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CASK: Europe's Full Service Airlines have the world's highest costs, US airlines the lowest

In the Americas there is a narrower CASK gap between FSCs and LCCs than elsewhere. This has created an opening for the development of the region's ultra-LCCs, particularly in the US. Europe is, on average, home to the highest-cost FSCs in the world, in spite of some cost-efficient FSCs that are close to LCC territory. Europe also has some ultra-LCCs, with even lower unit costs than in the US. The Asia Pacific & Middle East region has perhaps the greatest diversity of CASK levels, reflecting its range of business models and its combination of developed and emerging markets.

For all airlines and all markets, CASK reduction - or, at least having the most efficient level of CASK for the chosen business model - is crucial. The long-term history of the global airline industry is one of falling unit revenue in real terms. The only way that the industry has ever made a positive margin has been through lowering its CASK. This remains vitally the case as economic conditions remain soft.

After profits, CASK has become a vital focus for airline managements over recent years. Segmentation of the world's airlines according to their unit cost – cost per available seat kilometre (CASK) – reveals much about their relative competitive positioning. It highlights the differences between airline business models, and also between the major regions.

Key findings

  • In Europe there is a clear divide between CASKs for FSCs and LCCs - although a handful of cost-efficient FSCs are close to LCC territory
  • On average the European FSCs have the highest unit costs in the world
  • The unit cost gap between low cost airlines and full service airlines in the Americas is narrower than in any other major world region
  • The CASK gap between FSCs and LCCs in the Asia Pacific & Middle East region is generally wider than in any other region
  • While the Big 3 US airlines operate  80% of their seats in the enclosed domestic market, where the bulk of their profits are generated, Europe's Big 3 have 80% of their capacity in international markets, where competition is intense and new entry is commonplace
  • Maintaining CASK reductions is essential where RASK is trending persistently downwards

Americas: the region has the narrowest CASK gap between FSCs and LCCs

In the Americas, particularly in the US, much is made of the financial benefits accruing as a result of consolidation of the industry. This often pushes into the background the fact that the major US FSCs have all been through a process of cost reduction, notably time in Chapter 11 bankruptcy protection, which helped them to restructure labour costs in particular. They were the first to face serious LCC competition and the first to have to respond to it.

As a consequence, the unit cost gap between low cost airlines and full service airlines in the Americas is narrower than in any other major world region, as measured by cost per available seat kilometre.

A second factor in this compression of CASK differentials is that a number of longer-established LCCs have evolved from the purist low cost model to take on some of the product and service features of FSCs. This has led to cost creep in some cases and the chart below shows that there are some LCCs – such as Southwest (a four decades old airline which has not been through the Chapter 11 process) – that are positioned very close to some of the more cost-efficient FSCs in the region.

The narrowing of the CASK gap between FSCs and LCCs in the US has provoked the development of the ultra-low cost carriers (ULCCs). The ULCCs have levels of unit cost significantly lower than those of the airlines that pioneered the low cost concept. However, the ultra-LCCs of the US still have unit costs around the USD0.6c mark, higher than the USD0.5c level of the lowest cost operators in other world regions.

Just as low cost competition forces cost discipline on incumbents, the lack of it can cause legacy airline unit costs to remain high. Looking outside the US market, there are two legacy airline groups, based in Latin America and Canada, with CASK levels that are higher than might be expected from their average trip length. This may reflect the lesser degree of low cost competition faced by these two groups compared with the US. Nevertheless, the Latin American FSC group Copa would not look out of place among the LCCs in terms of its level of CASK.

Americas: the focus is intra-regional

Comparing CASK levels in the Americas with those of other global regions can also be revealing. More than in other parts of the world the airlines of the Americas operate mainly within their own region, with no long haul specialists. This shows itself in the relatively tight distribution of average trip lengths, with the majority of airlines on the chart packed in between 1500km and around 2500km.

By contrast, a number of airlines in Asia and the Middle East have much longer average trip lengths. Many of these also have relatively efficient CASK levels and growing reputations for product quality. In Europe there are also more airlines operating longer average trip lengths than most of the airlines of the Americas do.

It is the long haul markets that are the battleground for the growing global competition between airlines of different regions. By focusing on their own domestic and intra-regional markets, airlines from the Americas have conceded a big head start to those in other regions in the race for global pre-eminence. This approach now risks forcing these airlines into ever-decreasing circles of attempting to raise protectionist barriers around their own territory; certainly this appears to be at least a short term "strategy".

They would perhaps be better occupied concentrating on lowering their unit cost and improving product quality, giving themselves the means to go on the offensive against the rest of the world.

Americas airlines: cost per available seat kilometre (CASK, USDc) versus average passenger trip length (km)

Europe: the divide between high cost legacy groups and ultra-LCCs is significant

In Europe there is a clear divide between CASKs for FSCs and LCCs - although a handful of cost-efficient FSCs are close to LCC territory (see chart below). The higher-cost European FSCs, those that sit well above the FSC trend line, are mainly those that are part of the bigger European legacy airline groups, particularly Lufthansa and Air France-KLM.

As a group, European FSCs are longer haul than their American counterparts, but less so than those from the Asia Pacific & Middle East region.

The European LCCs can also be subdivided into two groups, with a lower cost ultra-LCC category clearly distinguishable. The three European ULCCs – Pegasus, Wizz Air and Ryanair – are in the same USD0.5c CASK ballpark as the lowest cost Asian LCCs. Given that Europe is a relatively high wage region, and that labour is one of the key costs for most airlines, this is a significant achievement.

On average the European FSCs are the highest cost airlines in the world.

At the same time they are most vulnerable to external competition: while the Big 3 US airlines operate  80% of their seats in the enclosed domestic market, where the bulk of their profits are generated, Europe's Big 3 have 80% of their capacity in international markets, where competition is intense and new entry is commonplace. It is little wonder they are searching for new ways of reinventing themselves on long and short haul routes.

Not only do the European airlines face significant price-based competition on short haul from the continent's increasingly powerful LCCs, but they also face growing competition on long haul from cost-efficient and high service quality airlines in the Middle East and Asia.

This emphasises the need for continuing further cost restructuring even by those that have already made good progress, especially if low cost long haul really does start to take a hold.

Europe airlines: cost per available seat kilometre (CASK, USDc) versus average passenger trip length (km)

Asia Pacific and Middle East: wider CASK gap between LCCs and FSCs; more long haul airlines than in other regions

The gap between FSCs and LCCs in the Asia Pacific & Middle East region is generally wider than in any other region (particularly in the Americas, where there has been the greatest degree of cost convergence). Asia Pacific has more long haul airlines than the other regions, positioning it well in competing for global traffic flows.

The Asia Pacific & Middle East region includes the world's lowest cost LCCs and some of its most cost-efficient FSCs, but also some very high cost FSCs. The concept of low cost long haul only really exists in the form of Air Asia X. Apart from that operator, Asia’s LCCs do not have longer average sector lengths than in other regions.

Asia Pacific and Middle East: FSCs divide into developed and emerging markets

CASK levels of FSCs in the region can broadly be divided into those from the region's more developed/industrialised nations and those from its emerging economies. Japan, Korea, Australia, New Zealand, Taiwan and Hong Kong are all home to the Asia Pacific's FSC airlines that have higher unit cost. The airlines with CASK below the FSC trend line for Asia Pacific & Middle East are generally based in emerging markets, where wage costs tend to be lower.

The higher cost Asia Pacific FSCs, such as Korean Air, would not look out of place on a similar chart of CASK versus average trip length for European FSCs. This helps to explain why a number of them have established LCC subsidiaries and associates, often based in the lower wage economies of the region.

The challenge for the Asia Pacific FSCs based in the higher cost economies of the region is clear: they must further reduce their costs. They are among the world's least cost-efficient airlines, as defined by the level of CASK for a given average trip length. They compete in the same region with most of the world's lowest cost LCCs and with most of its more cost-efficient FSCs.

Moreover, they are typically producers with higher costs than FSCs from the Americas, and this puts them at a disadvantage on trans-Pacific routes. Many of them have no cost advantage over European competitors and face a growing threat from Gulf airlines on Asia Pacific-Europe routes.

Some of Asia Pacific's lower cost FSCs, such as Philippine Airlines, have levels of unit cost that are as low as those of any FSC in the world and not inconsistent with LCCs in other regions. This gives them significant potential to develop more strongly beyond their local markets.

For the more cost-efficient Asia Pacific national airlines the challenge is to develop their product, network and brand to differentiate themselves from the LCCs, while comfortably underpricing their higher cost (but generally better branded and bigger) FSC competitors.

The LCCs of the Asia Pacific region face the challenge to retain, or reduce, what are already very low levels of CASK (in many cases) in order to compete with FSCs that have bigger networks and brands, and are better established globally. There is also the question of whether the long haul low cost model – more prevalent in this region than elsewhere – can firmly establish itself as sustainably profitable.

Asia Pacific & Middle East is already the largest world region by ASKs and it has the highest number of aircraft on order.

It benefits from large populations and higher economic growth rates. It also has a relatively high number of long haul, global airlines and several with very efficient unit cost levels. These factors should ensure that the region remains highly competitive on a global scale for the foreseeable future.

Asia Pacific & Middle East airlines: cost per available seat kilometre (CASK, USDc) versus average passenger trip length (km)

To be profitable, cutting CASK is essential to combat long term real decline in RASK

Why does CASK matter so much in the global context? Over a period of many decades the trend in unit revenue (total revenue per ASK, or RASK) has been downwards in real terms.

Using data from ICAO, IATA and Airline Monitor, CAPA calculates that RASK fell by 51% from 1960 to 2015, at constant prices.

That represents a compound average decline in real RASK of 1.3% pa over more than five decades. There have been periods - sometimes lasting several years - when RASK has risen in real terms, but the long term downward trend has been persistent.

World airlines: total revenue per ASK (RASK) at constant 2015 prices (USDc), 1960 to 2015

In the face of this downward trend in unit revenue in real terms, the global airline industry has had to reduce its unit cost in order to generate profits. However, the difference between the two has always been slender.

The 51% decline in real RASK from 1960 to 2015 was beaten by the fall in CASK, but only just. The CASK decline was 54% over the same period, a CAGR of -1.4% pa.

The world airline profit cycle, as illustrated by the industry's operating margin, varies from one year to the next depending on the difference between RASK and CASK in any particular year.

See related report: CAPA World Airline Profit Outlook 2016: margins at a new high of 8.2%. Fertile ground for new entry

World airlines: total revenue per ASK (RASK) and operating cost per ASK (CASK) at constant 2015 prices (USDc) and world airline operating margin (% of revenue) 1960 to 2015

Just as, in aggregate, the global airline industry has struggled to sustain real RASK growth, individual airlines often find that it can be difficult to maintain a reliably profitable strategy based on unit revenue increases.

In such an industry, CASK is king.

A word about CASK and CAPA's CASK Database

CASK analysis allows global airline unit cost benchmarking and strategic mapping

A plot of cost per available seat kilometre (CASK) against average trip length reconfirms a few truisms. For a given average trip length, low cost airlines (LCCs) really do have lower unit costs than FSCs. The long haul low cost business model still has only one pure practitioner, although a growing number of airlines are trying it out and there is a clear opportunity to make it work.

LCCs more typically stick to short/medium haul. Even FSCs tend to stick mainly to short/medium haul, with only a handful concentrating on intercontinental routes. Cost is increasingly a key dimension of competition, particularly in the crowded short/medium haul space.

A direct comparison of cost per available seat kilometre (CASK), or unit cost, for different airlines is not straightforward as it varies with the average distance flown. In general, the cost of producing a seat kilometre falls as average trip length increases. Plotting CASK versus average trip length allows the relative cost efficiency of different airlines to be compared visually.

All the CASK scatter plot charts in this report are taken from the CAPA CASK Database.

The Database contains detailed CASKs for approximately 100 airlines.

World airlines: cost per available seat kilometre (CASK, USDc) versus average passenger trip length (km)

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