Air Transport Department - Projet EuroMed Transport

Benchmarking of Key Airline Indicators
Dr George Williams
16 October 2008
Air Transport Department
Agenda
• Structure of Airline Operating Costs
• Sources of Cost differences
• Factors affecting Airline Operating Costs
• Benchmarking Performance
Air Transport Department
Variations in Unit Cost (2005)
140
120
US cents per ATK
100
80
60
40
20
0
Portugalia
Air Europa Continental
Air Transport Department
Swiss
Air France
Lufthansa
Thai
Nippon
Cargo
Air Asia
 Low costs do not automatically guarantee profitability
 High costs do not always imply losses
 The relationship between unit cost and yield (average
fare) is all important
Air Transport Department
Irrespective of whether an airline has high or low
operating costs, a thorough knowledge and
breakdown of them is vital in order for management
to:
• monitor performance (to check if targets / budgets are
being met. If not, remedial action can be taken)
• set appropriate fares and tariffs
• evaluate new routes, aircraft acquisition and
outsourcing opportunities
Air Transport Department
• For most carriers labour forms the largest input cost
(typically 25% - 40% of total operating costs)
• Considerable variation exists in airline cost structures
making comparison difficult
• Airline managers need to be aware of future trends in
the availability, price and quality of key input factors
(including Outsourcing opportunities)
• Some cost items are more controllable than others. It
is important to know what influence management can
exert on each input factor
Air Transport Department
Airline operating costs are traditionally sub-divided
into direct and indirect elements, after the exclusion
of non-operating items such as profits earned by
subsidiaries and those from asset sales.
(Interest payments traditionally have also been
excluded, but this distorts comparisons with carriers
that lease their aircraft.)
Air Transport Department
The widely used breakdown of operating costs that
follows is recommended by ICAO and is similar to the
approach adopted in the UK and US.
The ICAO system has the advantage that the cost
categories employed correspond to functional areas
within the airline.
Air Transport Department
Direct Operating Costs refer to the expenses incurred
directly in the operation of a particular aircraft and
include three main items:

Flying Expenses [Flight Crew Salaries & Expenses /
Fuel & Oil / Airport & En-Route Charges / Aircraft
Insurance / Rental of Flight Equipment and Crews]

Maintenance and Overhaul [Labour costs / Spares
used / Maintenance Overheads]

Aircraft Depreciation
Air Transport Department
Indirect Operating Costs include all those items of
expenditure which are not directly related to the
operation of a particular aircraft:

Station and Ground Costs

Passenger services

Ticketing, Sales and Promotion

General Administration
Air Transport Department
In practice the distinction between direct and
indirect operating costs is not always clear cut.
On average, direct operating costs (DOCs) account
for around one half of the total operating costs of
scheduled carriers. However, wide variations are
apparent between airlines. The DOC proportion of
total cost can vary between 45% and 70%.
Air Transport Department
IATA INTERNATIONAL SCHEDULED SERVICES
DISTRIBUTION OF COSTS IN 2003
DIRECT OPERATING COSTS (DOC)
%
FLIGHT OPERATIONS
Flight Crew
(6.2)
Fuel and Oil
(16.5)
Airport & En-Route Charges (9.3)
32.0
MAINTENANCE
10.4
DEPRECIATION / RENTALS / INSURANCE
14.0
TOTAL D.O.C.
56.4
Air Transport Department
INDIRECT OPERATING COSTS (IOC)
%
STATION AND GROUND
9.8
PASSENGER SERVICES
Cabin Attendants
Other Pax Services
12.8
(6.7)
(6.1)
TICKETING, SALES AND PROMOTION 14.5
GENERAL AND ADMIN.
TOTAL I.O.C
6.5
43.6
Source: IATA Airline Economic Results and Prospects 2004
Air Transport Department
While the ICAO approach enables the operating
costs of an airline to be isolated and compared with
other carriers, it provides neither a basis for pricing
decisions nor a means for deciding the appropriate
level of service frequency to provide on a route.
In order to be able to undertake these activities it is
necessary to consider the concept of escapability.
Air Transport Department
To enable an airline manager to know exactly which
costs the company will avoid if a particular flight is
not operated it is necessary to subdivide direct
operating costs into fixed and variable elements.
The variable direct operating costs are those items
of expenditure that can be escaped if a flight is not
operated. Alternatively, they are the additional costs
incurred when an extra flight is operated.
Air Transport Department
Sources of Cost Differences

Direct Operating Costs

Indirect Operating Costs

Seating Density / Load Factor
Air Transport Department
Unit Operating Costs in 2005
80
70
DOC
IOC
US cents per ATK
60
50
40
30
20
10
0
Portugalia
Air Europa Continental
Air Transport Department
Swiss
Air France
Lufthansa
Thai
Nippon
Cargo
Air Asia
% Direct Operating Costs in 2005
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
Portugalia Continental Lufthansa
Air Transport Department
Swiss
Air France
Thai
Nippon
Cargo
Air Europa
Air Asia
DOC breakdown in 2005
40
US cents per ATK
35
30
Flight Operations
25
Maintenance & Overhaul
Depreciation
20
15
10
5
0
Portugalia
Swiss
Air Transport Department
Lufthansa
Thai
Nippon Cargo
Air Asia
IOC breakdown in 2005
40
35
User Charges & Station Costs
Ticketing Sales & Promotion
Pax Services
US cents per ATK
30
25
20
15
10
5
0
Portugalia
Swiss
Air Transport Department
Lufthansa
Thai
Nippon Cargo
Air Asia
Major Factors Affecting Airline Operating Costs

Aircraft Characteristics
– speed and capacity determine aircraft productivity

Route Structure and Type of Network –
- stage length affects aircraft and crew utilization, fuel
used per block hour, relative station costs and some
maintenance expenses
- service frequency directly influences aircraft and
crew utilization rates
- average length of passenger haul affects sales and
passenger handling costs
Air Transport Department
Aircraft Productivity
Seat km per hour
600,000
500,000
A380
400,000
B747-400
300,000
200,000
B707
100,000
0
Air Transport Department
1950
1960
1970
1980
1990
2000
2010
Payload
Seat km per hour
Cost per seat km
Range
Range
Range
Air Transport Department
Influence of stage length on unit costs
120
110
British Midland
y = -54.004Ln(x) + 449.28
R2 = 0.7177
Euro cents per ATK
100
90
SN Brussels
70
Easyjet
Aer Lingus
Ryanair
50
700
Lufthansa
Spanair
60
40
500
Finnair
Austria
80
900
Air France
TAP Air Portugal
Iberia
Air Europa
Turkish
1100
1300
Stage Length (km)
Air Transport Department
KLM
British Airways
1500
1700
1900
Unit Cost against Stage Length (2005/6)
(Average Aircraft Seating Capacity)
8
Flybe (101)
7
pence per ASK
6
5
BA (232)
easyJet (148)
4
Virgin Atlantic (344)
3
Monarch (255)
Thomas Cook (246)
First Choice (225)
2
1
0
0
1000
2000
3000
4000
km
Air Transport Department
5000
6000
7000
8000
Operating Cost Comparison
2005/6 Financial Year
Airline
BA
Unit Cost
Load Factor
(pence per ASK) (% pass-km)
4.62
76.3
Av. Stage
Length (km)
Av. Seats
per aircraft
2260
232
easyJet
4.34
81.7
967
148
First Choice
2.46
89.9
2460
225
flybe
7.17
65.7
480
101
Monarch
2.71
83.4
2227
255
Thomas Cook
2.46
89.0
2785
246
Virgin Atlantic
3.51
73.9
7160
344
Air Transport Department
Major Factors Affecting Airline Operating Costs

Marketing Policy
- scale and type of sales promotional activity
- amount and quality of in-flight and ground
handling services provided

External Economic Factors
- aviation fuel prices
- landing fees and en-route charges
- exchange rates
- level of economic activity
Air Transport Department
Key Performance Indicators
• Break-even Load Factor (%) versus Load Factor (%)
• Staff Productivity (ASK or ATK per employee)
• Aircraft Utilisation (hours flown per day)
• % Internet Sales
• Fleet age and mix
Air Transport Department
Break-even Load Factor (%)
BELF (%) = Unit Cost ÷ Yield
Unit cost = Total Operating Cost ÷ ASK
Yield = Total Operating Revenue ÷ RPK
Air Transport Department
Passenger Load Factors in 2006
100
90
80
70
60
%
50
40
30
20
10
0
Virgin Atlantic
BA
Air Transport Department
GB Airways
easyJet
Monarch
XL
First Choice
BELF (%) versus LF (%)
100
90
LF (%)
BELF (%)
80
70
%
60
50
40
30
20
10
0
BA Connect
Flybe
Air Transport Department
Virgin Atlantic
Astraeus
easyJet
Monarch
First Choice
Airline Staff Productivity in 2006
9,000,000
8,000,000
7,000,000
ASK per Employee
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
Monarch
easyJet
Air Transport Department
First Choice
GB Airways
XL
Virgin Atlantic
BA
Flight Crew Costs & Productivity 2006
Airline
Average Number of
Personnel
3140
Average Annual
Expenditure (£)
97,600
easyJet
1208
64,200
First Choice
385
75,100
GB A/w
183
61,600
Monarch
385
68,400
Thomas Cook
337
67,500
Virgin Atlantic
702
82,000
XL
182
72,000
BA
Air Transport Department
Cabin Crew Costs 2006
Airline
Average Number of
Personnel
14327
Average Annual
Expenditure (£s)
27,900
easyJet
2176
19,300
First Choice
1245
18,700
GB Airways
466
10,600
Monarch
1383
15,500
Thomas Cook
1053
15,400
Virgin Atlantic
3839
13,300
XL
1032
15,100
BA
Air Transport Department
A320/319 Utilisation
16
First Choice
easyJet
BA
14
Hours per day
12
10
8
6
4
2
0
Q3 2004
Air Transport Department
Q4 2004
Q1 2005
Q2 2005
A330 / B744 Utilisation
Virgin
Monarch
BA
18
16
14
Hours per day
12
10
8
6
4
2
0
Q3 2004
Air Transport Department
Q4 2004
Q1 2005
Q2 2005