6_Benchmarking

8/7/2019 6_Benchmarking

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Air Transport Department

Benchmarking of Key Airline Indicators

Dr George Williams

16 October 2008


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Agenda

Structure of Airline Operating Costs

Sources of Cost differences

Factors affecting Airline Operating Costs

Benchmarking Performance


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Variations in Unit Cost (2005)

0

20

40

60

80

100

120

140

Portugalia Ai r Europa Contine ntal Sw iss Air Fra nce Lufthansa Thai Nippon

Cargo

Air Asia

UScents

perATK


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Low costs do not automatically guarantee profitability

High costs do not always imply losses

The relationship between unit cost and yield (average

fare) is all important


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Irrespective of whether an airline has high or lowoperating costs, a thorough knowledge andbreakdown of them is vital in order for managementto:

monitor performance (to check if targets / budgets arebeing met. If not, remedial action can be taken)

set appropriate fares and tariffs

evaluate new routes, aircraft acquisition andoutsourcing opportunities


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For most carriers labour forms the largest input cost

(typically 25% - 40% of total operating costs)

Considerable variation exists in airline cost structuresmaking comparison difficult

Airline managers need to be aware of future trends inthe availability, price and quality of key input factors(including Outsourcingopportunities)

Some cost items are more controllable than others. Itis important to know what influence management canexert on each input factor


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Airline operating costs are traditionally sub-divided

into direct and indirect elements, after the exclusion

of non-operating items such as profits earned by

subsidiaries and those from asset sales.

(Interest payments traditionally have also been

excluded, but this distorts comparisons with carriers

that lease their aircraft.)


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The widely used breakdown of operating costs that

follows is recommended by ICAO and is similar to the

approach adopted in the UK and US.

The ICAO system has the advantage that the cost

categories employed correspond to functional areas

within the airline.


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Direct Operating Costsrefer to the expenses incurred

directly in the operation of a particular aircraft andinclude three main items:

Flying Expenses [Flight Crew Salaries & Expenses /Fuel & Oil / Airport & En-Route Charges / Aircraft

Insurance / Rental of Flight Equipment and Crews]

Maintenance and Overhaul [Labour costs / Sparesused / Maintenance Overheads]

Aircraft Depreciation


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Indirect Operating Costsinclude all those items of

expenditure which are not directly related to theoperation of a particular aircraft:

Station and Ground Costs

Passenger services

Ticketing, Sales and Promotion

General Administration


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In practice the distinction between direct andindirect operating costs is not always clear cut.

On average, direct operating costs (DOCs) account

for around one half of the total operating costs of

scheduled carriers. However, wide variations are

apparent between airlines. The DOC proportion of

total cost can vary between 45% and 70%.


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IATA INTERNATIONAL SCHEDULED SERVICES

DISTRIBUTION OF COSTS IN 2003

DIRECT OPERATING COSTS (DOC) %

FLIGHT OPERATIONS 32.0

Flight Crew (6.2)Fuel and Oil (16.5)Airport & En-Route Charges (9.3)

MAINTENANCE 10.4

DEPRECIATION / RENTALS / INSURANCE 14.0

TOTAL D.O.C. 56.4


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INDIRECT OPERATING COSTS (IOC) %

STATION AND GROUND 9.8

PASSENGER SERVICES 12.8Cabin Attendants (6.7)

Other Pax Services (6.1)

TICKETING, SALES AND PROMOTION 14.5

GENERAL AND ADMIN. 6.5

TOTAL I.O.C 43.6

Source: IATA Airline Economic Results and Prospects 2004


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While the ICAO approach enables the operating

costs of an airline to be isolated and compared with

other carriers, it provides neither a basis for pricing

decisions nor a means for deciding the appropriatelevel of service frequency to provide on a route.

In order to be able to undertake these activities it is

necessary to consider the concept of escapability.


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To enable an airline manager to know exactly whichcosts the company will avoid if a particular flight is

not operated it is necessary to subdivide direct

operating costsinto fixed and variable elements.

Thevariable direct operating costsare those items

of expenditure that can be escaped if a flight is not

operated. Alternatively, they are the additional costs

incurred when an extra flight is operated.


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Sources of Cost Differences

Direct Operating Costs

Indirect Operating Costs

Seating Density / Load Factor


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Unit Operating Costs in 2005

0

10

20

30

40

50

60

70

80

Portu galia Air Europ a C ontinen tal Swiss Air Fran ce Lu fth ansa Th ai N ippo n

Cargo

Air Asia

UScentsperATK

DOC

IOC


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% Direct Operating Costs in 2005

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

Portugalia C ontinental Lufthansa Swiss Air France Thai Nippon

Cargo

Air Europa Air Asia


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DOC breakdown in 2005

0

5

10

15

20

25

30

35

40

Portugalia Swiss Lufthansa Thai Nippon Cargo Air Asia

UScentsper

ATK

Flight Operations

Maintenance & Overhaul

Depreciation


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IOC breakdown in 2005

0

5

10

15

20

25

30

35

40

Portugalia Swiss Lufthansa Thai Nippon Cargo Air Asia

UScentsper

ATK

User Charges & Station Costs

Ticketing Sales & Promotion

Pax Services


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Major Factors Affecting Airline Operating Costs

Aircraft Characteristics

speed and capacity determine aircraft productivity

Route Structure and Type of Network - stage length affects aircraft and crew utilization, fuel

used per block hour, relative station costs and somemaintenance expenses

- service frequency directly influences aircraft and

crew utilization rates- average length of passenger haul affects sales and

passenger handling costs


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Aircraft Productivity

Seat km per hour

0

100,000

200,000

300,000

400,000

500,000

600,000

1950 1960 1970 1980 1990 2000 2010

A380

B747-400

B707


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Range

Payload

Seat km per hour

Range

Range

Cost per seat km


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Influence of stage length on unit costs

y = -54.004Ln(x) + 449.28

R2 = 0.7177

40

50

60

70

80

90

100

110

120

500 700 900 1100 1300 1500 1700 1900

Stage Length (km)

Eurocent

sperATK

British Midland

Ryanair

Easyjet

SN Brussels

Austria Finnair

Lufthansa

Air France

Aer Lingus

Spanair

Iberia

Air Europa

Turkish

TAP Air Portugal

British Airways

KLM


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Unit Cost against Stage Length (2005/6)(Average Aircraft Seating Capacity)

0

1

2

3

4

5

6

7

8

0 1000 2000 3000 4000 5000 6000 7000 8000

km

pencepe

rASK BA(232)

Flybe (101)

easyJet (148)

VirginAtlantic (344)

Thomas Cook (246)

Monarch (255)

First Choice (225)


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Operating Cost Comparison2005/6 Financial Year

255222783.42.71Monarch

232226076.34.62BA

14896781.74.34easyJet

344716073.93.51Virgin Atlantic

246278589.02.46Thomas Cook

10148065.77.17flybe

225246089.92.46First Choice

Av. Seatsper aircraft

Av. StageLength (km)

Load Factor

(% pass-km)

Unit Cost

(pence per ASK)

Airline


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Major Factors Affecting Airline Operating Costs

Marketing Policy

- scale and type of sales promotional activity

- amount and quality of in-flight and groundhandling services provided

External Economic Factors

- aviation fuel prices

- landing fees and en-route charges

- exchange rates

- level of economic activity


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Key Performance Indicators

Break-even Load Factor (%) versus Load Factor (%)

Staff Productivity (ASK or ATK per employee)

Aircraft Utilisation (hours flown per day)

% Internet Sales

Fleet age and mix


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Break-even Load Factor (%)

BELF (%) = Unit Cost Yield

Unit cost = Total Operating Cost ASK

Yield = Total Operating Revenue RPK


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Passenger Load Factors in 2006

0

10

20

30

40

50

60

70

80

90

100

Virgin Atlantic BA GB Airways easyJet Monarch XL First Choice

%


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BELF (%) versus LF (%)

0

10

20

30

40

50

60

70

80

90

100

BA Connect Flybe Virgin Atlantic Astraeus easyJet Monarch First Choice

%

LF (%)

BELF (%)


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Airline Staff Productivity in 2006

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

Monarch easyJet First Choice GB Airways XL Virgin Atlantic BA

ASKperEmp

loyee


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Flight Crew Costs & Productivity 2006

72,000182XL

82,000702Virgin Atlantic

67,500337Thomas Cook

68,400385Monarch

61,600183GB A/w

75,100385First Choice

64,2001208easyJet

97,6003140BA

Average AnnualExpenditure ()

Average Number ofPersonnel

Airline


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Cabin Crew Costs 2006

15,1001032XL

13,3003839Virgin Atlantic

15,4001053Thomas Cook

15,5001383Monarch

10,600466GB Airways

18,7001245First Choice

19,3002176easyJet

27,90014327BA

Average AnnualExpenditure (s)

Average Number ofPersonnel

Airline


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A320/319 Utilisation

0

2

4

6

8

10

12

14

16

Q3 2004 Q4 2004 Q1 2005 Q2 2005

Hoursp

erday

First Choice

easyJet

BA


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A330 / B744 Utilisation

0

2

4

6

8

10

12

14

16

18

Q3 2004 Q4 2004 Q1 2005 Q2 2005

Hoursperday

Virgin

Monarch

BA

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