Airline Operating Costs
Dr. Peter Belobaba
Istanbul Technical University Network, Fleet and Schedule
Air Transportation Management Strategic Planning
M.Sc. Program Module 12: 30 March 2016
Lecture Outline
Cost Categorization Schemes
Administrative cost allocation
Functional cost categories and typical breakdown
Flight Operating Costs
Comparisons across aircraft types
Total costs vs. unit costs
Comparisons across airlines
Impacts of stage length on unit costs
Unit Cost Trends
Fuel, labor and non-labor unit costs
Aircraft and Employee Productivity
2
US DOT Form 41 Database
Form 41 contains traffic, financial, and operating cost
data reported to the DOT by US Major airlines
Data is reported and published quarterly for most tables
Detail of reporting differs for different expense categories
Aircraft operating expenses by aircraft type and region of operation
Other expenses more difficult to allocate by aircraft type
Cost categorization schemes differ, but all are
affected by accounting and allocation assumptions
Administrative cost categories – financial reports
Functional cost categories – airline cost and productivity
comparisons
3
Administrative Cost Breakdown US
Airlines 2013
AMORTIZATION OTHER
0.7% 3.5%
DEPRECIATION
4.7%
RENTALS
LANDING_FEES 7.0%
2.1%
SALARIES_BENEFITS
29.0%
SERVICES_TOTAL
15.9%
MATERIALS_TOTAL
37.1%
Source: US DOT Form 41 Financial Reports
4
Functional Cost Categories
Aircraft operating costs
Expenses associated with flying aircraft, also referred to as “Direct
Operating Costs” (DOC)
Aircraft servicing costs
Handling aircraft on the ground, includes landing fees
Traffic service costs
Processing passengers, baggage and cargo at airports
Passenger service costs
Meals, flight attendants, in-flight services
Promotion and Sales costs
Airline reservations and ticket offices, travel agency commissions
Other costs, including:
General and administrative expense
Depreciation and amortization
5
Functional Cost Breakdown US
Airlines 2013
ADMINISTRATIVE DEPREC AND
8.3% AMORTIZATION
ADVERTISING 0.6% Fuel costs comprised
RESERVATION 0.9% 34.6% of total; more
SALES than half of Aircraft
4.8%
Operating Costs
TRAFFIC SERVICE
10.6%
AIRCRAFT SERVICE AIRCRAFT
6.1% OPERATING COSTS
61.9%
PASSENGER
SERVICE
6.9%
Source: US DOT Form 41 Financial Reports
6
Typical Costs by Functional Category
Aircraft Operating Costs
Per Block Hour (for example, $4500 for 150-seat A320 in 2013)
Aircraft Servicing Costs
Per Aircraft Departure (average $1200)
Traffic Servicing Costs
Per Enplaned Passenger (average $20)
Passenger Servicing Costs
Per RPM (average $0.013)
Reservations and Sales Costs
% of Total Revenue (average 7%)
Other Indirect and System Overhead Costs
% of Total Operating Expense (average 12%)
7
“Back of the Envelope” Break Even Fare
Boston-Orlando A320 Flight 80% LF
AOC 3.0 block hours @ $4500 $ 13500
Aircraft Servicing (1 departure @ $1200) $ 1200
Traffic Servicing (120 pax @ $20) $ 2400
Pax Servicing (132000 RPM @ $0.013) $ 1716
System Overhead Costs (12% of sub-total) $ 2566
Sub-total $ 21382
Break Even Net Revenue per Pax (120) $ 178
Distribution and Sales Costs (7% of fare) $ 13
Break Even Average Fare $ 191
8
Airline Operating Cost Breakdown
Adapted from Form 41, used by Boeing, MIT (and
Aviation Daily) for more detailed comparisons
FLIGHT (DIRECT) OPERATING COSTS (DOC) = 50%
All costs related to aircraft flying operations
Include pilots, fuel, maintenance, and aircraft ownership
GROUND OPERATING COSTS = 30%
Servicing of passengers and aircraft at airport stations
Includes aircraft landing fees and reservations/sales charges
SYSTEM OPERATING COSTS = 20%
Marketing, administrative and general overhead items
Includes in-flight services and ground equipment ownership
Percentages shown reflect historical “rules of
thumb”.
9
World Airline Operating Cost Breakdown
ICAO OPERATING COST CATEGORIES 1992 2002 2005
Direct Aircraft Operating Costs 44.0 49.1 54.0
Flight Operations (Total) 26.1 30.7 37.7
Flight Crew 7.2 9.0 7.8
Fuel and Oil 12.2 13.0 21.9
Other 6.7 8.7 8.0
Maintenance and Overhaul 10.9 11.3 10.2
Depreciation and Amortization 7.0 7.1 6.1
Indirect Operating Costs 56.0 50.9 46.0
User charges and station expenses (Total) 17.2 17.0 16.2
Landing and associated airport charges 3.9 4.0 3.8
Other 13.3 13.0 12.4
Passenger services 10.8 10.3 9.3
Ticketing, sales and promotion 16.4 10.7 9.1
General, administrative and other 11.6 12.9 11.4
Source: ICAO, Belobaba et al (2009)
10
Flight Operating Costs
Flight operating costs (FOC) by aircraft type:
Reflect an average allocation of system-wide costs per block
hour, as reported by airlines for each aircraft type
Can be affected by specific airline network or operational patterns
Collected by US DOT as Form 41 operating data from airlines
Typical breakdown of FOC for US carrier:
CREW: Pilot wages and benefits
FUEL: Easiest to allocate and most clearly variable cost
MAINTENANCE: Direct airframe and engine maintenance cost,
plus “burden” or overhead (hangars and spare parts inventory)
OWNERSHIP: Depreciation, leasing costs and insurance
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Example: Airbus 320 (avg. 150 seats)
Costs per block-hour 2005 2007 2013
CREW $ 470 $ 454 $ 652
FUEL $1327 $1713 $2385
MAINTENANCE $ 524 $ 576 $ 716
OWNERSHIP $ 570 $ 570 $ 726
TOTAL FOC $2891 $3313 $4567
Based on reported average stage length and block-hr
daily utilization (weighted averages):
Different stage lengths and utilization by different airlines result in
substantial variations in block-hour costs for same aircraft type
Also, differences in crew (union contracts, seniority),
maintenance (wage rates), and ownership costs (age of a/c)
Source: US DOT Form 41 Statistics
12
A320 Aircraft Operating Costs 2013
Form 41 System Data
CREW COST FUEL/OIL MAINTENANCE OWNERSHIP TOTAL AOC
UNITED $793 $2,407 $624 $1,079 $4,903
DELTA $964 $2,254 $916 $536 $4,670
US AIRWAYS $431 $2,375 $1,014 $686 $4,506
VIRGIN AMERICA $419 $2,476 $362 $1,163 $4,420
FRONTIER $449 $2,488 $477 $827 $4,241
JETBLUE $665 $2,417 $700 $451 $4,233
SPIRIT $518 $2,233 $381 $921 $4,053
LCCs report 2% to 17% lower AOC per block hour than NLCs
Source: US DOT Form 41 Statistics
13
Comparison of FOC Across Aircraft
Types
All else equal, larger aircraft should have higher flight
operating cost per hour, lower unit cost per ASM:
There exist some clear economies of aircraft size (e.g., two pilots
for 100 and 400 seat aircraft, although paid at different rates)
Also economies of stage length, as fixed costs of taxi, take-off
and landing are spread over longer flight distance
But, many other factors distort cost comparisons:
Pilots paid more for larger aircraft that fly international routes
Newer technology engines are more efficient, even on small
planes
Reported depreciation costs are subject to accounting
procedures
Aircraft utilization rates affect allocation of costs per block-hour
14
FOC Selected Aircraft Types 2013
Form 41 System Data
Aircraft Average AOC/ AOC/ Average Utilization
Stage (block-
Type Seats Block-hr Seat-hr
(mi.) hrs/day)
E190 100 $3,612 $36.12 599 9.4
737-700 139 $4,358 $30.63 762 10.1
A320 150 $4,479 $29.86 1181 11.5
757-200 177 $5,839 $32.99 1523 10.1
A330-200 272 $8,795 $32.33 3645 14.6
747-400 375 $15,153 $40.41 4861 11.4
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Total Operating Costs vs. Unit Costs
Total operating costs increase with size of airline,
aircraft size and stage length
Increased output (ASMs) leads to higher total operating costs
Bigger aircraft cost more to operate (per block hour, per flight)
Longer stage length means more fuel burned, more pilot and
flight attendant hours
But, due to high fixed costs, airlines should have
economies of scale in unit costs (in theory):
Larger aircraft should have lower operating costs per seat and
per seat-mile (ASM)
Longer stage lengths should lead to lower unit costs
Larger airlines with bigger aircraft flying longer stage
lengths should have lowest unit costs.
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Impacts of Stage Length on Unit Costs
Industry unit cost curve is downward sloping with
respect to the average stage length.
A large proportion of the overall cost base is fixed, at
least in the short-term
Ownership costs, maintenance and ground infrastructure,
reservations/sales and overhead
Contributing factors: With longer stage lengths
All fixed costs can be spread over more ASMs
Shorter turn times relative to block times allow greater aircraft and
crew utilization
Average block speed increases and fuel burn decreases with
more time spent at cruise altitude
Cycle-related maintenance requirements are reduced
17
2012 Unit Cost (CASK)
Selected Non-US Airlines
Unit Cost vs Average Sector Length, 2012
NLCs
LCCs
ULCCs
Source: Emirates Open Sky 2/14 , CAPA Data
18
CASM vs. Stage Length US Airlines 2014
Unit Cost vs Stage Length, 2014
10
9.5
8.5 NLCs
CASM ex Fuel & Transport
7.5
6.5
LCCs
6
5.5
5
ULCCs
0 200 400 600 800 1000 1200 1400 1600 1800 2000
Average Stage Length
Allegiant Spirit Frontier United Delta American JetBlue Southwest Virgin America Alaska
Source: MIT Airline Data Project
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CASM Breakdown
CASM can be broken down as follows:
Transport Related expenses excluded for comparisons
Total CASM
Transport Related
Fuel
Labor CASM
CASM ex.
Transport and
Fuel Non-labor CASM
1 2 3 4 5
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Fuel, Labor and Non-Labor Costs
Compare macro trends over time and across airlines
Fuel Costs have been increasing to over 30%
Most “variable cost”, typically driven by global oil prices and factors
outside of airline control
Labor Costs have been decreasing in share
With greater emphasis on cost re-structuring and increasing labor
productivity
Significant cost advantages for newer airlines and LCCs
Non-labor Costs represent structural differences
In networks, product mix and operations
21
Operating Cost Breakdown by Region
• Fuel component has increased for all regions, while labor
percentages have declined.
• Labor share dropped the most for North America airlines.
Source: IATA
22
US Airlines CASM* Components
1995-2014
16.00
14.00
12.00
36.8%
10.00
TOTAL CASM (cents)
8.00 NON-LABOR
LABOR
29.8% FUEL
6.00
4.00
33.4%
2.00
0.00
Source: MIT Airline Data Project * CASM excl. Transp. Related Expenses
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US Airlines CASM* Components
1995-2014
6.00
5.00
4.00
CASM (cents)
3.00 FUEL
LABOR
NON-LABOR
2.00
1.00
0.00
Source: MIT Airline Data Project * CASM excl. Transp. Related Expenses
24
Aircraft Productivity
Aircraft “utilization” measured in block-hours/day:
Block hours begin at door close (blocks away from wheels) to
door open (blocks under wheels)
Gate-to-gate time, including ground taxi times
Productivity measured in ASMs per aircraft per day:
= (# departures) X (average stage length) X (# seats)
Increased aircraft productivity achieved with:
More flight departures per day, either through shorter turnaround
(ground) times or off-peak departure times
Longer stage lengths (average stage length is positively
correlated with increased aircraft utilization = block hours per day)
More seats in same aircraft type (no first class seating and/or
tighter “seat pitch”)
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Aircraft Productivity
Stage Length vs. Departures per Day
1,400 6.00
1,300 5.50
1,200 5.00
Average Departures per Day per Aircraft
Average Stage Length (mi)
1,100 4.50
1,000 4.00 Ave Stage Length
Departures/day
900 3.50
800 3.00
700 2.50
600 2.00
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: MIT Airline Data Project
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Aircraft Utilization
Block Hours per Aircraft per Day
14.00
12.00
+25%
10.00
Block Hours per Aircraft per Day
8.00
NLC Narrow body
LCC Narrrow body
6.00
NLC Wide body
4.00
2.00
Source: MIT Airline Data Project
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A320 Productivity Comparison 2013
Form 41 System Data
TOTAL AOC Stage Number Departures Block Hours ASMs AOC per
PER BLK-HR Length (mi) of Seats per Day per Day per Day ASM
UNITED $4,903 1165 142 4.6 10.2 760,666 $0.066
DELTA $4,670 888 150 5.3 9.6 702,985 $0.064
US AIRWAYS $4,506 1090 150 4.9 12.4 796,868 $0.070
VIRGIN AMERICA $4,420 1575 147 4.6 12.5 1,071,914 $0.052
FRONTIER $4,241 1057 168 5 10.1 894,791 $0.048
JETBLUE $4,233 1361 150 5.1 12.9 1,042,392 $0.052
SPIRIT $4,053 968 178 6.9 12.9 1,193,464 $0.044
LCCs generate 20-60% more output than NLCs with same aircraft type.
Source: US DOT Form 41 Statistics
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Employee Productivity
Measured in ASMs per employee per period
As with aircraft, employee productivity should be
higher with:
Longer stage lengths (amount of aircraft and traffic servicing for
each flight departure not proportional to stage length)
Larger aircraft sizes (economies of scale in labor required per
seat for each flight departure)
Increased aircraft productivity due to shorter turnaround times
(more ASMs generated by aircraft contribute to positive employee
productivity measures)
Yet, network airlines with long stage lengths and
large aircraft have lower employee productivity rates
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ASM per Employee
3.50
+60%
3.00
2.50 +35%
2.00
NLC
1.50 LCC
1.00
0.50
Source: MIT Airline Data Project
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NLC employment down by 36% since
2000, a loss of 150,000 jobs
450,000
400,000
350,000
300,000
250,000
NLC
LCC
200,000
OTHER
150,000
100,000
50,000
Source: MIT Airline Data Project
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Concluding Thoughts
Legacy carriers made dramatic progress in cost
cutting and productivity improvement 2001-2007
Labor and distribution costs saw biggest reductions
Productivity improvements through network shifts, work rules and
use of IT for passenger processing
Not much room for further cost reductions
Labor will push to recover wage and benefit concessions
Distribution costs can’t go much lower
Aging fleets will push up maintenance costs
Recent return to industry profitability has relied
heavily on demand growth and revenue generation
Capacity discipline – higher yields and higher load factors
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