The management of an airline company and the smooth running of its business are entitled to unavoidable expenses. The aviation industry incurs expenses that range from purchasing the airplanes, accounting for the labor force and, very paramount, the fuel costs. Every airline in the world is a profitable business corporation. Therefore, despite the provision of high-quality services to their clients being a prime course, profit is also a principal force behind the running of these organizations. The companies, therefore, have to strike a balance between making the profit and offering excellent services to their customers. Profit is at its maximum only if the expenses that the industry incurs assume a minimum.
The most basic of all the costs that an airline corporation cannot avoid is purchasing the airplanes. According to Boeing, a small passenger plane can cost almost 50 million USD while a larger jet may fetch for more than 300 million USD (Givoni & Rietveld, 2010). Apart from purchasing the aircraft, switching them also involves significant amounts of money. There are two major suppliers of airplanes, the Airbus, and Boeing, and therefore, the competition in matters of supplies is not very tough for the airlines. However, the companies offering air services have to try and dominate their competitors by providing comfortable and luxurious services to their customers. That means that the companies must look for more comfortable planes, and that transmits into higher costs of buying the aircraft (Horngren, 2009).
The other very principal cost that any airline must incur is labor. Airline companies employ a substantial number of people starting with the pilots and cabin crew members and the management personnel of the industry. An internet source, Payscale.com ranges the cost of hiring a pilot with around ten years of experience or more at the upwards of 100,000 USD annually (source: payscale.com). According to the website, the first officers together with other crew members do not earn as much, but they represent an enormous cost. Also, the other paid members of the team include the flight attendants, dispatchers, customer service and the baggage handlers among others. The labor cost is, according to the Air Transportation Association, the premier cost of any airline corporation.
Thirdly, airlines cannot evade fuel costs on their daily operations. Fuel costs amount to more than a quarter of an airline company’s total costs every year. These costs are therefore quite crucial to every airline bearing in mind that they are not a permanent value (Horngren, 2009). The monthly fluctuation of these values is what makes them critical since the companies are not in a pole position to project their financial outcomes after the fuel costs. Fuel prices bring about the effects of fuel efficiency to an airline since long haul carriers have a higher efficiency regarding fuel consumption compared to their short haul counterparts. The variation in fuel efficiency owes to the fact that landings and take-offs consume greater amounts of fuel. According to Wensveen & Leick, therefore, short haul airlines spend much more on fuel than their international counterparts (Wensveen & Leick, 2009).
Moreover, carriers spend on other financial sectors that include settling debts and other maintenance costs. It happens at times that a company falls short regarding capital that it requires running its business fully smoothly, and extra money and services are sought to complement the operations. Borrowing and lending is a typical scenario in any business firm and at the end of a stipulated time, these debts need a settlement. Debt settlement comes alongside some other maintenance costs that act on the offices, the airplanes and the machinery that is always prone to natural wear and tear. Insurance is also a substantial cost to many airlines while sometimes damages and repairs may amount to a significant figure that companies cannot overlook.
Fuel cost is a premier value, as stated earlier in the discussion, which does not have a constant position or a regular trend. In the attempts to protect themselves from the sudden fuel price upsurges, most large airline companies have hedging contracts for fuel prices. When the fuel prices are very high, these companies face financial losses or profits with a slight margin. On the other hand, when the fuel prices are very low, the airlines fetch a lot of benefits. Once these profits are predictably very impressive, many companies seek to review their fuel-hedging contracts and often some of them make great losses in the contracts give backs.
However, due to the volatility of these oil prices, it is not expected that the airlines will lower their ticket prices. It happens, as it did in 2008, that fuel prices go down remarkably and then surge upwards after a short while. Airfares mostly remain intact despite occasional jet fuel prices going down owing to that instability in the fuel prices. Airline companies will make covetable profits when the jet fuel costs are below their projections, although these profits will most likely go on to cover their debts and rewarding the shareholders. The companies may also prefer buying back the company shares to raise the value of their remaining stock to reward their passengers with slashed air fares.
Owing to enterprises in the US merging and leaving only four airline corporations operating and having dominant control on more than 80 % of the US air market, flights pack entirely. This dominant control of the market by only a quartet of companies ensures that the fares may vary but only within a small margin. With the airlines filling around 85% of their seats, air tickets are assuming a slow and upward trend even with reduced fuel costs. Airline patrons’ frequency of traveling, as Billington notes, is mainly dependent on the number of seats occupied by passengers (Billington, 2015). More seats get filled with lower fares, and that means fewer seats remain for occupation by the patrons.
- Billington, C. A. (2015). U.S. Patent No. 9,161,994. Washington, DC: U.S. Patent and Trademark Office.
- Givoni, M., & Rietveld, P. (2010). The environmental implications of airlines’ choice of aircraft size. Journal of Air Transport Management, 16(3), 159-167.
- Horngren, C. T. (2009). Cost Accounting: A Managerial Emphasis, 13/e. Pearson Education India.
- Wensveen, J. G., & Leick, R. (2009). The long-haul low-cost carrier: A unique business model. Journal of Air Transport Management, 15(3), 127-133.
