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By Peter Horder, Senior Vice PresidentSH&E Ltd
Brussels, 22 January 2003
Airline Operating Costs
Prepared for:
MANAGING AIRCRAFT MAINTENANCE COSTS Conference
1
AgendaAgenda
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
Airline Cost Elements
Indirect and Direct Operating Costs
Overhead Cost Control
Balance Sheet Effects
Reference Sources
Conclusions
2
IntroductionIntroduction
Current airline environment
Safety considerations and costs
– Security restrictions
– Insurance implications
Cost reduction versus revenue increases
Current airline environment
Safety considerations and costs
– Security restrictions
– Insurance implications
Cost reduction versus revenue increases
3
Airline Economic Affects from 11 SeptemberAirline Economic Affects from 11 September
SCHEDULED CARRIERS
! Frequency
! Routes
! Traffic
! Revenues
" Fares ?
! Profitability
SCHEDULED CARRIERS
! Frequency
! Routes
! Traffic
! Revenues
" Fares ?
! Profitability
Low Cost Carriers
! Fares
" Traffic
" Revenues
" Profitability
Low Cost Carriers
! Fares
" Traffic
" Revenues
" Profitability
Low Cost Carriers have been clear winners since 2001
4
Airline Safety and SecurityAirline Safety and Security
Safety is paramount– Flight procedures– Maintenance procedures– Ground Operations
Security Impacts– Cockpit security– On board security– Ground delays
– Increased searches– Baggage X-ray
Security costs– Airport charges– Increased passenger charges
Safety is paramount– Flight procedures– Maintenance procedures– Ground Operations
Security Impacts– Cockpit security– On board security– Ground delays
– Increased searches– Baggage X-ray
Security costs– Airport charges– Increased passenger charges
5
Operating Cost Comparisons Per ASKOperating Cost Comparisons Per ASK
Operating Cost Per ASK
Average Stage Length (Km)
0.000
0.025
0.050
0.075
0.100
0.125
0.150
0.175
0.200
0 500 1,000 1,500 2,000 2,500 3,000
(EUR)
FD
LO
LX
COE
EW
FR
OKU2
GOTV
BY
DP ZB
VBNI
QFTG
EK
BA
Source SH&E, AEA, IATA, Form 41
Luxair LG
Air 2000 DPBritannia BY
CityFlyer Express FDCrossair LXCzech OK
EasyJet U2
Eurowings EW
Go GO
LOT LO
Maersk Air VB
Monarch ZB
Portugalia NI
Ryanair FR
British Airways
Thai AirwaysQantas
Emirates
TGQFBAEK
6
Total Operating CostsTotal Operating Costs
Flight Ops28%
Maintenance11%
En-Route/Airport18%
Depreciation6%
Passenger services11%
Ticketing, Sales & Promotion
14%
Admin & Other12%
Source (ICAO 2001 World Average)
7
Some ICAO and F41 Cost Breakdown PercentagesSome ICAO and F41 Cost Breakdown Percentages
0
20
40
60
80
100
Braat
hens
easy
Jet
Air In
dia
JAL
Continen
tal
Delta
(F41
)
General & Admin
Sales & Promotion
Passenger Service
User Charges
Depreciation & AmortisationMaintenance
Flight Operations
8
Labour Productivity has an Impact on CostsLabour Productivity has an Impact on Costs
Source: Annual Accounts, Form 41, AAPA 2001
50
100
150
200
250
300
350
400
SQ LH CX AC BA SK KL U2 EK AA CO AF GF IB TG TP SV MH IR UL
Rev
enue
per
Em
ploy
ee (
US$
000
)
485
FR GO QF
9
Fuel Cost per ASKFuel Cost per ASK
U2
FR
GO
SKKL
IB
CO
AF
AA
AC
TP
LA
IR
UL
SQ
QF
MH
LH
EK
CX
BA AI
GF
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
500 1,000 1,500 2,000 2,500 3,000 3,500 4,000Average Stage Length (KM)
Fue
l Cos
t pe
r A
SK (
US
cent
s)
Source SH&E 2001Source SH&E 2001
10
Maintenance and Overhaul Costs asa Percentage of Total Operating CostsMaintenance and Overhaul Costs asa Percentage of Total Operating Costs
Source: SH&E, ICAO 2000 Financial Data
Percentageof Total
14.42
10.1011.03 11.06
13.8814.55
6.06
15.71
0
2
4
6
8
10
12
14
16
18
Luxair
Braat
hens
British
Euro
pean
Brym
onAirw
ays
Cityfly
erExp
ress
Lithuan
ian
Maers
kAir
Silkair
easy
Jet
8.0
13.9
GO Fly
5.04
Ryanair
11
Maintenance Cost per Flight hourMaintenance Cost per Flight hour
Source: Annual Accounts, Form 41, AAPA 2001
0
200
400
600
800
1000
1200
1400
1600
NH JL CX TP BA TG KL GF GO SQ IB AI AC SK AF CO AA EK
Mai
nten
ance
Cos
t pe
r F
light
Hou
r (U
S$)
FRU2
12
Cost of Sales per PassengerCost of Sales per Passenger
Cost of Sales = commissions, ticketing, sales and promotion costs
Source: Annual Accounts, Form 41, AAPA 2001
0
5
10
15
20
25
30
35
40
45
BA NH EK SQ QF SV KL TP AF LH IB CO GF AC TG AA SK CX
Cos
t of
Sal
es p
er P
asse
nger
(U
S$)
U2GO FR
13
Marketing Expense as a Percentage of SalesMarketing Expense as a Percentage of Sales
Source: Annual Accounts, Form 41, AAPA 2001
Mar
keti
ng E
xpen
se a
s %
of
Rev
enue
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
IR TP SV EK BA JL QF TG AF KL SK CO IB GF SQGO U2 FR
14
Passenger Service Cost per PassengerPassenger Service Cost per Passenger
Source: Annual Accounts, Form 41, AAPA 2001
0
5
10
15
20
25
30
35
JL TP KE TG EK SQ GF AC AI AA SK CO AF IR
Pas
seng
er S
ervi
ce p
er P
asse
nger
(U
S$)
GO U2
15
LCC cost advantage
30% Total crew cost
5% Landing & handling charges
50% Passenger related
70% Sales cost
60% Others (overheads)
Where Low Cost Carriers Achieve AdvantageWhere Low Cost Carriers Achieve Advantage
Cost per Available Seat KM
European Scheduled LCC Average Diff %
-
50
100
150
200
250
300
300 400 500 600 700 800 900 1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2000
Sector length
EU
R p
er 1
000
AS
K
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Focus on sector lengths up to, say, 1,500 km driven byreducing cost advantageincreasing revenue needdecreasing acceptance of lack of service
16
Direct Operating CostsDirect Operating Costs
Insurances1%
Passenger Service Costs8%
Fuel and oil27%
Airportfees 4%
Handling and dispatch fees11%
Commissions5%
Flight Crew12%
Lease Charges12%
Maintenance 15%
Navigation fees 5%
Source ICAO 2001
17
Indirect Operating Costs Indirect Operating Costs
Staff Costs12%
Other2%
Depreciation and Interest46%
Marketing Costs
34%
Administration Costs6%
18
Cost Allocation by NetworkCost Allocation by Network
500Overheads55Operating Profit
37,24515,2809,11512,850Total Cost
555-80485150Margin
12,6755,4002,8754,400Fixed Cost24,5709,8806,2408,450Variable Cost37,80015,2009,60013,000Revenue
981210Yield4,0001,9008001,300RPK6,0502,7001,1502,200ASK
TotalA - DA – CA - BRoute
19
Cost Allocation by RouteCost Allocation by Route
55-303390-32Margin
50022395182Overheads
37,74515,5039,21013,032Total Cost
55Operating Profit
12,6755,4002,8754,400Fixed Cost24,5709,8806,2408,450Variable Cost37,80015,2009,60013,000Revenue
981210Yield4,0001,9008001,300RPK6,0502,7001,1502,200ASK
TotalA - DA – CA - BRoute
20
Which Costs may be Controllable/Avoidable?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
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
21
Cost Data SourcesCost 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
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
22
Operating Cost Reporting - ICAOOperating Cost Reporting - ICAO
– Flight Operations– Flight Crew Salaries, Expenses and Training– Aircraft Fuel & Oil– Insurance & Uninsured losses– Lease/Rental of aircraft
– Maintenance & Overhaul
– Depreciation & Amortization
– User Charges & Station Expenses– Landing & Airport Charges– Route facility charges– Station Expenses
– Passenger Services
– Ticketing, Sales & Promotion
– General & Administration
– Flight Operations– Flight Crew Salaries, Expenses and Training– Aircraft Fuel & Oil– Insurance & Uninsured losses– Lease/Rental of aircraft
– Maintenance & Overhaul
– Depreciation & Amortization
– User Charges & Station Expenses– Landing & Airport Charges– Route facility charges– Station Expenses
– Passenger Services
– Ticketing, Sales & Promotion
– General & Administration
23
Financial Data from US DOT Form 41Financial 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 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
24
Direct Operating Cost Details – US DOT Form 41Direct Operating Cost Details – US DOT Form 41
– Flying Operations– Flight Crew Salaries, Expenses and Training
– Aircraft Fuel & Oil
– Insurance & Uninsured losses
– Lease/Rental of aircraft
– Direct Maintenance – Labour
– Repairs (by outside agencies)
– Materials
[note, more detail than ICAO]
– Depreciation & Amortisation– Flight Equipment
– Expense of Interchange Aircraft
– Other Depreciation & Amortization
– Flying Operations– Flight Crew Salaries, Expenses and Training
– Aircraft Fuel & Oil
– Insurance & Uninsured losses
– Lease/Rental of aircraft
– Direct Maintenance – Labour
– Repairs (by outside agencies)
– Materials
[note, more detail than ICAO]
– Depreciation & Amortisation– Flight Equipment
– Expense of Interchange Aircraft
– Other Depreciation & Amortization
25
Comparison/Benchmarking IssuesComparison/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
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
By Peter Horder, Senior Vice PresidentSH&E Ltd
Brussels, 22 January 2003
Airline Operating Costs
Prepared for:
MANAGING AIRCRAFT MAINTENANCE COSTS Conference
