This paper deals with cost drivers in the airline industry. A theoretical approach including examples is used. The objective is to gain a clear understanding of what problems airlines are facing within the industry and about the challenges they have to master concerning cost related topics. What are the key determinants behind cost related figures? This paper consists of five major parts. The first part explains the necessity of costing. Why should this topic be taken into account with regard to the airline industry? Therefore, a presentation of profitability within the industry and the significance of costing is presented. The second part demonstrates an overview of the general spreading of expenses, while the third part displays the categorization of costs. This is crucial for a clear understanding of the business; therefore, non-operating aspects have to be excluded. The last section deals with cost topics from different perspectives, such as e.g. total cost, unit cost or external cost factors. Essential matters such as the controllability of costs or BELF are additionally taken into account.
Table of Contents
1. Executive Summary
2 Introduction
2.1 Current Profitability of Airlines
2.2 The Significance of Costing in the Airline Industry
3 The General Spreading of Costs
4 Classification of Expenses
4.1 Non-Operating and Operating Costs
4.1.1 Non-Operating Cost
4.1.2 Operating Cost
4.2 Concept of Cost Escapability
5 Determinants of Costs
5.1 Controllability of Costs
5.2 Break-Even Load Factor
5.3 Total Operating Cost and Unit Cost
5.4 Influence of Demand
5.5 Externally Determined Input Costs
5.5.1 Fuel Prices
5.5.2 Airport and En-Route Charges
5.6 Cost of Labour
5.7 Aircraft Type and Attributes
5.8. Network Characteristics
5.9 Economies of Scale, Density and Scope
6 Conclusions
Objectives and Core Topics
This paper aims to provide a comprehensive theoretical understanding of cost drivers within the airline industry, identifying the key determinants that influence financial performance and challenging airlines to master cost-related obstacles.
- Categorization of operating and non-operating expenses.
- Evaluation of cost controllability and management influence.
- Analysis of key performance metrics like the Break-Even Load Factor (BELF).
- Impact of external factors such as fuel prices and infrastructure charges.
- Strategic roles of economies of scale, density, and scope in airline economics.
Excerpt from the Book
4.2 Concept of Cost Escapability
The concept of cost escapability classifies and evaluates expenses from a timely and technical perspective. Therefore, any cost item is assessed whether it can be avoided or cancelled within a certain time frame. The result is the degree of esacapability and helps in making decisions in order to avoid and reduce costs. Surely, some costs can be avoided very shortly, while others can be hardly avoided and would need more time in advance, in this case the degree of escapability would be low. In the end, all costs are avoidable, it is just an issue of time. The degree is not only result of a time related component, additionally a technical factor is taken into account, because also size and nature of costs is decisive in order to assess the degree of escapability.
The way airlines classify costs regarding the concept differs, a widely used approach consists of a traditional accounting related categorization, in which costs are divided into direct- and indirect operating costs, followed by a classification if they are fixed or variable. The variable costs are those to be avoided short-dated. These costs are avoided if one or more flights are cancelled. Factors such as e.g. fuel, variable flight crew costs, ATC related fees or catering expenses can thus be avoided. Fixed costs are not avoidable in the short-run and do not depend on variations in flight scheduling. If changes within flight schedule occur, fixed costs remain practically the same.
Summary of Chapters
1. Executive Summary: Provides an overview of the paper's theoretical approach to identifying airline cost drivers and the necessity of effective costing strategies.
2 Introduction: Discusses the current market environment and the inherent challenges airlines face in maintaining profitability amidst fluctuating economic conditions.
3 The General Spreading of Costs: Examines the typical distribution of major expenses across European airlines, highlighting the dominance of fuel and labour costs.
4 Classification of Expenses: Defines the framework for distinguishing between operating and non-operating costs, including a detailed look at direct and indirect cost components.
5 Determinants of Costs: Explores the specific factors influencing airline costs, including management controllability, external inputs, and structural network impacts.
6 Conclusions: Summarizes the strategic importance of understanding cost structures and applying concepts like economies of scale and scope to enhance future airline performance.
Keywords
Airline Industry, Cost Drivers, Profitability, Operating Costs, Non-Operating Costs, Cost Escapability, Break-Even Load Factor, Fuel Prices, Labour Costs, Economies of Scale, Economies of Scope, Network Characteristics, Unit Costs, Management Control, Aviation Economics
Frequently Asked Questions
What is the primary focus of this assignment?
This paper examines the various cost drivers within the airline industry, aiming to provide a theoretical framework for understanding what influences airline expenses and how they can be managed effectively.
What are the central themes of the research?
The central themes include the classification of expenses, the concept of cost escapability, the influence of external factors like fuel and airport charges, and the strategic importance of economies of scale and scope.
What is the core research objective?
The objective is to gain a clear understanding of the challenges airlines face concerning costs and to identify the key determinants behind cost-related figures to assist in strategic decision-making.
Which methodologies are employed in this study?
The study utilizes a theoretical approach, incorporating industry examples, annual report data, and existing literature on aviation economics to analyze cost components and profitability.
What is addressed in the main body of the paper?
The main body covers the distribution of costs, the distinction between operating and non-operating expenses, and an in-depth analysis of specific cost determinants such as aircraft type, network design, and labour.
Which keywords best characterize the work?
Key terms include Airline Industry, Cost Drivers, Profitability, Cost Escapability, Break-Even Load Factor, and Economies of Scale.
What does the "Concept of Cost Escapability" entail?
It involves assessing cost items based on whether they can be avoided or cancelled within specific time frames, helping managers decide which costs can be reduced in the short-run versus the long-run.
How do "Economies of Scale" impact an airline?
Economies of scale occur when an airline's unit costs decrease due to higher output, such as through larger aircraft or more efficient network utilization.
- Quote paper
- Manuel Jacoby (Author), 2019, Air Carriers. Competitive Indicators and Drivers of the German Domestic Aviation Market, Munich, GRIN Verlag, https://www.grin.com/document/985629
