Essay Sample on Airline Industry Cost Analysis: Fuel and Labor

Introduction

The business of moving people across the world has become an essential part of human life. The airline industry is highly competitive, and companies have to assess their costs when looking to make profits. According to Beers (2018), the major costs affecting the air industry are fuel and labor costs. He further states that labor costs tend to remain constant in the short term, while fuel prices fluctuate wildly depending on the price of oil CITATION Bee18 \l 2057 (Beers, 2018). Similarly, Victoria Bryan (2018) highlights labor and fuel as the major costs in the global airline industry, recommending that companies that look to succeed need to manage their labor costs effectively. In her analysis, these costs account to nearly half of airlines' expenses. After the fuel prices stabilized, labor costs have begun to surpass fuel costs as the airlines' highest single expense since 2016 (Bryan, 2018). Although fuel and labor costs are the major expenses affecting the air industry, companies can find areas to make critical cuts that will enable them to operate profitably.

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Fuel Costs

The sudden increase in fuel prices in 2008 caused several airline companies to stumble. In the words of Brian Beers (2018), "the companies had to go through serious restructuring to survive." Fuel contributes 10 to 12 per cent of an airline's operating expenses. Domestic airlines in the U.S. spend an estimated $2 - $5 billion every month on jet fuel (Grabianowski, 2009). Some companies plan for these costs by buying future contracts that lock the prices for a given period. However, this strategy could, at times prove costly when the prices drop since the companies will be paying for more than the market price. Typically, companies respond to a spike in fuel prices by increasing ticket prices or reducing the number of flights due to decreased travellers. Oil prices have, however, kept dropping amid a strengthening economy and increased travel. These conditions create a favorable operating environment for the airline industry by helping to increase revenue (Bryan, 2018).

Labor Costs

Labor costs are the other top expenses for airlines and are expected to rise to 33 per cent of total expenses (Bryan, 2018). This labor entails services from pilots, cabin crew members, and ground staff. Although the airline industry continues to grow, there has been a global shortage of labor, and certain regions face scarcity of qualified pilots. Workers demand increased wages through unions, which piles pressure on the industry to increase its spending. Also, the workforce has market power that is contributing to the rising cost labor as airlines make profits. In an example, Ryanair carrier was forced to cancel thousands of flights due to a shortage of pilots. Such a situation might influence workers on other carriers to assert wage pressure on the airlines, considering the impact of their service. The wage concern has even come up in the United Arab Emirates, a country that seldom experiences labor disputes and has banned unions and industrial action (Bryan, 2018). Airlines should, therefore, look for areas to save since the services of employees are integral.

Other Costs

The air industry has other expenses besides labor and fuel. One of these costs is airport fees. This cost represents the levies that an airline incurs for using the resources of a particular airport. The cost is higher for carriers that traverse more regions across the globe. Another cost for airlines is the tax that is paid to the government for doing business. Airlines also incur the costs of running computer systems that serve the purpose of tracking bookings. Besides the purchase cost, the companies need to spend in maintaining the equipment that helps to facilitate the operations of the airlines, particularly serving customers. Additionally, the carriers pay fees and percentages to websites and travel agents which add to the overall operating costs (Grabianowski, 2009).

Consolidation

Since the majority of these costs are vital for the airlines to operate, managers need to come up with means to cut expenses that hurt the profitability of the industry. One of the consolidation efforts mentioned by Victoria Bryan is focusing on the costs across the board and not only in one sector. Ryanair, for instance, which has one of the lowest costs in Europe succeeded by negotiating with airports and manufacturers, thus getting favorable deals on fees and orders. It is paramount for companies to strive to lower these costs for them to sustain operations and operate profitably (Bryan, 2018).

Conclusion

In conclusion, airline expenses are mainly dominated by fuel and labor costs. Other costs are incurred in taxes, fees, and purchases. A rise in these costs lowers the profits for companies and could severely hurt business as it happened during the fuel price increase in 2008. It also affects ticket prices forcing passengers to seek alternative modes of transport such trains for domestic travel. Labor costs are expected to keep rising due to the demand by workers to have their wages increased. This rise, however, could be sustained in a thriving economy; otherwise, there could be retrenchment. Managers need to find areas to reduce costs and also look for measures to address employee scarcity. A reduction in costs enables airlines to increase their revenue and sustain operations at a profit.

References

Beers, B. (2018, April 30). Which major expenses affect airline companies? Retrieved from Investopedia: https://www.investopedia.com/ask/answers/040715/what-are-major-expenses-affect-companies-airline-industry.asp

Bryan, V. (2018, February 14). Higher wages, fuel prices turn up cost pressure on airlines. Retrieved from Reuters: https://www.reuters.com/article/us-airlines-wages-inflation-analysis/higher-wages-fuel-prices-turn-up-cost-pressure-on-airlines-idUSKCN1FY292

Grabianowski, E. (2009, March 12). How Budget Airlines Work. Retrieved from How Stuff Works: https://money.howstuffworks.com/personal-finance/budgeting/budget-airline.htm