Skift Take

Is it time for the airline industry to adopt a new metric to determine revenue growth? Probably not, but kudos to analyst Hunter Keay for trying something new.

Nearly every brick-and-mortar retailer measures sales the same way — by determining how much revenue they earn from each square foot of store space. By that measure, Apple stores are often considered the world’s most effective use of commericial real estate. 

But airlines have a more byzantine approach for testing revenue. In the United States, they measure revenue by calculating how much money they earn for each available seat mile they sell. They determine their “available seat miles,” or ASMs, by taking the number of seats available and multiplying it by the number of total miles. Elsewhere, airlines tend to do the same, using kilometers as the benchmark.

Sometimes the calculation includes just passenger-related revenue, while other times it includes everything, including cargo. Airlines use acronyms like PRASM —meaning passenger revenue per available seat mile — and TRASM, which denotes total revenue per available seat mile.

The PRASM metric helps sophisticated investors and analysts compare airlines, and enables them to learn whether a carrier is making more or less revenue than in previous years, even if the airline is shrinking or growing. Using that metric, they know Delta Air Lines, which generated a 2016 fourth quarter PRASM of 13.58 cents, is in better shape than United, which made 12.41 cents.

But the metric is not that helpful for much else, nor is it easy to understand for outsiders. So recently, Hunter Keay, an analyst at Wolfe Research, crunched some numbers to determine which airlines best maximize the space on their aircraft.

“If each airplane is a factory, wouldn’t it make sense to unitize revenue over the amount of floor space in factory?” Keay asked in his report.

Keay tracked down the square footage of all the cabins flown by each airline, and calculated a total square footage for each carrier. He then divided an airline’s total revenue by its total square footage.

Here is how Keay ranked U.S. airlines, using data through the end of 2016.

Ranking Airline Revenue per Square Foot
1 Southwest Airlines $30,767
2 Delta Air Lines $29,846
3 JetBlue Airways $28,798
4 Hawaiian Airlines $28,279
5 Alaska Airlines $28,270
6 United Airlines $26,789
7 American Airlines $25,257
8 Spirit Airlines $24,636
9 Allegiant Air $15,972

Interestingly, the ratings do not perfectly match a recent ranking of each airline’s revenue per available seat mile, compiled by consultancy Oliver Wyman.

In its 2016-17 Airline Economic analysis, Oliver Wyman examined each U.S. airline’s revenue per available seat mile for last year’s second quarter, adjusting the numbers slightly to make them easier to compare with each other.

Using the more traditional metric, Oliver Wyman found Delta first, American second, and United third, with the combined Alaska and Virgin America entity fourth. JetBlue was fifth, followed by Southwest, Hawaiian, Allegiant, Spirit, and Frontier.

In his report, Keay noted that Southwest fared much better in maximizing its revenue per square foot than in revenue per available seat mile. Keay said this could be evidence that Southwest’s strategy of not charging bag or change fees may be more successful than some other analysts have estimated. Analysts tend to like fees, because it’s an easy way to produce more revenue without raising costs.

“For some airlines bag/change fees make sense, but given [Southwest’s] unique distribution strategy that relies on the concept of fairness and low fares all the time, they passed,” he said. “[Southwest] dominates the markets it serves more than any other airline we cover, and customers are generally willing to pay a premium to fly [it]. This allows LUV to embed fees in fares by spreading it out over a larger base.”

Keay noted that Southwest’s revenue per square foot increased 8 percent from 2011 to 2016, the second-largest increase in his study. Delta showed the biggest jump, up 11 percent in five years.

“[Southwest’s] planes are producing solid revenues, and bigger planes are driving incremental value,” Keay wrote. “Investors underrate [Southwest’s] network power generally due to ho-hum type communication from the company, we think. But this is solid.”

It’s not likely airlines will switch metrics any time soon. But maximizing space is something executives think about often. That includes Andrew Levy, United’s CFO, who mentioned it during the airline’s November investor day.

“The whole idea is to drive the highest amount of revenue per trip,” he said. “And it’s kind of like, we need a new metric – revenue per cubic foot or something, in an airplane, because that’s really what matters.”


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Tags: airlines

Photo credit: On a per square foot basis, Southwest makes more money than any of its competitors. But that's not a metric the airline industry uses. Southwest Airlines

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