Master in Aeronautical Engineering

Air Transport

Ex. 3; 3 pt. UC3M-fly Airlines is a well stablished Argentinian Low Cost Company
based in Buenos Aires. It currently covers 10 destinations , connecting
point to point some of the major cities in South America (Lima, Santiago
de Chile, Buenos Aires, Panama and Rio de Janeiro). UC3M-fly Airlines
chose a Boeing 737-900 to operate all its routes due to its low turnaround
time, higher capacity and low cost per passenger - kilometre. The charac-
teristics and costs associated can be found in Table 1. Under its current
operations, UC3M-fly Airlines were able to produce a revenue of 200M$
annually. The new elected CEO wants to change the current strategy of
point to point to a hub and spoke network based on Buenos Aires (EZE).
As a first assessment of her strategy, she proposes the study of the Rio
de Janeiro (GIG) - Santiago de Chile (SCL) route. For this, UC3M-fly
Airlines will close the direct routes GIG-SCL, GIG-EZE and EZE-SCL
and cover them with the indirect route GIG-SCL via EZE. These
routes are currently generating 38M$ annually in profit with 4 frequen-
cies1 per day in each route. With the new hub & spoke strategy, UC3M-fly
Airlines would operate only the indirect route GIG-SCL via EZE with 4
frequencies and prices for the tickets GIG-SCL, GIG-EZE and EZE-SCL
of 600$, 300$ and 400$ respectively. Analyse whether the CEO is right in
her decision of transforming the network to a hub & spoke.
Data:
• Table 3 summarises the profitability analysis of the GIG- SCL O-D
market when operated as direct route (four frequencies and 600$ as
ticket price).
• Table 2 contains annual demand data for each market, the number
of airlines operating those routes (not including UC3M-fly) and the
daily frequency and current average ticket price of the competitors,
as well as other useful information such as the distance or flight time
required.
• The market share in any market can be approximated by the formula:

100 f reqUC3M−f ly av.priceOT HERS

MSHARE = (1)
nAIRLIN ES av.f reqOT HERS priceUC3M−f ly

being the maximum attainable market share 90% and the minimum
5%. nAIRLIN ES represents the total number of airlines operating
that market.
Questions:
• Calculate the market share of UC3M-fly Airlines in each market.
(0.25pts)
1 A frequency of 4 flights per day for the point to point route GIG-SCL means 2 departures

from GIG and 2 from SCL

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 Master in Aeronautical Engineering

• Calculate the cost associated to operate each leg (GIG - EZE and
EZE - SCL) and the complete route (GIG - SCL via EZE). Assume
can capture all people willing to fly. (0.5pts)
• Calculate the revenue associated to operate each leg (GIG - EZE and
EZE - SCL) and the complete route (GIG - SCL via EZE). Assume
can capture all people willing to fly. (0.5pts)
• Calculate the profit of each leg and the route. (0.25pts)
• Calculate other useful KPIs for each leg (GIG - EZE and EZE -
SCL) and the complete route (GIG - SCL via EZE): RPK, ASK,
Load Factor, Seat Factor, CASK, RASK, Yield, BELF. (0.5pts)
• Compare the results of operating point to point or hub and spoke
based on the KPIs and the other indicators calculated. Which conclu-
sions can you obtain? Can UC3M-fly Airlines operates the indirect
route with profit? (0.5pts)
• Propose different alternatives to improve the profitability obtained
for this indirect route and the implications of those changes. (0.5pts)

Cost per Block-Hour ($ )

Crew Cost 2000
Fuel/Oil 4000
Ownership 2000
Maintenance 2000
Indirect Operating Costs ($ )
Passenger Service 0.010 $ per RPK
Traffic Servicing 10$ per Enplanement2
Aircraft Servicing 3000 $ per Departure
Promotion and Sales 15% of Total Operating Cost
plus General and Admin
Range 5915 Km
Seats Economy 225 SEATS
Seats Business 0 SEATS
Turn Around Time 2 HOURS
Table 1 – 737-900 Operating Costs

GIG-SCL GIG-EZE EZE-SCL

DEMAND ECON (PAX) 700000 600000 400000
DEMAND BUS (PAX) 15000 8000 12000
No AIRLINES 6 4 4
AV. FREQUENCY 3 3 5
AV. PRICE ECON 650 400 325
AV. PRICE BUS 1200 1100 1300
FLIGHT TIME (H) 4 3 2
DISTANCE (KM) 3000 2250 1250

Table 2 – Demand and competitors information

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 Master in Aeronautical Engineering

KPI GIG-SCL
RPK 433,333,333
ASK 985,500,000
Seat Factor(%) 44.0
Load Factor(%) 44.0
YIELD ($) 0.200
RASK($) 0.088
CASK($) 0.080
BELF($) 40.0
PROFIT($) 7,825,222
TOTAL COST ($) 78,841,444
Table 3 – Rio de Janeiro - Santiago (Direct route) profitability analysis