Management

In 2-3 pages (not counting cover and references), explain what expenses and costs facing today’s air industry. In addition, evaluate what the current fuel costs do to the industry and how they affect the ticket prices and the patrons’ flying occurrences.

Submission Instructions: Please attach the assignment in Word Format. Format your paper consistent with APA guidelines. Provide a minimum of 3 in text citations with an APA Reference List.

ANSWER

Air Industry Expenses and Costs

Air Industry Expenses and Costs

The Expenses and Costs facing Today’s Air Industry

For most people and organizations, it is not easy to understand the various costs and expenses facing the air transport industry today. A majority of people and organizations that rely on air transport are only concerned with the prices of tickets and not the costs associated with air transport operations. Airline companies incur various costs related to maintenance and operations. These include initial startup costs, maintenance costs, aircraft upkeep costs, personnel training and salaries, pilots hiring and training, and fuel costs (Morrell & Swan, 2006). The cost of an aircraft can run into millions of dollars. Pilots and first officers can also be very expensive depending on their qualifications and experience. The annual salaries of pilots and first officers of an airline company can run up to more than $120,000 annually.

Perhaps an even larger airline company expense is jet fuel purchase. The price of fuel fluctuates unexpectedly depending on the cost of a barrel of oil and the time of year. Fluctuations in the prices of fuel can directly reflect on the prices of tickets for consumers. Since 2014, air ticket prices have been quite steady despite the price of fuel fluctuating significantly every year. As Grabianowski (2017) explains, airlines face other indirect costs that determine their financial performance and ticket prices. These include fees paid to airports, maintenance costs, fees paid to governments, cost of running computer systems for bookings, cost of food and drinks served to passengers, fees paid to websites and travel agents, costs associated with pilot training, and other incidental costs (Grabianowski, 2017). All these costs affect the bottom lines of airline companies, as well as the prices of tickets for passengers.

As earlier stated, the most significant cost that affects the air transport industry is the cost of fuel. Aircraft fuel cost is a global issue that is difficult to control or regulate. Most of the time, fluctuations in oil prices result in the prices of other commodities changing. Major oil-producing and exporting countries influence the availability and cost of fuel. Non-governmental and privately-owned airline companies face huge challenges when it comes to economic challenges and competition. This is because airline companies that enjoy governmental support and protection enjoy subsidized costs for social benefit achievement. These companies incur fewer costs compared to non-governmental and privately-owned airlines.

Jet fuel represents the largest expense item for airline companies. These companies enter purchase contract agreements with oil refineries that refine crude oil into jet fuel. Oil forms the main component in the production of jet fuel. As such, the price of oil directly affects the price of jet fuel (Morrell & Swan, 2006). The magnitude to which the fluctuations in the cost of fuel affect the profitability of a company in the airline industry depends on the proportion of fuel cost in an airline company’s revenues. Jet fuel costs account for at least 25 percent of the total airline industry’s revenue every year. This means that if fuel cost savings are realized in the industry through a decrease in jet fuel costs, the industry would enjoy a significant improvement in the profit margin. Significant increases in the cost of jet fuel result in significant increases in airline operational costs and a decrease in the industry’s profit margin.

Today, air industry costs continue to fluctuate, making the air industry very unstable. Increases in fuel and non-fuel related costs paid by airline companies are passed on to the consumers. This results in fluctuations in the prices of tickets. Ticket prices will increase when the prices of jet fuel increase significantly but will not necessarily decrease with decreasing jet fuel costs. Government policies and programs also impact the performance and costs of airline companies. The Federal Airport Act of 1970 (Fischer, 2000), for instance, increased national funding for airport construction and improvements and created the Airport and Airway Trust Fund to finance the Federal Aviation Administration’s activities. The Act resulted in the existing passenger ticket tax increasing from 2 percent to 8 percent, adding a $3 head tax on passenger tickets for all international flights leaving the US. It also increased the fuel taxes from two cents per gallon to seven cents per gallon on gasoline and kerosene used by non-commercial aviation (Dilger, 2003).

The air transport industry faces numerous expenses and costs incurred in the operation and maintenance of aircraft and other machinery. In recent years, the industry has benefitted from minimal fluctuations in jet fuel prices because of the decrease in crude oil prices. However, unexpected fluctuations in oil prices in the last year can result in increased ticket prices and decreasing profit margins. However, the slowdown in airline operations as a result of the coronavirus pandemic may result in the costs and expenses not increasing significantly due to a decreased demand for air tickets. While non-fuel expenses and costs, including costs associated with personnel and services, are significant expenses for airlines, fuel will continue being the main driver for airline company bottom lines.

References

Dilger, R.J. (2003). American transportation policy. Online Library: Praeger.

Fischer, J. W. (2000). RS20177: AIRPORT AND AIRWAY TRUST FUND ISSUES IN THE 106TH CONGRESS.

Grabianowski, E (2017). How Stuff Works: How Budget Airlines Work. http://money.howstuffworks.com/personal-finance/budgeting/budget-airline1.htm

Morrell, P., & Swan, W. (2006). Airline jet fuel hedging: Theory and practice. Transport Reviews, 26(6), 713-730.