Introduction to Transportation Management
Expenses and Costs facing today’s Air Industry
The airline industry is one of the most dynamic trades in the corporate world. It undergoes numerous and rapid changes over short spans of time. The trends in this business fluctuates irregularly; which is why companies in this industry are very keen with the costs involved in their operations and the determinants that are essential for making decisions.
There are many factors that influence the relevance of a particular cost and its adjustments. Aside from the company’s overall economic status and business model, there are other factors which can affect the costs and expenses that are needed for a successful operation such as competition, market integration, and the development in technology. According to Forbes Insights’ Challenges of an Ever-Changing Industry, the emergence of stronger carriers and the increasing amount of consolidation creates a competitive landscape in which airlines must contend in (Forbes, 2011). The best way to keep up and thrive in this kind of environment is by increasing efficiencies, which can be done effectively by doing cost and expenses management.
The cost structure of an airline company can be divided into the operating and non-operating concerns (Gomes Eller & Moreira, 2014, p. 11). This report shall focus on the operating costs and expenses involved in airline management. According to The Aviation & Aerospace Almanac’s ICAO Air Transport Report, promotion and sales accounts for the major part of the operating expenses at 16.4%, followed by administration costs as 12.2%, fuel at 12%, station expenses 10.8%, passenger services 10.5%, maintenance 10.1%, flight crew 7.4%, and other miscellaneous issues, such as airport charges, enroute facility charges, and depreciation and amortization (as cited in Department of Global Studies and Geography, n.d.). Roughly two-thirds of these operating expenses are fixed; which is why the marginal costs for passenger tickets are small.
Labour and fuel costs remain to be the biggest concerns of majority of the airline companies today. In 2000, labour cost is about 2.5 times that of fuel cost. However, in 2010, both labour and fuel costs are equal at 25% each of the total operating cost (Firestine & Guarino, 2012). After remaining relatively stable throughout the 1990s, the price of fuel has gone up over the past decade. Fuel increases have brought up the rise in ancillary fees and have certainly influenced major changes in airline operations. These changes include reduction in capacity and an increase in fuel efficiency and productivity.
Fuel Costs and its Effect on Ticket Prices and Passenger Demographics
Despite an upward trend in fuel costs, it has been observed that airfares trended downward. This downtrend has concurred in the increase of airfares’ decoupling with services, such as reservation changes, baggage checks, online check-in, food and drink purchases, and other promotional gimmicks (Firestine & Guarino, 2012). Fuel costs have also affected airline operations in the capacity and fuel burn departments. The response of the domestic passenger capacity to increased fuel cost is manifested in the flight schedule adjustments and the aircraft size being used on a flight segment.
Airline productivity and efficiency are two different things. Both, however, is influenced by the changes in fuel burn. The rapid increase in fuel cost in the past decade posed a huge dilemma for both major and minor companies in the airline industry. Higher inefficiency meant higher fuel consumption. This has prompted the airline companies to look for more fuel-efficient means of operation. Low cost carriers are more productive and more fuel efficient (Firestine & Guarino, 2012). This is basically why legacy carriers have been reducing capacity while low cost carriers have continued to expand their capacities.
Legacy carriers obviously have higher operating costs, not to mention it operates only in very specific markets. Low cost carriers, on the other hand, are more prudent in their expansion goals; being rather selective on which markets to target (Firestine & Guarino, 2012). As a result of fuel cost increase, passenger demographics have shifted to the low cost carriers. Aside from providing more frequent flights to their routes, airline companies have been improving the services being offered to their patrons. Putting all variables into the equation, the result is lower ticket prices, better services, and improved quality of air transportation in general.
This doesn’t mean that everyone is in favour of higher fuel costs. Certainly, it has pushed the airline companies to look for ways of increasing revenue and utilizing whatever resources they have. Combining stronger revenue growth and higher efficiency gains is what airline companies have been doing in order to offset the impacts of increasing fuel cost. It is true that the companies have found a way around higher fuel costs but it doesn’t paint a pretty picture for the years to come. Having to catch-up with continuously increasing oil price cost the industry certain net losses (Smyth & Pearce, 2008, p. 33).
The fuel cost increase and its consequences are just proof of how dynamic this industry can be. Assessing the current status of the airline industry at this point suggests an optimal mix between cost efficiency and product quality. Air transportation technology is ever changing – just like the rest of the world. There are certainly other ways to make up for rocketing fuel costs. This will make do until science makes a monumental breakthrough on fuel alternatives that can make a difference in the field of aviation.
References
Firestine, T., & Guarino, J. (2012). A Decade of Change in Fuel Prices and U.S. Domestic Passenger Aviation Operations | Bureau of Transportation Statistics. Retrieved from http://www.rita.dot.gov/bts/sites/rita.dot.gov.bts/files/publications/special_reports_and_issue_briefs/special_report/2012_03_33/html/entire.html
Forbes. (2011). Challenges of an Ever-Changing Industry.
Gomes Eller, R. A., & Moreira, M. (2014). The main cost-related factors in airlines management. Journal of Transport Literature, 8(1), 8-23.
International Air Transport Association. (2010). Iata Economic Briefing February 2010 Airline Fuel And Labour Cost Share. Retrieved from https://www.iata.org/whatwedo/Documents/economics/Airline_Labour_Cost_Share_Feb2010.pdf
Smyth, M., & Pearce, B. (2008). Airline Cost Performance. Retrieved from https://www.iata.org/whatwedo/Documents/economics/airline_cost_performance.pdf
