You are on page 1of 19

B747-400F/SF B767-200/300 SF

‘Cost Characteristics of Airline Operations for Cargo Aircraft’ by D.J. Ghosh


2nd Annual Managing Airline Operating Costs Conference December 2005, Dublin, Ireland

A300-600RF A310-300F

www.american-friendship.com
Cost Characteristics of Airline
Operations for Cargo Aircraft

 What are the typical cost profiles of cargo and freight


forwarding airlines?

 What are the cost characteristics for both large and small
aircraft?

 To what degree do these costs vary depending on the


nature of the operation, size and age of the aircraft?

www.american-friendship.com
Cost Characteristics of Airline
Operations for Cargo Aircraft

GENERAL ECONOMIC PRINCIPLES FOR CARGO CARRIERS

 REVENUE: In general, air cargo generates only half as much revenue


and yields have been falling. Older aircraft are better suited.
 DIRECTION: Unlike passengers, cargoes move only in one direction,
creating directional imbalances and revenue shortfalls.
 TRIP COSTS : Generally, trip costs are fairly constant with increasing
payload.
 COMPETITION: Pure freight carriers usually cannot compete in markets
with the freight rates offered by the “belly capacity” of passenger
carriers since the latter are offered on a “marginal pricing” basis”.
 GROSS PROFIT: Pure freight operators can maximize “gross profit
performance” by seeking more “high density-high value” cargoes that
command a higher revenue premium (e.g. semi-conductors).

www.american-friendship.com
Cost Characteristics of Airline
Operations for Cargo Aircraft

REVENUE IS IMPORTANT

 Revenue management enables airlines to sell the right product, to the


right customer, at the right time, for the right price, to achieve the
highest amount of revenue possible.

 Cargo space is a perishable asset and empty space on a flight cannot


be resold.

 A small percentage increase in revenue has a greater effect on


profitability than a much larger reduction in costs.

 Most airline management tends to focus more on costs, because costs


are easier to control and measure. It is revenue that drives profits.

 Lower cost doesn’t always win.

www.american-friendship.com
Cost Characteristics of Airline
Operations for Cargo Aircraft

www.american-friendship.com
Cost Characteristics of Airline
Operations for Cargo Aircraft

HOWEVER ONE OF THE BIGGEST COSTS OF A CARGO AIRLINE IS


“OPPORTUNITY COST”

 Opportunity cost is the cost of not being able to utilize the asset for a
more productive use.

 There are two types of opportunity costs for cargo airlines:

 DIRECTIONAL IMBALANCES in the air cargo business create a lost


opportunity because freighters have to fly empty on one leg of the
voyage.

 LOWER AIRCRAFT UITLIZATION is a lost opportunity, because the


asset could be deployed somewhere else.

www.american-friendship.com
Cost Characteristics of Airline
Operations for Cargo Aircraft

QUESTION:WHAT ARE TYPICAL COST PROFILES OF CARGO AND FREIGHT


FORWARDING AIRLINES?

 All cargo airlines have two unique cost profiles compared to their
passenger counterparts:
 1)INTEGRATORS: Such as Fed Ex and UPS with a hub and spoke
system and higher yields typically “under utilize” their narrow body
aircraft.
 2)GENERAL CARGO OPERATORS: Such as Cargolux, British Airways,
Singapore Airlines and Cathay Pacific who operate both new and older
wide body freighter aircraft suffer from directional imbalances and
lower yields.

AIRPORT COSTS:
 Unlike passenger airlines, pure cargo airlines can fly into lower cost
“non hub” airports with lower landing fees, no noise restrictions and 24
hour access, thereby reducing costs.
www.american-friendship.com
Cost Characteristics of Airline
Operations for Cargo Aircraft

QUESTION:

WHAT ARE COST CHARACTERISTICS FOR BOTH LARGE AND SMALL


AIRCRAFT?

ANSWER:

 Larger cargo aircraft with their inherent disadvantage of directional


imbalances and lower yields, combined with a smaller pool of general
cargo operators, are more risky and more prone to a downturn in the
world economy.
 Aircraft financiers are less willing to finance this type of aircraft unless
they are dealing with top tier airlines.
 Smaller cargo aircraft which dominate the fleets of integrators enjoy
less directional imbalances and higher yields. Since integrators “under
utilize” them their ownership costs are higher.

www.american-friendship.com
Cost Characteristics of Airline
Operations for Cargo Aircraft

QUESTION:

TO WHAT DEGREE DO THESE COSTS VARY DEPENDING ON THE


NATURE OF THE OPERATION, SIZE AND AGE OF THE AIRCRAFT?

ANSWER:

 Larger airlines enjoy the benefits of economies of scale and fleet


commonality since they are able to spread their fixed costs over a wider
network.
 Older aircraft, especially the newer generation of older B747-400’s,
B767-300’s and B757 have a huge advantage because of their lower
capital costs (almost 1/3 the cost of new factory built freighters) and
their significantly improved operating economics compared to the
older B747-200’s, B-727’s, L-1011’s and MD-80’s.
 These “middle aged” aircraft will form the backbone of future freighter
fleets of the world.

www.american-friendship.com
Standard Body Aircraft
Cash Operating Cost Per Trip (With ownership cost)
25,000

20,000
USD / Trip

15,000

10,000

5,000

0
B-727-200F B-737- B-757- DC-8-63CF
700C-Frt 200SF
Based on 1000 NM trip
www.american-friendship.com
Medium Wide Body Aircraft
Operating Cost Per Trip (With ownership cost)
50,000
45,000
40,000
35,000
USD / Trip

30,000
25,000
20,000
15,000
10,000
5,000
0
A-300-600F A-310-200SF B-767-200SF B-767-300F

Based on 2000 NM trip

www.american-friendship.com
Large Wide Body Aircraft
Operating Cost Per Trip (With ownership cost)
120,000

100,000

80,000
USD / Trip

60,000

40,000

20,000

0
747-200SF 747- 400F DC-10-30F MD-11F

Based on 3000 NM trip


www.american-friendship.com
Standard Body Aircraft
Operating Costs Per Trip
100%
90%
80%
70%
60% % *Others
% Maintenance
50%
% Flight Crew
40%
% Fuel
30%
20%
10%
0%
B-727- B-737- B-757- DC-8-
200F 700C-Frt 200SF 63CF *Others: Interest, Insurance,
Landing Fees, Nav. & Com,
Depreciation, etc.

www.american-friendship.com
Medium Wide Body Aircraft
Operating Costs Per Trip
100%
90%
80%
70%
60% % *Others
% Maintenance
50%
% Flight Crew
40%
% Fuel
30%
20%
10%
0%
A-300- A-310- B-767- B-767-
600F 200SF 200SF 300F
*Others: Interest, Insurance,
Landing Fees, Nav. & Com,
Depreciation, etc.

www.american-friendship.com
Large Wide Body Aircraft
Operating Costs Per Trip
100%
90%
80%
70%
60% % *Others
% Maintenance
50%
% Flight Crew
40%
% Fuel
30%
20%
10%
0%
747- 747- DC-10- MD--11F
200SF 400F 30F *Others: Interest, Insurance,
Landing Fees, Nav. & Com,
Depreciation, etc.

www.american-friendship.com
Operating Economic Assumptions
Generic Analysis
 Cost Level: 2005 US Dollars

 Fuel: $1.95 per U.S. Gallon

 Maintenance: 27.25/hour
Mature maintenance
assumed for all aircraft

 Flight Crew: Function of maximum take-


off gross weight, number crew
members and block
time

www.american-friendship.com
Cost Characteristics of
Airline Operations for
Cargo Aircraft

Fuel
Consumption
of different
aircraft

www.american-friendship.com
Cost Characteristics of Airline
Operations for Cargo Aircraft

CONCLUSION

 Thus, the economics of a profitable cargo airline demand that

 You stay away from markets where there is too much of “marginally
priced” belly capacity.

 You find ways to address the imbalances in the air cargo business and

 You research ways to double the utilization of smaller freighters

 If you can, we wouldn’t have to worry so much about managing airline


costs.

Data courtesy of The Boeing Company

www.american-friendship.com
Cost Characteristics of Airline
Operations for Cargo Aircraft

A310-300F B767-200/300 SF

B747-400F/SF
A300-600RF

www.american-friendship.com