

Pricing in Relation to Load Factor The idea is to increase load factor- that is to gain profit minimize cost with a reasonable price offer to the passengerThe idea is to increase load factor- that is to gain profit minimize cost with a reasonable price offer to the passenger One approach utilize is off-peak pricing, that is..One approach utilize is off-peak pricing, that is.. –Introduce promotional fare to attract passengers during slack period –Slack period: Passenger demand declines/insufficient Just like off-peak night coach service, low fare ticket price is offered by airlinerJust like off-peak night coach service, low fare ticket price is offered by airliner

Advantages:Advantages: –Empty seats on low-traffic days are filled with passengers who are willing to travel on those less popular days-Why ?  CHEAPER! –Additional passengers add very little to the cots (primarily meal service), BUT they add a great deal to the flight’s total profit!

Disadvantages:Disadvantages: –The timing of the peak varied from route to route –Peak hours to go to Sabah might differs from peak hours to go to Johor Bharu- So, it is quite impossible to have off-peak pricing to all routes –It injects complications into the pricing structure- Fluctuation of ticket price

Therefore, it is essential for airliner to estimate the accuracy of its demand (particularly passenger demand)Therefore, it is essential for airliner to estimate the accuracy of its demand (particularly passenger demand) AND strategize its marketing (especially airline passenger marketing)AND strategize its marketing (especially airline passenger marketing)

Important Key terms Load factorLoad factor Revenue Passenger per Mile (RPM)Revenue Passenger per Mile (RPM) Positioning FlightsPositioning Flights Off-peak pricingOff-peak pricing

GROUP DISCUSSION If your airline has to provide positioning flights due to rush-hour demand, discuss how can you gain profit and minimize cost based on your capacity vs. demand?