Relevance Of Casm?

[Ukridge]

I realize that this board has fallen into a rather moribund state of misuse. As of late there seems to have been an exodus to the USAirways forum. Sad, as it was once a great place to read various opinions with some pretty lively debate and for an amateur like myself to learn about the industry.....
If there are any readers left, would it be possible to explain the real importance of CASM? The business press (and yes, the USAirways board) is now full of discussion using what appears to me the sole metric of CASM to measure the progress of United in its restructuring efforts. It appears that every article at some point remarks on the LCC's CASMs of 6-7 cents while those of United are dipping towards 8. Naturally we know the interpretations this spawns.
Is this however, not a completely accurate reflection of costs and particularly of costs and their relation to specific revenue generation? For example. Southwest (an airline I have never flown and probably will never have need to do so) has costs quoted in the 6 cent range. Yet they fly from Texas to Arizona. United alights numerous times a day at Heathrow. I do not think I need to inform most of you how much everything costs in London. All the attendant costs of fuel, landing fees, and the other elements of a trans-Atlantic flight as to which I could only venture a guess, must be significantly more than the Texas-Arizona segment. To me this begs the question. Of course the larger worldwide carriers are going to have greater costs! I can imagine if we were sending passengers into space that the cost of a booster per passenger meter hefted would also be greater than Houston to Dallas.
Therefore my question is simple. Is not the true heart of the matter simply what revenues can be generated with the set of costs incurred? What if (for a wild example) you pay astronomical fees in Tokyo (as BA claims to do) yet you could charge each customer 7,500 pounds or 10,000 dollars? Would the "8 cent" CASM not be irrelevant?
I may be missing something but it seems the revenue is as important if not more so, than a quick glance at the CASM to make the ultimate determination of if a carrier has a solid future.
Cheers

 

[Flying Titan]

UK -
I too am "just a passenger," but follow this industry closely. I believe its importance reaches far beyond those of us who are FFs - it has a dramatic economic development impact (positive or negative) in every city it touches. Cost per available seat mile is the measuring stick most often used because it can create a somewhat level playing field when comparing divergent airlines - such as those in the example you gave. The other part of the equation that is less frequently mentioned is Revenue per available seat mile. It goes without saying that if your RASM is significantly higher than your CASM then it doesn't really matter what your CASM is. However, in the current state of the industry, there tends to be very little difference in RASM with consumers being so price sensitive - so CASM is very important. Interestingly enough, there are examples of the LCCs pulling in higher RASM on some routes than the legacy carriers - indicating they are, at least in some cases, becoming the preferred carriers among consumers. JetBlue from NYC to Florida is one example. This revenue challenge is why legacy carriers must be so focused on cost reductions at present.

It has always seemed to me that total cost per block hour and revenue per block hour gives you a more faithful assessment of what the bottom line will look like. Unfortunately, this is great for making comparisons on specific routes and specific aircraft types - but not so good for comparing multiple routes, aircraft types and systems.

Personally, I would be more interested to see a discussion of how to increase RASM instead of always discussing CASM. I recognize that this is a more difficult question, but ultimately it holds the key to survival for carriers like US Airways and United. I, too, watch fares closely when I travel, but if more value is offered by one carrier over another, then I am likely to pay marginally more for that service. Of course, how to create that added value is the $64,000 question though, isn't it?

 

[ualdriver]

Ukridge-

CASM (cost per available seat mile) is the yardstick that measures how much it costs any airline to fly one seat in its airplane one mile. It is measured usually in pennies. The last management/pilot "roadshow" I went to put UAL's CASM's in the high 8's/low 9's as far as that figure is concerned.

I understand what you're saying about how important its relavance is. Keeping CASM's low is extremely important, but I think there are other things to take into consideration as well. For example, an airline like UAL will NEVER be able to get its CASM's down to the level of say, Jetblue, but that doesn't mean we won't be able to compete with them (someday!) or even need to. Jetblue's workforce is younger and on lower pay scales, they have newer aircraft, they fly point to point eliminating the high fixed costs of operating a large hub, they have a single aircraft fleet, etc., etc., and those are basically things no mature network carrier will be able to match easily, if at all. Another example- one might look at an airline like US Air and see that it has always had pretty high CASM's even after exiting bankruptcy, but one has to keep in mind that its average stage length is probably a lot shorter than the other major carriers (I'm too lazy to look up the exact numbers, someone I'm sure will post them). Since an airline with longer average stage lengths, apples to apples, will have a lower average CASM than an airline with shorter than average stage lengths, sometimes an airline's higher/lower average CASM's are not all that they would seem. To illustrate the stage length disparity, I've read that in 2001 it cost UAL about 10 cents per seat mile to fly the average 2000nm stage length. To fly an average 500nm stage lenght, it cost us about 18 cents per mile, even though (off the top of my head) we posted average CASM's in the low 11 cent rage. You can see that costs can go up dramatically as stage length decreases.

Does that mean that UAL (or any other mature network carrier) will never be able to compete with JetBlue or Southwest, especially going head to head? Not necessarily. Fortunately for us, we enjoy a unit revenue premium over our low cost competitors. Some of our customers are willing to pay a little more (sometimes a lot more) to fly a network carrier becase we fly to more places, because we have assigned seating, because we have first class/economy plus seating, because we have lounges, because we have a pretty good frequent flier program etc., etc. After all, Southwest doesn't fly outside the lower 48, and who wants to use their frequent flier miles for a flight to Amarillo, Texas when they can go to Hawaii on United : ) ? So sure, on some routes where we compete head to head we're probably going to lose a little bit (or a lot!) on some passengers who pay those $200 round trip coast to coast fares, but hopefully(!) we have some business people sitting up in first class who paid bigger bucks to make up the difference! So in theory, if people perceive that a network carrier is a good value for the premium they're going to pay to fly on us, we're OK (like we were in the booming 90's). If people perceive that our higher cost tickets are not worth the above mentioned advantages, then we're screwed, like we sort of are now : )

 

[JS]

I realize that this board has fallen into a rather moribund state of misuse. As of late there seems to have been an exodus to the USAirways forum. Sad, as it was once a great place to read various opinions with some pretty lively debate and for an amateur like myself to learn about the industry.....
If there are any readers left, would it be possible to explain the real importance of CASM? The business press (and yes, the USAirways board) is now full of discussion using what appears to me the sole metric of CASM to measure the progress of United in its restructuring efforts. It appears that every article at some point remarks on the LCC's CASMs of 6-7 cents while those of United are dipping towards 8. Naturally we know the interpretations this spawns.
Is this however, not a completely accurate reflection of costs and particularly of costs and their relation to specific revenue generation? For example. Southwest (an airline I have never flown and probably will never have need to do so) has costs quoted in the 6 cent range. Yet they fly from Texas to Arizona. United alights numerous times a day at Heathrow. I do not think I need to inform most of you how much everything costs in London. All the attendant costs of fuel, landing fees, and the other elements of a trans-Atlantic flight as to which I could only venture a guess, must be significantly more than the Texas-Arizona segment. To me this begs the question. Of course the larger worldwide carriers are going to have greater costs! I can imagine if we were sending passengers into space that the cost of a booster per passenger meter hefted would also be greater than Houston to Dallas.
Therefore my question is simple. Is not the true heart of the matter simply what revenues can be generated with the set of costs incurred? What if (for a wild example) you pay astronomical fees in Tokyo (as BA claims to do) yet you could charge each customer 7,500 pounds or 10,000 dollars? Would the "8 cent" CASM not be irrelevant?
I may be missing something but it seems the revenue is as important if not more so, than a quick glance at the CASM to make the ultimate determination of if a carrier has a solid future.
Cheers

You are absolutely correct. This is one of the problems in comparing averages.

For example, suppose you are comparing death rates by county, and you discover that the average time-until-death of people who live in Palm Beach County, Florida is 20 years less than the average time-until-death of people who live in Travis County, Texas (contains the city of Austin and the University of Texas).

Does this mean that if you live in Palm Beach County, FL, you should do whatever it takes to move to Travis County, TX, so you can (on average, anyway), add 20 years to your lifespan?

Of course not! The two averages are not comparable because people who live in Palm Beach County, FL are old, and people who live in Travis County are young.

In order to make a valid comparison between the two counties, you have to standardize the results. That is, break the death rates down by age, ratio the number of people by age so that the age distribution is the same, and then compare the averages.

Now, with airlines and their CASM, in order to standardize United Airlines with JetBlue, what you do is ratio UA's cost by route to match that of JetBlue. Take all of UA's internatinal routes and toss them completely, since JetBlue doesn't fly internationally. Then take all of UA's routes that JetBlue doesn't fly (which is most of them), and toss them completely. What you have left, ratio UA's operations to match those of JetBlue, and then calculate an average.

Because JetBlue doesn't fly internationally and they fly pretty long domestic flights (lots of LGB to East Coast flights, and NY-FL is a decent distance), I think you will find that UA's CASM is not that much more than B6.

Same goes for Southwest -- no international routes at all. Southwest does fly a lot of short flights, but even some of those intra-Texas routes are more than a piddly 200 miles (e.g., HOU-ELP). Unlike the other airlines, Southwest doesn't fly really short routes such as LAX-SAN or SAT-AUS or SEA-GEG.

 

[Ukridge]

Good replies from all - thank you. It raises some rather interesting questions though as to how difficult is must be to manage this. For example, United would have to compete on a Washington-Chicago route with a certain CASM for that pair. It then has to compete Washinton-London with BA and Virgin with another CASM for that pair. It must be tremendously difficult to find the balance point in this to make a profit. On the one hand it seems each airline would scurry to its "corner" in which it can operate as the sole carrier or with a distinct CASM advantage. On the other hand one cannot continually fracture the market and back away from competition on a city-pair lest this shrinkage in turn work the economies of scale in reverse and actually end up raising costs.
This is probably why (my guess as an amatuer) so very few carriers in the history of aviation have been consistently profitable.

 

[Speedbird]

Since jetBlue has been considered in this thread I'll include myself in the discussion.

I also think the obsession with CASM does not tell the whole story about success or failure in this business. I believe the key metric is the spread between RASM and CASM, or the operating margin of an airline. I think it's unrealistic for an airline like UAL to try and replicate the cost structure on an LCC, like JBLU. As others have already mentioned UAL provides a level of "service" that can't be measured equally in all areas with LCC's. The "extras" that UAL provides should (in theory) create a sufficient revenue premium to exceed it's higher costs. This is the basis of a "revenue-based" business model that almost all network carriers have operated on historically.

Meanwhile, the LCC's which do not provide the levels of service that network carriers do, must hold to a "cost-based" business model to generate its profits. Again, this has been the historical norm in the industry. However, when you throw out the differences (as has been suggested) between the network carriers and LCC's, and compare them directly in areas where they overlap, the levels of service are comparable, or better at the LCC's.

In a severe revenue-depressed environment, like the one we find ourselves in presently, the advantage goes to the cost-based competitor, especially if the differences in service become muted, or tilted in favor of the LCC.

For the latest quarter reported, jetBlue reported a system-wide CASM of 5.92 cents, an industry low. It reported a RASM of 7.38 cent, also an industry low. But the key metric (for me) was their operating margin of 19.7%, an industry high. If, as others suggest, UAL's competitive strength against LCC's is its worldwide network, FFP, and terminal lounges, to name a few, then let them charge a revenue premium for such extras and let the market vote with their wallets.

Of course we know that the market has already decided that those extras aren't worth the higher price of a ticket on UAL. Is that the fault of the LCC's? Or is it the fault of other network carriers, who compete for the same market segment with comparable products and services?

As long as a majority of travelers are unwilling to pay more for the extras that network carriers provide in this revenue-depressed environment, the LCC's will have a significant advantage over the network carriers who admittedly cannot reduce costs sufficiently to generate any appreciable operating margin, let alone net profitability.

 

[Doc]

Hence bring back deregulation and level the playing field ….Let the customer decide which airline to fly for the right reasons SERVICE.

 

[KCFlyer]

Hence bring back deregulation and level the playing field ….Let the customer decide which airline to fly for the right reasons SERVICE.

We are already in deregulation. But reregulation isn't the answer for you either. Should it ever happen, expect the government to use the successful low cost carriers as the model for their "reregulation" plan. They would have no other choice. After all, how many politicians would stand before their constituents and say "I have brought back the era of higher airfares for all of you so that you can choose who to fly for the right reasons...SERVICE"?

 

[JS]

Hence bring back deregulation and level the playing field ….Let the customer decide which airline to fly for the right reasons SERVICE.

Did you get hold of a time machine and go forward in time where the government re-regulated air travel? As in, "let's go back to de-regulation where the playing field IS level and the CUSTOMER decides HOW MUCH service to buy". I agree completely. 🙂

 

[SVQLBA]

As someone said earlier in this thread, you need to "normalize" CASM figure to make more sense. The main thing is to "stage length" adjust the figures. There are certain costs that you always incur (primarily passenger processing) whether the flight is a local hop or a transcon. On a longer flight, these "fixed" costs are averaged out over more ASMs, and so have less impact on CASM. Hence why you often read about "stage length adjusted CASM."

In fact, you can go further. As part of an analysis I did for my old company last year, we didn't just normalize stage lengths, but everything else e.g., cost of av fuel is different in different parts of the country. The scary result was, if you took figures just for 737 flying (so no impact from different economics of other types, though there will be variation among different 737 series), normalized for stage length, labor rate differences, fuel, FA staffing, etc etc, the CASM gap actually increased for Southwest vs. their competitors. I.e., Given their avg shorter hauls, if Southwest on average flew what the network carriers fly, the cost difference would be even greater. (Also, when you went through this adjustment, UAL's CASMs pre-BK were even higher than US Airways', for similar stage length reasons.)

What this means is that Southwest (and jetBlue) can fly profitably at fares that UAL cannot. And what UAL, U and the others still do not fully grasp, is that many business travellers are no longer prepared to pay massive premiums on a ticket from A to B just because the network can also take them to C on some FF miles down the road. Given that companies are increasingly forcing travellers to give their employer their FF miles and forcing them to fly coach, that doesn't help either. Given all that, do I prefer a center seat in an 85% load factor CO or UAL plane (at discount fare you won'tget E+), or (probably) a window or aisle in an SW plane, I'll take SW every day. As much leg room, more food (probably), friendlier service, and strong OTAP.

SW (and JB) have the cost advantage and (because the product is for many people competitive) pricing power also. Look at yields on UAL routes out of ORD where SW competes from MDW and where they do not.

HOWEVER -- I also agree, that a good chunk of people are prepared to pay a reasonable premium -- whether it be for lounges, roomier seat, etc etc. But, UAL has to bring its costs down to a level where that price premium matches what people VALUE. The concept of value has been entirely missing from network carrier pricing for too long, and JB and SW get this. Now, the salary and wage cuts, leasing cost cuts etc are important, but the key to reaching competitive cost levels is productivity. Southwest is not a low-salary carrier -- it is a low cost carrier because it uses its people and assets (aircraft, gates etc) very productively. In my view, AA's move toward rolling hubs started to get at this -- you can't be cost competitive if some of your most costly assets are unproductive for 15 hours a day. However, UAL is clinging rigidly to old pricing models and planning/scheduling models.

Lastly, UAL won't be able to come up with better ways of pricing the product (or better product design) until they have a proper customer segmentation that truly understands traveler behavior today -- corporate, SOHO, leisure, whether the traveller or a corp travel department does the buying, importance of leisure travel options on business travel decisions etc etc etc et bloody cetera. Having worked with a few airlines not just UAL, I believe the network carriers are miles away from where they need to be in this regard in order to create and deliver a "premium" product that customers value and are willing to pay for. One example -- network planning tools still show that a shorter connect time increases demand. But when was the last time you chose a flight or saw a display based on elapsed time (rather than carrier, arrival or departure time)? And many of the savviest travellers don't want miminum connect times anyway! Who would risk a 1 hr connection from an int'l flight at O'Hare?

Summary -- whether we on this board like it or not, JB and SW deliver a very good, value-for-money product that appeals not just to leisure travelers but a good chunk of biz travelers too. Because of their cost advantage, they can make money at fares that the majors cannot. There is still a market for a "premium" product, but not at the prices the network carriers still want to charge. The challenge for the network carriers is not just cost cutting, but
-- driving up productivity (especially of capital assets)
-- understanding the new travel market, based on a usable behavior-based customer segmentation that reflects the very different world we live in
-- designing and delivering a product (all aspects of the travel service) in a cost effective way that meets the demands of target customer segments (don't try to be all things to all people)
-- a pricing strategy where people feel they get value for what they pay for, and don't feel fleeced
-- a distribution strategy that doesn't just pump out discounted air fares in every conceivable channel. E.g., most airlines are just starting to think about the possibilities of upselling

I.e., pretty much a new business model -- revenue side as well as cost side. Other than AWA (and they have some distinctive passenger characteristics) I don't think UAL, U, AA, DL, NW or even CO get what they need to do. (I thought CO's recent FF moves showed that they have truly lost it, and many of Gordo's comments reflect this.) Air Tran, SW, JetBle and Frontier have plenty of cherries to pick away at as SW's move into PHL and jetBlue's moves into JFK, IAD, and BOS show.