The Airline Industry Costs and Its Main Groups
The airline industry is vital to the economy of every world country. The role of the airlines is to link the national economies and to facilitate the exchange of people, goods, and ideas. Nevertheless, the airline industry functioning is connected with the high costs. These costs can be divided into the following main groups:
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The capital costs
Different from the other service businesses, the airlines require an immense number of very expensive equipment and facilities to get started. They include the airplanes, the maintenance hangars, the flight simulators, etc. Therefore, the airline industry is a capital-intensive business. For example, even a relatively small airliner, such as a Boeing 737, costs around $50 million, when a larger airplane’s price can reach up to $300 million (Grabianowski, n.d., para. 1). No wonder that to finance all the necessary equipment the airlines need to find the sources, such as the loans or the long-term leasing.
The operating costs
This type of the costs is crucial for the successful functioning of the airline business. The costs include the following subgroups:
The fuel costs have become one of the biggest operating expenses for the airlines over the last 15 years. For instance, in the U.S. airline industry the labor costs were 2.5 times higher than the fuel costs in 2000 (Firestine & Guarino, 2012, p. 1). However, in 2013 the fuel expenses were $44.5 billion and accounted for 28% of the total operating expenses as against $39.6 billion of the labor expenses (25% of the total expenses) (Smallen, 2014, p. 3). Moreover, it is important to notice, that the fuel costs are extremely volatile, and it is difficult for the airlines to predict the future fuel prices. For instance, the U.S. carriers can spend from $2 to $5 billion on the fuel every month (Grabianowski, n.d., para. 3).
The labor costs were partly mentioned above. The airlines are labor-intensive and employ the large personnel from the pilots and flight attendants to the lawyers and cleaners. As the airlines provide the services, the high-skilled personal attention to every customer is required. The labor costs of the airline industry are very high. For example, the annual salary of the experienced pilot can approach $100,000. The salaries of the other crew members are less; nevertheless, they comprise the tangible costs (Grabianowski, n.d., para. 2).
The taxes and fees the airlines must pay are also significant. This expenditure item includes the federal taxes, the security fees, the facility charges, and the landing and rental fees.
The maintenance costs are essential for the airline industry. This expense item is closely connected to the flight safety. The maintenance costs include the cost of the spare parts, as well as the cost of the routine maintenance every several months, and the more intensive maintenance operations every few years (McCartney, 2012, para. 10).
The other costs, which include the aircraft and traffic service, the passenger service (from the free catering to compensating the lost baggage), the marketing costs, and the depreciation/amortization of the equipment.
As the fuel costs are a matter of great concern to the today’s airlines, they deserve a more intent look. To analyze the influence of the fuel prices on the airline industry thoroughly, it is necessary to take the two following periods of time:
Since the late 1990s till 2014
This period was characterized by the upward trend in the cost of the fuel. In accordance with the U.S. airline industry statistics, the jet fuel prices have surged from $0.72 per gallon in 2002 to $2.98 per gallon in 2013. Consequently, the airlines’ annual fuel costs have increased from about $14 billion to about $50 billion (Rahall II, Rockefeller IV, Shuster, & Thune, 2014, p. 7). Such an incredible growth of the prices has provoked the imminent changes in the airline industry. The new technologies to reduce the fuel requirements were adopted, and older jets were replaced with the new, more fuel efficient, ones. Therefore, the amount of the fuel burned improved significantly (in 2000 it was 28.6 gallons per passenger as against 22.5 gallons per passenger in 2011) (McCartney, 2012, para. 7).
At the same time, the high fuel prices have reduced the general aviation activity, have forced the airlines to lessen the redundant capacity, to decrease the number of the employees (325,000 in 2013 as against 422,000 in 2002 in the USA), and to increase the fares (by the summer of 2014, the U.S. airfares have grown by 5% in a year and by 31% in the five years). Also, the new instrument called the fuel hedging has emerged to protect the airlines against the future increases of the fuel price (Rahall II et al., pp. 12-13).
Since 2014 till now
At the end of the 2014 the crude oil prices began tumbling. Of course, the fuel prices have decreased significantly. The rating agency Moody’s forecasts the global airline industry will spend some $70 billion less on fuel in 2015 compared to 2014. Nevertheless, the experts believe, that the long-term strategy concerning the fleet planning and capacity will not be affected for now (Broderick, Flottau, Schofield, & Unnikrishnan, 2015, para. 2-3). Moreover, the ticket prices will also remain unchanged. The reasons not to cut the fares are that the oil prices are volatile, the airplanes are full at the current prices, and the airlines will surely suffer losses because of their hedging strategy. Instead of cutting the fares, the airlines are likely to use saved money to reduce their debts, purchase the new aircrafts and reward the shareholders.
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Broderick, S., Flottau, J., Schofield, A., & Unnikrishnan, M. (2015). Drop in Oil Prices Means an Airline Profitability Boost Now, But… Web.
Firestine, T., & Guarino, J. (2012). A Decade of Change in Fuel Prices and U.S. Domestic Passenger Aviation Operations. Web.
Grabianowski, E. (n.d.). How Budget Airlines Work.Web.
McCartney, S. (2012). How Airlines Spend Your Airfare. Web.
Rahall II, N.J., Rockefeller IV, J.D., Shuster, B., & Thune, J. (2014). Impact of Fuel Price Increases on the Aviation Industry. Web.
Smallen, D. (2014). 4th-Quarter and Annual 2013 Airline Financial Data. Web.