Chapter 3

Question 1

What are the 4 different needs airlines have for costing?

Answer 1

1. Need for accounting and general management
2. Cost identification needed to develop pricing policies and monitor cost trends
3. Need detailed cost info by flight and route to make operating decisions
4. Assessment of costs essential in evaluation of investments

Question 2

How are airline finances broadly divided?

Answer 2

1. Operating finances (primary activity)
2. Non-operating finances (secondary activities)

Question 3

What makes up operating finances?

Answer 3

1. Operating revenue - passenger/freight revenue
2. Operating costs - Direct and Indirect operating costs

Question 4

What makes up Non-operating finances?

Answer 4

1. Gains/losses from retirement of property/equipment
2. Interest paid on loans or received from deposits
3. Profit or losses from affiliates
4. Subsidies/taxes

Question 5

What are direct operating costs and what are the three main categories?

Answer 5

Direct operating costs are all costs associated with, and dependent on, the operation of the aircraft.
1. Cost of flight operations - largest element of DOC - includes flight crew, fuel, oil, airport and en-route charges, insurance on flight equipment, rental/lease charges
2. Maintenance and overhaul costs - routine maintenance and also extensive periodic overhauls (main costs=labour and spare parts)
3. Depreciation and amortisation - straight line over x years, 0-15% RV

Question 6

What are indirect operating costs and what are the four main categories?

Answer 6

Indirect operating costs are all costs that will remain unaffected by changes in the operation of the aircraft.
1. Station and ground expenses - costs incurred in providing an airline’s services at an airport - includes cost of all staff handling and servicing aircraft, passengers or freight; ground equipment, offices
2. Cost of passenger services - expenses related to cabin staff and other passenger service personnel (hotel, training); costs related to the passengers - catering, comfort on ground, delay expenses; premiums for passenger liability insurance
3. Ticketing, sales and promotion costs - related to staff engaged in reservation ticketing, sales and promotion, and office and other related costs arising from these activities. Also ticket commission to travel agencies
4. General and admin costs - small element, only include those expenditures which cannot be readily allocated to a particular activity

Question 7

Structure of costs breakdown figure

Answer 7

NB

Question 8

Trends in airline costs:

Answer 8

63% DOC, with fuel highest input. When fuel cheap, DOC=IOC=50%
When fuel expensive DOC>IOC

Question 9

What can airlines do when fuel rises significantly?

Answer 9

Cut indirect costs - promotion costs and labour costs

Question 10

Define the concept of escapability

Answer 10

The degree of escapability is determined by the time period required before a particular cost can be avoided. Think variable and fixed costs

Question 11

How do variable and fixed costs link to escapability?

Answer 11

Variable - escapable in short term - fuel, overtime, landing charges, catering, maintenance
Fixed - not escapable in short term or medium term - staff costs for pilots, cabin crew, engineers, aircraft standing charges