Pick a Number, Any Number!

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I noted only last week how JetBlue was trying to move upmarket. Essentially, it was envious of the lovely margins that airline industry veterans were getting from those premium paying passengers, and decided to go after them, probably erroneously, in my opinion.

Dominic Basulto, in a Washington Post article, applies Clayton Christensen's disruption theory to the airlines, and argues that the airlines are setting themselves up perfectly for disruption. They are constantly trying to move upmarket, focusing (naturally) on the highest-revenue customers, while putting less and less focus on those less-profitable coach class flyers.

Although the article mentions it only in passing, one key point comes up, one I have emphasized over and over again: metrics matter. In the airline industry, the number one metric that everyone focuses on is revenue per available seat mile (RASM). Quite simply (and somewhat simplified), it is the measure of how much money an airplane makes flying a seat one mile. A full airplane flying 500 miles with each passenger paying $500 generates a RASM of $1. If you can take out 20 coach seats, add in 10 business seats, and charge each business passenger $1,500 instead of 500, your RASM just went up.

So, is RASM good or bad? Well, it is good at first blush, because it measures your ability to generate revenue with that mighty expensive capital equipment you own. On the other hand, if everything you focus on, everything you measure, is around RASM, two quite bad things will happen:

  1. You will always invest in first class over business, and business over coach. It doesn't matter if an airplane has a ratio of coach passengers to business passengers of 10:1 or 100:1, you will constantly look for those few business class passengers and underinvest in coach.
  2. You will mis-measure the value. Unfortunately, RASM does not account for actual cost or opportunity cost. Sure, airlines measure them, but as a separate number, often in a separate department.

RASM doesn't take into account the fact that one business class seat takes the space of 3 or 4 (or more) coach seats, it is just a "seat" in my RASM. It also has a much higher operating cost, and a lower ability to sell.

Is business class higher revenue and higher profit per passenger? Yes, without question. Does RASM cause airlines to focus on those profitable business passengers? Yes again, without question. Does RASM cause you to be vulnerable to low-end disruption? Yes once again, without question.

The intense focus on a single metric like RASM, however apparently good, locks the business into a single mindset that leaves it vulnerable to a flank or even rear attack.

Time and again, the metrics you pick will determine how you grow, where you grow, whether and how you innovate.