1. Biography for William Swan Chief Economist, Seabury-Airline Planning Group. AGIFORS Senior Fellow. ATRG Senior Fellow. Retired Chief Economist for Boeing Commercial Aircraft 1996-2005 Previous to Boeing, worked at American Airlines in Operations Research and Strategic Planning and United Airlines in Research and Development. Areas of work included Yield Management, Fleet Planning, Aircraft Routing, and Crew Scheduling. Also worked for Hull Trading, a major market maker in stock index options, and on the staff at MIT’s Flight Transportation Lab. Education: Master’s, Engineer’s Degree, and Ph. D. at MIT. Bachelor of Science in Aeronautical Engineering at Princeton. Likes dogs and dark beer. (bill.swan@cyberswans.com)bill.swan@cyberswans.com © Scott Adams

2. Why Bypass? The Cost Motivation for Adding Nonstops William M. Swan Chief Economist Boeing Commercial Airplane Marketing Fall 2003

4. Small Markets Need Hubs Half of Demand too Small for Nonstops Network builds loads in Hubs Feeders bring demand from small towns –All the air travel to anywhere Hub distributes to major destinations –All the major long-haul places to go Result: half of onboard loads connect

5. Small Airplanes are Expensive

6. Hub Collects and Distributes Smaller Feeder Stations Larger and Farther Destinations

7. Flight Costs are Linear with Seats

8. Connecting Seats get Frequency “Free” Cost of connection is –Cost of extra seats origin-to-hub Includes “up and down cost” of departure cycle –Cost of connecting activities at hub A matter of $20 for gate, luggage, and passenger –Cost of extra seats hub-to-destination Includes “up and down cost” of departure cycle Notice cost of frequencies are not included Cost of seats (slope) is included

9. Bypass Flying Adds a Nonstop

10. Bypass Avoids One Departure Cycle Cost of Bypass is –Cost of extra flight origin-to-destination Includes cost of extra frequency –Cost of seats origin-to-destination Cost of seats (slope) is included –Does not include Cost of second “up-and-down” cycle Cost of handling connecting bags and passengers

11. Cost Formulas: Connecting Cost for Connections for S seats: = S * (Dist * 1.08 +2 * 722) * $0.02 + $20 Where –Dist is nonstop Origin-Destination Km –1.08 indicates 8% circuity for connection –722 is the “up-and-down” cost, in Km –2 is because there are two “up-and-downs” –$0.02 is the marginal cost per seat km –$20 is the cost of handling a seat connection

12. Cost Formulas: Connecting Cost for bypass for S seats: = (S + 104) * (Dist + 722) * $0.02 Where –Dist is nonstop Origin-Destination Km –722 is the “up-and-down” cost, in Km –$0.02 is the marginal cost per seat km –104 is the Frequency cost, in Seats

13. Bypass Trigger Point: Equal Cost S * (Dist * 1.08 +2 * 722) * $0.02 + $20 = (S + 104) * (Dist + 722) * $0.02 Solve for S: S = (104*(Dist+722)-20/0.02)/(0.08*Dist+722)

15. Other Formulations Short-haul and long-haul cost functions are different, giving different transition values Long-haul seat counts are around 72% of short-haul counts—rescaling the Y-axis Connections can be costed as a short-haul feed to a long-haul flight. Variable comfort. Some examples have used average seat cost on connections, not marginal seat cost.

16. Bypass Seats are Sensitive only to Departure and Frequency Costs Base Case ($20 / 8% / 722 / 104 / $0.02)252 seats Seat-Km Costs @ $0.015 / $0.025252 / 253 Connect cost @ $100 / $0248 / 254 Circuity @ 15% / 0%227 / 288 Departure costs @ 1200 / 400 km198 / 347 Frequency costs @ 75 / 150 seats182 / 365