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On 1/23/2003 1:33:46 AM AC AA LA FA wrote:
I never understood how the profitability of a hub is determined...anyone care to enlighten?
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Glad you asked! Finally, some real airline business talk...
You are right that the profitability of a hub is kind of a nebulous concept. For simplicity's sake, however, think of it as the sum of the profitability of each of its routes. Route profitability is measured in two ways:
1. By taking into account only the revenue and costs that are incurred on the route itself.
2. By taking (1) and adding to it the incremental revenue or costs driven by the passengers that the route fed to other upline/downline routes.
Pax/Cargo revenue is pretty easy to assign to the route level because you have PNRs that contain a price and an itinerary. Cost allocation is more of an art because you have a multitude of expenses that are not incurred on a flight-by-flight basis like aircraft depreciation/leases, aircraft maintenance, terminal rent, airport employees, etc. Fortunately, though, there are certain costs that can be nailed down to the flight level like fuel, landing fees, and certain types of pilot-f/a pay. Of course, there is even more art involved in (2) above, because you have to decide which costs are incremental to upline/downline routes and which are not.
Now, back to your question. To calculate hub profitability, you add the profitability of all of the hub's routes using methodology (1) above. You cannot add the routes together using methodology (2) because you may be double-counting numbers.
For example, assume that the STL hub only has two routes - DSM-STL and JFK-STL. Using methodology (1), you would add only the revenue and costs assigned to each route together to come up with your hub total. Under methodology (2), you would add revenue and costs from each route, plus the incremental portion of revenue and costs driven by DSM-STL pax on the JFK-STL route and vice versa. Therefore, the incremental revenue and costs would be double-counted when you added the routes together.
Does that help?