Air industries across the globe are faced with an increase in operational costs and expenses. The ability of an airline company to realize profit largely depends on its ability to manage well cost and expenses it is faced with. For the operations of the airline industry, the company has to incur an operational cost. This operational cost can be categorized into two, direct costs and overhead cost. According to Tsai and Kuo (2004), overhead costs are expenditures that goes to the management of an airline, marketing cost, quality checking cost and hangar cost (p. 274). On the other hand, direct cost, which according to Tsai and Kuo (2004) can be further be categorized into two subsets; direct fixed cost and direct variable costs.
These are the expenditures that can be traced to the cost of object facilitating the operations of an airline (p. 273-274). Expenses like maintenance cost, airplane insurance, cost of leasing, depreciation cost are examples of direct cost which are fixed in nature. In other words, they are not affected by the distance of flight either are they affected by the frequency of flights. However, expenses like pilot and cabin crew salaries, the cost for usage of the airport, fuel costs and in-flight catering services are attached to the flight and are therefore direct variable costs. Recently, fuel prices and cost of labor have become the greatest determinant of the profitability of an airline company. According to Bryan (2018), the two costs encompasses up to half the total operational cost of an airline company (para. 2). This paper carries out an insight of these expenses and how they are affecting the air industry.
Labor costs have lately surpassed the fuel cost with an average of 30.5% of the total operational cost of an airline company directed to settling these expenses (Bryan, 2018, para.3). The continuous rise of the cost of labor has often alluded to the scarcity of aircraft workers including qualified pilots in the global labor market whereas there is continued expansion of airplane feet globally. According to IATA (International Air Transport Association) chief economist, Brian Pearce, the cost of labor has been pushed up by the market power the workforce has gotten as a result of the profit which was initially made by a majority of airlines (Bryan, 2018, para. 5). Steady profit in the recent past for airlines has raised the expectation of labor compensation. In April 2017, American Airlines announced a mid-contract pay rise as a means of sharing their profit with their workers (Karp, 2017, para. 8).
The ability of airline companies to remain profitable over a longer period of time will depend greatly on their ability to manage their costs especially the non-fuel costs more so labor. With the scarcity of qualified pilots globally, there is already tags of war to get the most qualified pilots between airlines. This war is generally threatening the balance of salary of the pilots since there is an encroachment of monopoly for these pilots who hike their prices since there is high demand for their services. Across the globe, the air industry has been threatened by strikes of cabin crew members who are demanding improved condition for their work. In addition, there are demands in most airlines in the world for rising in salaries of airline workers (Bryan, 2018, para. 12). This is so because the airlines have been posting improved profits in the past few years. However, Pearce has issued a warning to the airline companies, that they risk incurring losses should their economic condition take an abrupt turn (Brian Pearce, 2018, para. 22).
Fuel prices are also significant determinant costs in the management of airlines. It is the second highest expenditure for the airline companies after labor cost. The rising fuel prices are definitely putting much strain on the operating cost for airline management. The fluctuation in jet fuel prices has often dealt heavy blows on the airline companies. It is therefore necessary for airline companies to anticipate for the mechanism of minimizing fuel cost and counteracting the rising operational cost (Naumann & Suhl, 2012, p. 2). Fuel cost varies with different aircraft and the length of flight for the aircraft. The longer the flight distance, the more fuel it consumes.
The schedule designs are a great determinant of fuel consumptions. There it is necessary for airline companies to strike the optimal frequency of their flights between given airports in order to ensure that they use fuel that is just enough to generate maximum profit. They don’t need to engage in strict freights which in return dump them into losses. Some airline companies like Delta Airlines resolved into buying a refinery to help cope with the fluctuation of fuel costs. Other companies adopt hedges against price hikes (Jassen, 2017, para. 8). Therefore, it is prudent to manage the cost of fuel in order to run the airline company at a favorable operating cost.
High fuel cost may result in high ticket prices as the airline companies opt to gain what they stand to lose in purchasing the fuel at that high cost by increasing the levy they impose on passengers. This effect can be realized by the companies through fuel surcharges (Naumann & Suhl, 2012, p. 4). There is also a possibility of the airline companies affected by the high fuel prices to reduce some services they offer to their passenger. This will in effect force them to reduce their ticket prices to still remain competitive in the air industry. Also, the passenger comfort will have been reduced. Therefore, high fuel prices are a catalyst for high ticket prices and low passenger comfort services offered by the airline companies.
In conclusion, airlines need to effectively manage their costs in order to survive the hash business conditions of the air industry. In this management, the cost of labor takes center stage. Failure to manage the cost of labor may sweep the airline company off its feet and thus hinder its ability to realize profitability. The rising cost of fuel also needs to be counteracted in order to maintain the shape of the airline business.