airline operating costs sh&e

8/10/2019 Airline Operating Costs SH&E

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By Peter Horder, Senior Vice President

SH&E Ltd

Brussels, 22 January 2003

Airline Operating Costs

Prepared for:

MANAGING AIRCRAFT MAINTENANCE COSTS Conference


2/27

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 CostsOverhead Cost Control

Balance Sheet Effects

Reference Sources

Conclusions


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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


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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


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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


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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 LOMaersk Air VB

Monarch ZB

Portugalia NI

Ryanair FR

British Airways

Thai AirwaysQantas

Emirates

TGQFBAEK


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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)


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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

R e v e n u e p e r

E m p l o y e e

( U S $ 0 0 0 )

485

FR GO QF


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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)

F u e

l C o s

t p e r

A S K ( U S c e n t s )

Source SH&E 2001Source SH&E 2001


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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

Percentage of Total

14.42

10.1011.03 11.06

13.88

14.55

6.06

15.71

0

2

4

6

8

10

12

14

16

18

L u x a i r

B r a a t h e

n s

B r i t i s h

E u r o p

e a n

B r y m o n A

i r w a y

s

C i t y f l y

e r E x

p r e s s

L i t h u

a n i a n

M a e r s

k A i r

S i l k a

i r

e a s y

J e t

8.0

13.9

G O F l y

5.04

R y a n

a i r


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Maintenance Cost per Flight hourMaintenance Cost per Flight hour


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

M a i n t e n a n c e

C o s

t p e r F

l i g h t H o u r

( U S $ )

FRU2


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12

Cost of Sales per PassengerCost of Sales per Passenger

Cost of Sales = commissions, ticketing, sales and promotion costs


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

C o s

t o f

S a l e s p e r

P a s s e n g e r

( U S $ )

U2GO FR


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13

Marketing Expense as a Percentage of SalesMarketing Expense as a Percentage of Sales


M a r

k e t i n g

E x p e n s e a s

% o

f R e v e n u e

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


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14

Passenger Service Cost per PassengerPassenger Service Cost per Passenger


0

5

10

15

20

25

30

35

JL TP KE TG EK SQ GF AC AI AA SK CO AF IR

P a s s e n g e r

S e r v

i c e p e r

P a s s e n g e r

( U S $ )

GO U2


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15

LCC cost advantage

30% Total crew cost

5% Landing & handlingcharges

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

E U R

p e r

1 0 0 0 A S 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


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Direct Operating CostsDirect Operating Costs

Insurances1%

Passenger Service Costs8%

Fuel and oil27%

Airportfees 4%

Handling and dispatch fees11%

Commissions5%

Flight Crew12%

Lease Charges

12%

Maintenance15%

Navigationfees 5%

Source ICAO 2001


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Indirect Operating CostsIndirect Operating Costs

Staff Costs12%

Other2%

Depreciation and Interest46%

Marketing Costs

34%

Administration Costs6%


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18

Cost Allocation by NetworkCost Allocation by Network

500Overheads55Operating Profit

37,24515,2809,11512,850Total Cost555-80485150Margin

12,6755,4002,8754,400Fixed Cost24,5709,8806,2408,450Variable Cost37,80015,2009,60013,000Revenue

981210Yield4,0001,9008001,300RPK6,0502,7001,1502,200ASKTotalA - DA CA - BRoute


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Cost Allocation by RouteCost Allocation by Route

55-303390-32Margin

50022395182Overheads37,74515,5039,21013,032Total Cost

55Operating Profit

12,6755,4002,8754,400Fixed Cost24,5709,8806,2408,450Variable Cost37,80015,2009,60013,000Revenue

981210Yield4,0001,9008001,300RPK6,0502,7001,1502,200ASKTotalA - DA CA - BRoute


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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


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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


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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


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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


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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


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By Peter Horder, Senior Vice President

SH&E Ltd

Brussels, 22 January 2003

Airline Operating Costs

Prepared for:

MANAGING AIRCRAFT MAINTENANCE COSTS Conference

airline operating costs sh&e

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