AE6601: One possible structure for the breakdown of airline costs is given: Air Transport Economics Assignment, KU, Singapore

1. One possible structure for the breakdown of airline costs is given in Figure Q1.1.

a. Explain the difference between:

(i)   Indirect Operating Costs and Direct Operating Cost

(ii)   Variable DOCs and Fixed DOC

(iii)  Capacity costs and Traffic Costs

b. List and explain 4 of the drivers that impact the cost of providing a service on a particular route.

c. If an airline decides to increase the frequency and capacity of flights, explain the internal and external factors which may lead to the average cost per seat increasing.

(d)The information in Figure Q1.2 is lifted from IAGs 2017 Financial Results and relates to the financial performance of two of their Spanish-based airline brands, Iberia and Vueling.

i. What is the metric airlines use to define and measure their operating expenditure?

From the information presented, calculate the missing metrics for cost for Iberia (round off answers to two decimal places).

(ii) Fuel unit cost

(iii) Non-fuel unit cost

(iv) Total unit cost

(v) Discuss why airlines would choose to report their expenditure costs without the cost of fuel included (ex-fuel)

2. (a) Give six examples of the determinants of supply for air transport?

(b)Prior to commencing services to a new country, suggest three economic parameters that an airline may analyze to determine the level of economic activity for that country.

(c) Explain how a lower level of economic activity in the United Kingdom may have an impact on the demand for air travel.

(d) Explain the terms ‘directional flow’ and ‘perishability’ when considering the characteristics of demand for air transport.

(e)If demand is such on a given route that two airlines are in direct competition with each other, explain why they might decide not to compete on price.

(f) Giveexplanations of three other ways in which competing airlines may attempt to differentiate themselves from the competition.

(g) An airline may face uncertainty due to factors such as increased competition on their network, rising costs, etc. What are the three responses airlines may consider countering this strategic uncertainty? Provide an example for each.

3. The Chicago Convention of 1944 resulted in the initial ‘Freedoms of the Air’ and various agreements and recommendations to facilitate the extension of world air routes through inter-governmental agreements.

a. What criteria may form part of an Air Service Agreement (ASA) between two or more countries?

(b) Discuss the immediate effects of deregulation/liberalization on the air transport market.

(c) What have been four effects of deregulation on the U.S airline industry through the 1990s and 2000s?

d. One of the initiators for airlines to enter into alliances is to circumvent nationality and ownership rules.

Name four challenges airlines may face when entering into an alliance?

e. Airlines constantly evaluate the economic viability of routes on their network and would do so when considering codesharing with a partner in a particular sector.

The following route table in Figure Q3.1[Singapore-Hong Kong–Singapore (SIN-HKG-SIN)] is operated with seven daily return flights utilizing five different aircraft.