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- 1. By Peter Horder, Senior Vice President SH&E Ltd Brussels, 22 January 2003 Airline Operating Costs Prepared for: MANAGING AIRCRAFT MAINTENANCE COSTS Conference
- 2. 1 Aggeennddaa Introduction Current Airline Environment Airline Cost Elements Indirect and Direct Operating Costs Overhead Cost Control Balance Sheet Effects Reference Sources Conclusions
- 3. 2 IInnttrroodduuccttiioonn Current airline environment Safety considerations and costs – Security restrictions – Insurance implications Cost reduction versus revenue increases
- 4. 3 Aiirrlliinnee EEccoonnoomiicc Affffeeccttss ffrroom 1111 SSeepptteembbeerr SCHEDULED CARRIERS ! Frequency ! Routes ! Traffic ! Revenues " Fares ? ! Profitability Low Cost Carriers ! Fares " Traffic " Revenues " Profitability Low Cost Carriers have been clear winners since 2001
- 5. 4 Aiirrlliinnee SSaaffeettyy aanndd SSeeccuurriittyy 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
- 6. 5 Oppeerraattiinngg Coosstt Coomppaarriissoonnss PPeerr ASSK Operating Cost Per ASK LO OK GO VB NI TV BA TG Average Stage Length (Km) (EUR) 0.200 0.175 0.150 0.125 0.100 0.075 0.050 0.025 0.000 FD LX COE EW FR U2 Britannia BY Air 2000 DP Monarch ZB Thai Airways Qantas Emirates British Airways TG QF BA EK CityFlyer Express FD Crossair LX Czech OK Eurowings EW LOT LO Maersk Air VB Portugalia NI BY DP ZB QF EK 0 500 1,000 1,500 2,000 2,500 3,000 Source SH&E, AEA, IATA, Form 41 Luxair LG EasyJet U2 Go GO Ryanair FR
- 7. 6 TToottaall Oppeerraattiinngg Coossttss Flight Ops 28% Maintenance 11% En-Route/Airport 18% Ticketing, Sales & Promotion 14% Passenger services Depreciation 6% 11% Admin & Other 12% Source (ICAO 2001 World Average)
- 8. 7 SSoomee IICAO aanndd FF4411 Coosstt Brreeaakkddoownn PPeerrcceennttaaggeess 100 80 60 40 20 0 Braathens easyJet Air India JAL Continental Delta (F41) General & Admin Sales & Promotion Passenger Service User Charges Depreciation & Amortisation Maintenance Flight Operations
- 9. 8 LLaabboouurr PPrroodduuccttiivviittyy hhaass aann IImppaacctt oonn Coossttss 400 350 300 250 200 150 100 50 SQ LH CX AC BA SK KL U2 EK AA CO AF GF IB TG TP SV MH IR UL Source: Annual Accounts, Form 41, AAPA 2001 Revenue per Employee (US$ 000) 485 FR GO QF
- 10. 9 FFuueell Coosstt ppeerr ASSK U2 FR GO SK KL IB AC CO LA AF AA TP IR UL SQ QF MH LH EK CX GF BA AI 1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 Average Stage Length (KM) Fuel Cost per ASK (US cents) Source SH&E 2001
- 11. 10 Maintenance and Overhaul Costs as a Percentage of Total Operating Costs Percentage of Total 18 16 14 12 10 8 6 4 2 8.0 Source: SH&E, ICAO 2000 Financial Data 14.42 10.10 11.03 11.06 13.88 14.55 6.06 15.71 0 Lithuanian Luxair Brymon Airways British European Braathens Cityflyer Express Maersk Air Silkair easyJet 13.9 GO Fly 5.04 Ryanair
- 12. 11 Maaiinntteennaannccee Coosstt ppeerr FFlliigghhtt hhoouurr 1600 1400 1200 1000 800 600 400 200 0 NH JL CX TP BA TG KL GF GO SQ IB AI AC SK AF CO AA EK Source: Annual Accounts, Form 41, AAPA 2001 Maintenance Cost per Flight Hour (US$) U2 FR
- 13. 12 Coosstt ooff SSaalleess ppeerr PPaasssseennggeerr Cost of Sales = commissions, ticketing, sales and promotion costs 45 40 35 30 25 20 15 10 5 0 BA NH EK SQ QF SV KL TP AF LH IB CO GF AC TG AA SK CX Source: Annual Accounts, Form 41, AAPA 2001 Cost of Sales per Passenger (US$) GO U2 FR
- 14. 13 Maarrkkeettiinngg EExxppeennssee aass aa PPeerrcceennttaaggee ooff SSaalleess 18% 16% 14% 12% 10% 8% 6% 4% 2% Source: Annual Accounts, Form 41, AAPA 2001 Marketing Expense as % of Revenue 0% IR TP SV EK BA JL QF TG AF KL GO U2 SK CO FR IB GF SQ
- 15. 14 PPaasssseennggeerr SSeerrvviiccee Coosstt ppeerr PPaasssseennggeerr 35 30 25 20 15 10 5 0 JL TP KE TG EK SQ GF AC AI AA SK CO AF IR Source: Annual Accounts, Form 41, AAPA 2001 Passenger Service per Passenger (US$) GO U2
- 16. 15 Whheerree LLoow Coosstt Caarrrriieerrss Acchhiieevvee Addvvaannttaaggee LCC cost advantage 30% Total crew cost 5% Landing & handling charges 50% Passenger related 70% Sales cost 60% Others (overheads) Cost per Available Seat KM 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% European Scheduled LCC Average Diff % 300 250 200 150 100 50 - 300 400 500 600 700 800 900 1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2000 Sector length EUR per 1000 ASK 0% Focus on sector lengths up to, say, 1,500 km driven by reducing cost advantage increasing revenue need decreasing acceptance of lack of service
- 17. 16 Diirreecctt Oppeerraattiinngg Coossttss Insurances 1% Passenger Service Costs 8% Fuel and oil 27% Airport fees 4% Handling and dispatch fees 11% Commissions 5% Flight Crew 12% Lease Charges 12% Maintenance 15% Navigation fees 5% Source ICAO 2001
- 18. 17 IInnddiirreecctt Oppeerraattiinngg Coossttss Staff Costs 12% Other 2% Depreciation and Interest 46% Marketing Costs 34% Administration Costs 6%
- 19. 18 Coosstt Allllooccaattiioonn bbyy Neettwoorrkk Route A - B A – C A - D Total ASK 2,200 1,150 2,700 6,050 RPK 1,300 800 1,900 4,000 Yield 10 12 8 9 Revenue 13,000 9,600 15,200 37,800 Variable Cost 8,450 6,240 9,880 24,570 Fixed Cost 4,400 2,875 5,400 12,675 Total Cost 12,850 9,115 15,280 37,245 Margin 150 485 -80 555 Overheads 500 Operating Profit 55
- 20. 19 Coosstt Allllooccaattiioonn bbyy Roouuttee Route A - B A – C A - D Total ASK 2,200 1,150 2,700 6,050 RPK 1,300 800 1,900 4,000 Yield 10 12 8 9 Revenue 13,000 9,600 15,200 37,800 Variable Cost 8,450 6,240 9,880 24,570 Fixed Cost 4,400 2,875 5,400 12,675 Overheads 182 95 223 500 Total Cost 13,032 9,210 15,503 37,745 Margin -32 390 -303 55 Operating Profit 55
- 21. 20 Whhiicchh Coossttss maayy bbee Coonnttrroollllaabbllee//Avvooiiddaabbllee?? 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
- 22. 21 Coosstt Daattaa SSoouurrcceess 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
- 23. 22 Oppeerraattiinngg Coosstt Reeppoorrttiinngg -- IICAO – 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
- 24. 23 FFiinnaanncciiaall Daattaa ffrroom USS DOTT FFoorrm 4411 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
- 25. 24 Diirreecctt Oppeerraattiinngg Coosstt Deettaaiillss –– USS DOTT FFoorrm 4411 – 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
- 26. 25 Coomppaarriissoonn//Beenncchhmaarrkkiinngg IIssssuueess 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
- 27. By Peter Horder, Senior Vice President SH&E Ltd Brussels, 22 January 2003 Airline Operating Costs Prepared for: MANAGING AIRCRAFT MAINTENANCE COSTS Conference