Costing Project on Airline Industry - Group 18

8/3/2019 Costing Project on Airline Industry - Group 18

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Presented By Group No. 18Ramesh Pamu - 65

Deepak Sahu - 85Ravindra M Salve - 87

Umesh D Sandbhor - 88

Pramod Tambe - 104

Sandip Kumar Verma - 112

Project on

Cost Analysis of Airline Industry



WHAT IS AIRLINES INDUSTRY

An airline provides air transport services for passengers orfreight, generally with a recognized operating certificate orlicense.

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 mailor cargo, through full-service international airlines operatinghundreds of airplanes.

Airline services can be categorized as being intercontinental,intra continental, domestic, or international and may beoperated as scheduled services or charters



Failed attempt at an airline before DELAG, Deutsche Luftschiffahrts- Aktiengesellschaft was the world's first airline. It was founded onNovember 16, 1909 with government assistance, and operatedairships manufactured by The Zeppelin Corporation. Itsheadquarters were in Frankfurt.

The five oldest non-dirigible airlines that still exist are Australia'sQantas, Netherlands' KLM, Colombia's Avianca, Czech Republic'sCzech Airlines and Mexico's Mexicana.

KLM first flew in May 1920 while Qantas (for the Queensland and

Northern Territory Aerial Services Limited) was founded inQueensland, Australia in late 1920

History of Airline Industry :



International Air Transport Association (IATA) International Civil Aviation Organization (ICAO)

International Regulatory Authorities for Airlines

Civil Aviation Authority Air Navigation Service

Civil aviationregulating authorities

in

India



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

Airline Codes:

IATA Airline CodesIATA 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 airlinedesignators, IATA has not so far used the optional third character in any assigned code. Controlled duplicates areissued to regional airlines whose destinations are not likely to overlap.

IATAcode

ICAOcode

AWBprefix

Airline Base Country Status Start End IC IAC 058 Indian Airlines Delhi (DEL) India 1953 -

ICAO Airline Codes

The ICAO airline designator is a three-letter designation code assigned by the International Civil AviationOrganization (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.

ICAOcode

IATAcode

AWBprefi

xAirline Base Country Statu

s Start End

IAC IC 058 Indian Airlines Delhi (DEL) India 1953 -

http://www.interstateairlines.com/

http://www.interstateairlines.com/



Airport Codes:

IATA

Code

ICAOCode

Airport City Country BOM VABB Chhatrapati Shivaji

International Airport Mumbai India

World Airport IATA Codes

An IATA airport code, also known an IATA location identifier or station code, is a three-letter code designating manyairports 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.

World Airport ICAO Codes

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

ICAOCode

icaoCode

Airport Country

5

WSSS

SIN Singapore - Changi Airport Singapore



Direct Operating Cost Indirect Operating Cost Overheads

Airline Cost Structure

A) AircraftRelated

• Fuel and Oil

• Maintenance

(Excluding In-House Labour)

• Landing Fees

• NavigationFees

• Handling Fees

• Crew Expenses

B) TrafficRelated

• Passengerand Cargo

Commission• Airport

Load Fees

• In-flightCatering

• General

PassengerRelated Cost

`

• Aircraftstandingcharges

• Flight Crew

Pay

• Cabin Crew Pay

• MaintenanceLabour (In-house Labour)

• Handing Costat BaseStations

• Sales Costs

• Administration

• Accounts

• GeneralManagement

• Personnel Dept.

• Property



Basic Airline Cost Structure

Labour23.3%

All Other26.9%

Fuel25.5%

Passenger traffic

commissions10.0%

Passenger food3.5%

Interest7.0%

Landing Fees2.2%

Advertising &Promotion

1.6%



Terminologies used in the Aviation Industry:

Payload Capacity

Available tonnekilometers (ATK)

Available Seatkilometers (ASK)/(APK)

Revenue tonnekilometers (RTK)

Revenue passengerkilometers(RPK)/(PTK)

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 becarried by an airplane (number of seatsoffered for sale) multiplied by thedistance over which they are carried

The number of tonnes carried on flightmultiplied by the kilometers over whichthey are carried

The number of passengers on a flightmultiplied by the distance travelled



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

A BDistance = 1000 Kilometers

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

Cargo Capacity = 10 tonne

ACTUAL VOLUME

Passenger Revenue

Actual Passengers = 150

RPK = Actual passengers multiplied bydistance

= 150 x 1000

= 150,000

Cargo Revenue

Actual Cargo = 5 tonnes

RTK = Total tonnage carried** multiplied bydistance

= ((150x0.1)+5) x 1000

= 20,000

AVAILABLE VOLUME

ASK / APK = number of seats multiplied bydistance

= 200 x 1000

= 200,000

ATK = Available tonnage carrying capacity**multiplied by distance

= ((200x0.1)+10) x 1000

= 30,000

** 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 goesup, demand goes down

Price is related to time of booking(i.e. relative to departure date of the flight).

Mathematical Representation:

P α T (Price α 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 thefare to the demand at any givenpoint 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 no’s 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

0

5000

10000

15000

20000

0 25 50 75 100

Seats

M o n e y

Revenue

Fixed Cost

Variable Cost

Total Cost

Break even

Break-even occurs when costs are equal to revenue



Break –even equation :

Fixed Costs + (Variable Costs x Actual passengers) = Fare x Actual passengers

COSTS = REVENUE

10,000+50 x P = 200 x P

10,000 = 150 x P

P = 10,000/150

P = 66.66 = 67

From Above Chart, The Fix Cost is 10000, Variable Cost is 50, Fare is 200



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 = 10000/450 + 50

P = 50 Marginal Cost = 250 = 10000/250 + 50

P = 100 Marginal Cost = 150 = 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 fromGovernment.

2.Containing rise in fuel prices by entering into Oil

futures or Zero Cost structure derivatives.3. Availing LIBOR linked loans eg. FCNRB – Term Loanor Demand Loan to contain Financial Expenses.

4. Providing subsidy on tax levied by the government onfuel.

5. Reducing Head Counts per flight / departments.6. Credit Controls eg. Customer credit, Payment terms,

follow up action, legal action & reporting.

Costing Project on Airline Industry - Group 18

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