With the latest merger of American airlines and US Air the number of players just got smaller and the cost to the consumer is poised to take a bump. While both the low cost discount airlines and the major carriers are trying to merge and attract more paying fares they are all facing some daunting expenses in the near future. In addition to rising fuel cost and increased mandatory maintenance requirements airlines are going to be experiencing some increased cost over the next five years. (Carter 2004)
One of the major cost areas facing the airlines now is associated with their fixed operating costs. These costs include the cost for staff salaries like flight attendants and pilots and also all of the support and maintenance staff necessary to allow a flight to take off and land safely. The cost for things like fringe benefits including health insurance and paid time off have risen exponentially over the last few years and is expected to continue rising with the mandates of the Affordable Healthcare Act being enforced. In addition to the cost of the employees rising other costs like those for materials and supplies like parts, passenger food and drinks are also rising. In every area of the airline industry costs are rising and so are the costs for areas associated with the airline industry. Areas like landing fees at the airports, hanger rental fees and gate expenses are increasing to the point that some airlines are choosing to operate fewer gates in order to conserve cash. This saved cash is used to offset the additional service costs associated with new promotions and national advertising campaigns.
If we break down these costs into their respective categories we wind up with three major sections. First there is Flight Operating costs, second there are Ground Operating costs and then finally there are Systems Operating costs. As was mentioned earlier in the document the Flight Operating cost are being increased by the additional burden the government is requiring for inspections of the airframe and all of the safety warning systems. These additional extensive major systems checks are costing the airlines over 30% more than they did just a year ago. When you add in the cost of depreciation and amortization of the investment for the planes and support equipment and the expenses just keep compounding. (GAIP 2014)
When we look at the Ground Operations expenses which include the aircraft servicing and traffic servicing cost we see the rise on a different plain. The cost to process the passengers through the system along with their baggage and added cargo has grown by over 20%. Some of it has been recouped by the added fees the major carriers have tacked on for baggage fees, flight change fees and passenger seat assignment fees. These fees have been responsible for over $32 million in additional revenue for the airlines over the last year. (American Airlines 2014) The baggage handlers unions at most of the major airports have received raises for their members as each contract was renewed. Included in Ground Operations is ticketing and since travel agencies are responsible for over 60% of the business travel ticketing their commission percentages have risen steadily since the airlines introduced internet or on-line ticketing because this allowed the airlines to reduce their reservations staffing to the general public but forced the business traveler to go to the travel agents to get service. (Carter 2004)
Finally the system operating costs have been on a roller coaster since 1996 when most airlines began phasing out full meals on flights in favor of snacks and a drink. When the airlines saved a little money in that area then the costs associated with many of their regional airline partners went up. Advertising, publicity and marketing expenses have become more expensive because there are more avenues that must be covered in order to reach the traveling public.
The last element in the rising cost of doing business in the airline industry is the fuel cost. Just like gasoline for automobiles the cost of high grade jet fuel has been on the rise. Since airlines do not purchase small amounts at a time the rising fuel prices did not have an immediate effect on the bottom line of the airlines, however now that several cycles of fuel purchases have hit the airlines they are working to try and get an handle on this major cost element. (Indexmundi Fuel Pricing Index) As part of their overall cost recapture program the airlines have raised fares to offset their CASM (Cost per Available Seat Mile) decline due to the increased fuel cost. (GAIP 2014) They have merged with each other, as the government would allow, to combine infrastructure and eliminate job function duplication and therefore some additional cost. They have reduced the number of flights on certain routes to force the planes to be fuller and thus increase their ROI.
Several of the airlines have begun to standardize on one or two airplane types that are both fuel efficient and yet have the range to make it across country. This limited plane concept allow them to reduce maintenance inventory and optimize fuel costs with regular servicing. This also allows them to have a solid formula for calculating RASM (Revenue per Available Seat Mile) because they have a standard performance model to use with standard airplane types. (American Airlines 2014) Finally most of the larger airlines have reconfigured their planes with smaller seats to cram more people on each flight and increase the RASM because the airplane is both fuller and better utilized. So in order to combat rising fuel prices the general flying public has had to pay more for the ticket, ride in smaller seats, have less variety of food options and then adjust their schedule because there are fewer flights going to their destinations. (USDOT 2014)
- GAIP(2014), Airline Data Project, Retrieved 11-1-14. Available: http://web.mit.edu/airlinedata/www/Res_Glossary.html
- American Airlines (2014), Basic Measurements in the Airline Industry, Retrieved 11-1-14. Available: http://www.aa.com/i18n/amrcorp/corporateInformation/facts/measurements.jsp
- Indexmundi Fuel Pricing, Jet Fuel Daily Price Index 1999 – 2014, Retrieved 11-1-14. Available: http://www.indexmundi.com/commodities/?commodity=jet-fuel&months=180&commodity=jet-fuel
- Carter, David A., Rogers, Daniel A. and Simkins, Betty J. (2004), “Fuel Hedging in the Airline Industry: The Case of Southwest Airlines”, SSRN, Retrieved 11-1-14. Available: http://www.sba.pdx.edu/faculty/danr/danraccess/courses/fin562/hedging_case_crj_submission.pdf
- USDOT, National Transportation Atlas 2014 Database, Bureau of Transportation Statistics, Retrieved 11-1-14. Available: http://www.rita.dot.gov/bts/home
