1. Chapter 5.1: Airline Cost Categorization
Maryam Zavareh

2. Introduction Source : DOT Form 41 Data base
Traffic, financial and operating cost data reported to the DOT by US airlines
Published Quarterly
Detail of reporting differs for different expense categories
(Example: AC Operating expense and other expenses based on AC type and region)

3. Administrative vs. Functional Cost Categories
2 different Approaches for partitioning airline operation costs:
Administrative
Financial Accounting Statement
Functional
More detailed cost comparison across airlines and even across different aircraft types

4. Administrative Cost Categories
Salaries and related fringe
benefits for all personnel
(general management, flight personnel, maintenance labor, other personnel)
Materials Purchased (fuel & oil,
parts, passenger food,
other materials)

5. Administrative Cost Categories
Services Purchased (advertising &
promotions, communications,
insurance, maintenance,
commissions, other services)
Landing Fees, Rentals, Depreciation, other Expenses

6. Administrative Cost Allocation
Labors (Salaries)
Materials
Services
Ref: The Global Airline Industry

7. Limitation of Administrative Cost Categorization
Not much detailed analysis
Difficult to separate out the components of salaries, materials and services that are explicitly associated with operating the aircraft, as opposed to ground operations.

8. Functional Cost Categories
allocates costs to the different functions within the airline’s operation
Flight Operating Costs
Ground Operating Costs
System Operating Costs

9. Flight Operating Costs
Direct operating costs
Flying operations
– Flight crew, Fuel costs
Maintenance – routine maintenance,
extensive major checks, “labor & parts”
Form 41 reports maintenance for direct airframe, direct engine and overhead/ burden
Depreciation & Amortization – Capital costs of airline assets

10. Ground Operating Costs
Aircraft servicing
– handling aircraft on ground,
landing fees
Traffic servicing
– processing passengers,
baggage and cargo at airports
Promotion and sales – airline reservation centers, ticketing offices, travel agency
commissions, and distribution system fees

11. System Operating Costs
Indirect operating costs
Passenger Service
– meals, flight attendants,
in-flight services
Advertising and Publicity
General and Administrative – can’t be associated to a particular activity
Transport-related – costs associated with the generation of transport related revenues. Fees paid to regional airline partners, extra baggage expense, and other miscellaneous overhead.

12. Functional Cost Allocation

13. ICAO Cost Categories
In many respects similar in structure to both functional and allocation schemes used by airlines and government around the world

14. Comparison Between ICAO and Form 41 Cost Categories
Overall , the structure of the cost allocation scheme is very similar.
Category
ICAO
Form 41
Maintenance
Single Category: Maintenance and overhaul
Three Categories:
Direct Airframe Maintenance
Direct Engine Maintenance
Maintenance Burden
Ticketing, Sale, Promotion
Single Category:
Ticketing, Sales and Promotion
2 Main Categories:
Advertising
Distribution Cost

15. Cost Drives by Functional Categories
Flight Operating Costs (FOC)
Reported per block hour (correlated with the amount of time aircraft is being utilized)
Aircraft Servicing Cost
Reported per aircraft departure, including cleaning, fueling, marshaling
Traffic Servicing Cost
Reported per enplaned passenger, including the processing of passengers and their baggage

16. Cost Drives by Functional Categories
Passenger Service Cost
Reported per revenue passenger kilometer (RPK)
Promotion and Sales Costs
Reported as a percentage of revenue, responsible for the generation of revenue
Other Indirect and System Overhead Costs
Reported as a percentage of total operating expenses

17. Other Cost Category Comparison
Total Operating Cost per Available Seat Mile (Unit Cost-CASM)
Total Operating Expense per Passenger Enplaned or RPM

18. Notes Thanks for Listening. Any Question?
Go to
The Global Airline Industry
Images were selected from various internet sites.