Lecture # 08

ADVANCE AVIATION ECONOMICS

 Today’s Agenda

The Economics of Passenger Charter

 Introduction

Charter or non-scheduled airlines had been operating low-

cost and low fare passenger services very successfully in some
parts of the world long before the emergence of the so-called
low-cost airlines.
They came into being in response to a particular regulatory
environment prevailing in the 1960s and 1970s.
They expanded very rapidly especially on holiday routes
between Northern and Mediterranean Europe, on trans-
Atlantic routes and later on some other routes such as North
America to the Caribbean.
In other regions of the world such as Asia or South America
passenger charters were less developed.
in the mid-2000s around 11–12 per cent of the
world’s inter-national passenger traffic, measured in
passenger-kms, was being carried on charter flights.
one third, of these charters was being operated by
scheduled network airlines such as Austrian, Finn air
or Tunis Air.
The economics of the charter model enabled charter
operators to sell seats on particular holiday routes to
tour operators or travel agents at 40 to 70 per cent
lower than the cheapest scheduled fare.
Reasons of Charter Airlines early success

First
Charter flights can bypass both the tight bilateral
regulations relating to scheduled flights and also the
IATA controls on air fares.
Second
the ability of charter airlines to offer significantly lower
fares than the scheduled net-work carriers, because of
their lower unit costs
The nature of the charter product

Two types of charter flights have emerged,

1. Ad hoc charters:
one-off flights where aircraft are chartered for a
specific event such as a sports fixture, a religious
festival or a sales promotion.
2. Series charters:
These charters involve multiple flights which may be
on behalf of tour operators, oil companies, the military
or others requiring the regular systematic transfer of
people.
Inclusive tour charters (ITCs)

These are where the whole of an aircraft is chartered by

one or more tour operators who combine the round-
trip seats with hotel or other accommodation into
‘pack-age’ holidays.
The passenger buys a holiday package from a travel
agent or tour operator at a single price and is unaware
of the cost of travel within that total price.
Some charter packages may involve minimal
accommodation or may include car hire, boat hire,
cruises, camping or other services in addition to or
instead of hotel accommodation
 Vertical integration – horizontal consolidation

Vertical integration
Definition
Vertical integration is the business arrangement in which a
company controls different stages along the supply chain. Instead
of relying on external suppliers, the company strives to bring
processes in-house to have better control over the production
process.

Vertical Integration by Charter Airlines

Charter industry has a strong tendency towards vertical integration
between travel companies or tour operators and charter airlines
and in some cases with hotels or hotel groups as well.
Horizontal Consolidation
Horizontal consolidation or horizontal integration are terms
used to describe the process of merging the same type of
business or product line at the same stage of production in a
single industry.

Horizontal Integration by Charter Airlines

Large leisure travel companies could expand was through
cross-border acquisitions
 Cost Advantages of Charter Operations

Direct operating costs

1. Flight operations
 It includes flight and cabin crew costs, fuel and airport and en-route
charges, insurance and depreciation.
 Here charter operators may enjoy some limited advantages.
 charter flight crews, receive lower salaries
 Pilots salaries depend on their availability, for instance shortage of
pilots may lead to higher salaries.
 cabin staff will be seasonally employed and will not be a cost burden
for the rest of the year.
 Fuel costs should be similar for both charter and scheduled carriers if
flying the same aircraft on the same route. In this case the charters may
have a cost disadvantage
En-route navigation charges will be identical when charter
and scheduled airlines are operating the same aircraft. On the
other hand, charter operators may pay lower airport charges by
using cheaper airports.
Maintenance costs for both charter and scheduled operations
would be broadly similar if using the same aircraft on the same
routes.
Insurance costs are only a very small part of total costs but large
well-established operators (whether scheduled or charter) would
both tend to benefit from lower rates.
Depreciation per hour, or lease costs per hour for leased
aircraft, would also be the same if both charter and scheduled
airlines achieved the same annual utilization on their aircraft.
Summary
A charter airline flying on the London–Barcelona market or on other
short-haul markets in the Europe-Mediterranean region can achieve some
limited direct cost economies compared to a scheduled operator.
Through higher daily aircraft utilization it can reduce its hourly
depreciation or lease costs.
By using fewer cabin crew and paying them less it can save costs here too,
though this is a small cost item.
If it can use cheaper airports at one or both ends of the route it can reduce
the level of airport charges by half or more.
Since on short-haul routes airport charges may represent 8–15 per cent of
total costs, this cost saving can be important.
These are the same areas in which low cost operators save costs. But
overall, the charter airlines’ savings on direct costs are limited.
Indirect operating costs
The differences in direct operating costs between
European network carriers and charters have been
highlighted above. Such differences are not large.
It is in the area of indirect operating costs that the costs
of charter and scheduled services begin to diverge most
markedly.
These are:
 station and ground expenses,
 passenger service costs,
 ticketing,
 sales and promotion costs
 costs of administration.
Station cost
 Charter airlines can save money by sub-contracting out most of
the aircraft, passenger and baggage handling activities at their
destination airports.
Ticketing, sales and promotion
 the seats that the charter airline offers in any market have been
chartered and paid for by tour operators and travel companies.
 Passenger service costs
 A marked saving in passenger service costs arises because it is
not necessary for charter airlines to offer a business class cabin
with the more expensive business class catering, newspapers,
magazines, etc.
Charter airlines tend to have very much lower general and
administrative costs because they require fewer
administrative and accounting staff.
Many functions which are crucial to scheduled airlines and
absorb significant resources either do not exist within a
charter airline at all or, because of the different nature of
charter operations, require relatively few staff.
A charter airline, for example, does not need a large
planning department with forecasting and yield
management staff or large numbers of accountants to sort
out revenue and sales accounting and inter-airline ticketing
debts.
Summary
 Charter airlines’ indirect costs may be up to half or less than those of
network airlines operating on the same routes with the same aircraft.
Major savings in indirect costs, which in short-haul operations may
represent about one third of total costs, together with slightly lower
direct costs, which are two-thirds of total costs, suggest that flying
similar aircraft a non-scheduled operator may have total round-trip
costs between 20 and 25 per cent lower than those of a scheduled
operator on the same route.
However, the initial 20–25 per cent operating cost advantage is
magnified by two key elements in the economics of non-scheduled air
services:
 high seating densities and very high load factors.
These are two advantages also enjoyed by low-cost airlines.