Introduction
The aircraft industry is evolving along with the world of technology. Hence, the number of costs and expenses involved in the industry is also changing. The growing number of concerns after a number of aircraft accidents, such as the recent Boeing 737 crash in China and earlier crashes, brought public and specialists’ attention to the way air organizations function. Therefore, the paper investigates and evaluates the main costs and expenses involved in the air industry.
Cost Analysis
There are numerous expenses involved in the operations of the aircraft industry. However, more than half of the expenses are divided between the four main categories. According to the Federal Aviation Administration report, the largest expense of the airline industry is labor, which constitutes 32.3 percent of the overall operating costs (Federal Aviation Administration, 2019). The second-largest expense is fuel, which constitutes 17.7 percent. 13.1 percent of operating costs are related to the maintenance materials’ purchase and storage (Federal Aviation Administration, 2019). Finally, the fourth largest expense is professional services, which is 8.6 percent. Other expenses are relatively low as they, besides aircraft rent and ownership, constitute less than 5 percent of the overall expenses.
It is worth noting that nearly two-thirds of the air industry expenses are fixed. The largest non-fixed expense is labor, as it constitutes around 75% of non-fixed costs. This puts passenger airlines in a position where each fare is valuable, and in order to gain profits, at least 65% of passenger seats on a flight should be bought (Federal Aviation Administration, 2019). In addition, fixed costs make air organizations rely on fuel costs.
Fuel Prices
To avoid adverse effects of the fluctuations in fuel prices, most air companies have long-term contracts with fuel suppliers. For instance, fuel price hedging is one of the strategies to secure air companies from losses after fuel prices spike up. Companies buy future contracts to secure the price of fuel at the level of the date of contract signing. However, companies are at the risk of losing money when fuel prices decline.
The price of a jet fuel directly effects the ticket price. As the fuel price increases, the company’s expenses increase, hence, creating a need for a bigger revenue. The entire industry is undergoing a revolution, which transforms the level of comfort, fuel consumption, and speed and carriage capacity of the aircraft. As competition for the passengers increases, the costs of air transport also reduce, thereby making it affordable to more people. However, the airline industry is generally oligopolistic (Boyd, 2017). Massive investments are required to set up an airline company, and more than 70% of this capital is often spent on fixed costs. This reduced the number of companies that can operate within the industry, and the available players are price setters. The shifting of world economic powerhouses is also transforming the way the airline industry works (Flottau, 2017). Moreover, externalities and price discrimination is affecting the passengers’ preference for various companies.
Air Industry Market Trends
In the current economic world, business operations have become complicated due to technological advancement, which has made the market more dynamic. This is due to frequent changes forcing market players to be up-to-date on market trends, less risking its life in the industry. Nowadays, firms can access information within a short period, encouraging many competitors in the industry because of free entry, forcing the prices of the products to decrease to survive in the industry. Clients are informed about the market through the internet; thus, they can make their best choice on the products they want.
The firm, on the other hand, has to be vigilant on its balances of the price, quantity, and quality to be vibrant in the market. Accordingly, there are some essential aspects in the transport sector, which a firm has to provide with high quality, for instance, the safety of the passengers and their belongings, efficiency in delivery, smart products and service, and differentiation in general. This creates a customer relationship, improving the corporation’s brand as its name spreads in a snowball manner. Due to the industrial revolution, there is much pollution through the emission of gases; hence the firm has to be part of the group sustaining the Earth for the wellbeing of all. These are some of the strategies that various companies have been applying in the airline industry, enabling it to expand to more than 40 destinations internationally.
Efficiency is an important ingredient in airline operations as the clients have to be satisfied to be maintained. Airlines that observe efficiency have expanded financially and structurally because their customers are consistent in number (Gossling & Upham, 2012). And those satisfied by the services market the firm to their friends, and within a short period, the number of clients has swollen. The safety of the passengers is key to the performance of the airline. Most clients prefer corporations that have been associated with minimal cases of accidents or none at all. This indicates both a high level of qualification and merited experience in work being done. Such organizations prosper in the activities, and they stay for a longer period in service.
Conclusion
The airline industry is undergoing massive structural changes, which are significant to the future profitability of this sector. The introduction of low-cost airliners is threatening the existence of some of the older companies, especially considering that younger companies have adapted to these changes (Boyd, 2017). The expenses in the air industry are mostly fixed with four main categories constituting more than half of the operational costs. The second largest expense is fuel, which demands implementation of different strategies such as purchasing future contracts to secure prices in case of fluctuations. Moreover, the prices of jet fuel directly affects the passenger ticket price.
References
Boyd, M. (2017). A New Disruptive Economic Model Is Emerging In The Airline Industry. Web.
Federal Aviation Administration (2019). Aircraft Operating Costs. Web.
Flottau, J. (2017). Branson’s Airline Cut-Back Shows Industry’s Structural Change. Web.
Gossling, S., & Upham, P. (2012). Climate change and aviation: Issues, challenges and solutions. London, England: Routledge.