A:

The major expenses that affect companies in the airline industry are labor and fuel costs. Labor costs are largely fixed in the short-term, while fuel costs can swing wildly based on the price of oil.

For this reason, analysts pay more attention to fuel costs in the near-term. Two-thirds of the costs of flying an airplane are fixed, so changes in fuel costs can swing a flight from profit to loss depending on how many people are on the flight.

Historically, the airline industry continues to be brutally competitive, even though the business of flying people all over the world and country has become an integral part of human life. The cost of flying continues to trend lower. The Internet has also created greater price transparency, reducing margins.

Cost of Labor for Airlines

Labor accounts for approximately 35% of the total of airlines' operating expenses. Operating expenses account for roughly 75% of all non-fixed costs.

During downturns, management looks to cut labor costs by laying off workers or reducing their pay or benefits. This is a consequence of being in a competitive business where customers have little brand loyalty – airlines generally have to compete on price rather than quality. Since growing profits is difficult, companies are forced to cut costs to be more profitable. 

Some of the lesser expenses for airlines are maintenance, parts and labor, handling luggage, airport fees, taxes, marketing, promotions, travel agent commissions and passenger expenses. As a whole, these account for nearly 55% of total operating costs.

Cost of Fuel for Airlines

Fuel costs account for 10% to 12% of operating expenses. Many companies have programs to hedge fuel costs. They buy futures contracts to lock in their costs for a set period of time, turning it into a fixed expense. When fuel prices rise, this behavior is rewarded. When fuel prices decline, this is punished as the market price of fuel is less than what they are paying.

Some of the worst times for airlines have been when oil prices spiked up. Airline companies can prepare for slowly rising prices by charging more for tickets or by reducing the amount of flights, but sudden moves higher lead many airlines to lose money.

In 2008, oil hit a high of $147 per barrel, a new all-time high. Airlines were unprepared, and many went through serious restructuring to survive. At that time, the airline index was 16, which was down from the high of 56 in January 2007 when oil was $60 a barrel.

The period from 2009-2014 saw an improving economy and oil prices that slowly climbed higher before plateauing around $100 from 2011-2014.

The drop in oil prices from 2014-2017 was particularly beneficial for airlines; unlike previous drops in oil, the economy continued to strengthen with travel increasing. Falling costs and rising revenue are desirable for any type of business.

RELATED FAQS
  1. The Average Debt/Equity Ratio of Airline Companies

    Find out more about the average long-term debt to equity ratio of companies in the airlines sector and the importance of ... Read Answer >>
  2. How are period costs and product costs different?

    Product costs are the direct costs involved in producing a product. Period costs are all costs not included in product costs ... Read Answer >>
  3. What is the difference between fixed cost and total fixed cost?

    Learn what a fixed cost is, what a variable cost is, what total fixed costs are, and the difference between a fixed cost ... Read Answer >>
  4. How Do Fixed and Variable Costs Affect the Marginal Cost of Production?

    Learn about the marginal cost of production and how it is affected by changes in fixed and variable costs. Read Answer >>
Related Articles
  1. Investing

    How Weak Oil Prices Affect Airline Profits

    Oil prices are a bit like the weather. This is an opportunity for airlines to invest the higher revenue back into the business.
  2. Investing

    4 Ways Airlines Hedge Against Oil

    Understand what a fuel hedge is and why an airline company would want to implement a hedging strategy. Learn about the different fuel hedging strategies.
  3. Investing

    Is That Airline Ready For Lift-Off?

    Break through the clouds to see if these stocks will rocket higher, or crash and burn.
  4. Investing

    5 Reasons Airline ETFs Are Doing Well Despite Oil Bounce (JETS, AAL)

    Learn why airline stocks and exchange-traded funds are increasing their profits consistently as oil prices are also on the rise.
  5. Insights

    TripAdvisor Ranks the World's Best Airlines

    Travel review portal TripAdvisor has provided a ranking for leading airlines at global and regional levels.
  6. Investing

    American Airlines Trades Ex-Dividend Wednesday (AAL)

    The company is adjusting to an environment where there are more seats available across the industry than demand, which forces airliners to cut prices.
  7. Insights

    Falling Prices, Revenue Hit Airlines

    2016 has been a tough year for U.S. airlines with overcapacity and falling prices.
  8. Personal Finance

    Top 4 Best Value Airlines

    Plane tickets can be pricey, they don't have to be! With this handy guide you can save your hard-earned money for when you're on the ground.
  9. Investing

    American Airlines’ 3 Key Financial Ratios (AAL)

    Learn about the financial ratios that are important in understanding and evaluating the business and financial statements of American Airlines Group.
RELATED TERMS
  1. Airline Industry ETF

    An airline industry ETF tracks the performance of a group of ...
  2. Cost Per Available Seat Mile - CASM

    Cost per available seat mile (CASM) is a common unit of measurement ...
  3. Richard H. Anderson

    Richard H. Anderson was CEO of Delta Airlines during merger with ...
  4. Discriminating Monopoly

    A discriminating monopoly is a market-dominating company that ...
  5. Gas Guzzler Tax

    Gas guzzler tax is added on sales of vehicles that have poor ...
  6. Avoidable Cost

    An avoidable cost refers to variable costs that can be avoided, ...
Trading Center