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Nov 05

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1 inch is NOT worth $773 million in revenue

BXP137683sEarlier this year, an MSN Money article about Southwest suggested that by reducing legroom one inch at every seat on every aircraft Southwest flies, the airline will generate approximately $773 million more in top-line revenue. Apparently, reducing each aircraft’s seat pitch, otherwise called legroom, by one inch allows Southwest to install an additional aisle of seats, resulting in 6 extra seats per plane. Given this increase in available seats, average number of flights in a month, average seat occupancy, and average ticket prices, Joshua Gross, the author of the original blog whose post MSN Money later picked up, calculated the increase in annual revenue as over ¾ of a billion dollars. The calculation is as follows:

Incorrect Calculation

Mike Boyd, President of Boyd Group International, whose sole business is aviation consulting, research, and forecasting, was quoted as saying, “it passes the smell test…(but) you better have tushies in those chairs.”

At first glance, compared to approximately $16.1 billion in Passenger Operating revenue in 2012, an increase of only $0.773 billion is not as implausible as it might otherwise seem.  However, there are some conceptual flaws in the calculation.

Firstly, the Seat Occupancy rate used in the calculation above is based on historical Southwest flights of a lesser capacity and should not be simply assumed for future flights of greater capacity. Increased seat availability is only an advantage for flights that are at or close to capacity. For example, the flight in the middle of May that takes off 50% full won’t benefit from the extra seats; however, the Christmas Eve flight that’s fully booked probably will. There is little chance that these incremental seats will be utilized at the overall occupancy rate.

Secondly, the average price Southwest charged for its flights in the past is not a static number for the future.  Airlines, like hotels, benefit from maximizing occupancy rates and will manage their prices to accomplish the optimal combination. Anything that impacts availability will also impact price.

Southwest Blog Supply & DemandThirdly, one must also consider how customers will assess the lesser legroom. A less appealing product offering may not be able to command the same price and may put some customers off entirely.

A more thoughtful analysis is required in order to properly value that extra inch.

About the author

Maksim Dvorkin

Maksim Dvorkin is a consultant at Fulcrum Inquiry, an accounting, finance and economic consulting firm specializing in complex litigation, forensic investigations and appraisal issues across a broad spectrum of industries.

Permanent link to this article: http://betweenthenumbers.net/2013/11/1-inch-is-not-worth-773-million-in-revenue/

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