AM414 Global Airline Management

Airline Economics &

Pricing – Case Study &
Activity

Dr Arif Sikander
2020/2021 1
Scope

 Four main areas today:

 Aircraft
 Flight planning
 Economics
 Airline Overheads
 Target: find the seat-km cost for a new
route PER-MRU
2
Costs

 Indirect
OperatingOperating
costs (DOC)
costs
 station
Flight and ground
 crew,
 Head fuel, airport/enroute charges, insurance
Office
 Maintenance
ticketing
 Depreciation/leasing
marketing
 general/admin

3
Definitions

 ASK = available seat-kms = no. seats for sale *

stage distance [265*5895 = 1.56 mill ASK]
 ATK = available tonne-kms = no. tonnes
capacity * stage distance [16*5895= 94368 ATK]
 Block time = time for each stage from leaving
gate to arrive at gate [9.35 hrs]
 Load factor = pax/available seats (usually
averaged) [172/265 = 65%]
 RPK =no. pax * stage distance
4
Effect of stage length

 Large effect on fuel use, a/c utilisation,

crew utilisation, airport charges, mtce

5
Aircraft size

 Larger a/c have lower seat-km cost

6
Direct operating
costs

7
Crew costs

 Salaries,travelling, stopover costs,

allowances, superannuation
 IMPULSE 737 CAPTAIN = $A125,000 per year
 JETSTAR A320 CAPTAIN (same as impulse)
$A125,000
 VB 737-800 Captain $A175,000 per year
 Qantas Captain 737-800 $A200-240,000 per
year
 Cathay = $350k Philippine AL = $32k
8
Crew costs $A/block hour

 Captain
 B747 = $270 737-800 = $200
 varies by ac size / country / airline
 First Officer @ 2/3 Captain
 value of 2 man cockpits
 Purser @ $70
 Cabin Attendants @ $60

9
Flight Attendants (AUS)

 PASSENGERS FLIGHT ATTENDANTS

 various - 36 1 Brasilia
 37 - 72 2 BAe146-100
 73 - 108 3 737-300
 109 - 144 4 737-700
 145 - 180 5 737-800 (not A321)
 181 - 216 6
 Above 216 1 for each floor level exit
10
Fuel

 Consumption varies by aircraft

 engine (generation)
 age
 Effect of sector length
 weight, cruise conditions
 Fuel price
 varies by country, airport, contract

11
Fuel

 Barrel
 Up 68% from
= 42 USlow of $USor26.93
gallons 159 (9/03)
litres
 AUS 24 cpl
 $US45.50 a barrel ($A63.19)
 + 10 + 8 + 5 = 47 cpl major airports
Australian 40 cents/litre
 discount for large users
Add refining 10 cpl
 737-800
 Add refiners margin 8 cpl
 was $1506/block
Add transport hour
5-15 cpl fuel
 = 63+now $2019/block hour
cpl major airports
 = $5-20 per ticket @ 65% LF 1-4 hrs blocks

12
Fuel hedging

 Risk
QF - management
70% of contractstool to
locked
stabilise
in @prices
$32
per barrelare relatively unhedged
 Airlines
 51 cpl (less
 Establish discount)
a price position
 average price = of
offset exposure 54price
cpl fluctuations
 cf 63 current price
 managing commodity prices
 $US80/barrel
 93 cpl
 = $13-51 per ticket @ 65% LF 1-4 hrs blocks

13
Fuel hedging

 Jet
establish
fuel a price per gallon for fuel
 no perfect
price falls -hedge
airline pays the difference to the
 banking
over the partner
counter or exchange traded
 price rises - the banking partner pays the
derivatives
difference
 heating oiltoorthe airline
crude
 Over hedging is bad
 income statement volatility
 questions coy. ability

14
Airport charges

 SYD
Airport
Airport
 landing
  $3.78/tonne MTOW
RFF
 RFF
security
  $0.64/tonne MTOW
noise
 security
lighting
 $0.66/tonne MTOW
 terminal navaid
 noise
 excl ground handle
 variable; $320/B737
 terminal navaid 15
Enroute charges

 Charge
Based on payable
distance
to and
governments
weight for use of
their air space
 SYD-PER B737-800
 Airservices
 $A 1220 Australia
 En Route Charge
 Meteorological Service Charge

16
Airline ground costs

 Ground
Provisioning
handling
 turning
consumables
the aircraft
(food around
and drink),
at the sector
 destination
magazines, airport
movies
 baggage
 Varies handling, aircraft cleaning, toilets,
by airline/class
and refuelling
 Varies by length of journey
 $700-2000 for B737-800
 1 hr $5 drink
 Freight handling
 6 hr $50 cost paper, movies
meals, drinks,
 $100/tonne
LCC $0

17
Capital costs

 Three elements
Cost based on route block hours
cost
versusof aircraft’s
the fundsestimated
used to acquire
annual the aircraft
block hour
economic
utilisation depreciation of the aircraft (if
 owned)
B737-800 3500 hours
 cost of insurance
 Thai 747 5000 hours
 Price variable
 Saudi 747 3260 hours
 quantity
 timing
 export credits
18
Capital costs
Boeing ($US million) 25% discounts

 737-700
 47.0 - 55.0
 747-400
 185.0 - 211.0
 767-300ER
 115.5 - 127.5
 777-300ER
 203.5 - 231.5
 737-300 $9.2
 737-700 $28.8

19
Leasing

 Credit
Standard
riskagreement
airlines
 1.1%
1% of/aircraft
month value per month
 higherconditions
 Return for older a/c
 777-200
 full check C
 value US$100
 Leasing engines million
 lease
strong$1 mill/month
mtce control
 Supply
Top 12 and demand influences
lessors
 US lease
 2800 a/crates lowest
 youngest a/c 20
Maintenance

 Checks
Includes
 transit
routine(1st
maintenance
of day)
 pre
maintenance
flight checks
 daily
periodic overhauls and repairs
 weekly
 Basis
 A check
flight 500 hours (A320)
hour
 C check
flight 3500 hours or 15 months (A320)
cycle
 A1-A12
AD cycles
 time
21
Engine maintenance

 Varies
Engineby
maintenance
thrust rating
 CFM56-3B1
life limited parts
18,500lbs EGT margin 140 deg C
 fan shaft 20000-30000
 CFM56-3C1 EFC margin 50 deg C
23,500lbs EGT
 removal/shop
 Varies by use visits
 based on EFC
 short haul deteriorates faster
 EGT margin erosion
 as does high temperature
 Planning to match LLP and shop visits

22
Other maintenance

 Thrust
Wheelsreverser
 $A 40/FC
34/FC 737NG
 APU
Tyres
 $A 37/FC
11/FC 737NG
 Base
Brakes
maintenance
 $A 371/FH
73/FC 737NG
737NG
 LRU
Landing
and gear
pooling fee
 $A 235/FH
26/FC 737NG
 Engine 23
Indirect operating
costs

24
Indirect operating costs
(airline overheads)

 Costs = 50% indirect + 50% direct

 Station and ground expenses (12%)
 Passenger services (10%)
 Ticketing, sales, promotion (16%)
 General and administration (12%)
 Fundamental difference between full service
carriers and LCC (low cost carriers)
 Key part of airline image
25
Station and ground
expenses

 Staff at airport
 check-in outsourced?
 Lounges
 own or shared
 Computers
 Ground handling equipment
 outsource? airline sourced equipment
 Rents, phones
26
Passenger services

 Crew costs
 training
 hotels, deadheading
 Expenses due delayed and cancelled
flights
 Meals provided on ground for pax
 Passenger liability insurances

27
Ticketing, sales, promotion

 Advertising
Staff:
 QF
reservations,
$A4.3 mill ticketing,
cf Garudasales,
0.7 mill
promotion
cf.
 call centres,travel
 Promotional web system
 Commissions
 agents to agents
 journalists
general + over-ride
 sponsorship
global distribution systems

28
General and administrative

 Often low
 overheads tend to get allocated to individual
cost centres
 varies by airline
 Significant accounting
 ticket reconciliation
 IATA lodgement

29
Total operating cost

30
VB 737-800
block hour costs
 ,Capital Cost/Hour $3,626
 ,Maintenance Cost/Hour $830
 Fuel Cost/Hour $1,921
 ,Crew Cost/Hour $645
 ,Airport Cost/Hour $227
 ,Enroute Cost/Hour $284
 ,Provisioning Cost/Hour $669
 ,Ground Handling Cost/Hour $412
 Freight Handling Cost/Hour $23
 Total Cost/Hour $8,635
 Total Cost/Passenger-km,$0.097
31
PER-SYD return
VB 737-800 4.3 hrs each way

 Capital Cost/Route $31,181

 Maintenance Cost/Route $7,138
 Fuel Cost/Route $16,517
 Crew Cost/Route $5,547
 Airport Cost/Route $1,950
 Enroute Cost/Route $2,440
 Provisioning Cost/Route $5,750
 Ground Handling Cost/Route $3,540
 Freight Handling Cost/Route $200
 Total Cost/Route,$74,263
 Cost/Seat-km,$0.063
32
Seat/pax km

 Conversion
 Seat/km = ,$0.063
 load factor = 65%
 0.063/65% = 0.097
 Pax/km = ,$0.097
 Load factors - above 65% > spillage
 Asia Pacific Airlines (incl QF, SIN, ANZ)
 77.5%

33
 Find the seat-km
cost for a new route
PER-MRU

34
Seat-km cost for a new
route PER-MRU 6365/827 = 7.7

 Find aircraft type

 thin route
 BAe 146 / 737-300 / 737-800 / A320 / 747
 Route 5895 km
 ETOPS 138 min = 6365 km
 827 kph block
 what is block time?

35
Capital cost

 Capital costs
 $A73 million
 4000 block hours/year
 11%/year lease (0.92%/month)
 0.9% insurance/year
 what is capital cost/block hour?
 Maintenance = $A1230/block hour
73e6*.119/4000=2172

36
Fuel cost


 Crew Cost/Hour$960
4555 kg/hour
 Airport Cost/Hour $236
  0.8 Cost/Hour
Enroute kg/litre $1,821
  $A 0.65
Ground / litre
Handling Cost/Hour $283
 Freight Handling Cost/Hour $26
 what is fuel cost/block hour

5694 lit = $3701 * 7.7 = $28497

37
Catering cost

 218 seats
 65% LF
 $A50
 what is catering /block hour?

218 * 65% = 142 * 50 = 7100 / 7.7 = 922

38
A320 costs
 Capital Cost/Hour $A2,172
 Maintenance Cost/Hour $A1,230
 Fuel Cost/Hour $3,701
 Crew Cost/Hour $960
 Airport Cost/Hour $236
 Enroute Cost/Hour $1,821
 Provisioning Cost/Hour $922
 Ground Handling Cost/Hour $283
 Freight Handling Cost/Hour $26
 Total Cost/Hour $11,351
 Total Cost/Seat-km $0.063
39
Fare
 Total Cost/Seat-km $0.063
 Total Cost/Pax-km $0.097
 6395 km
 = $620 average one-way fare for breakeven
@65%
 plus indirect operating costs
 + 35% semi-full service carrier
 = $ 837 single $ 1674 return
 averaged across plane, all classes

40
Scope

 Four main areas today:

 Aircraft
 Flight planning
 Economics
 Airline Overheads
 Found the seat-km cost for a new route
PER-MRU, and average ticket price

41