Airline Cost Structure

6) Airline Cost Structure 19

A) Direct Operating Cost 20

B) Indirect Operating Cost 22

C) Overheads. 23

7) Cost Comparison parameters and profitability analysis 26

A) Costs per aircraft km, Seat km and tone km 26

B) Profitability and the break-even load factor 27

C) VOLUME V/s TRAFFIC 30

D) Profit Analysis 32

E) Marginal Costing and Break-Even-Point 33

8) Cost Controls 37

AIRLINE COST STRUCTURE :-

a) Direct Operating Cost

b) Indirect Operating Cost

c) Overheads.

a) Direct Operating Costs are incurred as a direct result of the operation of a specific service- for example The Fuel, and oil consumed on a flight

b) Indirect Operating Cost are incurred for a whole period of time such as an operating season - for Example, pilot salaries must be paid even if a specific service is cancelled.

c) Overhead costs are incurred for even longer, such as buildings or the management of the airline.

A ) Direct Operating Costs

Direct Operating cost occur if and only if a given flight is actually operated

Within the airline industry there are two types of direct operating cost

I ) Aircraft Related Direct operating cost

1. Fuel and Oil :-The fuel costs for any given operation are based on price of fuel and fuel comsumption Characteristics of the aircraft involved.

2. Maintenance (Exculding in-house labour) :- Maintence costs are affected by several factors, including the following :

 Price of comumable Spares

 The time between overhaul on the airframe, engines and components

 The failure rate of various components

 The manpower effort required to perform the various maintence tasks

 The cost of labour

 The cost of getting the aircraft or components to the overhault locations

Maintence costs are unabvoidable in the airline industry to meet safety requirements.

3. Landing Fees :- These are levied by airport authorities for the airport facilities and services which they provide. It is common for charges to be divided into two categories at most airports :-

 A Fixed Aircraft fee

 A Variable load-related fee

4. En route/Navigation Fees :- These are charges by government in order to cover the cost of both en route air traffic control and naviation facilities. Most countries in Europe use the Eurocontrol organisation to charge for these services in accordance with a standardised formula and using a contralised billing facility.

5. Handling Fees :- These are levied, not by airport authorities, but outside handling agencies for aircraft turnaround services. Examples of such services include - passenger check-in and boarding, baggage and cargo loading, aircraft cleaning and normal turnaround technical support. These cost are linked directly to aircraft capacity. However, additional factors may also have an influence on handling costs, for example - time of day (night time or peak period) Whether the aircraft is equipped with an auxiliary power unit,

6. Crew Expenses :- The principal factor which influences crew Expenses is crew complement. In some very specific circumstances, and aircraft's block speed can have an impact on whether or not a crew overnight is required. Note that crew salaries are treated as indirect operating Costs.

II) Traffic Related Direct operting cost

1. Passenger and Cargo Commission :- These commissions relate to the sales commission fees which an airline must pay to travel agents / cargo agents for selling its services. They are usually represented as a percentage of gross revenue. Depending on the mixture of agency sales and own office sales, this percentage will very.

2. Airport Load Fees :- These have already been covered under the haading of LANDING FEES

3. In-flight Catering :- Clearly the cost of the food etc. prepared for in-flight catering form direct operting cost. Similarly, if a catering contractor is used to supply catering for a return sector then these costs would also be included under DOC. This is because the cost in both cases will only be incurred if specific services are operated. If the main base catering is prepared by the airline itself then costs such as catering staff salaries or catering equipment will be treated as IOC (indirect Opertating cost)

4. General Passenger Related Costs :- These include mishandled baggage costs, interrupted and cancelled flight expenses, free issue to business and First Class passengers and so on.

B ) INDIRECT OPERATING COSTS :-

1) Aircraft Standing Charges :- These Covers four Areas :

 Depreciation Write-off

 Interest on capital

 Development write-off

 Hull Insurance.

Aircraft can be bought outright or acquired through a loan or a leasing agreement. In all