Economic profit is defined as total revenue generated minus total cost. A profit will be achieved when the total revenue is greater than the cost. Otherwise, the company will be making a loss.
Profit = Revenue – Cost (if Profit > 0; loss when <0)
Airline profitability can be assessed by comparing profits from different time periods for the same airline or between competitor airlines for the same period. However, using profit volumes in these comparisons could be difficult due to seasonal discrepancies and differences in the size of airline operations. One alternative, to facilitate such comparisons, is to look at profit margin, which represents the percentage of revenue that is converted into profit.
Profit Margin
Profit margin = (Profit / Revenue) x 100
There are different types of profit margin, depending on the level of cost involved. Two common profit margin metrics are operational profit margin and net profit margin.
Operating Profit Margin = [(Revenue – Operating Costs) / Revenue] x 100
Net Profit margin = {[Revenue – (All costs and taxes)] / Revenue} x 100
The calculation of profit and profit margin in the airline business is no different to any other business. Some of the revenue and cost items, however, are very specific to the industry. The next two sections explain some of these airline business specific components.
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