Pre-Finals Pt. 1 Flashcards
An economic situation in which a small number of large companies dominate the market
Oligopoly
An industry composed of a few firms producing either similar or slightly similar products
Oligopoly
State the characteristics of an Oligopoly
- High barriers to entry
- Restricted market share
- Economies of scale (double output)
- Growth through merger
- Mutual Dependence
- Price rigidity
- Non-Price Competition
What are the five necessary expenditures for aircraft direct operating costs
- Aircraft ownership costs
- Labor costs: Flight and cabin crew
- Fuel costs
- Maintenance Cost
- Other direct costs: security taxes,insurance, regulatory/government costs
What are the distinct factors for airline price fares
- Last moment bookings
- Peak flying periods
- Frequent flyer miles
- Aircraft type and size
- Service amenities
State the advantages of aircraft leasing
- Provides long-term use of equipment (aircraft and engines) without large cash down payment
- Improves cash flow
- Improves financial profile by showing less long-term debt to creditors
- Offers more operational flexibility
State the aircraft leasing disadvantages
- Higher cost than purchasing
- Loss of residual value of aircraft
State the aircraft purchasing advantages
- Deprecation schedule
- Residual value of depreciated assets
- No amortization (if paid in full)
- Full authority over aircraft
- Can use for other purpose
State the aircraft purchasing disadvantages
- Requires large initial cash outlays
- Uncertainty of residual asset value during assumed aircraft life
- Restricts financial flexibility
State the purchasing vs. Leasing Decision
- Assume that a purchase means obtaining a term loan
- Most airlines use both purchasing and leasing in some combination
- Decision is a result of thorough cash flow analysis
- Ultimately depends on financial capability
This represents 20-25% of major US carriers direct operating expenses
Labor Costs
What is the purpose of fuel price hedging
Risk management
True or False. Hedging protects against price spikes and reduces volatility
True
True or False. New aircraft are 70% more fuel efficient than 40 years ago
True
What are the maintenance cost components
- Labor
- Materials
- Burden
- Outsourced costs
What are the other direct operating costs
- Security Costs
- Tax Costs
- Insurance Costs
What are the unique airline economic characteristics
- Complete pricing and market entry freedom
- Close government regulation/monitoring
- Government financial assistance
- High capital investment, technology driven
- High labor and fuel expenses
- Excess capacity
Total number of seats times the number of miles flown
ASM (available seat mile)
How much carrier made spread across ALL the available seats that were available (operating income / ASM)
RASM (revenue per available seat mile)
The cost incurred by an airline, spread against the available miles that could have been flown (operating cost / ASM)
CASM (cost per available seat mile)
Total number of seats sold (revenue passengers) multiplied by the number of miles flown
RPM (revenue passenger mile)
Passenger revenue divided by RPMs and income earned on tickets sold
Yield
RPMs divided by ASMs and the percent of available seats filled by revenue passengers - measure of capacity utilization
Load Factor
This affects costs and quality of services offered
Load Factor
What is revenue a product of?
Price and Demand
This has greatest impact on passenger demand
ticket price
Two of the load Factor Effects
- Capacity vs demand
- pricing and ticket sales
State the financial strength affects airline’s ability
- To secure capital assets
- To grow
- to return profit to investors
- To secure additional funding
- To retire debt
- to retain and compensate employees
- To gain market share
- To respond to economic changes and competitive challenges
State the aircraft manufacturers risks
- Long lead times for design and production
- High start-up and tooling costs
- Must sell hundreds to break even
- New aircraft must reflect the needs of several airlines
- Usually need a committed airline “launch customer”
