A question of finance.....

[Navajo8686]

Hi all

First post and I hope it's in the right place....

Another thread referred to the fact that a 747 cost 200m (which I assume is sterling but may be dollars).

In any even how on earth does an airline ever cover the cost? Using an assumption that 350 fare paying passengers pay £500 per journey and there are two journies a day for 300 days of the year then the revenue is £350,000 per day or £105m per year. However that takes no account of any of the other costs which are incurred (including the fact that the more people on board the more fuel is burnt) and does not reflect interest/capital/leasing charges which must also add a substantial overhead. Is there a basic cost per hour (irrespective of whether the plane's flying or not) which the industry uses?

I assume that freight is probably the key here - in which case which is the more profitable revenue earner - freight or humans?

I'm not starting an airline just very interested

Thanks in advance

Bernie

[BOAC]

Very few 'start-ups' buy an aircraft - they normally lease. It is only large airlines who can afford to 'own' them.

[willfly380]

first of all welcome to the network. it takes years to break even with a 747 , little lesser if you operate 737/320s.south west believes if you buy a jumbo , you will get a mammoth.
yes freight is more profitable

[Hamrah]

Navajo8686,

If you use the same analogy, you could never afford to own a car.

The way it actually works is that an aircraft, like any piece of equipment, depreciates over a period of time.

So, if you, say pay $36M for a 737-700, which 5 years later is worth $28M, then your depreciation costs over that period is $8M, or $133,333 per month. So thats the cost of ownership of your aircraft, which if you operate the aircraft on, say 4 sectors a day every day, means the cost of ownership comes to $1111 per sector or ( carry 148 passengers on each sector) $1.80 per passenger carried.

That gives you some idea as to how the cost of ownership comes into play when calculating how much you need to charge to make money.

Then you have to add on all the other direct costs ( fuel landing fees etc) followed by the Overheads ( salaries, offices etc).

Hope this helps.

H

[Navajo8686]

Thanks for your replies.

The finances of the airline world really are, at best, odd and at worst very weird!

At $1.80 a sector - as per Hamrahs' example - the other overheads must be quite exceptional to justify some of the short haul fares. I do appreciate that landing fees/parking can be very high.Even the LoCOs seem to charge high on that basis - the cheapest part of the equation seems to be the cost of the aeroplane! There does seem to be a high 'staff to plane ratio' (taking into account all of the employees not just the on plane jobs - this is not a criticism it's a comment so please don't bite!! ) within the industry so I guess that this must be the largest cost in reality.

Interesting

Thanks

Bernie

[The SSK]

Quick and dirty calculation based on AEA 2002 figures:

132.4 747-400s in the fleet, flying 526,884 million kms/year equals 3,98 mill km per aircraft.

Assume 400 seats/ac that's 1592 mill seat/km
AEA longhaul pax loadfactor was 79.2%, that's 1262 mill pax-km
Average longhaul yield was 6.34 cents per km

That gives total passenger revenue per ac for the year of more or less exactly $80m.

Freight and mail revenue add roughly 15% brings the total to $92m

(really dirty now) depreciate the ac at $10m pa over 20 years...

That means ac ownership costs are just over 10% of the total - sounds about right?

[Hamrah]

That seems about right, DJ, althought the average load factor and and average yields are lower on Shorthaul.

W.r.t. other costs, fuel is pretty high right now, and when it comes to crew costs, you have to bear in mind that you need to pay crew whether they are flying or not, so their costs are in Overheads rather than direct operating costs.

Now matter how you work it out, let me assure you the margins are in the order of 3-4%

H

[The SSK]

Eh?

Shorthaul load factors are lower, yes - 64.7% AEA 2002 compared with 79.2% longhaul.

But yields are much higher - 15.50 cents vs 6.34

Margins 3-4%? You mean somebody's making a profit?

[Drop and Stop]

I cant add anything to this discussion but I hope you will forgive me for posting this as it shows some of the costs involved in running an aircraft. I had been following this thread in the African forum: SAA Lebombo RIP (http://www.pprune.org/forums/showthread.php?s=&threadid=121600) . Besides the pictures it has this on the bottom of the first page:
This Boeing 747-200 (B747) joined the airline on 6 November 1971 at the cost of ZAR17 milion (Euro 1.9 million) and has carried 6 million passengers (world fleet of B747 to date has carried more than 3.5 billlion), done an amazing 107,000 flying hours, twelve and a half years airbone, 481.5 million nautical miles or 886 million Km using 160.5 million litres of jet A1, used 3384 tyres at a cost of ZAR30.4 million (Euro 3.38 million) nearly double the original purchase price.

Farkin Hell!

[LGS6753]

Hamrah's $1.80 is simply a depreciation figure.
Someone, somewhere has to fork out the $36m to buy the 737-700. They will want some return on their outlay (whether a Bank, leasing company or Grandma). Interest charges on that outlay at 5% would be $1.8m per annum. (Gulp)
That's $150,000 per month - more than depreciation - $1250 per sector or $8.45 per passenger (I think Hamrah's $1.80 depreciation figure should be $7.51 per passenger).
Adding the two together gives an aircraft holding cost of $15.96 per passenger - roughly £9 per passenger sector. That seems high, so I guess the aircraft do more than 4 sectors a day (more like 8, which would halve the figure). Also, perhaps discounts are available on 737-700s!

I would be interested in anyone's view - are you out there, Beancounter?

[The SSK]

The convention is to treat interest as a quasi-operating cost and calculate operating profit (loss) both before and after interest.

But bear in mind that interest works both ways - airline journeys are invariably paid for in advance of the costs incurred and all that revenue - $92m p.a. in the case of my 747 above - is earning interest from the day it is received. So the net interest burden is much lower and can even be negative.

[Hamrah]

LGS6753,

I was just trying to demonstrate a cost of ownership calculation to answer Navajo's question. Neither the cost of the 737, nor the depreciation rate used are necessarily representative of todays market.

I hope Navajo now has a better appreciation of the way costs are calculated.

H

[Navajo8686]

..for your replies.

Appreciated

Bernie