Airline Operating Costs

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By Peter Horder, Senior Vice President SH&E Ltd

Brussels, 22 January 2003

Airline Operating Costs

Prepared for:

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Agenda

Introduction

Current Airline Environment Airline Cost Elements

Indirect and Direct Operating Costs Overhead Cost Control

Balance Sheet Effects Reference Sources Conclusions

Introduction

Current Airline Environment Airline Cost Elements

Indirect and Direct Operating Costs Overhead Cost Control

Balance Sheet Effects Reference Sources Conclusions

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Introduction

Current airline environment

Safety considerations and costs

– Security restrictions – Insurance implications

Cost reduction versus revenue increases

Current airline environment

Safety considerations and costs

– Security restrictions – Insurance implications

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Airline Economic Affects from 11 September

SCHEDULED CARRIERS ! Frequency ! Routes ! Traffic ! Revenues " Fares ? ! Profitability SCHEDULED CARRIERS ! Frequency ! Routes ! Traffic ! Revenues " Fares ? ! Profitability

Low Cost Carriers

! Fares

" Traffic

" Revenues

" Profitability

Low Cost Carriers

! Fares

" Traffic

" Revenues

" Profitability

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Airline Safety and Security

Safety is paramount – Flight procedures – Maintenance procedures – Ground Operations Security Impacts – Cockpit security – On board security – Ground delays – Increased searches – Baggage X-ray Security costs – Airport charges

– Increased passenger charges

Safety is paramount – Flight procedures – Maintenance procedures – Ground Operations Security Impacts – Cockpit security – On board security – Ground delays – Increased searches – Baggage X-ray Security costs – Airport charges

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Operating Cost Comparisons Per ASK

Operating Cost Per ASK

Average Stage Length (Km)

0.000 0.025 0.050 0.075 0.100 0.125 0.150 0.175 0.200 0 500 1,000 1,500 2,000 2,500 3,000 (EUR) FD LO LX COE EW FR OK U2 GO TV BY DP ZB VB NI QF TG EK BA

Source SH&E, AEA, IATA, Form 41

Luxair LG Air 2000 DP Britannia BY CityFlyer Express FD Crossair LX Czech OK EasyJet U2 Eurowings EW Go GO LOT LO Maersk Air VB Monarch ZB Portugalia NI Ryanair FR British Airways Thai Airways Qantas Emirates TG QF BA EK

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Total Operating Costs

Flight Ops 28% Maintenance 11% En-Route/Airport 18% Depreciation 6% Passenger services 11% Ticketing, Sales & Promotion 14%

Admin & Other 12%

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Some ICAO and F41 Cost Breakdown Percentages

0 20 40 60 80 100 Braath ens easy Jet Air Indi a JAL Cont inen tal Delt a (F 41)

General & Admin Sales & Promotion

Passenger Service User Charges

Depreciation & Amortisation Maintenance

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Labour Productivity has an Impact on Costs

Source: Annual Accounts, Form 41, AAPA 2001

50 100 150 200 250 300 350 400 SQ LH CX AC BA SK KL U2 EK AA CO AF GF IB TG TP SV MH IR UL R even u e p e r E m p loyee (U S $ 000) 485 FR GO QF

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Fuel Cost per ASK

U2 FR GO SK KL IB CO AF AA AC TP LA IR UL SQ QF MH LH EK CX BA AI GF 0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000

Average Stage Length (KM)

Fuel Cos

t per

ASK (US cent

s)

Source SH&E 2001

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Maintenance and Overhaul Costs as a Percentage of Total Operating Costs

Source: SH&E, ICAO 2000 Financial Data

Percentage of Total 14.42 10.10 11.03 11.06 13.88 14.55 6.06 15.71 0 2 4 6 8 10 12 14 16 18 Luxair Braath ens British E uro pea n Bry mon Airw ays Cit yfly erEx press Lith uan ian Maer sk Air Silk air easy Jet 8.0 13.9 GO Fly 5.04 Ryanai r

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Maintenance Cost per Flight hour

0 200 400 600 800 1000 1200 1400 1600 NH JL CX TP BA TG KL GF GO SQ IB AI AC SK AF CO AA EK M a int ena nce Co st per F lig ht H o ur ( U S$ ) FR U2

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Cost of Sales per Passenger

Cost of Sales = commissions, ticketing, sales and promotion costs

0 5 10 15 20 25 30 35 40 45 BA NH EK SQ QF SV KL TP AF LH IB CO GF AC TG AA SK CX Co st o f Sa le s pe r P a sse ng e r ( U S$ ) U2 GO FR

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Marketing Expense as a Percentage of Sales

M a rk eti n g E x p en se as % of R even u e 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% IR TP SV EK BA JL QF TG AF KL GO U2 SK CO FR IB GF SQ

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Passenger Service Cost per Passenger

0 5 10 15 20 25 30 35 JL TP KE TG EK SQ GF AC AI AA SK CO AF IR Pas se nger Se rvic e p er Pas se n ger (US$) GO U2

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LCC cost advantage 30% Total crew cost

5% Landing & handling charges

50% Passenger related 70% Sales cost

60% Others (overheads)

Where Low Cost Carriers Achieve Advantage

Cost per Available Seat KM

European Scheduled LCC Average Diff %

-50 100 150 200 250 300 300 400 500 600 700 800 900 1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2000 Sector length EU R per 1000 A S K 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Focus on sector lengths up to, say, 1,500 km driven by reducing cost advantage

increasing revenue need

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Direct Operating Costs

Insurances 1%

Passenger Service Costs 8%

Fuel and oil 27% Airport

fees 4%

Handling and dispatch fees 11% Commissions 5% Flight Crew 12% Lease Charges 12% Maintenance 15% Navigation fees 5% Source ICAO 2001

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Indirect Operating Costs

Staff Costs 12% Other

2%

Depreciation and Interest 46%

Marketing Costs 34%

Administration Costs 6%

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Cost Allocation by Network

500 Overheads 55 Operating Profit 37,245 15,280 9,115 12,850 Total Cost 555 -80 485 150 Margin 12,675 5,400 2,875 4,400 Fixed Cost 24,570 9,880 6,240 8,450 Variable Cost 37,800 15,200 9,600 13,000 Revenue 9 8 12 10 Yield 4,000 1,900 800 1,300 RPK 6,050 2,700 1,150 2,200 ASK Total A - D A – C A - B Route

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Cost Allocation by Route

55 -303 390 -32 Margin 500 223 95 182 Overheads 37,745 15,503 9,210 13,032 Total Cost 55 Operating Profit 12,675 5,400 2,875 4,400 Fixed Cost 24,570 9,880 6,240 8,450 Variable Cost 37,800 15,200 9,600 13,000 Revenue 9 8 12 10 Yield 4,000 1,900 800 1,300 RPK 6,050 2,700 1,150 2,200 ASK Total A - D A – C A - B Route

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Which Costs may be Controllable/Avoidable?

Which Costs may be Controllable/Avoidable? All costs are variable over time

Strategic and Tactical decisions can be taken

– aggressive re-negotiation of contracts

– Hedging instruments

– E,g, fuel, currency – Outsourcing

– Changes in accounting policies !

Staffing

– Replacement or increased efficiency?

– Overtime

Operating “unprofitable” routes

– More economical flying through different routings, aircraft and airports

– Allocation of indirect costs

– Do you know which routes really are unprofitable?

Levels of service

– Low cost vs. full service model

All costs are variable over time

Strategic and Tactical decisions can be taken – aggressive re-negotiation of contracts

– Hedging instruments

– E,g, fuel, currency

– Outsourcing

– Changes in accounting policies !

Staffing

– Replacement or increased efficiency?

– Overtime

Operating “unprofitable” routes

– More economical flying through different routings, aircraft and airports

– Allocation of indirect costs

– Do you know which routes really are unprofitable?

Levels of service

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Cost Data Sources

Major Sources

– Airline Annual reports – ICAO

– US DOT Form 41

Other Sources

– IATA – AAPA

– UK CAA (and other national regulators)

Profit & Loss Statement

– Revenues – Operating Costs Balance Sheet – Assets – Liabilities Major Sources

– Airline Annual reports

– ICAO

– US DOT Form 41

Other Sources – IATA

– AAPA

– UK CAA (and other national regulators)

Profit & Loss Statement – Revenues

– Operating Costs

Balance Sheet – Assets

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Operating Cost Reporting - ICAO

– Flight Operations

– Flight Crew Salaries, Expenses and Training – Aircraft Fuel & Oil

– Insurance & Uninsured losses – Lease/Rental of aircraft

– Maintenance & Overhaul – Depreciation & Amortization

– User Charges & Station Expenses

– Landing & Airport Charges – Route facility charges

– Station Expenses

– Passenger Services

– Ticketing, Sales & Promotion – General & Administration – Flight Operations

– Flight Crew Salaries, Expenses and Training

– Aircraft Fuel & Oil

– Insurance & Uninsured losses

– Lease/Rental of aircraft

– Maintenance & Overhaul

– Depreciation & Amortization

– User Charges & Station Expenses – Landing & Airport Charges

– Route facility charges

– Station Expenses

– Passenger Services

– Ticketing, Sales & Promotion

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Financial Data from US DOT Form 41

Direct Operating Expenses

– Reported quarterly by fleet type

Indirect Operating Expenses

– Reported quarterly by carrier and allocated by ASM or other appropriate measure to each fleet

Other Finance Related Data Reported

– Traffic Statistics – Revenues

– General Profit & Loss – Balance Sheet

Direct Operating Expenses

– Reported quarterly by fleet type

Indirect Operating Expenses

– Reported quarterly by carrier and allocated by ASM or other appropriate measure to each fleet

Other Finance Related Data Reported – Traffic Statistics

– Revenues

– General Profit & Loss

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Direct Operating Cost Details – US DOT Form 41

– Flying Operations

– Flight Crew Salaries, Expenses and Training – Aircraft Fuel & Oil

– Insurance & Uninsured losses – Lease/Rental of aircraft

– Direct Maintenance

– Labour

– Repairs (by outside agencies) – Materials

[note, more detail than ICAO]

– Depreciation & Amortisation

– Flight Equipment

– Expense of Interchange Aircraft – Other Depreciation & Amortization

– Flying Operations

– Flight Crew Salaries, Expenses and Training

– Aircraft Fuel & Oil

– Insurance & Uninsured losses

– Lease/Rental of aircraft

– Direct Maintenance – Labour

– Repairs (by outside agencies)

– Materials

[note, more detail than ICAO]

– Depreciation & Amortisation – Flight Equipment

– Expense of Interchange Aircraft

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Comparison/Benchmarking Issues

ICAO

– Data for all ICAO carriers worldwide – Profit & Loss and Balance Sheet

But,

– Not broken down by fleet

– Maintenance & Overhaul not subdivided – Limited data on low-cost/regional carriers

DOT Form 41

– Broken down by fleet – New data quarterly

But,

– Only for US carriers

ICAO

– Data for all ICAO carriers worldwide

– Profit & Loss and Balance Sheet

But,

– Not broken down by fleet

– Maintenance & Overhaul not subdivided

– Limited data on low-cost/regional carriers

DOT Form 41

– Broken down by fleet

– New data quarterly

But,

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By Peter Horder, Senior Vice President SH&E Ltd

Brussels, 22 January 2003

Airline Operating Costs

Prepared for: