High Costs and Small Margins
Thanks to technological advances, the airline industry boomed in the second half of the twentieth century. As the industry grew, operating costs grew with it. In 2014, the global airline industry spent over $699 billion to make a profit (Cros, 2015). High operating costs have reduced the profit margin for carriers and left them scrambling to find ways to expand their margins.
To ensure effective and efficient operations, globally airlines will spend $174 billion dollars on operating costs, or 25% of total revenue (Cros, 2015). The vast majority of these expenses will be in the form of payroll. Unlike the other industries, the airline industry is highly unionized. In 2006, 49% of air workers were unionized …show more content…
The International Air Transport Association’s (IATA), annual Maintenance Cost Task Force (2015) reported carriers paid $1,000 per flight hour and $2,637 per departure with an average cost of $3.5 million per aircraft. Direct maintenance costs only make up a portion of all maintenance expenses. On average carriers will employ 12 mechanics and 5 maintenance staff per aircraft (Cros, 2015). Additionally, to facilitate rapid maintenance carriers must stock spare parts. The cost of spares total $1.10 per dollar spent on direct maintenance (Saltoglu, Humaira, & Inalhan, 2016, p. 3). Direct maintenance comes at an opportunity cost. Building on IATA data through additional research, Saltoglu, et al. (2016), concluded that for every hour an aircraft is receiving maintenance, carriers are losing $7.08 per seat (p. 10). Seven American air carriers reported maintenance of their A320 fleet comes at an opportunity cost in excess of $1,000 per hour (Saltoglu, et al., 2016, p. …show more content…
In 2014, airliners paid $223.6 billion on aviation fuel alone (Cros, 2015). The small fluctuation in the price of oil can have a dramatic impact on firms’ margins. An increase of one percent in jet fuel prices translates to $530 million for the US airline industry (Baazargan, Lange, Tran, & Zhou, 2013, p. 55). Many airliners are actively trying to mitigate this unpredictability. Many carriers are now employing hedging strategies (Yu-Hern & Pei-Chi, 2011, p. 10405). This strategy is when carriers agree on a fixed fuel price with suppliers for a set period. By doing this, the carrier eliminates fluctuation. However, this comes at a risk, as prices may fall in during the set period. If this is the case, the airlines must pay the agreed upon
Thanks to technological advances, the airline industry boomed in the second half of the twentieth century. As the industry grew, operating costs grew with it. In 2014, the global airline industry spent over $699 billion to make a profit (Cros, 2015). High operating costs have reduced the profit margin for carriers and left them scrambling to find ways to expand their margins.
To ensure effective and efficient operations, globally airlines will spend $174 billion dollars on operating costs, or 25% of total revenue (Cros, 2015). The vast majority of these expenses will be in the form of payroll. Unlike the other industries, the airline industry is highly unionized. In 2006, 49% of air workers were unionized …show more content…
The International Air Transport Association’s (IATA), annual Maintenance Cost Task Force (2015) reported carriers paid $1,000 per flight hour and $2,637 per departure with an average cost of $3.5 million per aircraft. Direct maintenance costs only make up a portion of all maintenance expenses. On average carriers will employ 12 mechanics and 5 maintenance staff per aircraft (Cros, 2015). Additionally, to facilitate rapid maintenance carriers must stock spare parts. The cost of spares total $1.10 per dollar spent on direct maintenance (Saltoglu, Humaira, & Inalhan, 2016, p. 3). Direct maintenance comes at an opportunity cost. Building on IATA data through additional research, Saltoglu, et al. (2016), concluded that for every hour an aircraft is receiving maintenance, carriers are losing $7.08 per seat (p. 10). Seven American air carriers reported maintenance of their A320 fleet comes at an opportunity cost in excess of $1,000 per hour (Saltoglu, et al., 2016, p. …show more content…
In 2014, airliners paid $223.6 billion on aviation fuel alone (Cros, 2015). The small fluctuation in the price of oil can have a dramatic impact on firms’ margins. An increase of one percent in jet fuel prices translates to $530 million for the US airline industry (Baazargan, Lange, Tran, & Zhou, 2013, p. 55). Many airliners are actively trying to mitigate this unpredictability. Many carriers are now employing hedging strategies (Yu-Hern & Pei-Chi, 2011, p. 10405). This strategy is when carriers agree on a fixed fuel price with suppliers for a set period. By doing this, the carrier eliminates fluctuation. However, this comes at a risk, as prices may fall in during the set period. If this is the case, the airlines must pay the agreed upon