Airline Economics 101
There are four primary measures of performance:
TRAFFIC – usually measured in volume – i.e. passenger-km or tonne-km
CAPACITY – similarly, seat-km or available tonne-km
REVENUE – does not include taxes and charges collected on behalf of the government
EXPENSES – including external costs such as airport and air navigation charges
There are four secondary measures:
LOAD FACTOR – traffic divided by capacity
YIELD – revenue divided by traffic
UNIT COST – expenses divided by capacity
OPERATING RATIO (= profit margin) – revenue divided by expenses
There is also a third-order measure:
BREAKEVEN LOAD FACTOR – either unit cost divided by yield or load factor divided by profit margin
So the economics of the operation depends on the interaction of the various elements. Longhaul services tend to have much lower yields than shorthaul, but also lower unit costs and higher load factors. An airline flying mainly business routes can have low load factors and relatively high unit costs but can make up for this with very high yields.
Over time, yields always reduce, so unless the unit costs reduce as well, the breakeven load factor goes up – but profitability can still be maintained if the achieved load factor goes up as well.
The above is the traditional airline business model. It may not necessarily work with low-cost since yield varies greatly with load factor and ancillary revenues play a much greater part in the equation, as do financial inducements from airports (are they a revenue or a negative cost?)