mulletman101
Topic Author
Posts: 6
Joined: Thu Apr 15, 2010 3:55 am

Operating Cost Per Passenger Vs Fare Quoted

Tue May 18, 2010 9:16 am

Hi Guys. From San Fran to Narita on an A332.

The direct costs associated with a 90% payload, single economy class, we worked out to be around $1100US. The fare quoted by delta is $1710US.

Can anyone provide any advice as to why there would be so much of a difference? would this be a route they make high profits on, and others there is little or no margin?

Thanks
MM
 
vv701
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Joined: Fri Aug 19, 2005 10:54 am

RE: Operating Cost Per Passenger Vs Fare Quoted

Tue May 18, 2010 11:20 am

I guess it depends on what you included in direct costs.

For example did you include amoritization or the lease cost of the aircraft? Did you include maintenance and engineeing costs for your aircraft? Did you include the cost of ground as well as air crew (such as check-in clerks and baggage handlers)? Did you include on-board cleaning and catering costs? Did you include ATC charges for your flight? Did you include crew expenses annd allowances for their lay over in Tokyo? Did you include take-off, landing and any other airport charging costs for your flight? Did you include all applicable taxes such as passenger tax or employee tax relevant to youtr flight? Did you include external aircraft cleaning costs or thew cost of repainting the aircraft every five to eight years?

Indirect costs will include selling, advertising, insurance and administration (including a whole host of individual costs from the staging of the airline's or its holding company's Annual General Meeting to running its Press Office and paying Directos' fees and expenses) costs. They will also probably include the cost of buying futures in both the currency markets (for tickets purchassed in a foreign currency) and fuel markets. And then there are the costs of maintaining all the airline's assets from its head office to its maintenance hangars.

In the end it probably almost comes down to 'How long is a bit of string?' although the Annual Report of the airline you used will probably give you (in the detailed 'Notes' section) at least some appreciation of how it might be!
 
mulletman101
Topic Author
Posts: 6
Joined: Thu Apr 15, 2010 3:55 am

RE: Operating Cost Per Passenger Vs Fare Quoted

Tue May 18, 2010 12:11 pm

Hi there VV, thanks a lot for your reply, Ive saved it to my comp. Well it is just an intro aircraft subject, so it is not very technical. We were just told to assume that fuel makes up 30% of the direct operating cost. From there worked out around $1100 for the direct operating cost.
 
DLPMMM
Posts: 2121
Joined: Wed Apr 20, 2005 12:34 am

RE: Operating Cost Per Passenger Vs Fare Quoted

Tue May 18, 2010 12:37 pm

Quoting mulletman101 (Thread starter):
Can anyone provide any advice as to why there would be so much of a difference? would this be a route they make high profits on, and others there is little or no margin?

Please note that the price charged on any route is not directly related to any cost basis.

The price charged is according to what the market will bear. That is how a free market economy works.

If a route has low costs and high prices leading to a large profit, then other airlines will start flying the route. Other airlines flying the route will increase the quantity of seats supplied thereby decreasing the price of the tickets through competition. This is repeated between all point on an airlines routemap.

This is why an oversupply of carriers (like USA legacy carriers) leads to consistant losses across the industry and calls for consolidation. It is also why the Chapter 11 system in the USA has exacerbated the legacy airline oversupply problem.

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