Summary Airline Business
Airline Cost
Operating Cost ‘total op. cost’ of core activity – core activity: moving passenger/cargo from A to B
§ Direct operating cost
o Variable (Fuel, oil, variable maintenance, variable crew, airport charges)
o Fixed (Cost of ownership: Fleet (Fixed cost), Calendar driven cost: maintenance, Fixed flight crew:
pilots etc, …)
§ Indirect operating
o Ticketing, sales, promotion
o Passenger service (catering, handling,…)
o Fixed: Facilities, Equipment, Depreciation
o Variable: Commissions, Catering, Handling
Non-operating costs
§ Interest expense
§ Loss on assets
§ Miscellaneous (foreign exchange losses)
Fixed Costs
Fixed vs variable depends on time frame
§ Short run; stick to schedule. Why?
o delays cost money
o ranking
o passengers (customers) potential loss when no flying: customer satisfaction
§ medium run; schedule and minor technical adjustments
§ long run; (almost) anything goes
Fixed costs high in aviation à economic implication? Economies of Scale
Density Economies (Reminder)
§ What happens if output density in network increases?
Eco of density: avg costs decrease with density
§ Cost per passenger on a link decreases if the number of passengers traveling on that link increases
RTD = 1/e, where e (elasticity)
§ Why not just look at KLM’s network?
o HUB&Spoke network
o - many of others went bankrupt with this strategy
o - you need to compare it with other airlines
Marginal costs decrease in output: always decreasing, next unit is cheaper —> average cost decrease as well: Eco of
density
MC = derivative of C
Why Economies of density?
Larger aircraft burn more fuel, but operating cost per passenger are lower
Certain fixed that reduce over a certain amount of products/passengers.
Higher densities (passenger flow) allow for more flight hours per day
hub and spoke:
many fixed cost are duplicated over many links
Higher density (passenger flow) allows for more intensive use of ground facilities and personnel.
§ Many fixed costs duplicated for every link
§ More links à more coordination cost
Airline Cost
Operating Cost ‘total op. cost’ of core activity – core activity: moving passenger/cargo from A to B
§ Direct operating cost
o Variable (Fuel, oil, variable maintenance, variable crew, airport charges)
o Fixed (Cost of ownership: Fleet (Fixed cost), Calendar driven cost: maintenance, Fixed flight crew:
pilots etc, …)
§ Indirect operating
o Ticketing, sales, promotion
o Passenger service (catering, handling,…)
o Fixed: Facilities, Equipment, Depreciation
o Variable: Commissions, Catering, Handling
Non-operating costs
§ Interest expense
§ Loss on assets
§ Miscellaneous (foreign exchange losses)
Fixed Costs
Fixed vs variable depends on time frame
§ Short run; stick to schedule. Why?
o delays cost money
o ranking
o passengers (customers) potential loss when no flying: customer satisfaction
§ medium run; schedule and minor technical adjustments
§ long run; (almost) anything goes
Fixed costs high in aviation à economic implication? Economies of Scale
Density Economies (Reminder)
§ What happens if output density in network increases?
Eco of density: avg costs decrease with density
§ Cost per passenger on a link decreases if the number of passengers traveling on that link increases
RTD = 1/e, where e (elasticity)
§ Why not just look at KLM’s network?
o HUB&Spoke network
o - many of others went bankrupt with this strategy
o - you need to compare it with other airlines
Marginal costs decrease in output: always decreasing, next unit is cheaper —> average cost decrease as well: Eco of
density
MC = derivative of C
Why Economies of density?
Larger aircraft burn more fuel, but operating cost per passenger are lower
Certain fixed that reduce over a certain amount of products/passengers.
Higher densities (passenger flow) allow for more flight hours per day
hub and spoke:
many fixed cost are duplicated over many links
Higher density (passenger flow) allows for more intensive use of ground facilities and personnel.
§ Many fixed costs duplicated for every link
§ More links à more coordination cost
