Focus on Unit Cost Efficiency in Airline Industry

The term 'ultra low cost' in the airline industry primarily refers to achieving low unit costs through asset efficiency and production. Unit cost represents the efficiency of producing units, with airlines measuring it in 'seat miles'. Increasing units produced can be achieved by either adding more seats per airplane or flying the airplane for more minutes per day, known as higher utilization. This focus on unit cost efficiency differentiates airlines and categorizes them based on their production efficiency and asset utilization.

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Scott Haralson, CFO of Spirit Airlines, joins CJ in this episode to discuss the complexities of operating an airline business. He explains what it means to run an ultra-low-cost carrier model and what goes into calculating the operating costs per available seat mile, Spirit’s most important metric. He talks about the difficulty of forecasting for an airline, explaining the costs you may not think about, what goes into network planning, the challenges of hedging fuel prices, navigating capital intensive decisions such as buying airplanes, and doing all of the above through unpredictable economic cycles and volatility. He also sheds light on why Spirit’s ICP (Ideal Customer Profile) is leisure travelers over business travelers and the important role of dynamic pricing in the airline industry.

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@cjgustafson222 (CJ)

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TIMESTAMPS:

(00:00) Preview and Intro

(02:40) Sponsor - Leapfin | Mercury

(04:46) Unit Cost Production in an Ultra-low-cost Carrier Model

(08:02) The North Star Metric of Cost Per Available Seat Mile

(13:24) Spirit’s ICP of Leisure Travelers Over Business Travelers

(16:10) The Impact of Flight Utilization on Spirit’s Business Model

(19:42) Sponsor - NetSuite | Maxio

(22:11) The Difficulty of Forecasting for an Airline