- INTRODUCTON
The airline industry delivers mode of transport through air, where passengers and freight can be transported utilizing aircraft. The most common planes are airplanes and helicopters. The origin of this industry is dated long ago around 400 B.C. until the first successive airplane in 1903. U.S. airline industry is organized into three modules commercial, general, and military. National and regional carriers are the main classification of commercial aviation. They focus on business operations commonly. General aviation compiles personal, business, and executive flights. The airline industry also focuses on services, marketing, and financial issues (Vasigh, 2017). This mode of transport can either be scheduled or nonscheduled. This industry has employed many people. Some of the jobs are service technicians, aircraft mechanics, engineers, agents, attendants, travel clerks, and ticket agents. This paper will examine different aspects of microeconomics in the airline industry. This will be achieved by looking at different data collected from various sources. The journal aims to discuss microeconomics alone (Vasigh, 2017). The airline industry as a whole is very complex, as there are dozens of airlines that one can choose from. This research will analyze the macro environment of the airline industry and look into the different factors that are in play.
- COST STRUCTURE
- Direct operating cost
- Maintenance Costs
Maintenance cost vary depending in the class of aircraft, for example jets, helicopters and turbo props. The cost may depend on the aircraft type, (e.g. jet vs. a long range). Regardless of the class or type, research shows that the maintenance cost ranges from 10 to 45 percent of the total operating expenses per year. The ten percent is still significant since the allocated total operating expenses are more than millions of dollars. The cost category alone catches the attention of executive management team. However, maintenance cost changes their behavior over period of time even at the flight hours. The behavior of maintenance cost is very tricky and deceiving issue in the Airline industry. The nature of the maintenance is also essential to attract much attention. The behavior of the maintenance cost is analyzed in order to know the progress of the expenditure of a certain type and class of the Airline.
- Fuel and Oil
Airline fuel is a kerosene-based fuel. It is derived from petroleum specifically crude oil. The cost of Airline fuels is affected by the price of crude oil. Airlines can hedge fuel prices, meaning constant price is agreed for a specific period of time. This creates a partial defense between price of the oil and its effect to the airline expenditures. Even if hedging is put in place, it affects the profitability of the Airline in huge margin (to be discussed later). In 2019, the expense of airline fuels for U.S. airlines both domestic and international routes increased with two dollars per gallon. For the last 15 years the cost has been volatile. In 2014 the cost was almost $4 per gallon and it has fallen to almost $2 per gallon in 2019. Jet fuel is the most used Airline fuel. Fuel and oil cost represent between 20 and 30 percent of airlines total expenditures. This means than any change in the price will affect the financial position of airlines.
- Landing fees
Landing fees are charges that are paid by an airline to the airport company for landing. Landing fees depend on the airport and airport management. Congested airports charge highly because slots are held by airline able to charge high prices due to supply and demand. Less congested airports charge less because demand is not high. The size (Area) and weight of the aircraft determines the cost of landing fee. The fees range from $100 to $500. Fees may be waived if the aircraft is refueling at the airport. The fees are used to maintain runways and airport building.
- Crew Expenses
On average, crew expenses take around one-third of the total airline cost. Crew expenses involve all cost and expenses incurred by Service Providers in providing the Airline and satisfaction to its customers. Crew expenses include salary, bonuses, taxes, insurances and employee benefits as well as training cost. In U.S. about $45 billion is used in Crew expenses every year.
- Passenger and Commission of Cargo
The number of passengers in airline industry has increased over the last 15 years. The passengers means the one who had flight tickets with a commercial airlines. There are several factors that have contributed to the growth of air travels. First, increase in low-cost airlines, growth of middle class in U.S. and the growth of infrastructure in airports hence increasing carrying capacity. Cargo planes also have dominated the expenses of the traveling cost. Loading and offloading cargos incurs some expenses to the big share of cost in airline industries. In 2019, Passenger and Cargo cost represented 5 percent of the allocated expenses.
- Passenger Related Costs
They are several cost customers impose to airline industry both when they are onboard and off board. The most common service when a passenger is onboard is in-flight meal. The meals include foods and beverages. They are prepared before the take offs. The meals vary in quality and quantity depending on different airline companies and classes of travel. In U.S. meals may be free or of charge depending on the Class Airline one has boarded. This may depend on the airline companies involved. The cost and availability of meals in U.S. airlines has changed in the recent years. Financial pressure have forced the airlines to change the meals of abandon the completely.
- Indirect operating cost
- Aircraft Standing Charges
Aircrafts can be bought through leasing agreement and loans. In all cases, regular payment for is involved – loan repayment or leasing charges payments – all these charges are indirect operating cost. In smaller aircraft fleets, the spares cost higher that for the large fleets. Most of the standing charges are linked directly to the purchasing price of the aircraft. If the aircraft was used before, the depreciation period is very short. For a new aircraft, due to risk premature technicalities and economic obsolesce the same applies. The deals offered to a used airline and a new airline are totally different because they are affected by the depreciation rates. Generally, most insurances are based on the aircraft issued value under a certain percentage. The safety record and experienced level of the aircraft affects insured value greatly. A new aircraft cannot establish a premium valued insurance until it attains a safety record. High premium are charged when aircrafts fly to areas with wars (War zones).
- Flight Crew Pay
There is always a need for the third and even the fourth member in a crew when aircraft is to travel for a long distance. Other factors that affect crew numbers require schedules. These factors include crew work rule, productivity and scheduling. Crew numbers are affected by fleets’ size. In some airlines crew salaries are dictated by the productivity formulae of a certain fleets. Pilots of larger aircrafts will get higher salaries.
- OVERHEAD
The overhead costs and expenses are incurred for even longer periods. These cost may include sales, administration, accounts, general managements, employments and HR departments as well as property cost among others. Relatively, these cost are not affected by either type of Aircraft used or the level of flying operations. However, the number of customers can be increased to rise additional staff on the revenue accounts.
- EFFECTS OF THE AIRLINE ENVIRONMENT ON AIRCRAFT COSTS
- Utilization
To achieve lower unit cost, fixed costs can be distributed over longer flying hours. The best opportunity to maximize utilization is provision of Long-haul operations in an aircraft. This is because the smaller the turnaround periods are caused by the high the utilization of aircraft. Turnarounds are obviously unproductive. Therefore, fewer turnarounds would lead to lower costs for the airline. Today’s modern aircraft are capable of increasing fleet utilization as they are becoming more reliable in terms of operational efficiency and economy. With regard to short distance travels, fleet utilization could be improved if the turnarounds are kept, as short as possible. However, certain commercial factors inhibit the airline’s ability to maximize its fleet utilization. There are many markets where passengers are extremely reluctant to fly during particular times of the day, as this has the effect of shortening the commercial day.
- Sector Length
Short distance operations have a higher cost than long distance operations. A number of reasons explains why it is expensive to have a short-haul aircraft. Short-haul operations must pay a higher proportion of landing fees and handling fees; a short-haul operation, by its nature; causes more periods of inefficient aircraft operation, particularly during approach and take-off periods; Fuel consumption is higher at low levels of operation. Therefore, fuel costs are proportionately higher for a short-haul operation, than for a medium or long-haul ones; in short-haul operations, there are more aircraft turnaround periods. This results in lower aircraft utilization, and lower productivity levels. A short-haul operation incurs higher maintenance costs. This is directly related to the need to overhaul the cycle-related components, including; engine parts and under-carriage units.
- Fleet size
Cost levels are directly related to the number and type of aircraft, in a given fleet. As previously discussed, an airline with a small fleet will proportionally incur higher costs in certain areas, in terms of spares and crew; than an airline with a larger fleet. There are also other costs that may be related to having a small fleet. The smaller airlines are expected to have an adequate provision for standby capacity or schedule recovery. Furthermore, in-house functions may not be conducted by small airlines. They will have to purchase these services from external agencies, usually at very high costs.
- Labor Cost
Local labor costs have an impact on costs such as crews, maintenance and handling costs. Operations in countries where there are lower wages, would translate to significant cost reductions. However, this advantage might be counter-balanced by losses which may arise from poor labor efficiencies in certain functions, such as; maintenance and handling
- PROFITABILITY ANALYSIS
- CONCLUSION
References
Goetz, A. R., & Sutton, C. J. (2017). US Airline Industry. Low Cost Carriers:” Emergence, Expansion and Evolution, 199.
Gupta, H. (2018). Evaluating service quality of airline industry using hybrid best worst method and VIKOR. Journal of Air Transport Management, 68, 35-47.
Hussain, R., & Phau, I. (2016). The mediating role of customer satisfaction: evidence from the airline industry. Asia Pacific Journal of Marketing and Logistics.
Saleem, M. A., Zahra, S., & Yaseen, A. (2017). Impact of service quality and trust on repurchase intentions–the case of Pakistan airline industry. Asia Pacific Journal of Marketing and Logistics.
Shaw, S. (2016). Airline marketing and management. Routledge.
Sinha, D. (2019). Deregulation and liberalization of the airline industry: Asia, Europe, North America and Oceania. Routledge.
Williams, G. (2017). The airline industry and the impact of deregulation. Routledge.
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