Optimal Financial Key Performance Indicators: Evidence From The Airline Industry

Selecting relevant Key Performance Indicators involves an assessment of both cost- and revenue-driven measures. Cost driven allocation usually predominates, due primarily to a traditional accounting mindset coupled with the need for cost savings in the current economic environment. Using data from the airline industry in all of the major markets in the world, this paper demonstrates that revenue- or profit-driven KPIs, consistently applied, will more likely lead to better financial performance than ‘flying’ the business based on cost-driven metrics or those representing a mixture of revenue target and cost-driven metrics. Specifically it examines the effectiveness of models that characterize performance based on two performance indicators, in particular – seats and passenger-kilometers. We document strong evidence indicating that Operating Profit per Passenger or per Passenger-Kilometer is the most significant variable when it comes to explaining the variation in airline profitability. Our conclusion is that despite the traditional belief that measuring performance per seat is only appropriate for point-to-point destination services, typically provided by Low Cost Carriers, the same model also fits Full Service Network Carriers and thus, can be used by them as a meaningful tool for financial targeting and strategic decision-making.