Financial conundrums (or is that conundra?)

Time to let you in on some of our “behind-the-scenes” work.

Many of you have probably been wondering what’s happened to our monthly financial reports; frankly since Clint Watson is now no longer with us in much capacity, we’ve decided that rather than get up to speed on his methods and continue in the same way, we would instead crack on with getting the majority of the financial background coded into the site itself. In so doing, we’re picking apart just what affects the profit and/or loss of an airline such as MetroAir, and we thought we’d share just a little of what goes in to our thinking. Feel free to comment!

Costs

An airline’s cost is something that will need to be more than covered by any revenue the airline makes, otherwise it is in loss. In effect, it takes up one side of the profit equation.

MetroAir’s costs can be split into a multitude of categories. Firstly, there are costs directly associated with the operation of each flight, such as fuel, ground handling, landing and gate fees, airport taxes, crew, food, and in-flight entertainment to name but a few. Aside from direct operating costs, there are rather major “fixed” costs such as aircraft leases / loan repayments, non-crew staff costs, office and hangar rental, and website and booking system maintenance for example.

In essence, compiling a realistic assessment of an airline’s cost is a case of research. As such it’s not so much complex as it is meticulous.

Revenue

Revenue is the part of the equation that will hopefully outweigh the airline’s costs. For those coming from a relatively inexperienced financial understanding, revenue is the total amount of money generated by operations, in effect the number of passengers carried multiplied by the amount they each pay for their ticket.

It’s at this point that one can make assumptions. Why not set a high price so that you get more money from each passenger and therefore increase revenue? Unfortunately not. Economic theory dictates that all goods and services have a marginal utility; a unit of each item is worth a certain amount of money. If the price becomes higher than the perceived value the customer gives it, they won’t buy it. Simple as that. So plenty of people would be happy to fly across the continent for $20, but not all that many for $2000. The result is a downwards-sloping demand curve; as the price increases, the demand for tickets decreases.

How we determine the shape and nature of this curve for each given flight on our schedule is the crux of the problem. There are a whole host of factors that affect the way in which consumers respond to ticket prices, each with varying degrees of significance. Some factors considered include time of day, flight distance, number of competitors on the route, airline perception and a whole host of others. In a nutshell:

Demand Formula concept

Whilst I’m not too eager to go into any further detail on the factors (all you other VA CEOs & CFOs can figure it out yourselves!!), it’s worth considering that even once we’ve condensed all this into a relatively simple source formula, Matt has quite a job ahead of him in coding it into the site in a way that SQL can process.

So that’s the road ahead. Stay tuned for news about other things in the pipeline including expansion plans for the future.