“If you can’t measure it, you can’t improve it” is maybe one of the most important quotes on business by renowned management consultant Peter Drucker. This is especially true in the data-driven field of revenue management.
Therefore, it’s crucial to establish a baseline. But what are numbers should an airline look at when gauging its RM practices? Described below and sorted by category are several revenue management metrics and KPIs.
For our first category let’s look at how to effectively measure available capacity.
Seat Capacity: Number of seats on flown flight legs multiplied by the number of flights flown.
Departures: Number of flights legs scheduled for revenue service (this does not include charter, ferry or training flights.
Plane Distance (miles/kilometers): Sum of flown miles/kilometers for all revenue flight legs operated.
Completion Factor: The percentage of scheduled flights that are completed and not cancelled over a defined period.
Completion Factor = Number of flight legs flown in period t divided by number of flight legs scheduled in period t.
Available Seat Miles/Kilometers (ASM/K): The industry-standard unit measure of supply; a measure of an airline’s passenger-carrying capacity on a flight weighted by the distance each passenger travels.
ASM/K = seat capacity multiplied by the number of miles/kilometers traveled multiplied by the number of flight departures.
Here’s how to effectively measure traffic volume and capacity utilization.
Passengers: Number of revenue passengers occupying seats onboard a set of flight legs.
No-Show Factor: The number of passengers who book a ticket but do not show up for the flight.
No-Show Factor = 1 – (the number of booked passengers who show up and fly divided by the number of booked passengers).
Show-Up Rate: The inverse of the no-show factor; the number of passengers who book a ticket and show and fly.
Show-Up Factor = 1 – (the number of booked passengers who don’t show up and fly divided by the number of booked passengers).
Seat Factor: Measures the capacity utilization of an airline; NOT distance weighted.
Revenue Passenger Miles/Kilometers (RPM/K): A measure of passenger traffic on a flight, indicating the number of miles/kilometers, or distance, traveled by the passengers.
RPMK = number of passengers multiplied by the number of miles flown x number of flight departures.
Load Factor (LF): Measures the capacity utilization of an airline and is generally used to assess how effectively an airline provider fills seats.
LF = ∑ (RPMs) / ∑ (ASMs)
Now we get to the all-important revenue metrics. Here’s how to gauge revenue quality.
Passenger Revenue: Sum of the price paid for each airline ticket sold on a flight (excluding taxes).
Average Fare: The average price paid by a passenger.
Average Fare = The passenger revenue divided by the total amount of passengers.
Revenue Per Flight: The total revenue per flight leg (excluding taxes).
Revenue Per Revenue Passenger Mile/Kilometer: Measures the average fare paid per passenger per mile/kilometer flown.
Yield = ∑ (Revenue) / ∑ (RPM/K)
Yield or RPM Yield: Sum of ticket revenues paid by a set of passengers divided by the RPMs for that same set of passenger trips.
Revenue per Available Seat Miles/Kilometers (RASM/K): A unit of measure used to calculate the effectiveness of the airline at fillings its seats and capturing revenue.
RASM = ∑ (Revenue) / ∑ (ASM/K)
Here’s a handy trick!
If you know the LF and Yield for a flight or set of flights, then you also know the unit revenue or RASM/K. Here’s how:
Load Factor x Yield = RASM/K
RPMs/ASMs x Revenue/RPM/K = RASM/K
Since RPM/K are numerator in one term, denominator in the next term, they cancel each other out mathematically. Resulting in…
Revenue / ASM/K = RASM/K, which is true by definition. VOILA!!!
Revenue Proration Methodologies
Let’s now take a look at how revenue is shared among the segments in a single itinerary.
Straight Rate Distance: Divides the revenue based on the proportion of miles over an itinerary.
Square Root of Miles: Divides the revenue based on the square root of miles over the itinerary.
IATA Prorate Factor: Weighted mileage considering the fixed cost difference between short and long flight segments, but also between different geographical areas.
These are the basic revenue management metrics and KPIs to guide you in your analysis. Stay tuned for a more nuanced piece where we walk you through some advanced metrics, using this article as a foundational piece.