Airlines Economics

ECON 471-DL1/695-DL3: Airline Economics Spring 2021

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Part One: 10 quick multiple-choice questions. Two points each. No partial credit. 1. “Pay to Block” is a metric that:

¢ Measures airplane efficiency ¢ Is best when it is above 2.0 ¢ Is difficult to measure because of data limitations ¢ Measures the productivity of pilots and flight attendants 2. Airline Pricing:

¢ Changes quickly and seeks to offer multiple fare levels ¢ Is based on a detailed forecast to measure price elasticity ¢ Is a long-term macro-level forecasting process ¢ Determines where each plane flies every day 3. Passengers agree with this document when they buy an airline ticket:

¢ APIS Documentation ¢ Contract of Carriage ¢ Terms and Conditions ¢ Passenger Bill of Rights 4. Banks share their credit card profits with airlines because:

¢ Cards that don’t award airline points are not used ¢ Banks own some of the airline business ¢ The cost to issue miles to customers is minimal to the bank ¢ Allying with an airline is more profitable because more people use the card

ECON 471-DL1/695-DL3: Airline Economics Spring 2021

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5. A rise in flight cancellations after the introduction of the Tarmac Delay Rule is an example of:

¢ An unintended consequence ¢ Prescriptive Regulation ¢ The DOT protecting airline consumers ¢ An airline incentive 6. Two countries defining and often limiting the rights for air service

between them is called:

¢ Bilateral Agreement ¢ Open Skies Agreement ¢ Alliance Agreement ¢ Fifth-Freedom Authority 7. In a typical negotiation between an airline’s management and its

unionized labor group:

¢ Economic principles are overwhelmed by emotional ones ¢ Both management and the union are trying to optimize their result ¢ Both sides often see the problem in the same ways ¢ Unions care about average costs while management thinks about

marginal costs 8. A recent airline pricing category that takes away product features in

exchange for a lower price is called:

¢ Super Saver Fares ¢ Basic Economy Fares ¢ Point of Sale Pricing ¢ Revenue Management

ECON 471-DL1/695-DL3: Airline Economics Spring 2021

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9. Which statement below is most true about aircraft ownership?

¢ Efficient airlines both own and lease airplanes ¢ Once an airline is profitable, they stop leasing planes ¢ Owning airplanes outright requires a strong balance sheet ¢ Aircraft Lessors take some of the profits from the airlines they serve 10. A route with high PDEWs means that:

¢ It is profitable ¢ It is operationally challenging ¢ Many people fly between the two cities every day ¢ It requires a wide-body aircraft

ECON 471-DL1/695-DL3: Airline Economics Spring 2021

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Part Two: 10 hard to “just guess” questions. Three points each. No partial credit. 11. Rank the following from one though four, with “one” having the lowest

price elasticity and “four” having the highest price elasticity:

A piece of checked baggage on a flight _____ An airline ticket _____

A drink on a long flight _____

Electricity for your house or apartment ______

12. Check all that are true about Frequent Flier programs:

☐ The first one was offered by American Airlines in the early 1980’s

☐ Some flights “earn” more miles, while others “burn” more

☐ They are a proven way to engender loyalty

☐ Initially rewarded usage, but trending now toward rewarding profitability

☐ A point earned on one airline is good to redeem on any other airline

☐ Programs are often linked to an affinity credit card 13. State at least four ways that an airport generates revenue:

ECON 471-DL1/695-DL3: Airline Economics Spring 2021

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14. If an airline does not overbook, which of the following would be true?:

☐ They would never have an oversale

☐ They would sell fewer tickets than if they overbooked

☐ Their Load Factor would be lower

☐ Their RASM would be lower

☐ They would never appear in a major negative media story

☐ They would carry fewer business travelers 15. Using five words or fewer for each, describe the regulatory oversight

provided by each of the following U.S. Government agencies: FAA ___________________________________________ DOT ____________________________________________ DOJ ____________________________________________

Homeland Security ________________________________ 16. Explain how some airlines have used sale and leaseback financing to

grow faster and keep their costs lower.

ECON 471-DL1/695-DL3: Airline Economics Spring 2021

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17. International flying is more complicated and expensive than domestic flying because:

☐ Variety of navigation and communication protocols used around the world

☐ Additional security checks are required on arrival

☐ Pilots must be able to communicate effectively in both English and the language of the country they are flying to

☐ Having to deal with multiple currencies and foreign exchange rate risk

☐ It is hard to find willing code share partners

☐ Aircraft may need special or extra equipment 18. The box below represents the total profits for an airline over a specific

period of time. Draw in the box to show what a good profitability measurement system would do and write a sentence or two explaining this concept:

Explanation:

ECON 471-DL1/695-DL3: Airline Economics Spring 2021

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19. Create the mathematical equation for the metrics on the right using the letters corresponding to the metrics on the left:

A. ASM Load Factor = ______________ B. Passenger Revenue Yield = ____________________ C: RPM RASM = ___________________ D: Operating Expenses CASM = ___________________ E: Total Revenue 20. Leasing Companies are important to the airline industry. Leasing

Companies help airlines by:

☐ Buying their aircraft when the airlines don’t need them anymore

☐ Subsidizing aircraft rents during difficult financial times

☐ Making aircraft available sooner than they may be through direct purchase

☐ Making aircraft available at a better price than possibly attainable direct

☐ Allow airlines to create flexible fleet plans through ownership and leasing

☐ Keep the supply of narrow-bodies and wide-bodies in balance

ECON 471-DL1/695-DL3: Airline Economics Spring 2021

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Part Three: 5 open-ended questions. Ten points each. Partial credit is possible.

21. You work for the Department of Transportation, and have been informed by the FAA that 30 new take-off and landing slots are being added to LaGuardia airport. Outline the prioritized criteria that you would use to determine which airlines will receive these slots. More specific means more likely for full credit.

22. For each Economic Principle shown below, detail one aspect of the commercial

airline industry that demonstrates this principle accurately, using just a short phrase or sentence:

a. Tradeoffs: b. Incentives: c. Opportunity Cost: d. Marginal Economics: e. Price Elasticity: f. Scarcity:

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23. You are the head of Fleet Planning for your airline, and the Schedule

Planning team has determined that the airline needs to acquire 50 more 180- seat sized aircraft to be delivered in the next five years to support the airline’s growth plan.

You are presented the following offers:

A. The PlaneRight leasing company offers you:

- 25 A320 NEO (New Engine Option) Aircraft, deliverable evenly over the next five years

- 25 737NG aircraft, new but the earlier edition of the ill-fated 737MAX, also deliverable evenly over the five years

- A 12-year lease on all 50 airplanes, priced at $340,000 per month - 2 months security deposit - Return after 12 years in with completed full airframe check resolving any

issues discovered, and engines rebuilt to “like-new” standard B. The FlyByNight leasing company offers you:

- 50 10-year old A320 CEO aircraft (CEO stands for “current engine option” and is an older, higher fuel burning engine than what the NEO has)

- 35 of these are “sister ships”, meaning that they were all ordered to the same specification by a single airline

- 15 are not part of this same original order but are close in their specification. The biggest difference is that these 15 have all coach seating and your airline uses a coach plus business class seating configuration.

- Planes would be delivered evenly over the next three years - An 8-year lease on each airplane, priced at $165,000 per month - No security deposit required - After 8 years, the right to return each airplane “as is” as long as proper

maintenance is kept up, or purchase the plane outright for $7 million. C. Boeing, eager to restart the 737MAX program, offers you:

- 50 737 MAX aircraft delivered evenly over the next five years - The operating cost of the 737MAX is 90% of the operating cost of the

A320 NEO and yet it can carry up to three more customers - The planes are priced at $40M each - You would need to find financing for these deliveries, which could be a

bank mortgage or a sale-leaseback deal with a lessor Which deal do you take and why? For the two you reject, what would have to change for you to take that offer instead?

ECON 471-DL1/695-DL3: Airline Economics Spring 2021

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24. Your airline’s Department of Transportation on-time performance is the lowest in the industry at 65%. Your completion factor (percentage of scheduled flights not cancelled) is the highest in the industry at 99.8%. This is because you have a policy to delay a flight rather than cancel it even if the delay is long, believing that this is better customer service. How would you respond to a news reporter who asks you on air why anyone should trust your airline given your low on-time performance? Make this into 3-6 talking points to give on TV, since they will cut you off if you are too wordy.

25. Why might a schedule planner choose to keep operating a flight that has a

negative operating profit according to the flight profitability report? More specific means better chance of full credit. There may be more than one answer to this question. More complete also means better chance for full credit.

There are no more exam questions. The next page is an optional puzzle. If you complete this, I will add

two (2) points to your total class grade! Also, there is a two-question optional survey attached. If you answer this with helpful information, I will add 2

point to this exam grade.