One of the more surprising emails that I received last month when we kicked off our new "Traveling with Wings" column here at TSC, was one written by a new reader. His comments were, "I am so glad you are now doing a column about the business travel side of the industry. At least I can understand that. I try to read your Wing Tips' columns, but I am just lost when you start talking about RASM and yields and all that other stuff."
Well, that made me stop dead in my tire tracks and realize that maybe we needed to talk some basics here. I realized that sometimes I do write as though all of you have read EVERYTHING I have written and know all.
So, today, let's take a Wing Tips' basic look at some of the more frequently used terms in the industry, and why investor's should be familiar with them.
RASMS, CASMS and Yields--Oh my!
The airline industry, as does most, has a jargon all its own to describe certain key elements of its operations. In some ways, we are more blessed when analyzing this industry than we are with others, because of the Department of Transportation (DOT) reporting requirements for the airlines. This ensures that key operational information is reported on a monthly basis. This operational information can be a gold mine for those of us who are investors and know what to look for. So, what ARE the basic operational terms you need to know, understand and dissect?
ASM's-Available Seat Miles.
This term refers to how many seat miles were actually AVAILABLE for purchase on an airline. This is a measure of capacity. This tells us just how much space was available for purchase by a passenger. You are hearing a lot right now about how analysts are concerned with all the additional capacity that will be coming into the system in 1999. Well, this is exactly what we are talking about here. Projected increase in overall system ASM's for 1999 should come in around 5-7%--depending on how much airlines cut back or modify current plans.
RPM's-Revenue Passenger Miles.
This refers to how many of those seats are actually sold. This is a measure of an airline's traffic. Funny, but this one figure, by itself tells us absolutely nothing about how an airline is doing. A large increase in RPM's will sometimes mean only that an airline simply has more capacity year over year and has thus sold a higher number of seats.
Only, when you compare it to the ASM's, and determine the load factor, does the number take on any importance. But--watch what happens frequently when an airline sends out a release that touts "April Traffic up 45%". Bingo. Frequently we will see a blip upward in the stock for that airline on that day. Just a Pavlovian reaction.
If you take the number of RPM's and divide by the number of ASM's--guess what you get? You get what we call the load factor. Or, you get the percentage of seats that WERE sold, versus the number of seats that COULD have been sold.
Now, here is an important thing to remember. Every month all the airlines report their monthly traffic figures, year over year, which include RPM's , ASM's and load factors for the previous month. Generally you always like to see stable or increasing load factors. However, just because a carrier reports a lower load factor this is not necessarily bad news--even though many people assume this is the case. Granted, it can mean bad news.
However, if the carrier is flying fewer passengers, but making more money per each passenger who flies--then this situation can actually be preferable overall to the bottomline of the carrier.
Conversely, just because an airline is posting record load factors--that tells us nothing. Those seats may have been sold for 5 bucks and change. Which is not so good news. Which brings us to the next related set of terms.
Yield is the term we use to tell us just how much an airline makes per revenue passenger mile (RPM). In other words, how much did the airline make on each seat it sold?
The related term to this one is RASM (Revenue Per Available Seat Mile), or "unit revenue" as many airlines call it. This figure, as you can probably figure out, represents how much a carrier made spread across ALL the available seats that were available (ASM). This number is now more or less the industry standard that is tracked religiously each month by airline revenue management folks--as it gives us a little better overall picture of how an airline is performing than the yield figure alone.
Pretty much says it all. This is the Cost per ASM figure. This is the generally accepted figure by which costs are calculated in the industry. This is the figure you hear bantered about when an airline is said to have " 7.5 cents per mile costs". Yes, it is, as you can probably figure out, the costs incurred by an airline, spread against the available miles that could have been flown. Not the miles that were actually flown. Whether those seats were sat in or not, those aluminum-clad beauties still had to get up in the air. And those take-offs and landings don't come cheap.
And finally, this is another term you may hear discussed when talking airline financial performance. Simply put, stage length refers to the length of the average flight of a particular airline.
As stage length increases, costs tend to go down--so consequently, increases in the stage length of an airline will tend to bode well for the cost side---all other things being equal. This is a big advantage of the long-haul transcontinental airlines. Longer flights--fewer take offs and landings--equals lower costs.