United Airlines Cost and Productivity Analysis Nahid Boustani

United Airlines Cost and Productivity Analysis Nahid Boustani Spring 2013

United Airlines Inc. – It is a Legacy carrier – It provides a higher level of services than a low-cost carrier • first class and/or business class • frequent-flyer program • airport lounges • Is member of an airline alliance through which it has partners that agree to provide these services to its passengers as well. • There is a higher level of services in the cabin, such as meal service and in-flight entertainment. – Operating major hubs – Serving Domestic as well as International markets

Definitions • ASMs – One aircraft seat flown 1 mile. – • RPM – One paid passenger flown one mile. – • • ∑ i (Number of seats (Flight i) * Distance Flown (Flight i) ∑ i (Number of Passengers (Flight i) * Distance Flown (Flight i) RASM (Unit Revenue) – Total operating revenue/ASM CASM (Unit Cost) – Total operating cost/ ASM PRASM – total passenger revenue/ASM Yield – Average Fare paid by passenger per mile flown= Total revenue/ RPM Fuel Consumed – Total amount of fuel used Fuel Costs per ASM – Total fuel cost /ASM Non-Fuel Costs per ASM: – (Total Operating Expenses-fuel cost)/ASM

Chart 1 40000000 88 35000000 87 30000000 86 25000000 85 20000000 84 15000000 83 10000000 82 5000000 81 0 RPM ASM Avg Load Factor 80 2006 2007 2008 2009 2010 2011 2012 United Airlines, All major airports (origin airports)-All numbers are for Scheduled services. Data are for Q 3 of each year. The load factor is an average percentage load factor of monthly data in Q 3. • ASM and RPM have the same trends and are pretty stable between 2006 to 2011. • Average Load Factor does not seem to be the right metric to use for calculating the quarterly load factor. It does not reflect the changes in ASM and RPM.

Chart 2 12000000 10000000 8000000 Total Operational Revenue 6000000 Total Operational Cost 4000000 Incom/Loss before Tax 2000000 0 2006 2007 2008 2009 2010 2011 2012 -2000000 Note: All numbers are in thousands of dollars. • Total revenue and total operating cost have the same pattern. • From 2011 Revenue and Operating Cost increase. • As total cost increase in 2008 due to depression and rise of fuel price, the Income before tax decreases dramatically.

Chart 3 0, 35 0, 3 0, 25 RASM ($/ASM) 0, 2 CASM ($/ASM) 0, 15 Yield ($/RPM) PRASM ($/ASM) 0, 1 0, 05 0 2006 2007 2008 2009 2010 2011 2012 Note: Passenger Revenue used to calculate PRASM is from Scheduled Passengers only to be consistent with ASM data on chart 1. • During 2008 -2009 Revenue decreases and cost increases that lead to decreasing in RASM and PRAZM and increase in CASM.

Chart 4 1000000 400000 900000 350000 800000 300000 700000 600000 2500000 200000 400000 150000 300000 Fuel Cost ($) Non-fuel Cost ($) Fuel Consumption (gallons) 100000 200000 50000 100000 0 0 2006 2007 2008 2009 2010 2011 2012 • The peak in Fuel cost around 2008 is due to United’s pre-purchasing fuel in prediction of fuel costs to go up.

Chart 5 2500 4 3, 5 2000 3 2, 5 1500 2 1000 1, 5 Fuel Operational Expenses/ASM Non-fuel Operational Expenses/ASM Fuel Price/gallon 1 500 0, 5 0 0 2006 2007 2008 2009 2010 2011 2012 • Fuel Prices and operational expenses/ASM are oscillating in the same pattern with a max peak in 2008 due to United’s prepurchasing fuel. • Fuel price affects fuel cost. • Non- fuel Cost is influenced by the economy recession in 2008.

Effects • • • a. Fuel Prices on Expense – Fuel price has changed the fuel cost. b. Fuel prices on Airline Finance – Changes in the fuel price directly affects the operational expenses and operational revenues c. Fuel Prices on Airline Network Structure – No answer. I used average load factor of the monthly data for Q 3. It seems like this is not the right way to calculate the load factor of the quarter. The load factor trend does not comply with the ASM and RPM trends.