Chapter 5.1: Airline Cost Categorization

1. Chapter 5.1: Airline Cost Categorization Maryam Zavareh

2. Introduction • Source : • DOT Form 41 Data base • Traffic, financial and operating cost data reported to the DOT by US airlines • Published Quarterly • Detail of reporting differs for different expense categories • (Example: AC Operating expense and other expenses based on AC type and region)

3. Administrative vs. Functional Cost Categories • 2 different Approaches for partitioning airline operation costs: • Administrative • Financial Accounting Statement • Functional • More detailed cost comparison across airlines and even across different aircraft types

4. Administrative Cost Categories • Salaries and related fringe benefits for all personnel (general management, flight personnel, maintenance labor, other personnel) • Materials Purchased (fuel & oil, parts, passenger food, other materials)

5. Administrative Cost Categories • Services Purchased (advertising & promotions, communications, insurance, maintenance, commissions, other services) • Landing Fees, Rentals, Depreciation, other Expenses

6. Administrative Cost Allocation • Labors (Salaries) • Materials • Services

7. Limitation of Administrative Cost Categorization • Not much detailed analysis • Difficult to separate out the components of salaries, materials and services that are explicitly associated with operating the aircraft, as opposed to ground operations.

8. Functional Cost Categories • allocates costs to the different functions within the airline’s operation • Flight Operating Costs • Ground Operating Costs • System Operating Costs

9. Flight Operating Costs • Direct operating costs • Flying operations – Flight crew, Fuel costs • Maintenance – routine maintenance, extensive major checks, “labor & parts” Form 41 reports maintenance for direct airframe, direct engine and overhead/ burden • Depreciation & Amortization – Capital costs of airline assets

10. Ground Operating Costs • Aircraft servicing – handling aircraft on ground, landing fees • Traffic servicing – processing passengers, baggage and cargo at airports • Promotion and sales – airline reservation centers, ticketing offices, travel agency commissions, and distribution system fees

11. System Operating Costs • Indirect operating costs • Passenger Service – meals, flight attendants, in-flight services • Advertising and Publicity • General and Administrative – can’t be associated to a particular activity • Transport-related – costs associated with the generation of transport related revenues. Fees paid to regional airline partners, extra baggage expense, and other miscellaneous overhead.

12. Functional Cost Allocation

13. ICAO Cost Categories • In many respects similar in structure to both functional and allocation schemes used by airlines and government around the world

14. Comparison Between ICAO and Form 41 Cost Categories • Overall , the structure of the cost allocation scheme is very similar.

15. Cost Drives by Functional Categories • Flight Operating Costs (FOC) • Reported per block hour (correlated with the amount of time aircraft is being utilized) • Aircraft Servicing Cost • Reported per aircraft departure, including cleaning, fueling, marshaling • Traffic Servicing Cost • Reported per enplaned passenger, including the processing of passengers and their baggage

16. Cost Drives by Functional Categories • Passenger Service Cost • Reported per revenue passenger kilometer (RPK) • Promotion and Sales Costs • Reported as a percentage of revenue, responsible for the generation of revenue • Other Indirect and System Overhead Costs • Reported as a percentage of total operating expenses

17. Other Cost Category Comparison • Total Operating Cost per Available Seat Mile (Unit Cost-CASM) • Total Operating Expense per Passenger Enplaned or RPM

18. Notes • Thanks for Listening. • Any Question? • Go to http://catsr.ite.gmu.edu/ • The Global Airline Industry • Images were selected from various internet sites.