The main costs that affect the company in the aviation industry are fuel costs. Labor costs are largely fixed in the short term, while fuel costs can peel on the basis of oil prices.
For this reason, analysts pay more attention to the cost of fuel in the near future. Two thirds of the cost of flying the plane are fixed, so changes in the cost of fuel can swing the flight from profit to loss depending on how many people on the flight.
Historically, the airline industry continued to be severely competitive, although the business of flying people all over the world, and the country has become an integral part of human life. The cost of flying continues to decline. The Internet has also created greater price transparency, reducing the margin.
Labor costs for airlines
Labor accounts for approximately 35% of the total operating costs of airlines. Operating costs account for approximately 75% of all fixed costs.
During recessions, management looks to cut costs on wages, laying off workers and reduce their wages or benefits. This is due to the fact that in a competitive business where customers have little brand loyalty — airlines are forced to compete on price, not quality. Since increasing profit is difficult, companies are forced to cut costs to be more profitable.
Some of the lesser expenses for airline repair, parts and operation, baggage handling, airport fees, taxes, marketing, promotions, commissions, agent and the passenger costs. Overall, they account for about 55% of total operating costs.
The cost of fuel for airlines
Fuel costs make up 10 to 12% of operating expenses. Many companies have programs to hedge the cost of fuel. They buy futures contracts to lock in their value over a certain period of time, turning it into a main account. When fuel prices rise, this behavior is rewarded. When fuel prices decline, it is punished as the market price of fuel less than they pay.
Some of the worst times for the airlines when oil prices rose. Airlines can prepare for slower price growth due to more charging for tickets, or by reducing the number of flights, but sudden movements above many airlines to lose money.
In 2008, oil reached a high of $ 147 per barrel, a new record high. The airline was not willing, and many went through a major restructuring to survive. At that time, the airline index 16, which was down from 56 in January 2007, when oil cost $60 per barrel.
In the period from 2009-2014 saw the economy improving and oil prices, which slowly rose higher and higher until stagnated around $ 100 from 2011-2014.
The fall in oil prices from 2014-2017 was particularly profitable for airlines, unlike previous drops in oil prices, the economy continued to strengthen with travel increases. Cost reduction and revenue growth are desirable for any type of business.