Microeconomics: Cost Analysis and Profitability in Airline Industry

This report provides a comprehensive microeconomic analysis of the airline industry, examining its cost structure, profitability, and the impact of various factors. The analysis begins with an introduction to the concept of opportunity cost in the airline industry, emphasizing its importance in pricing strategies. It then delves into the cost structure, categorizing costs into direct operating costs (maintenance, fuel, landing fees, crew expenses, passenger costs), indirect operating costs (aircraft standing charges, cabin crew pay), and overheads. The report further explores the effects of the airline environment on aircraft costs, including utilization, sector length, fleet size, and labor costs. A profitability analysis is conducted, considering aircraft capacity and return on capital employed. The report concludes by highlighting the influence of marketing managers on service levels and costs, emphasizing the significance of understanding these factors for effective airline management and strategic decision-making. The report uses multiple credible sources, including academic journals and industry publications, to support its analysis. The application of microeconomic principles to the airline industry is well demonstrated in this report.

Running head: MICROECONOMICS
MICROECONOMICS
Name of the Student
Name of the University
Author Note

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Table of Contents
Introduction................................................................................................................................2
Cost Structure.............................................................................................................................2
Direct Operating Cost............................................................................................................2
Indirect Operating Costs........................................................................................................4
Effects of the Airline Environment on Aircraft Costs...............................................................5
Profitability Analysis.................................................................................................................6
Conclusion..................................................................................................................................7

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Introduction
In the Airline industry the most important cost for pricing is the opportunity cost as
per the capacity. There is incremental cost which is other than the capacity cost that includes
food and ticketing, which are literally trivial as per compared. There are airlines which does
look like the historical cost or even the replacement cost which is in the buying planes that
does have many opportunities which is for the profitable pricing and in a competitive market,
that would be soon go bankrupt, it is because of the most of profitability of an airline that
comes in the incremental revenue, which does it generates in selling the seats at the prices,
which is below the average cost per seat. There is a key in making the strategy profitable in
understanding on the ongoing basis which is the expected opportunity cost of selling a seat
upon a particular time on basis of that particular flight.
Cost Structure
In case of the airlines industry, there is no competition of price that is been done
without the reduction of cost and overheads. The airline industry does rely upon the airline
services and upon the provision of aviation labor, fuel (Williams, 2017). However, there are
several airlines that are need for the legacy carriers which are usually depend on the cost
distributive networks. Usually, the airline cost is divided into three categories which are
direct operating costs, indirect operating costs and overheads.
Direct Operating Cost
When the flight start operating, the direct operating cost come in the process. In the
airline industry, there are two types of direct operating cost which are one is related to the
aircraft and other is related to traffic. Between the aircraft and traffic, there is a difference
which is dependent upon the type of aircraft that is been operated (Goetz & Sutton, 2017) .

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The traffic related direct operating cost are usually independent upon the aircraft. Some of the
direct operating cost are explained below:
Maintenance Costs: These are the cost which are usually unavoidable, and it is necessary for
airline so that they can keep their safety up to the mark. It is important to make necessary
tradeoff between the cost level and punctuality performance, in which there is a lot concern
for the managers, those who are related to the marketing (Gupta, 2018). Thus, this issue does
influence mainly the maintenance cost of airlines. It is important for them to deal with the
technical problems that has been arise and to repair them time to time, so that there is no
delay in the journey’s. The maintenance cost has been very high as there is requirement of
maintain a good performance, in which the expenses are made unavoidable.
Fuel and Oil: The cost of fuel does depend upon consumption of fuel and the aircraft that is
been involved (Abdelghany & Abdelghany, 2016). Thus, the fuel hedging is one of the
common risk that the airline industry does face in a very bad way, though the management
does takes serious steps so that it does not happen.
Landing fees: The airport authorities do take some charges from the airlines for the airport
facilities that they are providing. It certainly has common charges which is usually divided
into two sections, one is the fixed aircraft and the other is variable load fee (Sinha, 2019).
There is a fixed aircraft fee, which is usually based on the aircrafts maximum weight, though
there are some expectations which are usually dependent upon the airport.
Crew Expenses: There are several factors that does depend upon the crew expenses which is
crew complement. There are certain circumstances which includes the block speed that does
have an impact on whether there is a requirement of the crew overnight. Thus, sometimes it is
not considered as the indirect operating cost.

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Passenger and Commission of Cargo: The commissions do have to related to the sales
commission fees that has to be taken for the intermediaries, that also includes the cargo
agents for the selling of their services (Shaw, 2016). It does usually represent the percentage
of gross revenue and the airline that do have the cut on the agency commission in several
countries.
Passenger Related Costs: There are costs that does includes the baggage costs, cancelled
flight expenses, in which there are handling of denied boards. The expenses do include the
provision of specialized services offered to the business and the first class passengers.
Indirect Operating Costs
The indirect operating costs are the costs, that are usually incurred for the period of
time, without the operating season. The cost that are considered as the indirect cost are cannot
be avoided and at a certain level of flying that has been decided. There are changes in flight
programmer, in which there are certain cost that does include the standing charges, flight
crew pay and cabin crew pay and the maintenance labor. Thus, all these cost are directly
dependent upon the aircraft type that they are using.
Aircraft Standing Charges: The aircraft sometimes can be brought or acquired through by the
bank loans or the leasing agreements. There are several payments that are been categorized as
the indirect operating cost, which is with regards to the leasing of the aircraft and there is a
lease of charges that does replaces the depreciation and interest charges (Saleem, Zahra &
Yaseen, 2017). There are several provisions that does act as a major spare which comes under
the head of depreciation. There are several spare cost per aircraft, which is usually higher
than it’s for the large fleets. There is a minimum requirement of fleet size which is done
regardless if the fleet size. The aircraft does have a depreciation period in which can be

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certain as per the case. There are higher premiums that are been charged in the airlines at
flying in the specific areas which are designated at the war zones.
Cabin Crew Pay: There are several number of personnel in cabin that are been directly related
to the seating capacity which is in the aircraft. There are several legal requirements that has
been derived from ICAO for the cabin crew safety (Hussain & Phau, 2016). There are
number of cabin crew that is been upon the board that is been dependent on the number of
seat and the number of exits in the aircraft. There are several requirements that does vary
upon the special inflight catering requirements, which does include services that is also
provided upon the business and first class passengers.
Overheads
The overhead cost and expenses that are been incurred for the longer periods, there
are costs which does includes the sales, accounts, employment, administration, general
management and human resources. There are certain costs that are unaffected by both the
several types which the aircraft uses and there are several level of flying operations. There are
number of passengers which will be possible that can arise for the additional staff in the
revenue accounts.
Effects of the Airline Environment on Aircraft Costs
Utilization: There are fixed cost which are usually distributed over the longer flying hour that
helps in achieving lower unit costs. There are long term operations which helps in the best
opportunities for the maximum utilization of the aircraft. It does uses of the utilization of
aircraft, where it does uses the smaller turnover period (Eaton, 2017). There are turnarounds
that use the lead of the lower cost for the airline, in which there is modern aircraft that is been
capable of the increase utilization of fleet. There are several terms of operational efficiency

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and economy, in which there are short haul operations, there is fleet utilization which helps in
improving and can be as short as possible.
Sector Length: There are short haul operations that does have the higher cost which does
have the medium or long haul operations. The short haul operations that has been for higher
proportion of landing fees and in handling fees, there are causes that does have periods of the
inefficient aircraft operation, that does have particular approach and take off periods. There
are more aircraft turnaround periods, in the short haul operations, in which there are medium
or long haul ones, that resulted in the lower aircrafts utilization and lower productivity levels.
Fleet size: The cost levels that has been directly related to the number and several type of
aircraft which is used in the fleet. In the smaller airlines, there is an adequate provision that is
been expected to the adequate provision which is for the standby capacity or the schedule
recovery. There are some in-house instructions which is to be conducted to the small airlines.
Thus, it will help in purchasing of services from the external agencies, which is usually at a
very high costs.
Labor Cost: The labor cost does have an impact which does includes the crews, maintenance
and handling costs, there are operation in which it does includes the crews, maintenance and
handling costs. In some countries, it has been seen that there are several lower wages, that
would help in translating the significant cost reductions (Baumeister & Onkila, 2017). There
are several advantages that does help in countering the balances by losses that will arise
through the labor efficiencies in several functions, which does include the maintenance and
handling.

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Profitability Analysis
The aircraft capacity is being considered through the conversion of the passengers and
through the cargo capacity in the terms of weight. However, there are craft in which it is been
capable of carrying the additional weightage of cargo. The aircraft does vary in their sizes
and in capacity also, thus it can only be compared with the performance which can only be
expressed with the costs and in terms of the units of production.
In term of the return of capital employed, it can be done by comparing the
profitability of organizations, that can be taken into amount in which the capital can be used.
There are several implications that can be seen upon the expenditure on the investments that
does have an effect on the profit.
Conclusion
There are several policies which the marketing managers do provide, which will help
in influencing the level of services. They are also affected through the cost that are relevant
and expenses. The airlines do have direct operating costs, indirect operating costs and
overheads, the operating cost om sector length, utilization of aircraft, fleet size, labor cost. If
there is number of passengers that will increase, that will help in the possibility in which in
the operational requirements might increase the necessity of more resources.

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References
Abdelghany, A., & Abdelghany, K. (2016). Modeling applications in the airline industry.
Routledge.
Baumeister, S., & Onkila, T. (2017). An eco-label for the airline industry?. Journal of
cleaner production, 142, 1368-1376.
Eaton, J. (2017). Globalization and human resource management in the airline industry.
Routledge.
Goetz, A. R., & Sutton, C. J. (2017). US Airline Industry. Low Cost Carriers:"
Emergence, Expansion and Evolution, 199.
Gupta, H. (2018). Evaluating service quality of airline industry using hybrid best worst
method and VIKOR. Journal of Air Transport Management, 68, 35-47.
Hussain, R., & Phau, I. (2016). The mediating role of customer satisfaction: evidence
from the airline industry. Asia Pacific Journal of Marketing and Logistics.
Saleem, M. A., Zahra, S., & Yaseen, A. (2017). Impact of service quality and trust on
repurchase intentions–the case of Pakistan airline industry. Asia Pacific Journal of
Marketing and Logistics.
Shaw, S. (2016). Airline marketing and management. Routledge.
Sinha, D. (2019). Deregulation and liberalisation of the airline industry: Asia, Europe,
North America and Oceania. Routledge.
Williams, G. (2017). The airline industry and the impact of deregulation. Routledge.