TMLT Paper #1

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School

American Military University *

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Course

311

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Business

Date

Feb 20, 2024

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docx

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Uploaded by ChancellorQuail3494

1 True Costs of an Airline TLMT311: Introduction to Transportation Management

2 True Costs of an Airline Operating costs are at the heart of every airline, encompassing many different areas from upfront aircraft costs, maintenance, fuel, and labor. As with any industry an airline’s profitability and longevity, understanding and managing these expenses is vital for an airline to thrive in such a competitive environment. In this paper we will investigate the complex world of different operating costs, and how airlines manage these complex costs to run efficiently. Labor Costs There are fluctuating numbers depending on the source about the percentage of labor costs for an airline, but one thing that is agreed upon is that labor costs are the largest part of an airline’s expenses. Airline payrolls account for around 35% of an airline's operating expenses (Finlay, 2023). There are some major drawbacks to the labor costs being most of an airline’s expenses. Because of the large percentage that labor costs takes up airlines are often quick to cut those costs in downturns and slow periods in aviation. This leads to workers being laid off as the first act by many airlines to lower expenses. Fuel Costs Fuel prices affect all Americans and by many is one of the most important prices that they look at. Airlines are also significantly affected by rising fuel prices, which is their second largest expense behind labor costs. Carriers typically pass on to consumers as much as 60 percent of a volatile rise in the price of fuel, experts said, a process that usually takes months (Chokshi & Krauss, 2022). Passing these rising prices on to consumers is essential for airlines to remain profitable and prevent significant losses. The average airline spends anywhere from 10 to 20 percent of their costs on fuel. Many airlines buy futures on fuel prices to try and hedge against rising prices. This works well and is a good move when jet fuel prices rise during this period, but

3 if the opposite happens and jet fuel prices fall over the futures contract then the airline is paying more for their fuel than the current market price. Normally these higher prices in fuel and consequently higher ticket prices would discourage flyers from these expensive flights. According to the New York Times, rising fuel costs and fares seem to be doing little to dissuade consumers (Chokshi & Krauss, 2022). The covid lockdowns may have a roll in the eagerness for consumers to fly regardless of ticket prices. Mixing being locked down from travelling for two years with stimulus checks being sent out is a recipe for a strong willingness to travel. Miscellaneous Costs Labor and fuel costs are by far the two largest expenses for airlines, but they still only account for about 50 percent of an airline’s expenses. The other half is comprised of many different expenses including maintenance, passenger services, advertising, legal, landing fees, renting aircraft and terminals at airports. Out of these expenses advertising, passenger services and aircraft rentals are the highest costs. Because of the lower costs of the miscellaneous costs to an airline, these services are not normally the first ones to be changed when there is a downturn in aircraft traffic. Conclusion Operating costs consist of many different expenses that go into running an airline. The two most important expenses for an airline to manage are fuel and labor costs, which makes these the first places airlines look to adjust. High fuel prices often lead to higher ticket prices and downturns in flying often lead to workers being laid off. Miscellaneous costs are unavoidable and contain expenses that are not within the control of the airline to change, such as maintenance costs, terminal fees, and aircraft rental fees. Like any other business, airlines have a tough job to remain profitable and manage expenses.

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4 References Airline operating costs and productivity - international civil aviation ... ICOA. (n.d.). https://www.icao.int/mid/documents/2017/aviation%20data%20and%20analysis %20seminar/ppt3%20-%20airlines%20operating%20costs%20and%20productivity.pdf Chokshi, N., & Krauss, C. (2022, April 15). Fuel prices send airfares higher, but travelers seem ready to pay. New York Times . Retrieved October 29, 2023, from https://www.nytimes.com/2022/04/15/business/energy-environment/fuel-prices-travel- cost.htm. Finlay, M. (2023, May 18). What are the biggest expenses for airlines? . Simple Flying. https://simpleflying.com/biggest-expenses-airlines-guide/ Passenger Airlines operating costs, United States, 2019: The Geography of Transport Systems . The Geography of Transport Systems | The spatial organization of transportation and mobility. (2022, June 25). https://transportgeography.org/contents/chapter5/air-transport/airline-operating-costs/ #:~:text=Labor%20is%20the%20most%20important,for%20rationalization%20during %20a%20downturn.

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