Project on Cost Analysis of Airline Industry

Presented By Group No. 18

Ramesh Pamu Deepak Sahu Ravindra M Salve Umesh D Sandbhor Pramod Tambe Sandip Kumar Verma - 65 - 85 - 87 - 88 - 104 - 112

WHAT IS AIRLINES INDUSTRY

An airline provides air transport services for passengers or freight, generally with a recognized operating certificate or license. Airlines lease or own their aircraft with which to supply these services and may form partnerships or alliances with other airlines for mutual benefit. Airlines vary from those with a single airplane carrying mail or cargo, through full-service international airlines operating hundreds of airplanes. Airline services can be categorized as being intercontinental, intra continental, domestic, or international and may be operated as scheduled services or charters

History of Airline Industry :

Failed attempt at an airline before DELAG, Deutsche LuftschiffahrtsAktiengesellschaft was the world's first airline. It was founded on November 16, 1909 with government assistance, and operated airships manufactured by The Zeppelin Corporation. Its headquarters were in Frankfurt. The five oldest non-dirigible airlines that still exist are Australia's Qantas, Netherlands' KLM, Colombia's Avianca, Czech Republic's Czech Airlines and Mexico's Mexicana. KLM first flew in May 1920 while Qantas (for the Queensland and Northern Territory Aerial Services Limited) was founded in Queensland, Australia in late 1920

International Regulatory Authorities for Airlines International Air Transport Association (IATA) International Civil Aviation Organization (ICAO)
Civil aviation regulating authorities in India Civil Aviation Authority Air Navigation Service

Every Airline should be registered with following agencies for unique Alfa-Numeric code

Airline Codes:

IATA Airline Codes

IATA airline designators are two-character designation codes assigned by the International Air Transport Association (IATA) to the world's airlines. Although the IATA standard provides for three-character airline designators, IATA has not so far used the optional third character in any assigned code. Controlled duplicates are issued to regional airlines whose destinations are not likely to overlap.

IATA ICAO AWB code code prefix IC IAC

Airline

Base Delhi (DEL)

Country India

Status Start 1953

End -

058 Indian Airlines

ICAO Airline Codes

The ICAO airline designator is a three-letter designation code assigned by the International Civil Aviation Organization (ICAO) to aircraft operating agencies, aeronautical authorities and services. The codes are unique by airline. Each aircraft operating agency, aeronautical authority and services related to international aviation is allocated both a three-letter designator and a telephony designator.

ICAO code IAC

AWB IATA prefi code x IC

Airline

Base
Delhi (DEL)

Country
India

Statu Start End s 1953 -

058 Indian Airlines

Airport Codes:
World Airport IATA Codes
An IATA airport code, also known an IATA location identifier or station code, is a three-letter code designating many airports around the world, defined by the International Air Transport Association (IATA). The codes are unique at any given point in time, although defunct codes may be re-used after a suitable period of time has elapsed.
IAT A ICAO Airport Co Code de BO Chhatrapati Shivaji VABB M International Airport

City

Country

Mumbai

India

World Airport ICAO Codes

The ICAO airport code or location indicator is a four-letter alphanumeric code designating each airport around the world. These codes are defined by the International Civil Aviation Organization (ICAO). The ICAO codes are used by air traffic control and airline operations such as flight planning.

ICAO icao Code Code

Airport

Country 5

WSS S

SIN Singapore - Changi Airport

Singapore

Airline Cost Structure

Direct Operating Cost

A) Aircraft Related
Fuel and Oil Maintenance (Excluding InHouse Labour ) Landing Fees Navigation Fees Handling Fees Crew Expenses

Indirect Operating Cost

Aircraft standing charges Flight Crew Pay Cabin Crew Pay Maintenance Labour (Inhouse Labour) Handing Cost at Base Stations

Overheads
Sales Costs Administration Accounts

B) Traffic Related
Passenger and Cargo Commission Airport Load Fees In-flight Catering General Passenger Related Cost

General Management
Personnel Dept. Property

Basic Airline Cost Structure

Interest 7.0% Landing Fees 2.2% Advertising & Promotion 1.6%

Passenger food 3.5% Passenger traffic commissions 10.0%

Labour 23.3%

Fuel 25.5% All Other 26.9%

Terminologies used in the Aviation Industry:

Payload Capacity Total Aircraft Capacity Available for the Carriage of Passengers, Baggage, Cargo, Mail, and is measured in metric tonnes. The Payload Capacity of an aircraft (measured in tonnes) multiplied by Kilometers Flown The number of passengers which can be carried by an airplane (number of seats offered for sale) multiplied by the distance over which they are carried The number of tonnes carried on flight multiplied by the kilometers over which they are carried The number of passengers on a flight multiplied by the distance travelled

Available tonne kilometers (ATK)

Available Seat kilometers (ASK)/ (APK)

Revenue tonne kilometers (RTK) Revenue passenger kilometers (RPK)/(PTK)

Example : How to Calculate The Seat Load Factor and Revenue load Factor A
Cargo Capacity

Distance = 1000 Kilometers

= 10 tonne

Passenger (pax) Capacity = 200 seats (aircraft Capacity)

ACTUAL VOLUME Passenger Revenue

Actual Passengers = 150 RPK = Actual passengers multiplied by distance = 150 x 1000 = 150,000

AVAILABLE VOLUME ASK / APK = number of seats multiplied by distance = 200 x 1000 = 200,000

ATK = Available tonnage carrying capacity** multiplied by distance

= ((200x0.1)+10) x 1000 = 30,000

Cargo Revenue
Actual Cargo = 5 tonnes RTK = Total tonnage carried** multiplied by distance = ((150x0.1)+5) x 1000 = 20,000

** Passenger assumed to weigh 0.1 t (100kg) = AWP + AWL = 80 kg +20 kg = 100 kg = 0.1 t

LOAD FACTORS :
LOAD FACTORS Seat / Passenger = RPK x 100 ASK = 150000 x 100 200000 = 75% Revenue / Weight = RTK x 100 ATK = 20000 x 100 30000 = 67%

Marginal Costing and Break-even

The classic demand and supply curve states that, as price goes up, demand goes down Price is related to time of booking (i.e. relative to departure date of the flight). Mathematical Representation: P T (Price Time of Booking) i.e. closer the time of travel, cheaper the price of ticket. The idea behind marginal costing / pricing is to exactly match the fare to the demand at any given point of time.

Total Cost for per flight

Fixed Cost : The cost of operating a flight, Which remains the same whether the
aeroplane is empty or full

Variable Cost : The cost per passenger Food, Some fuel Exp., Baggage
Handling, Passenger Handling, and So on

Total Cost of Flight : Fixed Cost + (Variable Cost x Actual nos of Passengers)

Fixed Cost per flight = 10,000, Variable Cost per passenger per flight = 50 Total Cost for Flight = 10,000+50 x P Note : Flight means one single sector i.e. Mumbai to Hydrabad..

BREAK EVEN COST CHART FOR FLIGHT

20000
Break even

15000
Money

10000 5000 0 0 25 50 Seats 75 100

Revenue Fixed Cost Variable Cost Total Cost

Break-even occurs when costs are equal to revenue

Break even equation :

From Above Chart, The Fix Cost is 10000, Variable Cost is 50, Fare is 200 Fixed Costs + (Variable Costs x Actual passengers) = Fare x Actual passengers

COSTS
10,000+50 x P
10,000 P

REVENUE
200 x P
150 x P 10,000/150

=
= =

66.66 = 67

Marginal Cost :
Marginal Cost formula for x passengers : Fare for passenger no p = Fixed Cost + Variable cost per passenger P Where X= 50 = 10,000 + 50 = 250 50 = 250 is the marginal cost and hence the fare you should charge the 50 passengers

P=1

Marginal Cost = 10050 = 10000/1

+ 50

P = 10 Marginal Cost = 1050 = 10000/10 + 50 P = 25 Marginal Cost = 450 P = 50 Marginal Cost = 250 P = 100 Marginal Cost = 150 = 10000/450 + 50 = 10000/250 + 50 = 10000/100 + 50

Path forward

Things to Look Forward

Technology Vision 2020 Global airlines traffic to increase in lieu of the good performance Allowing of Private Participation & FDIs in construction & maintenance of air traffic infrastructure Air transport supports US$3 trillion of global economic activity. That is 8% of global GDP and 29 million jobs

Challenges
Infrastructure Avian Flu Tackling the rise in Fuel Price Tax on leasing from government With the advent of LCC, other airlines too reducing their price significantly Costs pressures (ATF Prices & Staff Cost)

Measures for Controlling Cost:

1.Waiver / Concession on tax on leasing from Government. 2.Containing rise in fuel prices by entering into Oil futures or Zero Cost structure derivatives. 3. Availing LIBOR linked loans eg. FCNRB Term Loan or Demand Loan to contain Financial Expenses. 4. Providing subsidy on tax levied by the government on fuel. 5. Reducing Head Counts per flight / departments. 6. Credit Controls eg. Customer credit, Payment terms, follow up action, legal action & reporting.