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

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 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

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 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

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 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

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 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%)
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 “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

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 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”.

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 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)

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 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
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 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

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 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

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 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

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 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

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 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

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 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
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 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
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 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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