Question

How are airlines affected by historical costs and current costs?

Answer 1

Airlines are mainly affected by labor and fuel costs. Labor costs are normally fixed in the short-term, while fuel costs can change based on the price of oil. Changes in fuel costs can turn a flight from profit to loss depending on the number of tickets sold to passengers.

Historically, the airline industry continues to be highly competitive. The continuous rise and fall in the price of oil compels it to change the ticket price which may be a burden for the passengers but in order to sustain in the airline industry, the airline companies need to bring updates in their price.

Labor is the main part of airline expenses, it accounts 35% of the total of airline operating expenses. When there is a downturn, management tries to cut labor costs in order to adjust the revenue with the operating costs.

Fuel costs which is a major headache for airline companies account for 10-20% of operating costs. Airlines prepare themselves for the oil price hike by increasing a small amount in ticket prices, but sudden rise in oil prices may disturb the smooth operation of the airline industry.

In 2008, oil price suddenly went up to $147 per barrel, airlines were not prepared for this. They try to reorganize their system to survive. From the year 2009-2014, oil prices change but slowly, giving some relief to airline companies. The recent drop in oil prices from 2014-2017 was beneficial for the airline industry, the economy continued to grow with increasing travel planning by people. From 2014-2020, there is also a mix up of rise and fall in oil prices, making the airline industry more flexible in adjusting its operating costs with a change in ticket price and labor costs.

There is no high difference between the rate of historical costs and current costs of airline industry. It varies depending upon the price of the oil . The airline industry need to adjust their operating expenses in order to be competitive in the marketplace.