Source: The Aviation & Aerospace Almanac, ICAO Air Transport Reporting Form EF-1.
Operating Expenses of the Airline Industry
Globally, labor accounts for 35% of the operating costs of the airline industry, which represents about 75% of all non-fixed costs. Layoffs are consequently the first strategy used by the airline industry for rationalization during a phase of downturn. Fuel comes in second with 10-12% and commissions to travel agents account for 6% (down from 10% in 1995). With the development of e-commerce, many customers are able to buy tickets directly from the airlines or from a low cost online broker, instead of using a travel agent.
Since about two thirds of the operating expenses are fixed, the marginal costs of taking an extra passenger are very small. This leads to overbooking and highly discounted seats if several remain unsold in the days before the flight as a money losing fare is better than no fare at all. To cover its costs, an airline must have on average 65% of its seats occupied (passenger load factor), a share that increased in since deregulation. The average passenger load factor varied from 66% to 69% through the 1990s, underlining low profit margins within the industry. Another consequence of deregulation processes was the emergence, especially in the United States, of several regional airlines providing feeder services.
The above graph underlines the specificities of operating expenses. They include flight operations (fuel, pilots), maintenance (parts and labor), station expenses (handling passengers, luggage and freight at terminals), promotion (advertising, reservations and travel agent commissions; 80% of all ticket sales are done through travel agents), passenger services (food and entertainment), administration, equipment depreciation and amortization and transport related (delivery trucks). Still, airline do not have to assume much research and development costs since these costs are assumed by the suppliers of the equipment that airline uses, from the planes themselves to seats and onboard entertainment.
For a transcontinental flight between New York and Los Angeles, it costs about 12 cents per seat mile to operate a B-757, which has 188 seats. This 2,500-mile transcontinental flight must thus generate $56,400 to break even, or $300 per seat.