Chapter 5.1: Airline Cost Categorization

Chapter 5.1: Airline Cost CategorizationMaryam Zavareh

Source :DOT Form 41 Data baseTraffic, financial and operating cost data reported to the DOT by US airlinesPublished QuarterlyDetail of reporting differs for different expense categories(Example: AC Operating expense and other expenses based on AC type and region) Introduction

2 different Approaches for partitioning airline operation costs:AdministrativeFinancial Accounting StatementFunctionalMore detailed cost comparison across airlines and even across different aircraft types

Administrative vs. Functional Cost Categories

Salaries and related fringe benefits for all personnel (general management, flight personnel, maintenance labor, other personnel)

Materials Purchased (fuel & oil, parts, passenger food, other materials)Administrative Cost Categories

Services Purchased (advertising &promotions, communications, insurance, maintenance, commissions, other services)

Landing Fees, Rentals, Depreciation, other Expenses

Administrative Cost Categories

Administrative Cost AllocationLabors (Salaries)MaterialsServices

Ref: The Global Airline Industry

6Not much detailed analysis Difficult to separate out the components of salaries, materials and services that are explicitly associated with operating the aircraft, as opposed to ground operations.Limitation of Administrative Cost Categorization

allocates costs to the different functions within the airlines operation

Flight Operating CostsGround Operating CostsSystem Operating Costs

Functional Cost Categories

Direct operating costsFlying operations Flight crew, Fuel costsMaintenance routine maintenance, extensive major checks, labor & parts Form 41 reports maintenance for direct airframe, direct engine and overhead/ burdenDepreciation & Amortization Capital costs of airline assetsFlight Operating Costs

Aircraft servicing handling aircraft on ground, landing feesTraffic servicing processing passengers, baggage and cargo at airportsPromotion and sales airline reservation centers, ticketing offices, travel agency commissions, and distribution system feesGround Operating Costs

Indirect operating costsPassenger Service meals, flight attendants,in-flight servicesAdvertising and PublicityGeneral and Administrative cant be associated to a particular activityTransport-related costs associated with the generation of transport related revenues. Fees paid to regional airline partners, extra baggage expense, and other miscellaneous overhead.System Operating Costs

Functional Cost Allocation

In many respects similar in structure to both functional and allocation schemes used by airlines and government around the world

ICAO Cost Categories

Overall , the structure of the cost allocation scheme is very similar.

Comparison Between ICAO and Form 41 Cost CategoriesCategoryICAOForm 41MaintenanceSingle Category: Maintenance and overhaulThree Categories: Direct Airframe Maintenance Direct Engine Maintenance Maintenance BurdenTicketing, Sale, PromotionSingle Category: Ticketing, Sales and Promotion2 Main Categories: Advertising Distribution Cost

Flight Operating Costs (FOC)Reported per block hour (correlated with the amount of time aircraft is being utilized)Aircraft Servicing CostReported per aircraft departure, including cleaning, fueling, marshalingTraffic Servicing CostReported per enplaned passenger, including the processing of passengers and their baggage

Cost Drives by Functional Categories

Passenger Service CostReported per revenue passenger kilometer (RPK) Promotion and Sales CostsReported as a percentage of revenue, responsible for the generation of revenueOther Indirect and System Overhead CostsReported as a percentage of total operating expenses Cost Drives by Functional Categories

Total Operating Cost per Available Seat Mile (Unit Cost-CASM)Total Operating Expense per Passenger Enplaned or RPM

Other Cost Category Comparison

Thanks for Listening.

Any Question?Go to http://catsr.ite.gmu.edu/The Global Airline Industry

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Notes