Airline Economics Consolidated

AIR TRANSPORT INDUSTRY

 Consists of producers and consumers  Manufacturers of aircrafts and aircraft-

related products are identified as producers  Airlines consist of the major airlines, regional airlines, charter airlines, air cargo carriers, air taxi operators and general aviation  Unique in that it is both a producer and consumer

 It avails of the products and services of

manufacturers to provide for the final consumers  Airlines are not allowed to operate without sufficient insurance covers for the third party liability  The regulatory powers of governments have a very significant influence in the Air Transport Industry

 The ultimate industry players are the

consumers –the air travelers and the air shippers

Total Performance System (THE IPO OF PRODUCTION) *The Airline Industry is still an industry that is governed by the general principles of production and the structure and operational efficiency that governs the viability of the business enterprise

Factors of Production  MAN  MONEY  MACHINES  MATERIALS

Machines  The most capital-intensive  The entire question of profitability and

continued existence of the airlines lies on the correct choice of aircraft

Men  Airline human resources have

experienced the most turbulent transportation within the airline industry with both material and psychological impact on the global economy

Money  The proliferation of venture capitalists

ensures the free flow of money for as long as the venture is viable

Materials  The acquisition and utilization of

materials have also become critical in the Airline Industry

Methods  A 5th M has become imperative an input

of production for the airline industry  The airline today has become fully weband computer-based in all aspects of its operation from purchasing to flying

Airline Accounting Structure  The final measure of an airline’s success

is in the bottom line and how it contributes to the appreciation of the airline’s value in terms of shareholders’ stock price

 Revenue  Operating costs  Core vs. Diversified Airline  Aircraft ownership  ]Insurance  Space Inventory  Cockpit and Cabin Crew Pay

 Allowances, Benefits and Company

Configuration  Airframe and Engine Maintenance  Fuel and Oil  Air Traffic (ATC) Navigational and Airport Charges

AIRCRAFT ACQUISITION

Aircraft acquisition  Big decision area for most airlines  Often takes a lot of study and

deliberation before a decision is firmed up  Aircraft to be acquired is scrutinize as to how it dovetails with the mission, vision, goals & objectives of the airline

6 Major areas of investigation 1. Market Analysis 2. Strategic Planning 3. Operational Analysis 4. Aircraft Analysis 5. Economic Analysis 6. Financial Analysis

Aircraft Analysis Airplane Interior configuration Major options Engines, gross Weights, etc

Capacity, operating weights

STRATEGIC PLANS

Airport Conditions runway length elevation temperature stopway / clearway Slope, obstacle in heights & location

Airplane Performance Document Route data distance, wind temperature flight profile, alternate airports

FINANCIAL ANALYSIS

Allowable take-off & Landing weights

Mission analysis Payload, block, fuel,, Block times

ECONOMIC ANALYSIS

Fleet Planning for Network Expansion 1. Fleet Planning  a complicated and cross-functional activity demanding broad skills and knowledge in technical and commercial areas  tries to match the right amount of capacity for a specific market

Things to be considered:  Economic indicators  Competitive structure  Airline forecast  Aircraft of choice

Portfolio Fleet Planning  Policy of constant re-fleeting in order to fine-tune the fleet and the service levels to the prevailing market conditions and for the market changes they perceive happening in the immediate future. 2. Support for the approved operating plan

Options in Aircraft Acquisition 1. Buy option & Capital or Finance Lease

Option - title of ownership passes from the seller/leaser to the buyer/lessee - most capital intensive - contributes to about 35% to 45% of direct operating costs of airlines

2. Operating Lease - renting the equipment usually on per aircraft per month basis for a definite period of time - no transfer of title - most popular means of aircraft acquisition - much quicker to execute, very convenient, & less vulnerable to inflation & foreign exchange fluctuations

3. Sell and Leaseback -

-

An airline that owns a fleet of aircrafts would still sell a unit generate the cash & then leaseback the unit 2 reason why airline resort to this: 1. to remove asset risk on the sold equipment 2. to have liquidity through the generation of cash from sale

3. Sell and Leaseback -

Paying lease in small amount allows to ride out the economic crunch

-

The residual cash fro sale is plowed to operation & ease up the working capital

AIRCRAFT CONFIGURATION

Aircraft Configurations  Vary widely  Can describe an aircraft’s aerodynamic

layout or specific components.

Power Plant: The Engine  The engine makes up for much of the

aircraft’s cost, sometimes more expensive than the airframe itself.  The area of consideration for engine includes the aspect of engine commonality, which provides for flexibility, efficiency and economy derived from the economies of scale of high degree of engine commonality.

Turboprops and Jets  Other special categorizations related to

power plant because they are found adaptable to specific markets and specific routes.  Turboprops: lost their appeal in the passenger aircraft because of the explosive growth of regional jets.  Still, turboprops are desirable for short hops, low volume routes operating in airports with technical limitations like runway length, width and surface bearings.

 Adaptable also for air cargo operation

particularly in three to ten-ton capacity aircraft in the short and medium haul routes.  Jet aircraft: high pollutant with much higher level of toxic emissions that contribute to the depletion of ozone layer but preferred for passenger carriage because of the speed and the smoothness of navigation and cruise.

Airframe configurations  The aircraft is categorized in many

ways:

It could either be a narrow-body or a wide-body, a short-haul, medium-haul or long-haul aircraft.  Aircraft is also categorized based on its power plant. It could be piston-driven, turboprop driven, or pure jet-driven. 

 There are pressurized and non-

pressurized aircrafts.

Short-haul aircrafts  Most aircrafts in the short-haul, narrow-

body category are turboprops (but the advent of regional jets is tipping the balance)  Some short-haul aircrafts are still nonpressurized but by market preference, most are pressurized.  Have a range of between 3,000 to 6,000 kms that allows as much as 8 hrs of sustained flight depending on operating circumstances.

 In terms of density, this same aircraft

category generally belongs to the narrowbody category consisting of just one aisle and seating of about 100 to 200 passenger.  Normally deployed in the domestic sectors of most airlines although it is not uncommon to find it being used in regional and international sectors particularly in geographically compact territories like Europe.

Medium-Haul Aircraft  Would be on a range of from 10,000 to

11,000 kms with sustained flying time of over 10 hours depending on operating circumstances.  The aircrafts deployed on the route today are two-aisle and therefore widebodied, pressurized and jet-propelled.

Medium-Haul Aircraft  The seating configuration would be

between 250-300.  Example: regional routes of the Philippine carriers to the neighboring countries like Hong Kong, Sydney or Riyadh.

Long-Haul Aircraft  Can negotiate distances beyond 13,000

kms with sustained flight of as much as 16 hours.  Few years ago, it would require a fourengined aircraft to meet the range but the two aircraft manufacturers have developed the two-engine technology recently for long-haul mission. (Example: latest variants of A340s an B777z)

Furnished Equipments  The major areas of buyer furnished

equipments are the cockpit, the cabin and the belly of the airframe.  Cockpit BFEs: choice of avionics would be the major BFE item in the cockpit. These are critical items to the safe operation of the aircraft so that original equipment manufacturer keep constant monitoring of their performance, particularly those involved in the communication and navigation.

 Cabin BFEs: Less critical in terms of safety

but often the more major area of concern, debate and activity.  The major items are the seats and the inflight entertainment (IFE) system.  Belly Hold BFEs: not perceptible to passengers but have great concerns to airline operators are items in the cargo and baggage compartments in the belly of the aircraft.

AIRCRAFT UTILIZATION

Aircraft Utilization  The cycle of operation of an aircraft.  Varies depending on the ff: 



size, mission, fleet configuration, degree of air and ground operational capability of the airline the degree of airport mechanization and its scheduled time of operation

Aircraft Utilization Basic Aircraft Utilization Scheme

Overnight Service Check

Towing to Ramp Position

Ground Service 20m – 1 h

Spotting Aircraft

Taxi Take Off

Departure

Cruise

Land Taxi In

Ground Service 20m – 1 h

Arrival and Start of Turnaround

Aircraft Utilization Aircraft Phased Checks  Aviation authorities generally the International Civil Aviation Organization (ICAO) established the discipline of maintenance, repair and overhaul (MRO) service to be provided to every certificated aircraft.

Aircraft Phased Checks  Aviation authorities established the discipline of maintenance, repair and overhaul (MRO) service to be provided to every certificated aircraft.  The International Civil Aviation Organization (ICAO) requires a standard schemes of phased checks to ensure the safety of aircraft operation.

Aircraft Phased Checks  S or service checks are done before and after every flight of the day.  The phase checks A, B, C and D are done after many flight hours or cycles depending on the type of aircraft.

Aircraft Phased Checks  The lighter checks (A and B) are usually done overnight when the aircraft is in the barn after a day of flight.  The C and D checks are heavy checks requiring the grounding of aircraft.

Aircraft Phased Checks  The C check could run for two weeks.  The D check requires 45 days of grounding the aircraft when the unit is dismantled and brought back up again at the end of the check.

Spotting the Aircraft  A fully serviced aircraft the night before is towed and parked on the gate for a flight assignment.  It is also towing from one gate to another or from terminal to terminal.  Usually required one hour before scheduled time of departure.

Ground Handling the Flight  Many simultaneous activities happening in preparation for departure:  fueling, catering and in – flight sales provisions, loading cargo, baggage and corresponding documents such as load, cargo and passenger manifests, passenger check in and weight and balance or load controlling

Taxi, Take Off and Landing  Block time consists of taxiing in/out, take off and landing times and cruising time.  In major airports, taxi time is so long because of many aircrafts lining up for take off which causes flight delays.  Take off and landing also face the issue of noise pollution particularly for airports located near highly populated communities.

Cruising Time  refers to flying time  impacted by several factors:  direction of the wind  the altitude  man – made factors (burnout)

Turnaround Time  The aircraft is being serviced in order to return to its origin or send it on a continuing flight.  The moment the chocks are put on, the turnaround time kicks in and the whole cycle is repeated again.

Ground Handling the Flight  the passengers are boarded, closure of doors and chock off which signal the departure.  On the reverse it is chock on and opening of doors which signal arrival time.

COMMONALITY

Before…  There was a time when the trend in the

airline industry was to have the best, latest and top-of-the-line equipment (aircraft or ground service). • It was some kind of airline machismo to have varied types of aircraft for it implies an improved image of the airline.

HOW COMMONALITY STARTED...  Airbus came out with mixed type

of aircraft having common cockpit.  When commonality was registered to the airline industry, the concept is immediately adopted and extended in all the major aspects of the industry.

COMMONALITY’S IDEAL GOAL:  To have just one aircraft type in the

fleet:  one type of engine  one inventory of aircraft parts  one type of every kind of ground service equipment  one kind of training module for cockpit, cabin and maintenance crew  enjoy the tremendous economies of scale engendered by it all

COMMON COCKPIT & SISTERSHIPS  Airbus Industrie started the

elimination of the steering wheel of the aircraft and introducing the joystick as well as standardizing the glass cockpits of the A320, A330 and A340. n The benefits of these revolutionary act from the company resulted to a tremendous economic impact on the airlines n The 1st major impact in the airline operation is in the flight deck crew

impact on the line operation of a fleet  flexibility on the crew rest,

which varies between a longhaul and short-haul rated pilot  with multiple ratings, the no. of recurrent and transition training are respectively reduced.

Engines, spare parts and GSE Commonality  Fleet commonality leads to a

reduced level of inventories of engines, ground service equipment (GSEs) and spare parts of the aircraft and the GSEs. n Commonality’s bebenit is reflected in the maintenance of spare engines

Values gained in commonality  Economy n

the opportunity for cost avoidance and cost cutting are many, w/c can translate into greater economy in the operation of the airline

 Maintainability:  It

is so much easier to train and learn one set of knowledge than a convoluted set of facts to imbibe.  Maintenance, repairs and overhauls becomes easy.

 Flexibility:  Any

aircraft can be tapped w/o having to scramble for crew or ground staff, all of whom are expected to have been thoroughly trained in just one module of training.

 Reliability  The

promptness of the airline’s operation can lead to a favorable perception of reliability of the airline on the part of the public.

 ALL OF THE VALUES GAINED

LEADS TO AN EFFICIENT OPERATION OF THE AIRLINE, HAVING LOADS AND REVENUES AT LOWER LEVELS OF COST AND ENSURES SECURITY, SAFETY AND CONVENIENCE OF THE CUSTOMER.

Payload Range

Payload Range  Aside from safety, it is payload that

matters much in commercial aviation “…to be able to carry the most payloads at the greatest distance..”

 Short Sector Syndrome  the

cost per kilometer in shorter routes is higher than the cost per kilometer in longer routes.

Economies of Distance FOR A SHORT STAGE LENGTH CRUISE COST: $600 PER KM

LANDING COST $ 2,000

TAKE OFF COST $ 2,000

STAGE LENGTH= 100KMS

COMPUTATION OF COST PER KILOMETER FOR A 100 KM STAGE LENGTH: CRUISE = $600 x 100KMS = $60,000 TAKE-OFF + LANDING = $ 4,000 TOTAL COST OF TRIP = $64,000 COST PER KILOMETER = $64,000 / 100KMS = $ 640

Economies of Distance FOR A LONG STAGE LENGTH CRUISE COST: $ 580 PER KM

LANDING COST $ 2,000

TAKE OFF COST $ 2,000 STAGE LENGTH= 500KMS

COMPUTATION OF COST PER KILOMETER FOR A 100 KM STAGE LENGTH: CRUISE = $580 x 500KMS = $290,000 TAKE-OFF + LANDING = $ 4,000 TOTAL COST OF TRIP = $294,000 COST PER KILOMETER = $294,000 / 500KMS = $ 588

Measures to overcome Short- sector syndrome  Collect surcharges for air sectors

shorter than say 300 kms. it’s not an easy matter to get the CAB to approve fare increase proposals  would likely invite criticisms from the public 

 SHORT-RANGE OR SHORT-HAUL

for flights less than two hours  MEDIUM-RANGE OR MEDIUM-HAUL  for regional routes that require as much as seven to eight hours of flight  LONG-RANGE OR LONG-HAUL  for sectors exceeding nine hours 

Aircraft Range  Extending Aircraft Range  Hubbing Operation  Long Haul Aircraft Ruined Airports  High Profile Victim of Distance/Payload

Trade-Off

Aircraft Weights  Basic Weights - the certificated weight of the aircraft when it rolled out of the manufacturer’s production shops upon conclusion of a sale.

 Operating Weight - fuel is loaded into the aircraft oftentimes taking into consideration the usual enroute and terminal weather experienced at both ends of the sector involved

Payload Penalties  The maximum take-off weight of any

aircraft is influenced to a great extent by the characteristics of the origin airport  Issues like runway length, surfacebearing strength, prevailing terminal weather and many more have always to be taken into consideration

Measures of Payload  Volumetrics  Seat Factor – utilization of seats in an

aircraft  number or booked or boarded passengers divided by the seating configuration  Passenger Load Factor – a measure of the occupied seats of the aircraft being flown the sector distance of the flight

 Overall Load Factor  revenue

ton kilometers divided by the available ton kilometers

RTK = actual loads of passengers multiplied to the sector distabce ATK = established allowable payload multiplied to sector distance

 Passenger vs. Cargo capacity

- Cargo units, which presumably are allocated a certain capacity in the passenger aircraft complete with measurement in terms of available freight ton kilometer, almost always find its shipments offloaded due to full load of passengers and baggage

Traffic, Yield and Revenue Optimization  REVENUE MANAGEMENT SYSTEM (RMS) 

the aircraft compartment is notionally divided into more than the usual First, Business, and Economy classes and in the case of cargo, more than the Express and General but with more products for small yet high yielding air parcels and perishable shipments

Other payload determinants  Air Service Agreements  Airways  Altitudes