Airline Operating Costs

By Peter Horder, Senior Vice President

SH&E Ltd
Prepared for:

MANAGING AIRCRAFT MAINTENANCE COSTS Conference

Brussels, 22 January 2003

 Agenda

Introduction

Current Airline Environment

Airline Cost Elements

Indirect and Direct Operating Costs

Overhead Cost Control

Balance Sheet Effects

Reference Sources

Conclusions

1
 Introduction

Current airline environment

Safety considerations and costs

– Security restrictions
– Insurance implications

Cost reduction versus revenue increases

2
 Airline Economic Affects from 11 September

SCHEDULED CARRIERS Low Cost Carriers

! Frequency ! Fares
! Routes " Traffic
! Traffic
" Revenues
! Revenues
" Profitability
" Fares ?

! Profitability

Low Cost Carriers have been clear winners since 2001

3
 Airline 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
4
 Operating Cost Comparisons Per ASK

Britannia BY
Air 2000 DP
Monarch ZB

Thai Airways TG

(EUR) Operating Cost Per ASK Qantas QF

BA
British Airways
Emirates EK
0.200
CityFlyer Express FD
Crossair LX
0.175 Czech OK
Eurowings EW
Luxair LG
FD LOT LO
0.150 Maersk Air VB
Portugalia NI
LX
0.125 VB
COE NI
EasyJet U2

0.100 Go GO
EW BA Ryanair FR
U2
OK
0.075 LO QF EK
TV TG
GO
FR BY
0.050
DP ZB

0.025

0.000
0 500 1,000 1,500 2,000 2,500 3,000

Source SH&E, AEA, IATA, Form 41 Average Stage Length (Km)

5
 Total Operating Costs

Admin & Other

12%
Ticketing, Sales
& Promotion Flight Ops
14% 28%

Passenger services
11%

Depreciation
6%
En-Route/Airport Maintenance
18% 11%

Source (ICAO 2001 World Average)

6
 Some ICAO and F41 Cost Breakdown Percentages

100
80

60

40

20

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et
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41
di

JA
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B

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C
General & Admin
Sales & Promotion
Passenger Service
User Charges
Depreciation & Amortisation
Maintenance
7 Flight Operations
 Labour Productivity has an Impact on Costs

485
400

350

300
Revenue per Employee (US$ 000)

250

200

150

100

50

FR SQ LH CX AC BA SK GO KL U2 QF EK AA CO AF GF IB TG TP SV MH IR UL

8
Source: Annual Accounts, Form 41, AAPA 2001
 Fuel Cost per ASK

1.6
LA

1.5 AC

1.4
Fuel Cost per ASK (US cents)

1.3
U2
SK AF KL
1.2 MH CX

1.1 LH
CO SQ
GF
1.0
IB BA AI
FR AA
UL
0.9
QF
IR GO
0.8 TP EK

0.7
500 1,000 1,500 2,000 2,500 3,000 3,500 4,000
Average Stage Length (KM)
Source SH&E 2001
9
 Maintenance and Overhaul Costs as
a Percentage of Total Operating Costs

Percentage
of Total
18
15.71
16
14.42 14.55
13.88 13.9
14

12 11.03 11.06
10.10
10
8.0
8
6.06
6 5.04

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an

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ai
ay

Fl
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ir

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10 Source: SH&E, ICAO 2000 Financial Data

 Maintenance Cost per Flight hour

1600

1400
Maintenance Cost per Flight Hour (US$)

1200

1000

800

600

400

200

0
NH JL CX TP BA TG KL GF GO SQ IB AI AC U2 SK AF CO AA FR EK

Source: Annual Accounts, Form 41, AAPA 2001

11
 Cost of Sales per Passenger

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

45

40

35
Cost of Sales per Passenger (US$)

30

25

20

15

10

0
BA NH EK SQ QF SV KL TP AF LH IB CO GF AC TG AA SK GO CX U2 FR

Source: Annual Accounts, Form 41, AAPA 2001

12
 Marketing Expense as a Percentage of Sales

18%

16%

14%
Marketing Expense as % of Revenue

12%

10%

8%

6%

4%

2%

0%
IR TP SV EK BA JL QF TG AF KL GO U2 SK CO FR IB GF SQ

13
Source: Annual Accounts, Form 41, AAPA 2001
 Passenger Service Cost per Passenger

35

30
Passenger Service per Passenger (US$)

25

20

15

10

0
JL TP KE TG EK SQ GF AC AI GO AA SK CO AF U2 IR

14 Source: Annual Accounts, Form 41, AAPA 2001

 Where Low Cost Carriers Achieve Advantage

LCC cost advantage

Cost per Available Seat KM
300 100% 30% Total crew cost
90%
250
80% 5% Landing & handling
EUR per 1000 ASK

200 70% charges

60%
150 50% 50% Passenger related
40%
100
30% 70% Sales cost
50 20%
10% 60% Others (overheads)
-
300 400 500 600 700 800 900 1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2000
0%
Sector length
European Scheduled LCC Average Diff %

Focus on sector lengths up to, say, 1,500 km driven by

reducing cost advantage
increasing revenue need
decreasing acceptance of lack of service
15
 Direct Operating Costs

Commissions Insurances Lease Charges

Handling and dispatch fees 5% 1% 12%
11%
Navigation
fees 5% Flight Crew
12%
Airport
fees 4%

Maintenance
Fuel and oil 15%
27%
Passenger Service Costs
8%

Source ICAO 2001

16
 Indirect Operating Costs

Other Administration Costs

2% 6%

Marketing Costs
Depreciation and Interest 34%
46% Staff Costs
12%

17
 Cost Allocation by Network

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

18
 Cost Allocation by Route

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

19
 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

20
 Cost 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
21
 Operating 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

22
 Financial 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

23
 Direct 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

24
 Comparison/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

25
Airline Operating Costs

By Peter Horder, Senior Vice President

SH&E Ltd
Prepared for:

MANAGING AIRCRAFT MAINTENANCE COSTS Conference

Brussels, 22 January 2003