Airline performance metrics may need an overhaul


Cost per available seat kilometer (CASK) and revenue per available seat kilometer (RASK) are two measures of an airline’s performance; however, given the dynamic and diverse nature of the airline industry in today’s world, these two measures may no longer be sufficient to gauge a carrier’s level of success.

Flightplan spoke to two industry experts to understand if RASK and CASK are now past their expiration date. But first, let’s take a look at how these metrics work.

Airlines use the RASK metric to measure the total operating revenue generated per seat (empty or full) per km flown. For example, IndiGo’s RASK for the April to June quarter 2022-23 was ₹4.69 compared to ₹2.73 for the same period the previous year. This means the airline earned ₹4.69 for each seat and kilometer flown, which is 72% more than last year. IndiGo’s CASK for the April to June quarter was ₹5.08 compared to ₹5.55 in the previous year. The airline’s cost per kilometer decreased by 8.5%.

While these numbers indicate an airline’s performance, critics aren’t impressed.

Easy but imprecise

Steve Saxon, Partner, McKinsey & Company, said Activity area that while CASK is easy to measure, it has several inaccuracies. “CASK also includes costs incurred by non-passenger divisions. Comparisons are nearly impossible between carriers that aggregate freight or third-party maintenance operations in their financial reports. Different carrier accounting policies also hamper CASK comparison attempts. CASK does not give companies deep insight into their costs or identify concrete levers to reduce them,” Saxon said.

Carriers based in the same region may have different network and fleet strategies and therefore use different types of fleets to service similar networks. In the past, for example, two carriers in the Middle East had roughly the same CASK ($8 cents) and passenger carrying length (6,000 kilometers). Yet one of them only used a fleet of jumbo jets, while 30% of the other consisted of narrow-body aircraft.

Therefore, Saxon believes that airlines should look at cost drivers. Although the airline does not control the price of fuel, it does control efficiency. So measuring fuel consumption in gallons per block hour is a much better metric than CASK.

The real way for airlines to learn how cost differentials add up is to create a bottom-up view of unit costs, volumes and productivity of their cost categories. For example, What is the airline’s credit rating? Over how many years does it depreciate the planes? What residual value does the airline assume for the aircraft? We call this a driver-based approach. Companies should start by modeling their economics for a theoretical bottom-up route, by cost tiers, and then compare their drivers with those of their competitors. Few players operate a single type of fleet, but carriers can recreate the basic operating economics of an efficiently managed Airbus A320 or Boeing 777 by combining public domain information with expert information . Identifying differences in detailed cost drivers makes this type of benchmarking very useful.

Does this mean that even the RASK metric should be discarded?

RASK has similar flaws, Saxon pointed out. It does not take into account the different business class travelers who pay more. Short flights have a higher revenue per kilometer than longer flights – passengers do not pay 10x for a ticket for a 5,000 km journey than for a 50 km journey.

Internally, airlines are looking at much more than RASK. They monitor average ticket prices and load factors per flight for each cabin class. They have sophisticated systems that track whether sales of each flight are on track and whether prices need to be raised or lowered. Airlines also look at the average fares of the competition. RASK therefore remains valuable if raw.

Neelesh Mundra, Partner, McKinsey & Company, says airlines should focus on their cost structures. Tracking, measuring, and benchmarking costs are useful when they drive action, and driver-based benchmarking does just that. “One company that used this approach found their cabin crew numbers outnumbered their peers. After quantifying the cost to the entire airline, new in-flight service processes and simpler catering freed up one crew member per flight. Another critical cost factor is the cockpit crew utilization rate. To manage costs, some airlines have improved their line-up, developed training programs, scheduled crews more efficiently and reduced the number of pilots in leadership roles,” Mundra said.

Now may be a good time for airlines to revisit CASK and RASK metrics, as aggregate views of airline costs have limitations. Instead, a better approach would be to focus on cost drivers to analyze airline performance.

Published on

September 04, 2022


Comments are closed.