Airline unit economics: RASK, CASK, load factor, fuel, and leasing
Work through one flight with ASK, RPK, load factor, yield, RASK, and CASK; find the break-even load factor; see how fuel hedging and leasing work.
Industry brief, with a one-minute summary: Airlines and aviationKey takeaways
- Airlines measure everything per seat kilometre. If revenue per available seat kilometre (RASK) is above cost per available seat kilometre (CASK), the airline makes money; the gap is its unit profit.
- ASK (available seat kilometres): seats offered x kilometres flown. It measures capacity.
- RPK (revenue passenger kilometres): paying passengers x kilometres flown.
- Load factor: RPK / ASK. The share of seat kilometres that were sold.
Key idea
Airlines measure everything per seat kilometre. If revenue per available seat kilometre (RASK) is above cost per available seat kilometre (CASK), the airline makes money; the gap is its unit profit.
The vocabulary, in plain words
- ASK (available seat kilometres): seats offered x kilometres flown. It measures capacity.
- RPK (revenue passenger kilometres): paying passengers x kilometres flown. It measures traffic.
- Load factor: RPK / ASK. The share of seat kilometres that were sold.
- Yield: passenger ticket revenue / RPK. The average fare paid per passenger kilometre.
- RASK: total revenue / ASK. CASK: total operating cost / ASK. Usually shown in cents or local currency units.
- Break-even load factor: CASK / total revenue per RPK (fares plus extras such as bags). The load factor at which revenue exactly covers cost.
Worked case
The economics of one low-cost flight
The prompt
An illustrative low-cost airline flies an Airbus A320 with 180 seats on a 1,000 km route. On one flight it carries 153 passengers. The average fare is USD 85 and each passenger spends USD 20 on extras. The airline's CASK is 8 US cents. What are the load factor, RASK, yield, profit on the flight, and the break-even load factor?
The structure
- Compare revenue per seat kilometre with cost per seat kilometre
- ASK = seats x km; RPK = passengers x km
- Revenue = passengers x (fare + extras)
- Cost = ASK x CASK
Working it through
1. ASK
180 seats x 1,000 km.
ASK:180 × 1,000 = 180,0002. Load factor
RPK of 153,000 divided by ASK.
Load factor (percent):153 × 1,000 ÷ 180,000 × 100 = 853. Revenue
153 passengers x USD 105.
Flight revenue (USD):153 × (85 + 20) = 16,0654. RASK
Revenue divided by ASK, in US cents.
RASK (US cents):16,065 ÷ 180,000 × 100 = 8.925. Yield
Ticket revenue per RPK: the USD 85 fare over 1,000 km, in US cents.
Yield, fares only (US cents):153 × 85 ÷ 153,000 × 100 = 8.56. Total revenue per RPK
Fares plus extras, per RPK, in US cents. This is the number to use for break-even.
Revenue per RPK (US cents):16,065 ÷ 153,000 × 100 = 10.57. Cost and profit
Cost is 180,000 ASK x 8 cents = USD 14,400.
Flight profit (USD):16,065 - 180,000 × 0.08 = 1,6658. Break-even load factor
CASK divided by total revenue per RPK.
Break-even load factor (percent):8 ÷ 10.5 × 100 = 76.19
The recommendation
The airline should keep flying this route but manage fares closely, because it earns about USD 1,665 per flight at an 85 percent load factor and breaks even at about 76 percent. First, that is only about 16 passengers of margin. Second, extras of USD 20 per passenger lift revenue per RPK to 10.5 cents against a CASK of 8 cents. The risk is a small fall in demand or rise in fuel cost, which can wipe out the profit. As a next step, track load factor and fares on this route every day.
Fuel hedging
Fuel is one of the largest airline costs, and its price moves with oil. Hedging means agreeing today on the price of some future fuel, using financial contracts. It does not make fuel cheaper on average. It makes costs more predictable: the airline gains when prices rise above the hedged price and loses when they fall below it. Many European airlines hedge a large share of the next 12 months; some airlines in other regions hedge little or none.
Worked case
What a 50 percent fuel hedge does
The prompt
An illustrative airline in Europe will buy 2 million barrels of jet fuel next year. It hedges half at USD 100 per barrel. What is its fuel cost if the market price is USD 150 per barrel, and if it is USD 70, compared with not hedging?
The structure
- Fuel cost = hedged barrels x hedged price + unhedged barrels x market price
- High price case: USD 150
- Low price case: USD 70
Working it through
1. High price, hedged
1 million barrels at 100 plus 1 million at 150, in USD millions.
Fuel cost with hedge at USD 150 (USD millions):1 × 100 + 1 × 150 = 2502. High price, not hedged
All 2 million at 150.
Fuel cost without hedge at USD 150 (USD millions):2 × 150 = 3003. Low price, hedged
1 million at 100 plus 1 million at 70.
Fuel cost with hedge at USD 70 (USD millions):1 × 100 + 1 × 70 = 1704. Low price, not hedged
All 2 million at 70.
Fuel cost without hedge at USD 70 (USD millions):2 × 70 = 140
The recommendation
The airline should keep hedging about half its fuel, because the hedge narrows the range of outcomes: fuel costs USD 250 million instead of USD 300 million at USD 150 a barrel. First, that saves USD 50 million if prices jump. Second, it costs USD 30 million if prices fall to USD 70, since fuel then costs USD 170 million instead of USD 140 million. This means the hedge is insurance, not a bet. The risk is a long fall in prices, which leaves the airline paying more than rivals that did not hedge. As a next step, review how much of next year's fuel is hedged and at what price.
Leasing, slots, and turnarounds
A large share of the world's airline fleet is leased rather than owned. In an operating lease, the lessor owns the aircraft and the airline pays monthly rent, often quoted as a lease rate factor (monthly rent divided by the aircraft's value). Leasing needs less cash upfront and makes it easier to change the fleet. A slot is permission to use a busy airport's runway at a given time. At crowded airports such as London Heathrow, slots are scarce and valuable; under EU rules, an airline must use a slot series at least 80 percent of the time to keep it next season ("use it or lose it"). Turnaround time, the minutes between landing and the next departure, decides how many flights an aircraft can do a day. LCCs aim for about 25 to 30 minutes on short routes.
An airline in India flew 12 billion ASK in a month and sold 10.2 billion RPK. What was its load factor, in percent?
An airline in the Gulf had operating costs of USD 9 billion and flew 150 billion ASK in a year. What is its CASK, in US cents?
A lessor rents out a new narrow-body aircraft worth USD 50 million at a monthly lease rate factor of 0.7 percent. What is the yearly rent, in USD millions?
An airline's RASK is 7.5 cents and its CASK is 7.8 cents. What does this tell you?
Sources for this lesson (1)
- Recognized public explanations of case-interview concepts and frameworks
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