246  Analyzing Performance this statistic is misleading. To see why, disaggregate the ratio of labor expenses to revenues using available seat-miles (ASMs): Labor Expenses Revenues Labor Expenses ASMs Revenues ASMs =    ÷     The ratio of labor expenses to revenues is a function of labor expenses per ASM and revenues per ASM. Labor expenses per ASM are the labor costs required to fly one ASM, and revenues per ASM represent the average price charged per ASM. Although Airlines A and B have similar ratios of labor ex- penses to revenues, they have different operating models. Airline B has an 18 percent advantage in labor cost per ASM ($34.1 per thousand ASMs versus $41.6 for Airline A). But what Airline A loses in labor costs, it recovers with higher prices. Because of its locations and reach, especially internationally, Airline A can charge an average price 17 percent higher than Airline B ($150.0 per thousand ASMs versus $127.9 per thousand ASMs). But what is driving this differential in labor expenses per ASM? Are Air- line B’s employees more productive? Or are they paid less? To answer these questions, disaggregate labor expenses to ASMs, using the following equation: Labor Expenses ASM Labor Expenses Employees ASMs Employee =      ÷ s       Two elements drive labor expenses per ASM: the first term represents the av- erage salary per full-time employee; the second measures the productivity of each full-time employee (millions of ASMs flown per employee). The boxes on the right side of Exhibit 12.6 report the calculations for this equation. The EXHIBIT 12.5  Airline A and Airline B: Financial and Operating Statistics $ million Airline A Airline B 2016 2017 2018 2016 2017 2018 Revenues 25,591 26,449 28,912 4,609 4,908 5,361 Aircraft fuel and related taxes (4,069) (4,839) (6,515) (752) (954) (1,329) Salaries and related costs (7,123) (7,659) (8,021) (1,189) (1,321) (1,431) Other operating expenses (10,836) (11,258) (11,731) (1,786) (1,938) (2,094) Operating profit 3,562 2,693 2,645 882 695 506 Operating statistics Employees, full-time equivalent 64,400 62,860 61,600 11,190 12,197 12,787 Available seat-miles, millions 177,513 183,670 192,683 37,534 39,205 41,917 Analyzing Revenue Growth  247 average salary is 16.4 percent higher for Airline A, while productivity per mile is 4.6 percent lower. Although the salary differential appears significant, it is quite small in 2018 compared with the early 2000s, when average salaries dif- fered by a factor of almost 2. Furthermore, the differences in productivity can be driven by different route structures and the level of service provided. Analyzing performance using operating drivers gives additional insight into the competitive differences among airlines. But the analysis is far from done. In fact, a thoughtful analysis will often raise more questions than it answers. For instance, can the salary difference between Airline A and Airline B be explained by the mix of employees (pilots are more expensive than gate personnel) or the location of the employees (the East and West coasts are more expensive than the Midwest)? Each of these analyses will provide additional insight into each carrier type’s ability to survive and prosper. Analyzing Revenue Growth Chapter 3 showed that ROIC, cost of capital, and growth in cash flows drive a company’s value. By analyzing historical revenue growth, you can assess the potential for growth in the future. The calculation of year-to-year revenue growth is straightforward, but the results can be misleading. Three prime culprits distort revenue growth: the ef- fects of changes in currency values, mergers and acquisitions, and changes in EXHIBIT 12.6  Operating Drivers of Labor Expenses to Revenues, 2018 Airline A 9.1 Airline B 9.4 Operating margin, % Airline A 27.7 Airline B 26.7 Labor expenses/revenues, % Airline A 22.5 Airline B 24.8 Aircraft fuel/revenues, % Profit and loss statement Key performance indicators Airline A 40.6 Airline B 39.1 Other costs/revenues, % Airline A 150.0 Airline B 127.9 Revenues/1,000 ASMs,1 $ Airline A 41.6 Airline B 34.1 Labor expenses/ 1,000 ASMs,1 $ Airline A 3.1 Airline B 3.3 ASMs1/employee, millions Airline A 130.2 Airline B 111.9 Labor expenses/ employee, $ thousands 1 Available seat-miles (ASMs) are the standard unit of measure for the U.S. airline industry.