Airlines’ performance metrics may need an overhaul

Cost per Available Seat Kilometer (CASK) and Revenue per Available Seat Kilometre (RASK) are two measures of an airline’s performance; however, given the dynamic and diverse nature of the airline industry in today’s world, these two metrics may no longer be sufficient to evaluate a carrier’s level of success.

Flightplan spoke to two industry experts to understand if the RASK and CASK are now past their sell-by date. But first, let us examine how these metrics work.

Airlines use the RASK metric to measure the total operating revenue generated per seat (empty or full) per km flown. For example, IndiGo’s RASK for the April-June quarter of 2022-23 was ₹4.69 versus ₹2.73 for the same period the previous year. Meaning, the airline earned ₹4.69 for every seat and kilometre flown, which was 72 per cent higher than the last year. IndiGo’s CASK for the April-June quarter was ₹5.08 compared with ₹5.55 the previous year. The airline’s cost per km went down 8.5 per cent.

While these figures indicate an airline’s performance, critics are not impressed.

Easy but inaccurate

Steve Saxon, Partner, McKinsey & Company, told BusinessLine that while CASK is easy to measure, it has several inaccuracies. “CASK also includes the costs incurred by non-passenger divisions. Comparisons are almost impossible between carriers that aggregate freight or third-party maintenance operations in their financial reports. The carriers’ different accounting policies also bedevil the attempts to compare CASKs. CASK neither gives companies deep insight into their costs nor identifies concrete levers to reduce them,” Saxon said.

Carriers based in the same region may have different network and fleet strategies and therefore use different kinds of fleets to serve similar networks. In the past, for example, two middle eastern carriers, had roughly the same CASK (8 $ cents) and passenger-haul length (6,000 kilometres). Yet one flew a wide-body only fleet, while 30 per cent of the other consisted of narrow-body aircraft.

Therefore, Saxon believes that airlines should look at cost drivers. While the airline does not control the fuel price, it controls the efficiency. So, measuring fuel consumption in gallons per block-hour is a much better metric than CASK.

The real way for airlines to learn how cost differentials add up is to build a bottom-up view of their cost buckets’ unit costs, volumes, and productivity. For example, What is the airline’s credit rating? Over how many years does it depreciate aircraft? What residual value does the airline assume for the aircraft? We call this a driver-based approach. Companies should start by modelling their economics for a notional route bottom up, by cost buckets, and then compare their drivers with those of competitors. Not many players operate a single fleet type but carriers can re-create the baseline operating economics of an efficiently run Airbus A320 or Boeing 777 by combining information in the public domain with expert insight. Identifying differences in detailed cost drivers makes this kind of benchmarking quite valuable.

Does this mean even the RASK metric needs to be shelved?

RASK has similar flaws, pointed out Saxon. It does not account for different business class fliers who pay more. Short flights have a higher revenue per kilometre than longer flights – passengers do not pay 10x for a ticket for a 5,000km journey than they do for a 50km journey.

Internally, airlines look at much more than RASK. They monitor average ticket prices and load factors by flight for each cabin class. They have sophisticated systems which track whether sales for each flight are on track and if prices should be raised or lowered. Airlines also look at the average fares of the competition. RASK, therefore, remains valuable if crude.

Neelesh Mundra, Partner, McKinsey & Company, says, airlines should focus on their cost structures. Tracking, measuring, and benchmarking costs is useful when it inspires action, and that is what driver-based benchmarking does. “One company that used this approach found that its cabin crew complements were higher than its peers. After it quantified the cost across the airline, new in-flight service processes and simpler catering helped free up one crew member per flight. Another critical cost driver is cockpit-crew utilisation rates. To manage costs, some airlines have improved their rostering, developed training programs, planned crews more effectively, and reduced the pilots in management roles,” Mundra said.

It is perhaps the right time for the airlines to revisit CASK and RASK metrics as aggregate views of airline costs have limitations. Instead, a better approach would be to focus on cost drivers to analyse the performance of airlines.

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