Airline Operating Costs
By Peter Horder, Senior Vice President SH&E Ltd Prepared for:
MANAGING AIRCRAFT MAINTENANCE COSTS Conference
Brussels, 22 January 2003
Agenda
Introduction Current Airline Environment Airline Cost Elements Indirect and Direct Operating Costs Overhead Cost Control Balance Sheet Effects Reference Sources Conclusions
Introduction
Current airline environment Safety considerations and costs – Security restrictions – Insurance implications
Cost reduction versus revenue increases
Airline Economic Affects from 11 September
SCHEDULED CARRIERS
Low Cost Carriers
! Frequency
! Fares
! Routes
" Traffic
! Traffic
" Revenues
! Revenues
" Profitability
" Fares ? ! Profitability Low Cos t Ca Carrie rs h av e be en cle ar w in ne rs si n ce 200 001 1
Airline Safety and Security Safety is paramount – Flight procedures – F light pro pr ocedures – – Maintenance Main Ma inte tena nanc nce e procedures proc proced edur ures es – Ground Operations – G round Ope Op erations
Security Impacts – Cockpit – C ockpit pit security se security – On – O n board bo board security se securit urity y – – Ground Ground delays delays – Increased searches – Baggage X-ray
Security costs – – Airport Airpo porrt charges charges – – Increased Incr In crea ease sed d passenger pass pa ssen enge gerr charges char charges ges
Operating Cost Comparisons Per ASK
Operating Cost Per ASK
(EUR)
0.200 0.175 FD
0.150
LX
0.125
VB NI
COE
0.100
EW
BA
U2
Britannia Air 2000 Monarch
BY DP ZB
Thai Airways Qantas British Airways Emirates
TG QF BA EK
CityFly CityFlyer er Express Express Crossair Czech Eurowings Luxair LOT Maers Maersk k Air Air Portugalia
FD LX OK EW LG LO VB NI
EasyJet Go Ryanair
U2 GO FR
OK
0.075
TV
TG
GO
FR
0.050
LO
QF
EK BY DP
ZB
0.025 0.000 0
500
Source SH&E, AEA, IATA, Form 41
1,000
1,500
Average Stage Length (Km)
2,000
2,500
3,000
Total Operating Costs
Admin & Other 12% Ticketing, Sales & Promotion 14%
Flight Ops 28%
Passenger services 11% Depreciation 6% En-Route/Airport 18% Source (ICAO 2001 World Average)
Maintenance 11%
Some ICAO and F41 Cost Breakdown Percentages
100 80 60 40 20 0
n s e t h a a r B
e t J s y a e
i a d n r I i A
L J A
a l 1 ) t 4 n F e ( n i a t l t n e D C o
General & Admin Sales & Promotion Passenger Service User Charges Depreciation & Amortisation Maintenance
Labour Productivity has an Impact on Costs 485 400
350
300 ) 0 0 0 $ S U ( 250 e e y o l p m E 200 r e p e u n e 150 v e R 100
50
FR
SQ
LH
CX AC CX
BA BA
SK
GO
KL
U2
QF
EK
AA AA
CO
AF AF
GF
IB
TG
TP
SV
MH MH
IR IR
UL
Fuel Cost per ASK
1.6 LA AC
1.5
1.4 ) s t n 1.3 e c S U ( K1.2 S A r e p t s 1.1 o C l e u F 1.0
SK
U2
AF
KL
MH
CX
LH GF IB
FR
BA
SQ
CO
AI
AA
UL 0.9 QF IR 0.8
GO
EK
TP
0.7 500
1,000
Source SH&E 2001
1,500
2,000 2,500 Average Stage Length (KM)
3,000
3,500
4,000
Maintenance and Overhaul Costs as a Percentage of Total Operating Costs Percentage of Total
18 15.71
16 13.88
14 12
11.03
13.9
14.42
14.55
11.06
10.10 10 8.0
8 6.06 6
5.04
4 2 0
r t s s l y n n s i i r y s a a r n a F A i i a e e e x r a s k y J t h e n w p O u p a n r o i L x G u a e r a s a a r A y E h u t r a e i R M E B L o n l y e r h s m f i t i B r y t y r i B C
i r a l k i S
Maintenance Cost per Flight hour
1600
1400
) $ 1200 S U ( r u o H t 1000 h g i l F r e p 800 t s o C e c n a 600 n e t n i a M 400
200
0 NH
JL
CX
TP
BA
TG
KL
GF
GO
SQ
IB
AI
AC
U2
SK
AF
CO
AA FR EK
Cost of Sales per Passenger Cost of Sales = commission commissions, s, ticketing, sales and promotio promotion n costs 45
40
35 ) $ S U ( 30 r e g n e s s a 25 P r e p s e 20 l a S f o t s o C 15
10
5
0 BA
NH
EK
SQ
QF
SV
KL
TP
AF
LH
Source: Annual Accounts, Form 41, AAPA 2001
IB
CO
GF
AC
TG
AA
SK
GO
CX
U2
FR
Marketing Expense as a Percentage of Sales
18%
16%
14% e u n e v e 12% R f o % s 10% a e s n e p x E 8% g n i t e k r a 6% M 4%
2%
0% IR
TP
SV SV
EK EK
BA
JL JL
QF QF
TG
AF AF
KL
GO
U2
SK
CO
FR
IB
GF
SQ SQ
Passenger Service Cost per Passenger
35
30
) $ S 25 U ( r e g n e s s a P20 r e p e c i v r e S15 r e g n e s s a P 10
5
0 JL
TP TP
KE
TG
EK
SQ
GF
AC
AI
GO
AA
SK
CO
AF
U2
IR
Where Low Cost Carriers Achieve Advantage LCC cost advantage
Cost per Available Seat KM 300
100%
30% To Tota tall cre crew w co cost
90% 250
80%
K S 200 A 0 0 0 1150 r e p 100 R U E
70% 60% 50%
5% Landing & handling charges 50% 50 % Pa Pass ssen enge gerr rela relate ted d
40% 30% 20%
50
10% 300
40 0
500
60 0
7 00
800
0%
900 1 000 11 00 1200 130 0 1400 150 0 160 0 1700 1800 190 0 2 000
Sector length European Scheduled
LCC Average
Focus on sector lengths up to, say, 1,500 km driven by by reducing cost advantage increasing revenue need decreasing acceptance of lack of service
Diff %
70% Sales cost 60% 60 % Ot Othe hers rs (ov (over erhe head ads) s)
Direct Operating Costs
Handling and dispatch fees 11% Navigation fees 5%
Commissions Insurances 1% 5%
Lease Charges 12% Flight Crew 12%
Airport fees 4%
Fuel and oil 27%
Source ICAO 2001
Maintenance 15% Passenger Service Costs 8%
Indirect Operating Costs
Other 2%
Administration Costs 6%
Marketing Costs Depreciation and Interest 46%
34% Staff Costs 12%
Cost Allocation Allocation by Network Network
Route
A-B
A–C
A-D
Total
ASK
2,200 1,300 10 13,000 8,450 4,400 12,850 150
1,150 800 12 9,600 6,240 2,875 9,115 485
2,700 1,900 8 15,200 9,880 5,400 15,280 -80
6,050 4,000 9 37,800 24,570 12,675 37,245 555
RPK Yield Revenue Variable Cost Fixed Cost Total Cost Margin Overheads Operating Profit
500 55
Cost Allocation by Route
Route
A-B
A–C
A-D
Total
ASK
2,200 1,300 10 13,000 8,450 4,400 182 13,032 -32
1,150 800 12 9,600 6,240 2,875 95 9,210 390
2,700 1,900 8 15,200 9,880 5,400 223 15,503 -303
6,050 4,000 9 37,800 24,570 12,675 500 37,745 55
RPK Yield Revenue Variable Cost Fixed Cost Overheads Total Cost Margin Operating Profit
55
Which Costs may be Controllable/Avoidable? All costs are variable over time Strategic and Tactical decisions can be taken – aggressive re-negotiation of contracts – Hedging instruments – E,g, fuel, currency – Outsourcing – Changes in accounting policies !
Staffing – Replacement or increased efficiency? – Overtime
Operating “unprofitable” routes – More economical flying through different routings, aircraft and airports – Allocation of indirect costs – Do you know which routes really are unprofitable?
Levels of service – Low cost vs. full service model
Cost Data Sources Major Sources – – –
Airline Annual reports ICAO US DOT Form 41
Other Sources – – –
IATA AAPA UK CAA (and other national regulators)
Profit & Loss Statement – Revenues – Operating Costs
Balance Sheet – Assets – Liabilities
Operatin Opera ting g Cost Cost Report Reporting ing - ICA ICAO O
– Flight – F ligh ight Operations Op Operations – Flight Crew Salaries, Expenses and Training – Aircraft Fuel & Oil – Insurance & Uninsured losses – Lease/Rental of aircraft
– Maintenance – M ain aintena tenanc nce e & Overhaul Ove Overh rhau aull – Depreciation – De Depr prec ecia iati tion on & Amortization Amo Amort rtiz izat atio ion n – – User User Charges Charg Ch arges es & Station Stat St atio ion n Expenses Exp Expen ense ses s – Landing & Airport Charges – Route facility charges – Station Expenses
– Passenger Services – P assenger Serv Se rvic ice es – – Ticketing, Tick Ticket etin ing, g, Sales Sale Sales s & Promotion Pro Promo moti tion on – – General Gene Genera rall & Administration Admi Admini nist stra rati tion on
Financial Data from US DOT Form 41
Direct Operating Expenses – Reported quarterly by fleet type
Indirect Operating Expenses – Reported quarterly by carrier and allocated by ASM or other appropriate measure to each fleet
Other Finance Related Data Reported – Traffic Statistics – Revenues – General Profit & Loss – Balance Sheet
Direct Operatin Direct Operating g Cost Cost Details Details – US DOT Form Form 41
– – Flying Flyin lying g Operations Operation ions – Flight Crew Salaries, Expenses and Training – Aircraft Fuel & Oil – Insurance & Uninsured losses – Lease/Rental of aircraft
– Direct Maintenance – D irect Ma M aintena nan nce – Labour – Repairs (by outside agencies) – Materials [note, more detail than ICAO]
– – Depreciation Depr De prec ecia iati tion on & Amortisation Amo Amort rtis isat atio ion n – Flight Equipment – Expense of Interchange Aircraft – Other Depreciation & Amortization
Comparison/Benchmarking Issues
ICAO – Data for all ICAO carriers worldwide – Profit & Loss and Balance Sheet
But, – Not broken down by fleet – Maintenance & Overhaul not subdivided – Limited data on low-cost/regional carriers
DOT Form 41 – Broken down by fleet – New data quarterly
But, – Only for US carriers
Airline Operating Costs
By Peter Horder, Senior Vice President SH&E Ltd Prepared for:
MANAGING AIRCRAFT MAINTENANCE COSTS Conference
Brussels, 22 January 2003
