Question

Question 1:

Read the articles
(i) Cost structure of the airline industry in general

(ii) Cost structure of a low-cost carrier (Air Asia India)

Answer this question:
Compare and contrast the cost structure of (i) the airline industry in general and (ii) the low-cost carrier, in terms of cost classifications.

Question 2:

Discuss the impact of Covid-19 on the profitability of the airline industry – general and low-cost carriers alike, due to its cost structure – cost classification and cost behaviour.

Answer 1

Answer

1

The major expenses that affect companies in the airline industry are labour and fuel costs. Two-thirds of the costs of flying an airplane are fixed and the industry continues to be brutally competitive

Airlines generally have to compete on price rather than quality.

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

Fuel costs account for 10% to 12% of operating expenses. Many companies have programs to hedge fuel costs.

When oil prices spiked up companies slowly charging more for tickets to overcome that.

A low-cost carrier or low cost airline is an airline that offers generally low fares in exchange for eliminating many traditional passenger services.

A low-cost carrier supported by electronic ticketless systems In-flight service, no class differentiation, high flight frequencies, minimum delays Airports, unreserved seating,   employees working in multiple roles, competitive wages, profit sharing and high productivity.

2

The COVID-19 crisis will have an impact for years, and the market will take years, to return to pre-crisis levels.

Reviewing and re-evaluating operational cost structures and business models are key and essential to ensure lean, optimized, and sustainable operations.

In these situations airlines will look for ways to keep fixed costs down.

During downturns, management looks to cut labour costs by laying off workers or reducing their pay or benefits.

Finance teams will need to be closely involved to protect cash levels, capture revenues as soon as possible, and delay cash-outs as much as possible.

Companies that take a data-driven, action-oriented, and digitally supported approach will have the best chance to emerge stronger from the COVID-19 crisis.