Another travel retail revenue might be an airline’s sales of travel insurance. Travel retail income was the lowest ancillary revenue source at about 5% in 2012 (Figure 6.14). Figure 6.15 shows several world airlines and the percent of their total revenue that is attributable to ancillary revenue. Figure 6.15. Ancillary revenue as a percent of total revenue (Engel, n.d.) The menu pricing fees that can be added to the basic fares can be significant. For example, JetBlue charges as much a $100 to change a reservation, and Spirit might charge as much as $100 to store a bag in the cabin overhead compartment. In 2013, U.S. airlines raised a whopping $3.35 billion for checked baggage, and $2.81 billion for changing reservations (Koenig, 2014). Figure 6.14 shows baggage and a la carte fees combined accounted for 45% of U.S. airline ancillary revenues in 2012. Cost Structure Next we look at airline costs. Federal laws require that U.S. airlines submit cost data to the U.S. DOT on a monthly, quarterly and annual basis. Typically, airlines report costs categorized by administrative areas, as shown in Figure 6.16.
Finance and Cost Structure 151 Figure 6.16. Administrative cost breakdown for the 4 th quarter of 2013 shown as a percent of total operating expenses (Airlines 4 America (n.d.a). Although this type of categorization does the job for the accountants, it does not highlight specific activities of the airline’s operation that contribute to costs. A more useful method is to categorize costs based on functional areas (Belobaba, 2009). “The three major functional cost categories for airlines are flight operating costs, ground operating costs and system operating costs” (Belobaba, 2009, p. 115). Figure 6.17 shows the same costs as Fig 6.16, but re-categorized by functional group. Fuel, 26.8 Labor, 23.9 Rents & Ownership, 10.2 Pro Services, 7.5 Food & Beverage, 1.4 Landing Fees, 1.8 Maintenenace Material, 1.7 Insurance, 0.3 Commissions, 0.9 Advertising, 0.8 Supplies, 0.6 Transport Related, 14.1 Other, 10
Finance and Cost Structure 152 Fig. 6.17. Airline cost breakdown for the 4 th quarter of 2013 shown as functional costs. Adapted from Airlines 4 America (n.d.a). Functional Cost Areas Flight operations. It’s no surprise that the largest cost area is flight operations. This area includes all costs associated with operating the aircraft: flight crew (pilot) labor costs, fuel costs, maintenance expenses and aircraft ownership costs (depreciation and amortization). Most operating expenses are directly attributable to flight time, or block time (airline gate-to-gate time), so flight operations costs are usually reported on a per block hour basis (Belobaba, 2009). Generally, flight operations are responsible for about 50% of total costs, as Figure 6.17 illustrates. With the restructuring of U.S. network carriers since 2000, flying operations expenses have increased as a percentage of total expenses as a result of reductions in non-flight expenses and because of increasing fuel prices.
You've reached the end of your free preview.
Want to read all 269 pages?
- Fall '16
- Kelly Lawton
- United Airlines, Delta Air Lines, Pan American World Airways, Cab, Douglas DC-3