Chapter 4 Flashcards
What are the three broad categories of factors affecting airline operating costs?
- External economic factors over which airlines have no control: fuel prices, airport and en-route charges, certain distribution costs, levels and patterns of demand
- Costs over which airlines have somewhat greater but still limited control: staff costs, type of aircraft and pattern of aircraft used
- Costs over which management has high/total control: marketing, product planning, financial policy, corporate strategy
Discuss the relationship between costs and demand. What are the two aspects of demand that impact unit cost?
Two way relationship between cost and demand. Cost influences demand as it affects the price of the service and the level of service. Demand affects cost in two ways:
- Route traffic density:
* Influences size and type of aircraft - key determinant of unit cost
* Influences frequencies and thus annual utilisation of each aircraft - higher utilisation=lower unit costs
*Affects level of station costs per passenger and per tonne of cargo
*Don’t model only for peak periods - Sector length:
*Geographical location of the home base influences potential sector lengths and traffic densities
What are some methods airlines use to influence patterns of demand?
- Concentrate on denser traffic sectors
- Try increase traffic by marketing
- Try improve own traffic density by increasing market share over competitors (differentiation)
Discuss externally determined input costs of fuel, user charges and commission payments
- Fuel - largest input cost, determined by price of oil. At local level prices can differ with handling and distribution costs or government intervention
- Shorter sectors with more landings = more user charges (LCC=20, BA =7)
- Commissions paid to travel agencies, credit card companies
Discuss labour as a cost element. What is the relationship between employment rate, average wage rate and labour productivity?
Employment rate - employ more people, wage rate goes down, productivity goes down (less to do). Higher wages, lower employment, higher productivity.
What four measures can airlines take to control labour costs?
- Freeze and reduce wages when negotiating contracts
- Reduce staff numbers
- Outsourcing
- Franchising
Learn aircraft size graph
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Learn hourly productivity calculation. What are the components?
Payload, seat/ton km, speed 800km/h*20ton payload=16000 seat/ton km
raise speed = higher cost but productive and unit cost lower
Why are bigger and faster airplanes not always the best option? even though unit costs minimised
must consider demand factors and design characteristics of aircraft.
Different aircraft cater for different traffic densities (carrying capacity) and route lengths (travel capacity)
Longer routes = bigger planes with more fuel
Great demand = big planes with high carrying capacity
What makes engine performance crucial?
Critical for maximising productivity due to fuel consumption
How do route structure and network characteristics influence costs?
- Stage length - longer stage length = lower the DOC per unit of output (until payload must be sacrificed)
- Frequency of services - greater flexibility in schedule planning = increase aircraft and crew utilisation = less hotel costs, quicker turnaround
- Fleet size - economies of scale = spreading overhead costs and maintenence
What factors influence how much carriers spend on product features and quality?
- Sector length/travel time
- Time of day or night
- Competitive pressures from other carriers
What minimum standards of product quality do carriers need to achieve?
- Cabin layout and density
- Number of crew
- In-flight catering and cabin product features
How do carriers differentiate on the ground?
- More check-in desks
- More ground staff for passenger handling and assistance
- Lounges
- Internet booking
