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! Frequency! Routes! Traffic! Revenues " Fares? Low Cost Carriers! Fares " Traffic " Revenues " Profitability! 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 Britannia Air 2000 Monarch BY DP ZB (EUR) 0.200 0.175 0.150 0.125 0.100 0.075 0.050 FD COE EW FR LX U2 VB NI TV Operating Cost Per ASK BA OK LO TG GO QF Thai Airways Qantas British Airways Emirates CityFlyer Express Crossair Czech Eurowings Luxair LOT Maersk Air Portugalia EasyJet Go Ryanair BY DP ZB EK TG QF BA EK FD LX OK EW LG LO VB NI U2 GO FR 0.025 0.000 0 500 1,000 1,500 2,000 2,500 3,000 Source SH&E, AEA, IATA, Form 41 Average Stage Length (Km) 5
Total Operating Costs Ticketing, Sales & Promotion 14% Admin & Other 12% Flight Ops 28% Passenger services 11% Depreciation 6% En-Route/Airport 18% Maintenance 11% Source (ICAO 2001 World Average) 6
Some ICAO and F41 Cost Breakdown Percentages 100 80 60 40 20 0 Braathens easyjet Air India General & Admin JAL Continental Delta (F41) Sales & Promotion Passenger Service User Charges Depreciation & Amortisation Maintenance 7 Flight Operations
Labour Productivity has an Impact on Costs 400 485 350 Revenue per Employee (US$ 000) 300 250 200 150 100 50 FR SQ LH CX AC BA SK GO KL U2 QF EK AA CO AF GF IB TG TP SV MH IR UL 8 Source: Annual Accounts, Form 41, AAPA 2001
Fuel Cost per ASK 1.6 1.5 LA AC 1.4 Fuel Cost per ASK (US cents) 1.3 1.2 1.1 1.0 0.9 0.8 SK FR U2 IR MH LH IB GO TP AF GF BA CO AA KL QF AI UL EK CX SQ 9 0.7 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 Average Stage Length (KM) Source SH&E 2001
Maintenance and Overhaul Costs as a Percentage of Total Operating Costs Percentage of Total 18 16 14 13.88 13.9 14.42 14.55 15.71 12 10 8 6 5.04 6.06 8.0 10.10 11.03 11.06 4 2 0 Ryanair Maersk Air easyjet Braathens British European Brymon Airways Cityflyer Express GO Fly Luxair Lithuanian Silkair 10 Source: SH&E, ICAO 2000 Financial Data
Maintenance Cost per Flight hour 1600 1400 Maintenance Cost per Flight Hour (US$) 1200 1000 800 600 400 200 11 0 NH JL CX TP BA TG KL GF GO SQ IB AI AC U2 SK AF CO AA FR EK Source: Annual Accounts, Form 41, AAPA 2001
Cost of Sales per Passenger 45 Cost of Sales = commissions, ticketing, sales and promotion costs 40 35 Cost of Sales per Passenger (US$) 30 25 20 15 10 5 0 BA NH EK SQ QF SV KL TP AF LH IB CO GF AC TG AA SK GO CX U2 FR 12 Source: Annual Accounts, Form 41, AAPA 2001
Marketing Expense as a Percentage of Sales 18% 16% 14% Marketing Expense as % of Revenue 12% 10% 8% 6% 4% 2% 13 0% IR TP SV EK BA JL QF TG AF KL GO U2 SK CO FR IB GF SQ Source: Annual Accounts, Form 41, AAPA 2001
Passenger Service Cost per Passenger 35 30 Passenger Service per Passenger (US$) 25 20 15 10 5 0 JL TP KE TG EK SQ GF AC AI GO AA SK CO AF U2 IR 14 Source: Annual Accounts, Form 41, AAPA 2001
Where Low Cost Carriers Achieve Advantage EUR per 1000 ASK 300 250 200 150 100 50 - Cost per Available Seat KM 300 400 500 600 700 800 900 1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2000 Sector length 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% LCC cost advantage 30% Total crew cost 5% Landing & handling charges 50% Passenger related 70% Sales cost 60% Others (overheads) European Scheduled LCC Average Diff % 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
Direct Operating Costs Handling and dispatch fees 11% Navigation fees 5% Commissions 5% Insurances 1% Lease Charges 12% Flight Crew 12% Airport fees 4% Fuel and oil 27% Passenger Service Costs 8% Maintenance 15% Source ICAO 2001 16
Indirect Operating Costs Other 2% Administration Costs 6% Depreciation and Interest 46% Staff Costs 12% Marketing Costs 34% 17
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 500 55 18
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 55 19
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