Airline Operating Costs

Airline Operating Costs

By Peter Horder, Senior Vice President SH&E Ltd Prepared for:

MANAGING AIRCRAFT MAINTENANCE COSTS Conference

Brussels, 22 January 2003

Agenda

Introduction Current Airline Environment Airline Cost Elements Indirect and Direct Operating Costs Overhead Cost Control Balance Sheet Effects Reference Sources Conclusions

1

Introduction

Current airline environment Safety considerations and costs – Security restrictions – Insurance implications

Cost reduction versus revenue increases

2

Airline Economic Affects from 11 September

SCHEDULED CARRIERS

Low Cost Carriers

! Frequency

! Fares

! Routes

" Traffic

! Traffic ! Revenues

" Revenues " Profitability

" Fares ? ! Profitability

Low Cost Carriers have been clear winners since 2001 3

Airline Safety and Security Safety is paramount – Flight procedures – Maintenance procedures – Ground Operations

Security Impacts – Cockpit security – On board security – Ground delays – Increased searches – Baggage X-ray

Security costs – Airport charges – Increased passenger charges 4

Operating Cost Comparisons Per ASK

Operating Cost Per ASK

(EUR)

0.200 0.175 FD

0.150

LX

0.125

VB NI

COE

0.100

EW

BA

U2

Britannia Air 2000 Monarch

BY DP ZB

Thai Airways Qantas British Airways Emirates

TG QF BA EK

CityFlyer Express Crossair Czech Eurowings Luxair LOT Maersk Air Portugalia

FD LX OK EW LG LO VB NI

EasyJet Go Ryanair

U2 GO FR

OK

0.075

TV

TG

QF

GO

FR

0.050

LO

EK BY DP

ZB

0.025 0.000 0

500

Source SH&E, AEA, IATA, Form 41 5

1,000

1,500

Average Stage Length (Km)

2,000

2,500

3,000

Total Operating Costs

Admin & Other 12% Ticketing, Sales & Promotion 14%

Flight Ops 28%

Passenger services 11% Depreciation 6% En-Route/Airport 18% Source (ICAO 2001 World Average) 6

Maintenance 11%

Some ICAO and F41 Cost Breakdown Percentages

100 80 60 40 20

General & Admin Sales & Promotion Passenger Service User Charges Depreciation & Amortisation Maintenance 7

Flight Operations

(F 41 ) D el ta

en ta l C

on tin

JA L

In di a Ai r

yJ et ea s

B ra at he ns

0

Labour Productivity has an Impact on Costs 485 400

350

Revenue per Employee (US$ 000)

300

250

200

150

100

50

FR

8

SQ

LH

CX AC

BA

SK GO

KL

U2

QF

EK

Source: Annual Accounts, Form 41, AAPA 2001

AA

CO

AF

GF

IB

TG

TP

SV

MH

IR

UL

Fuel Cost per ASK

1.6 LA AC

1.5

Fuel Cost per ASK (US cents)

1.4

1.3 SK

U2

AF

1.2

KL

MH

1.1

CX

LH GF

1.0

IB

FR

BA

SQ

CO

AI

AA

UL 0.9 QF IR 0.8

0.7 500

1,000

Source SH&E 2001 9

GO

EK

TP

1,500

2,000 2,500 Average Stage Length (KM)

3,000

3,500

4,000

Maintenance and Overhaul Costs as a Percentage of Total Operating Costs Percentage of Total

18 15.71

16 13.88

13.9

14.55

14.42

14 12

11.03

11.06

10.10 10 8.0

8 6.06 6

5.04

4 2

10

Source: SH&E, ICAO 2000 Financial Data

Si lk ai r

Lu xa ir

ua ni an Li th

R

ya na ir M ae rs k ea Air sy B Jet ra at B he rit ns is h Eu ro B pe ry m an on Ai C rw ity ay fl y s er Ex pr es s G O Fl y

0

Maintenance Cost per Flight hour

1600

Maintenance Cost per Flight Hour (US$)

1400

1200

1000

800

600

400

200

0 NH

JL

CX

TP

BA

TG

KL

GF

GO

SQ

Source: Annual Accounts, Form 41, AAPA 2001 11

IB

AI AC

U2

SK AF

CO

AA FR EK

Cost of Sales per Passenger Cost of Sales = commissions, ticketing, sales and promotion costs 45

40

Cost of Sales per Passenger (US$)

35

30

25

20

15

10

5

0 BA

NH

EK

SQ

QF

SV

KL

TP

AF

LH

Source: Annual Accounts, Form 41, AAPA 2001 12

IB

CO

GF

AC

TG

AA

SK

GO

CX U2

FR

Marketing Expense as a Percentage of Sales

18%

16%

Marketing Expense as % of Revenue

14%

12%

10%

8%

6%

4%

2%

0% IR 13

TP

SV

EK

BA

JL

QF

TG

AF

Source: Annual Accounts, Form 41, AAPA 2001

KL

GO

U2

SK

CO

FR

IB

GF

SQ

Passenger Service Cost per Passenger

35

Passenger Service per Passenger (US$)

30

25

20

15

10

5

0 JL 14

TP

KE

TG

EK

SQ

GF

AC

Source: Annual Accounts, Form 41, AAPA 2001

AI

GO

AA

SK

CO

AF

U2

IR

Where Low Cost Carriers Achieve Advantage LCC cost advantage

Cost per Available Seat KM 300

100%

30% Total crew cost

90% EUR per 1000 ASK

250

80% 70%

200

60% 150

50%

50% Passenger related

40% 100

30%

70% Sales cost

20%

50

10% 300

400

500

600

700

800

900 1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2000

0%

Sector length European Scheduled

LCC Average

Focus on sector lengths up to, say, 1,500 km driven by reducing cost advantage increasing revenue need decreasing acceptance of lack of service 15

5% Landing & handling charges

Diff %

60% Others (overheads)

Direct Operating Costs

Handling and dispatch fees 11% Navigation fees 5%

Commissions Insurances 1% 5%

Lease Charges 12% Flight Crew 12%

Airport fees 4%

Fuel and oil 27%

Source ICAO 2001 16

Maintenance 15% Passenger Service Costs 8%

Indirect Operating Costs

Other 2%

Depreciation and Interest 46%

17

Administration Costs 6%

Marketing Costs 34% Staff Costs 12%

Cost Allocation by Network

Route

A-B

A–C

A-D

Total

ASK RPK Yield Revenue Variable Cost Fixed Cost Total Cost Margin

2,200 1,300 10 13,000 8,450 4,400 12,850 150

1,150 800 12 9,600 6,240 2,875 9,115 485

2,700 1,900 8 15,200 9,880 5,400 15,280 -80

6,050 4,000 9 37,800 24,570 12,675 37,245 555

Overheads Operating Profit

18

500 55

Cost Allocation by Route

Route

A-B

A–C

A-D

Total

ASK RPK Yield Revenue Variable Cost Fixed Cost Overheads Total Cost Margin

2,200 1,300 10 13,000 8,450 4,400 182 13,032 -32

1,150 800 12 9,600 6,240 2,875 95 9,210 390

2,700 1,900 8 15,200 9,880 5,400 223 15,503 -303

6,050 4,000 9 37,800 24,570 12,675 500 37,745 55

Operating Profit

19

55

Which Costs may be Controllable/Avoidable? All costs are variable over time Strategic and Tactical decisions can be taken – aggressive re-negotiation of contracts – Hedging instruments – E,g, fuel, currency – Outsourcing – Changes in accounting policies !

Staffing – Replacement or increased efficiency? – Overtime

Operating “unprofitable” routes – More economical flying through different routings, aircraft and airports – Allocation of indirect costs – Do you know which routes really are unprofitable?

Levels of service – Low cost vs. full service model 20

Cost Data Sources Major Sources – Airline Annual reports – ICAO – US DOT Form 41

Other Sources – IATA – AAPA – UK CAA (and other national regulators)

Profit & Loss Statement – Revenues – Operating Costs

Balance Sheet – Assets – Liabilities 21

Operating Cost Reporting - ICAO

– Flight Operations – – – –

Flight Crew Salaries, Expenses and Training Aircraft Fuel & Oil Insurance & Uninsured losses Lease/Rental of aircraft

– Maintenance & Overhaul – Depreciation & Amortization – User Charges & Station Expenses – – –

Landing & Airport Charges Route facility charges Station Expenses

– Passenger Services – Ticketing, Sales & Promotion – General & Administration

22

Financial Data from US DOT Form 41

Direct Operating Expenses – Reported quarterly by fleet type

Indirect Operating Expenses – Reported quarterly by carrier and allocated by ASM or other appropriate measure to each fleet

Other Finance Related Data Reported – Traffic Statistics – Revenues – General Profit & Loss – Balance Sheet

23

Direct Operating Cost Details – US DOT Form 41

– Flying Operations – Flight Crew Salaries, Expenses and Training – Aircraft Fuel & Oil – Insurance & Uninsured losses – Lease/Rental of aircraft

– Direct Maintenance – Labour – Repairs (by outside agencies) – Materials

[note, more detail than ICAO]

– Depreciation & Amortisation – Flight Equipment – Expense of Interchange Aircraft – Other Depreciation & Amortization 24

Comparison/Benchmarking Issues

ICAO – Data for all ICAO carriers worldwide – Profit & Loss and Balance Sheet

But, – Not broken down by fleet – Maintenance & Overhaul not subdivided – Limited data on low-cost/regional carriers

DOT Form 41 – Broken down by fleet – New data quarterly

But, – Only for US carriers

25

Airline Operating Costs

By Peter Horder, Senior Vice President SH&E Ltd Prepared for:

MANAGING AIRCRAFT MAINTENANCE COSTS Conference

Brussels, 22 January 2003