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Traffic costing, pricing and planning -- the airline decision Murphy, John Daniel 1966

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TRAFFIC COSTING, PRICING AND PLANNING— THE AIRLINE DECISION by JOHN DANIEL MURPHY B. Comm., University of B r i t i s h Colombia, 1963  A THESIS IN COMMERCE SUBMITTED TO THE FACULTY OF GRADUATE STUDIES IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION in the Department of Commerce and Business Administration  We accept this thesis as conforming to the required standard  THE UNIVERSITY OF BRITISH COLUMBIA April,  1966  In the  requirements  British  mission  I agree  f o r reference  for extensive  purposes  without  of  this  21,  I  of this  of  at the University  of  for financial  shall  further thesis  make  agree for  that  gain  copying  shall  1966  Columbia  that  freely per-  o r by or  publi-  n o t be a l l o w e d  permission.  Business  it  scholarly  o f my. D e p a r t m e n t  i s understood  o f Commerce and  April  fulfilment  the Library  by t h e Head  The U n i v e r s i t y o f B r i t i s h V a n c o u v e r 8, C a n a d a Date  that  in partial  degree  and study.  It  thesis  my w r i t t e n  Department  thesis  copying  may b e g r a n t e d  representatives.,  cation  this  f o r an advanced  Columbia,  available  his  presenting  Administration  ABSTRACT Two words i n t h e t i t l e o f t h i s t h e s i s t y p i f y i t s objectives.  They a r e t h e words " c o s t i n g " and " p l a n n i n g . "  C o s t i n g because c o s t s a r e such a s e n s i t i v e and i n f l u e n t i a l f a c t o r i n t h e economy t h a t t h e y r e q u i r e c a r e f u l a n a l y s i s ^ and p l a n n i n g because i t a t t e m p t s t o i n t e r - r e l a t e t h e many d i v e r s e r o l e s and a r e a s o f a b u s i n e s s o p e r a t i o n i n t o a m e a n i n g f u l whole and p r o v i d e d i r e c t i o n f o r t h e f u t u r e . Throughout t h i s p r e s e n t a t i o n , t e c h n i q u e s  and s k i l l s  o f c o s t i n g , p r i c i n g and p l a n n i n g have been p r o p o s e d , d e v e l o p e d and t h e n adapted t o t h e u n d e r l y i n g f u n c t i o n s and the f o r m a l o r g a n i z a t i o n of a h y p o t h e t i c a l a i r l i n e .  While  the major theme i s a n a l y s i s o f c o s t s f o r p l a n n i n g a n d d e c i s i o n making f u n c t i o n s , a more t h a n b r i e f r e f e r e n c e t o the complementary f i e l d s o f revenues and performance s t a t i s t i c s i s made as t h e y f o r m a n i n t e g r a l p a r t o f a n airline s f  operation.  The a r e a s o f a i r l i n e o p e r a t i o n t o w h i c h t h i s  study  i s i n t e n d e d t o make i t s major c o n t r i b u t i o n s a r e : 1.  P r o v i d e a n a c c u r a t e measure o f t h e r e l a t i v e p r o f i t a b i l i t y o f t h e many s e r v i c e s and t y p e s o f equipment  2.  operated.  Provide a uniform b a s i s f o r t h e p r i c i n g o f f a r e s f o r a i r l i n e s e r v i c e s , i n which the cost i i  iii f a c t o r s c a n be weighed i n terms o f t h e o t h e r contributing factors. 3.  P r o v i d e a n e f f e c t i v e and r e a l i s t i c b a s i s f o r planning and d e c i s i o n m a k i n g — e n s u r i n g t h a t c o n t r o l i s e x e r c i s e d and t h e d e s i r e d r e s u l t s are  The  achieved.  subject of t h i s thesis i s a hypothetical  Canadian a i r l i n e , w h i c h o p e r a t e s  on r o u t e s and uses  equipment w h i c h a r e f a m i l i a r t o C a n a d i a n t r a v e l l e r s .  The  c o s t s and performance i n f o r m a t i o n used a r e f u l l y r e p r e s e n t a t i v e o f a i r l i n e o p e r a t i o n s , a l t h o u g h t h e y have been drawn f r o m p u b l i s h e d r e g u l a t o r y s o u r c e s , a v i a t i o n j o u r n a l s and p e r i o d i c a l s . The  subject of t h i s t h e s i s i s recognized as being  b o t h b r o a d and complex.  T h i s study i s b u t a b r i e f  i n v e s t i g a t i o n o f t h e s u b j e c t and o n l y some o f t h e major f o r c e s have been c o n s i d e r e d .  A d e t a i l e d study i s  i m p o s s i b l e c o n s i d e r i n g t h e t i m e and o t h e r w h i c h a r e imposed.  limitations  However, t h i s t h e s i s s h o u l d  provide  an i n s i g h t i n t o c u r r e n t c o m p l i c a t i o n s w h i c h p r e v a i l i n t h e a i r l i n e i n d u s t r y and a l s o suggest a course o f a c t i o n t o overcome some o f t h e p r o b l e m s , and a t t h e same t i m e p r o v i d e management w i t h a u s e f u l b a s i s f o r p l a n n i n g and d e c i s i o n making.  TABLE OF CONTENTS CHAPTER I.  PAGE HISTORY AND BACKGROUND OP THE COMMERCIAL 1  AIRLINE INDUSTRY H i s t o r y o f N o r t h A m e r i c a n Commercial  1  Airlines Background o f A i r l i n e A c c o u n t i n g Practises II.  IG  OPERATING CHARACTERISTICS OF THE 13  COMMERCIAL AIRLINE INDUSTRY The Economics o f O p e r a t i o n  13  . . . . . . . .  P e r i s h a b l e Nature o f the Inventory S h o r t Economic L i f e o f Equipment P r e v e n t a t i v e N a t u r e o f Maintenance  ...  19  . . . .  20  ...  21  P u b l i c S e r v i c e Aspect of the Industry . .  22  H i g h Degree o f F i x e d C o s t s  23  i  Summary o f Economic F u n c t i o n s o f  III.  Commercial A i r l i n e O p e r a t i o n  .  24  Economic F a c t o r s  .  25  .  25  Business Conditions AIRLINE STRUCTURE FUNCTIONS AND ORGANIZATION  29  The Company  29 iv  CHAPTER  PAGE A i r l i n e Equipment, S t r u c t u r e and Routes . .  3°  Functions of the A i r l i n e  33  F l y i n g Operations  33  Customer S e r v i c e  33  Sales  35  Ground S e r v i c e s  35 36  Organization of the A i r l i n e  3&  President Vice President—Purchases  and S t o r e s  . .  36  Vice President—Operations  38  Vice President—Finance  40  V i c e P r e s i d e n t — S a l e s and Customer Service . . . . . . IV.  41  BUDGETING AND COSTING PRACTISES FOR MAJOR ELEMENTS OF AIRLINE COSTS  44  Summary o f A i r l i n e P l a n n i n g and Budgeting P r a c t i s e s  44  Accounting  f o r Labour C o s t s  Accounting  f o r Materials, Supplies,  and S e r v i c e C o s t s  47  48  A d m i n i s t r a t i o n , B u r d e n and Overhead 55  Costs Accounting  f o r Operating  and Revenues  Statistics 57  vi CHAPTER V.  PAGE 65  THE COST OF OPERATING v  Overhaul Costs  67  D i r e c t F l y i n g Operations Costs I n F l i g h t Passenger S e r v i c e Crew C o s t s Aircraft VI.  . .  83  THE COST OF SERVICE AND SALES  83  The C o s t o f S e r v i c e Passenger Meals and S u p p l i e s  . . . . . .  84  . . . . . . . . .  85 87  Customer S e r v i c e  90  The C o s t o f S a l e s Advertising  VII.  72 76  Ground O p e r a t i n g C o s t s  Cargo H a n d l i n g S e r v i c e  66  91  . . . . .  P r o m o t i o n and S o l i c i t a t i o n  91  T r a v e l Agencies  91  SUMMARY OF PLANNING CONTROL AND ANALYSIS  95  Summary Statements  97  R a t i o s o f A i r c r a f t and Route 100  Profitability Breakeven R a t i o — B r e a k e v e n F a c t o r  . . . .  104  Gross O p e r a t i n g P r o f i t C o n t r i b u t i o n Factor Cargo C o n s i d e r a t i o n s C o s t Rate R e l a t i o n s h i p s  105 118 123  vii  CHAPTER  PAGE 123  S h o r t Run Long Run  . ..  A i r c r a f t S c h e d u l i n g and F a r e s VIII.  COMMENTS AND CONCLUSIONS  128 132 137  Problem A r e a s  141  Problem S o l u t i o n s  142  A i r Cargo  145  The A i r l i n e D e c i s i o n  147  BIBLIOGRAPHY  150  LIST OF TABLES TABLE I.  PAGE Revenue P a s s e n g e r s C a r r i e d by  Canadian 8  Carriers II. III.  32  Aircraft Characteristics One Way B a s i c F a r e s and Route  34  Mileages IV.  Labour Cost C l a s s i f i c a t i o n s  by 49  F u n c t i o n s and Departments V. VI. VII. VIII. IX. X.  T a b l e of A i r c r a f t L a n d i n g Fees  51  T a b l e o f S t a n d a r d F u e l Consumption C o s t s . .  52  Capital  $6  and Equipment D e p r e c i a t i o n  Aircraft Depreciation  58  A i r c r a f t Insurance Costs  59  Comparison  of A c t u a l Y i e l d t o 60  Standard Fare XI.  S t a n d a r d Passenger Revenue and F u e l 69  Cost S p e c i f i c a t i o n s XII.  Table of V i s c o u n t A i r c r a f t Operating Capacity Costs  XIII.  .  T a b l e o f Vanguard A i r c r a f t O p e r a t i n g 74  Capacity Costs XIV.  73  T a b l e o f DC-8  A i r c r a f t Operating 75  Capacity Costs viii  ix TABLE XV.  PAGE T o t a l O p e r a t i n g Cost p e r A v a i l a b l e Seat 8l  M i l e b y A i r c r a f t Type XVI. XVII. XVIII. XIX.  The D i r e c t C o s t s o f S e r v i c e  89  The D i r e c t C o s t s o f S a l e s  93  Passenger One-Way T r i p Length  .  ACE A i r l i n e s ' Summary o f E s t i m a t e d Revenue, C o s t s a n d P r o f i t  XX.  108  Toronto-Winnipeg  F l i g h t Sector 109  Breakeven F a c t o r XXIII.  Montreal-Toronto F l i g h t Sector 113  G.O.P. F a c t o r XXIV.  Toronto-Winnipeg  F l i g h t Sector  G.O.P. F a c t o r XXV.  114  T y p i c a l S h o r t Run C o s t Elements f o r An A l l - C a r g o O p e r a t i o n  XXVI. XXVII.  107  Montreal-Toronto F l i g h t Sector Breakeven F a c t o r  XXII.  99  Comparative Round T r i p Route S e c t o r O p e r a t i n g C o s t s b y A i r c r a f t Type  XXI.  98  E x i s t i n g a n d Proposed Revenues and Y i e l d . . E x i s t i n g and Proposed Operating Costs  124 133  Direct 135  LIST OF FIGURES FIGURE  PAGE  1.  Routes Operated  31  2.  Organization Chart  37  3.  T o t a l Operating  Cost per A v a i l a b l e 63  Seat M i l e 4.  Montreal-Toronto F l i g h t  Sector 110  B r e a k e v e n F a c t o r , DC-8 5.  Montreal-Toronto F l i g h t  Sector  B r e a k e v e n F a c t o r , Vanguard 6.  Montreal-Toronto F l i g h t  .  Sector  Breakeven F a c t o r , Viscount 7.  Montreal-Toronto F l i g h t  Montreal-Toronto F l i g h t  11? Sector 116  G.O.P. F a c t o r , Vanguard 9.  Montreal-Toronto F l i g h t  Sector 117  G.O.P. F a c t o r , V i s c o u n t 10.  Production/Cost  R e l a t i o n s h i p s f o r an 126  A l l - C a r g o C a r r i e r . .' 11.  Cost/Rate R e l a t i o n s h i p s f o r an 127  All-Cargo Carrier . 12.  112  Sector  G.O.P. F a c t o r , DC-8 8.  I l l  P r o f i t Relationships f o r an 129  All-Cargo Carrier  x  xi  FIGURE 13.  PAGE  Growth R e l a t i o n s h i p s f o r an Carrier  All-Cargo 131  CHAPTER I HISTORY AND BACKGROUND OP THE COMMERCIAL AIRLINE INDUSTRY HISTORY OF NORTH AMERICAN COMMERCIAL AIRLINES The commercial airlines of North America, as we know them today, had their beginning at the end of the f i r s t World War,  The effect of the earlier commercial airlines i s  discernible on a i r transportation today, even though "the aircraft as a means of transportation" is almost a l l the two eras have i n common.  In today's age of electronic marvels,  space travel is no longer considered a dream of a few explorers, but rather an accepted certainty which w i l l be attained within this century.  It was the excitement of  travel and the desire to conquer the unknown which gave romance and glamour to early a i r transportation.  The early  pioneering of commercial a i r services, which evolved into flying mail and the performance of feats of endurance, s k i l l and courage, were the hallmarks of early aviation. From this point onward there was a distinct evolution of the role of the airplane in transportation.  The area which  best typifies this change is the Canadian northland.  The  a b i l i t y to penetrate into what was then, and to some extent is now, unexplored wilderness, was made practical by the float-equipped planes flown by bush p i l o t s . 1  2  Commercial bush flying from the f i r s t f i l l e d a real economic need in Canada and was able to pay i t s way without government subsidies. These swiftly-expanding bush lines were primarily responsible for opening up the northern parts of Canada and greatly helped the development of such major industries as mining and trapping.l The above quotation indicates that the potential of the aircraft i n terms of i t s economic and social values was thus recognized, and with this recognition, the growth and evolution into today*3 commercial airlines was begun.  While  this process was deferred by World War II, In which the a i r craft played a major r o l e , bush flying was the forerunner of our current day transcontinental and international a i r l i n e s . The evolution within the United States of America concentrated to a much greater degree on the movement of mall as the means of sustaining the development of a i r transport. Passenger travel accounted for very l i t t l e  revenue—government  subsidies greatly accelerated the growth of a i r routes and carriers.  It was widely believed that passenger revenues  would never be sufficient to sustain the necessary economic strength for sound growth. With the passage of the McNary-Watres Act in 1930, the large number of independent carriers, each operating with government mail franchises, was reduced and overall control  Howe, C D . , Cfrnacfa Spr.qafls, I t a WjLnRg, External Affairs, May, 1948. A  3 was held by three lnter-related groups.  These were subject,  In 1934, to anti-trust action which resulted in competitive 2  bidding for franchises, and more important, the enactment of the f i r s t of many regulatory rulings and requirements. The period 1934 to 1938, which marked the passage of the C i v i l Aeronautics Act, saw the airlines attempt to recoup the losses from r a i l passenger travel to offset the lower a i r mail revenues.  The C i v i l Aeronautics Act of 1938 resulted i n  permanent certification for approximately fifteen carriers, providing subsidy i n the form of mail contracts.  The  certification represented a permanent licence for the carriers, and i n return for the subsidy, the certificated carriers were required to adhere to a broad and comprehensive series of regulations governing commercial and operating practises. The element of subsidy for these trunk carriers^ for carriage of mail continued to 1951* With the end of World War II, the demands of a i r travel mushroomed. Many new feeder a i r l i n e companies were established to provide services to smaller centres and to areas of the country where the sparseness of population prevented an economic scale of operation.  2  Outright subsidy  A i r Mail Act of 1934.  ^Trunk airlines are basically long-haul carriers having sufficient passenger volumes necessary to sustain an economic operation within CAA regulations.  4  was, and s t i l l i s , paid to these airlines i n order to provide service. The evolution of commercial a i r transport i n Canada was different from that of the United States i n both the form of development and timing.  During the early pioneering  period, 1919 to 1925, commercial aviation was limited mainly to surveying and a e r i a l reconaissance and was closely linked to resource industries i n frontier areas. In the period 1926 to 1929 commercial a i r transport in Canada began to show i t s two basic divisions—mainline 4  aviation and frontier aviation or bush flying.  Mainline  aviation provided service between major population centres in competition with surface transport and bush flying was related closely to northern resource developments where no competition from surface transport was present. Mainline aviation had to rely on government support as i t used high cost equipment compared to surface transport. The advantage of speed did not fully compensate for the irregularity and uncertainty of service.  Frontier aviation,  on the other hand, was self supporting right from the start. Its only weakness was the reliance upon resource developments which were of a speculative nature.  Industry Canadian P o l i t i c a l Science Association Conference on Statistics, Kingston, June, i 9 6 0 , p. 4 . f  5 The development of mainline a v i a t i o n i n Canada was spurred by the passing of the A i r Commerce A c t by the U.S.A. Congress i n 1926.  This r e g u l a t i o n was intended t o regulate  and encourage expansion of commercial a v i a t i o n I n the U.S.A. A number of a i r t r a n s p o r t operation were s t a r t e d and by 1928 some of the U.S.A. operators began t o explore the Canadian a i r transport market p o s s i b i l i t i e s .  The Canadian Government,  f o l l o w i n g a p o l i c y t o b u i l d an independent Canadian t r a n s p o r t system, examined the p o s s i b i l i t y of developing a t r a n s continental a i r service.^ During the depression p e r i o d of 1930 t o 1935 two opposite trends were evident.  Mainline a v i a t i o n ' s  development was h a l t e d and a t the same time f r o n t i e r a v i a t i o n developments expanded as i t was based on m i n i n g — e s p e c i a l l y gold mining.  By 1932, l n t e r - c i t y a i r s e r v i c e s were v i r t u a l l y  discontinued and f r o n t i e r a v i a t i o n became the dominant sector of the a i r t r a n s p o r t Industry. The p e r i o d o f 1936 t o 1940 witnessed  stabilization,  government c o n t r o l and amalgamations. The f o l l o w i n g b a s i c changes I n the s t r u c t u r e of the a i r t r a n s p o r t i n d u s t r y occurred.  & Mm  ?Wilson, J.A., The T^f ^uenc? ..kyX^X&D, & Development p£ Canada's A i r Power. Department o f Transport, Canada, 1943.  6 1,  Large scale development work on national airways and airports system.  2.  Economic control over the industry by the government.  3«  Creation of an a i r l i n e system which became Canadian Pacific A i r l i n e s .  4.  Creation of Trans Canada Airlines as the "chosen instrument ' for the development of mainline 1  services. Until the passage of the Trans-Canada Air Lines Act of 1937 >  n o  effort towards establishment of cross-Canada service  had been considered by the private operators of that day. Canada, unlike i t s neighbour to the south, was poorly equipped i n terms of facilities—both landing fields and navigational f a c i l i t i e s . At the time of the passage of legislation In 1937, Canada was at least ten years and many millions of dollars behind the progress i n the U.S.A.  Establishment of Trans-  Canada Air Lines took the form of purchase of the assets and route of Canadian Airways who operated between Vancouver and Seattle, a distance of some 120 miles.  The f i r s t passenger  was carried between Montreal and Vancouver on April 1, 1939* In 1938 when the Transport Act was passed, economic control over the industry was administered by the Board of Transport Commissioners.  The Board was authorized to licence  a l l routes on the basis of public convenience and necessity.  7 I t a l s o had c o n t r o l over r a t e s and schedules.  The  first  l i c e n c e s were granted according t o the d o c t r i n e of "grandf a t h e r s * r i g h t s " which e f f e c t i v e l y h a l t e d i n t r o d u c t i o n of competitive s e r v i c e s and competition over the northern routes was a l l but e l i m i n a t e d . The c a r r i e r s could e s t a b l i s h t h e i r i n i t i a l t a r i f f s and the Board e x e r c i s e d s t r i c t s u p e r v i s i o n over t a r i f f f i l i n g s and changes* With the e n t r y of Canada i n t o war, the resources of the a i r l i n e were f u l l y engaged and while the commercial development was h e l d I n abeyance, war-time experience c o n t r i b u t e d c o n s i d e r a b l y t o post-war stages of Canadian aviation.  The formation of Canadian P a c i f i c A i r Lines during  the war, p r i v a t e l y financed by i t s parent company, the Canadian P a c i f i c Railway provided Canada w i t h another major carrier.  The combination of the routes of these two  carriers-  one p r i v a t e and the other government owned—provide a world wide network of a i r routes and a l s o some measure of domestic competition. The s t o r y of Canadian c i v i l a v i a t i o n i n the post war p e r i o d was one of expansion and growth as i n d i c a t e d by Table I . The f i r s t f u l l post war year, 194-6, saw a s i x - f o l d increase i n passengers c a r r i e d over 1939*  By i960 there had been a  f u r t h e r s i x - f o l d increase over 194-6 and a t h i r t y - f i v e f o l d increase over 1939.  The growth i n demand f o r a i r l i n e s e r v i c e s  was such t h a t a i r l i n e resources and a b i l i t y were s t r e t c h e d t o the utmost t o provide the necessary c a p a c i t y .  Improved  8  TABLE I REVENUE PASSENGERS CARRIED BY CANADIAN CARRIERS  1934 35 36 37 38 39 40 41 42 . . . . . . . 43 44 45 46 47 48 49 50 | l . . . . . . 52 53 54 55 . . . . . . . 56 57 58 59 60 61 62 63 64 Source:  72,085 140,379 99,451 110,864 104,117 133,776 135,779 181,219 198,205 282,886 371,397 490,809 802,811 836,047 1,054,778 1,211,149 1,452,081 1,788,558 1,897,005 2,211,737 2,316,665 2,717,337 3,320,705 3,726,603 4,022,937 4,681,264 4,726,849 i'9?l,563 5,266,206 5,633,480  C i v i l A v i a t i o n Annual Reports - D.B.S  9 equipment, ranging through the Douglas DC-3, Canadair North S t a r , Douglas DC-6, and Lockheed Super C o n s t e l l a t i o n s , made t h e i r appearances as superior equipment.  They were l a t e r  superseded by a i r c r a f t having greater passenger appeal and Improved economics. The advent of turbine-engine V i c k e r s Viscount equipment i n 1955 represented a f i r s t i n North America f o r T.C.A,  Pure  j e t Douglas DC-8»s put i n t o operation I n A p r i l i 9 6 0 , heralded yet another advance i n passenger appeal and lower cost a i r t r a n s p o r t . The c y c l e of re-equipment i n the p e r i o d 194J> t o 1950 r e s u l t e d i n s e v e r a l years o f heavy l o s s .  The use o f j e t  equipment i n i 9 6 0 , set o f f a f u r t h e r p e r i o d o f u n p r o f i t a b l e operations, due t o the debt and t r a n s i t i o n costs a s s o c i a t e d with their introduction. Of t h i s capsule h i s t o r y o f commercial a i r l i n e operations i n North America, two f a c t o r s have a d i r e c t bearing on the subject o f t h i s t h e s i s : 1.  The c y c l e and scale o f re-equipment and growth.  2.  The r e g u l a t o r y r u l i n g s and l e g a l sanctions placed on commercial scheduled a i r l i n e s .  The f i r s t f a c t o r , growth and expansion on a wide s c a l e , does not permit the time or the more s t a b l e s c a l e o f operations which could r e a d i l y f o s t e r the a p p l i c a t i o n of modern c o s t i n g and p r i c i n g p r a c t i s e s .  A minor but c o n t r i b u t i n g f a e t o r t o  t h i s a p p l i c a t i o n I s the tendency t o view the a i r l i n e as an  10  e n t e r p r i s e d i s t i n c t l y and completely d i f f e r e n t from more conventional business e n t e r p r i s e s * The e f f e c t of some of the i n i t i a l r e g u l a t o r y r e q u i r e ments applying t o U.S.A. c a r r i e r s , and t o a l e s s e r degree t o Canadian a i r l i n e s , has played a major p a r t i n shaping the I n t e r n a l accounting p r a c t i s e s and cost determining of the a i r l i n e s .  procedures  Since these requirements are l e g a l and have  as t h e i r aim, comparisons of operating costs and r e l a t i v e economic strengths between c a r r i e r s , they have precluded the normal development and a p p l i c a t i o n of c o s t i n g and p r i c i n g techniques.  This v o i d i n the determination and r e p o r t i n g of  economic c o s t s , designed t o a s s i s t management i n d i s c h a r g i n g i t s r e s p o n s i b i l i t i e s , i s the purpose of t h i s  thesis—however  modest the attainment. BACKGROUND OP AIRLINE ACCOUNTING PRACTISES The enactment of l e g i s l a t i o n during the p e r i o d 1930  to  1940 had the e f f e c t of g i v i n g each a i r l i n e a p u b l i c u t i l i t y f r a n c h i s e t o provide s e r v i c e t o the c i t i e s designated i n i t s license.  I n exchange f o r t h i s f r a n c h i s e , a i r l i n e s were  r e q u i r e d by law, and subject t o s p e c i f i e d p e n a l t i e s , t o abide by the r u l i n g s d i c t a t e d by the r e g u l a t o r y body.^  °In Canada t h i s i s the A i r Transport Board, and i n the U.S., the C i v i l Aeronautics Board and the Federal A v i a t i o n Agency.  11  The major areas of a i r l i n e operation which are  subject  t o close r e g u l a t i o n and r u l i n g a r e : 1.  F l i g h t operating p r a c t i c e s .  2.  Maintenance of equipment.  3.  C e r t i f i c a t i o n of a i r w o r t h i n e s s of a i r c r a f t  and  components. 4.  Approval of f a r e s (domestic and i n t e r n a t i o n a l ) .  5.  Accounting f o r a s s e t s , l i a b i l i t i e s , income and expenses.  6.  P r o v i s i o n of s e r v i c e s p e c i f i e d i n the l i c e n s e .  7.  Corporate r e l a t i o n s h i p s w i t h other a i r l i n e s or manufacturers of a i r c r a f t .  8.  L i c e n s i n g mechanics, crew, and c e r t a i n operating s t a f f t o perform c e r t a i n functions on s p e c i f i e d types of a i r c r a f t .  9. 10.  Adherence t o Department of Transport r e g u l a t i o n s . Submission of accounting  statements of income,  statements of operating s t a t i s t i c s , balance sheets, e t c . These r e g u l a t i o n s represent an accounting by the a i r l i n e t o the r e g u l a t o r y body, who  i n t u r n , a c t s on behalf of  the p u b l i c convenience and n e c e s s i t y .  Without d i s p u t i n g the  v a l i d i t y and purpose of the r e g u l a t i o n s , they have played a major part i n shaping the i n t e r n a l accounting the a i r l i n e s .  The s i t u a t i o n which now  p r a c t i s e s of  faces an a i r l i n e i s  whether t o i n c u r the a d d i t i o n a l cost and e f f o r t t o o b t a i n  12  more representative costs and revenue per u n i t of service or to attempt to manage with data not suited or designed to meet management needs. The major phases of i n t e r n a l accounting a f f e c t e d by regulatory requirements are the c l a s s i f i c a t i o n and a l l o c a t i o n of the basic cost and revenue data common to both needs. Accounting f o r a i r l i n e revenues i s as complex and d e t a i l e d , and equally as Important to management as costs. The following b r i e f examples serve to point up the basic c o n f l i c t and difference i n purpose of the two t y p e s — regulatory and management  accounting: Regulatory  Management  By type, i . e . , s a l a r i e s and wages  By f i x e d and variable, i.e d i r e c t labor  C l a s s i f y costs  By function (uniform f o r a l l carriers)  By function and organization responsibility  Allocate costs (Example J preventative maintenance good f o r 3,000 hours)  Written o f f t o cost as incurred  Charged t o cost as hours are used/flown  Describe  costs  CHAPTER I I OPERATING CHARACTERISTICS OP THE COMMERCIAL AIRLINE INDUSTRY THE ECONOMICS OF OPERATION The concept of an economic operation i m p l i e s the i n t e l l i g e n t use of a v a i l a b l e resources i n order t o a t t a i n under given circumstances the best p o s s i b l e r e s u l t s w i t h a minimum of expenditure.  The c r i t e r i o n f o r success of any-  business e n t e r p r i s e i s whether and t o what extent such an a c t i v i t y leads t o a p r o f i t .  I f a p r o f i t i s not made, t h i s  i n d i c a t e s that the general p u b l i c i s not w i l l i n g t o pay enough f o r the product or s e r v i c e f o r the business e n t e r p r i s e t o produce s u f f i c i e n t revenues t o cover the expenses i n v o l v e d . This could mean e i t h e r that the product or s e r v i c e o f f e r e d by such an e n t e r p r i s e i s useless or that the business i s not conducted i n an e f f i c i e n t manner. Taking the Commercial A i r l i n e Industry as a whole, i t i s obvious that the i n d u s t r y has not y e t reached a completely s e l f - s u p p o r t i n g stage.  I t s t o t a l a c t i v i t y i s divided into  two d i f f e r e n t p a r t s : 1.  Operating ground f a c i l i t i e s  2.  Operating a i r c r a f t  The p r o v i s i o n and operation of ground f a c i l i t i e s ( a i r p o r t s and a i r t r a f f i c c o n t r o l systems) comes b a s i c a l l y 13  14 under the r e s p o n s i b i l i t y of the governments and communities concerned.  Without government support i n p r o v i d i n g ground  f a c i l i t i e s the development o f the whole i n d u s t r y would have been t h r o t t l e d i n i t s i n f a n c y , and i t would s t i l l be s e v e r e l y hampered today i f the a i r l i n e s were burdened w i t h the f u l l cost of a l l ground f a c i l i t i e s they use. The second phase i s the operation o f the a i r c r a f t . While i t a l s o r e q u i r e d p u b l i c support I n i t s e a r l i e r stages, i t r a p i d l y developed i n t o a more and more commercial a c t i v i t y . Today the a i r l i n e i n d u s t r y has reached a stage o f m a t u r i t y where the operation o f a commercial a i r l i n e should normally be a b l e t o stand on i t s own f i n a n c i a l feet." " 1  A few trunk  c a r r i e r s of the world a r e c u r r e n t l y s u b s i d i z e d by t h e i r governments, not p r i m a r i l y on the grounds t h a t they c a r r y s p e c i f i c burdens f o r the n a t i o n a l community, but r a t h e r f o r the sake of n a t i o n a l p r e s t i g e . A i r l i n e management have t o cope w i t h economic problems j u s t as management o f conventional business e n t e r p r i s e s have t o cope w i t h s i m i l a r economic problems. To s u c c e s s f u l l y conduct a commercial business e n t e r p r i s e , management must e x e r c i s e i t s Influence on both revenues and expenditures.  On both s i d e s , however, i t s power o f c o n t r o l  i s subject t o c e r t a i n l i m i t a t i o n s Imposed by e x t e r n a l  ^•Although t h i s appears t o be p l a i n economic common sense, many important a i r l i n e s a r e not completely s e l f supporting.  15  conditions.  W i t h i n i t s own span of c o n t r o l i t I s management's  job t o make both ends meet. The power t o f i x f a r e s and r a t e s i s not vested s o l e l y i n the hands of i n d i v i d u a l a i r l i n e management. As a i r transport provides a p u b l i c s e r v i c e , i t i s l i k e other p u b l i c u t i l i t i e s — a regulated i n d u s t r y — a n d the power t o r e g u l a t e i t s f a r e s and r a t e s i s h e l d by a government body.  In t h i s  regard f a r e s should be based upon costs and should be such t o allow recovery of a l l costs under economical and e f f i c i e n t management, i n c l u d i n g a f a i r l e v e l of p r o f i t s t o provide competition w i t h other i n d u s t r y f o r c a p i t a l and labour resources. The p r i d e and ambition of a i r l i n e management i s t o o f f e r the p u b l i c safe t r a n s p o r t a t i o n and a h i g h q u a l i t y of service.  This I s achieved by using competitive modern  equipment, f l y i n g according to schedules c a r e f u l l y adapted t o the needs of the p u b l i c , maintaining the highest p o s s i b l e p u n c t u a l i t y , o r g a n i z i n g a r e l i a b l e r e s e r v a t i o n s system and educating the whole s t a f f i n a s p i r i t of c a r e f u l personal a t t e n t i o n towards the customer.  This s e r v i c e of a h i g h  q u a l i t y must be o f f e r e d t o the p u b l i c by an a c t i v e s a l e s f o r c e , and what they s e l l must be too good t o be thrown away a t a p r i c e below c o s t s and what i t i s worth.  T h i s , very  b r i e f l y , i s how a i r l i n e management exerts an i n f l u e n c e on i t s revenues t o b r i n g them t o the highest p o s s i b l e l e v e l .  16 From the foregoing i t appears that g e n e r a l l y management can exert no d i r e c t i n f l u e n c e on the amount of i t s earnings s i n c e the r a t e s are f i x e d by a r e g u l a t o r y body and the general trend of economic development i s c l e a r l y outside the c o n t r o l of any one company's management*  Such a conclusion i s q u i t e  erroneous since the q u a l i t y of the s e r v i c e o f f e r e d i s a f a c t o r shaped e x c l u s i v e l y by management, and t h i s i s how i t must endeavor t o c o n t r o l i t s revenues. I t i s true t h a t the r e s u l t s of such e f f o r t s are slow t o mature, and there i s r a r e l y an immediate and v i s i b l e connection between any given e f f o r t i n t h i s f i e l d and f r u i t i t bears.  the  Improving the q u a l i t y standards of a  company takes a l o t of patience and perseverance.  Many a i r -  l i n e managements, being impatient and wanting to see quick r e s u l t s , put t h e i r main e f f o r t i n t o a c t i v e s a l e s promotion and h i g h pressure salesmanship.  I n so doing they tend to  f o r g e t t h a t s a l e s promotion holds not only a promise f o r p o s s i b l e added revenue but i s a t the same time a considerable cost f a c t o r . There i s a c e r t a i n p r o p o r t i o n between the cost of s a l e s promotion and the produced revenues which are as reasonable and normal.  accepted  However, the more the pressure  on  s a l e s promotion i s i n c r e a s e d , the more t h i s r e l a t i o n s h i p d e t e r i o r a t e s , u n t i l f i n a l l y a point i s reached where every d o l l a r s o l d y i e l d s only a small percentage t o cover the operating costs of the company, w h i l e a l l the r e s t i s eaten  17 up by the high-pressure  sales a c t i v i t y .  I f an e n t e r p r i s e i s t o be s u c c e s s f u l , i t s revenues not only have t o cover i t s current operating c o s t s , but a l s o must leave an operating income which allows i t t o r e p l a c e the f i x e d assets w i t h i n a reasonable commercial l i f e - t i m e . Once t h i s t a r g e t i s met, the operation should y i e l d an adequate p r o f i t on the invested equity c a p i t a l .  Only under  these c o n d i t i o n s has a company any chance t o s e l l new e q u i t y stock on the market when the n e c e s s i t y of f i n a n c i n g new investments a r i s e . These considerations show how important i t i s f o r an a i r l i n e t o replace i t s f l i g h t equipment w i t h i n a reasonable l i f e - t i m e , whereby commercial obsolescence i s the dominating factor.  I t i s obvious that the expensive a i r l i n e s of the  present day j e t generation r e q u i r e very s u b s t a n t i a l amounts of y e a r l y d e p r e c i a t i o n allowances.  Under normal c o n d i t i o n s  adequate operating income can only be reached by pushing the p u t i l i z a t i o n of the f l i g h t equipment t o a very high l e v e l . This a g a i n r e q u i r e s c a r e f u l planning of the a i r l i n e f l e e t many years ahead of time and i n such a way t h a t a maximum degree of t e c h n i c a l s t a n d a r d i z a t i o n can be achieved, thus reducing the r e l a t i v e maintenance costs t o a low l e v e l and p r o v i d i n g the b a s i s f o r high u t i l i z a t i o n . S p e a s , R.D., Economic A p p r a i s a l o f 3Let, fgj»«LttffiEt Performance« A i r Transport Conference, New York U n i v e r s i t y , May, 1962. 2  18  Once an a i r l i n e ' s management has succeeded i n p u t t i n g together a l l these pieces of a long term planning p u z z l e , i t i s s t i l l confronted w i t h the problem of keeping i t s c u r r e n t operating expenses s u f f i c i e n t l y low t o earn enough f o r d e p r e c i a t i o n and p r o f i t .  Constant pressure i s exerted upon  management f o r higher s a l a r i e s , more promotions, more s t a f f , e t c . and i t takes a l o t of energy and f i r m r e s o l u t i o n on managements' part t o a v o i d d e f i c i t s i n an i n d u s t r y where the average p r o f i t margin i s as narrow as i t i s i n the commercial a i r l i n e industry.  gojaa jjaiaas Aspects & copffierslai. AixUsst  QQSXS  I n the ever-changing panorama of supply and demand, of income and expenses, of p r i c e s and p r o f i t s , cost i s the e t e r n a l v a r i a b l e . Costs are such a s e n s i t i v e and i n f l u e n t i a l f a c t o r i n the economy that they r e q u i r e c a r e f u l a n a l y s i s and determination. The commercial a i r l i n e i n d u s t r y presents a challenge to management when i t comes t o a n a l y z i n g and determining costs.  There a r e s e v e r a l c h a r a c t e r i s t i c s the i n d u s t r y has t o  face which are not u s u a l l y encountered i n other i n d u s t r i e s . Some of these a r e : 1.  P e r i s h a b l e nature of the inventory  2.  Short economic l i f e of equipment  3...  Preventative nature of maintenance  19  4,  P u b l i c s e r v i c e aspect of the  5.  High degree o f f i x e d costs  Per;teha>;Le Nature 2£ ^ One  industry  Ims^SSl  o f the c h i e f c h a r a c t e r i s t i c s o f the a i r l i n e  i n d u s t r y i s the h i g h l y perishable nature o f i t s product. This product i s b a s i c a l l y space-weight i n motion and i s c a l l e d A v a i l a b l e Ton M i l e s ^ or A v a i l a b l e Seat M i l e s .  4  When  a 110-seat a i r c r a f t leaves Vancouver on a 524 mile f l i g h t t o Edmonton, i t creates 57)640 A v a i l a b l e . Seat M i l e s .  These  must be s o l d p r i o r t o departure or they w i l l never be s o l d a t a l l . I f a t departure time only one-half of the A v a i l a b l e Seat M i l e s are s o l d , the a i r l i n e i s s t i l l forced t o i n c u r the costs o f manufacturing the 57>640 A v a i l a b l e Seat M i l e s i n order t o s e l l the 28,820 which were booked a t departure time.  A f t e r a p a r t i a l l y f i l l e d a i r c r a f t departs, there i s  nothing that can be r e t a i n e d and h e l d f o r future demand or perhaps s o l d a t an a t t r a c t i v e s a l e p r i c e .  Nor i s i t p o s s i b l e  t o wait a few minutes before f l i g h t time and then o f f e r the remaining unsold space a t an a t t r a c t i v e discount.  The a i r -  l i n e i s l i t e r a l l y "stuck" w i t h the production cost o f the unsold space which does not have even a scrap value.  ^ T o t a l Ton M i l e s o f l i f t capacity a v a i l a b l e f o r s a l e . 4 T o t a l Seat M i l e s a v a i l a b l e f o r s a l e .  20  \  A i r l i n e c o s t s , i n t o t a l , a r e u s u a l l y r e l a t e d t o two factors:  the Cost per A v a i l a b l e Ton M i l e and the Cost per  Revenue Ton M i l e , ^  I n the previous example, the 28,820  A v a i l a b l e Seat M i l e s t h a t were s o l d a t departure time a r e r e f e r r e d t o as Revenue Passenger M i l e s .  The r e l a t i o n s h i p o f  Revenue Passenger M i l e s t o A v a i l a b l e Seat M i l e s and Revenue Ton M i l e s t o A v a i l a b l e Ton M i l e s i s c a l l e d the Load Factor and i t i s i n d i c a t i v e o f the u t i l i z a t i o n that i s being made o f the space-weight that i s manufactured.  This i s one o f the  key r e l a t i o n s h i p s that a i r l i n e management watch c l o s e l y as the higher the Load F a c t o r , the more p r o f i t a b l e the o p e r a t i o n — t h i s analogy w i l l be discussed i n l a t e r  chapters.  Short Economic L i f e of Equipment The a i r l i n e s business does not r e q u i r e extensive r e a l estate holdings or b u i l d i n g s t o house i t s main productive machinery.  The machine or a i r c r a f t i s , however, a tremendously  expensive piece o f equipment and i t s u s e f u l l i f e i s r e l a t i v e l y short.  Modern j e t a i r c r a f t cost from 6 m i l l i o n t o 10 m i l l i o n  d o l l a r s each t o purchase and yet t h e i r u s e f u l l i f e o f roughly ten years i s very short by comparison w i t h the twenty t o t h i r t y years common i n r a i l r o a d r o l l i n g stock and heavy ^Revenue Ton M i l e s are the Ton M i l e s which are s o l d . To o b t a i n t h i s t r a f f i c measure Passenger M i l e s are converted t o Ton M i l e s on the b a s i s of about 10 t o 1. That I s , 10 passengers w i t h a l l o w a b l e f r e e baggage are accepted as e q u a l l i n g one t o n . ^The number of f a r e paying passengers flown times the length o f the t r i p i n m i l e s . This i s the amount o f A v a i l a b l e Seat M i l e s s o l d .  21  manufacturing machinery.  The r a p i d r a t e of design and  t e c h n o l o g i c a l development that t r a n s p o r t a i r c r a f t experience, causes r a p i d economic obsolescence, but due t o standards and methods of a i r c r a f t maintenance, there i s no p e r c e p t i b l e p h y s i c a l obsolescence.  Hewer, f a s t e r , more comfortable a i r -  c r a f t f o r c e o l d e r and l e s s modern designs out of the competit i v e p i c t u r e and render them j u s t as obsolete as though they were p h y s i c a l l y worn out. G e n e r a l l y , the i n d u s t r y has e s t a b l i s h e d about seven years as being the p e r i o d of usefulness and a c c o r d i n g l y , I s the d e p r e c i a t i o n span i n today's a i r t r a n s p o r t s . ago the span was seven y e a r s .  A few years  This i s a r e l a t i v e l y short  time i n which t o recover the investment i n a piece of equipment worth approximately s i x m i l l i o n d o l l a r s , pay i t s operating eost and earn a reasonable p r o f i t .  The  expenses,  investments and p r o f i t must a l l be returned over a r a t h e r short l i f e span out of a c o n s i d e r a b l y l e s s than t o t a l c a p a c i t y as a 70% Load Factor i s about the maximum that can be reached i n normally competitive circumstances. Preventative Nature o£  Maintenance  The cost of maintaining a i r c r a f t i n p e r f e c t f l y i n g c o n d i t i o n i s one of the most s u b s t a n t i a l elements of a i r l i n e c o s t s , g e n e r a l l y over 20% goes i n t o maintenance of equipment. No expense and no e f f o r t i s ever spared t o improve the t e c h n i c a l performance and s a f e t y of the a i r c r a f t .  22  The g o a l o f a i r l i n e maintenance i s n o t t o r e p a i r breakdowns b u t r a t h e r t o p r e v e n t breakdowns f r o m o c c u r r i n g . I f a i r l i n e maintenance expense were l i m i t e d p u r e l y t o r e p a i r i n g s t r u c t u r e s and p a r t s when t h e i r c o n d i t i o n w a r r a n t e d r e p a i r , t h e c o s t i n terms o f o p e r a t i n g expense would be a g r e a t d e a l lower t h a n i t i s b u t t h e i n d u s t r y c o u l d n o t p o i n t w i t h a s much p r i d e t o t h e i r r e e o r d o f s a f e t y and d e p e n d a b i l i t y . The p r e v e n t a t i v e c h a r a c t e r o f a i r l i n e maintenance and the i n c r e a s i n g c o m p l e x i t y o f a i r c r a f t p l a c e s a r e s t r i c t i o n on the i n i t i a t i v e o f management, w i t h r e s p e c t t o a c o n s i d e r a b l e section of operating costs.  T h i s does n o t f r e e management o f  the r e s p o n s i b i l i t y o f e n s u r i n g t h a t t h e y a r e g e t t i n g t h e most f o r t h e i r maintenance d o l l a r , i . e . , knowing what maintenance i s c o s t i n g and e n s u r i n g t h a t i t i s done as e f f i c i e n t l y and economically as p o s s i b l e . P u b l i c S e r v i c e Aspect of the Industry Another c h a r a c t e r i s t i c of a i r l i n e s which l i m i t s the e l a s t i c i t y o f c o s t management i s t h e f a c t t h a t t h e y a r e a h i g h l y r e g u l a t e d common c a r r i e r i n d u s t r y .  E v e r y c o u n t r y has  a Governmental agency s e t up t o c o n t r o l t h e o p e r a t i o n o f t h e commercial a i r l i n e s .  As mentioned i n t h e p r e v i o u s  chapter,  i t i s t h e C i v i l A e r o n a u t i c s B o a r d i n the U n i t e d S t a t e s and t h e A i r T r a n s p o r t B o a r d i n Canada.  I n order f o r an a i r l i n e  t o o p e r a t e a r o u t e , i t f i r s t must o b t a i n p e r m i s s i o n f r o m t h e r e s p e c t i v e agency and once t h e l i c e n s e has been o b t a i n e d , an  23 a i r l i n e cannot abandon a r o u t e w i t h o u t a p p r o v a l f r o m the governing schedule Board.  body.  The r a t e s a r e l i k e w i s e r e g u l a t e d and  every  change on a r o u t e must be f i l e d w i t h the r e s p e c t i v e To i n c r e a s e v o l u m e — t o p r o v i d e mass t r a n s p o r t a t i o n —  t h e i n d u s t r y must c o n t i n u e t o lower i t s r a t e s .  To lower i t s  r a t e s , i t must lower i t s c o s t s t h r o u g h more e f f i c i e n t methods o f o p e r a t i o n and y e t p r o v i d e a r e a s o n a b l e  p r o f i t margin.  H,ftBh, Degree o f FjLxefl °Sta c  W i t h i n the a i r l i n e i n d u s t r y , a h i g h p e r c e n t a g e o f c o s t s a r e e s s e n t i a l l y f i x e d i n the s h o r t r u n .  This percentage  v a r i e s w i t h each c a r r i e r and each type o f o p e r a t i o n . r e a s o n f o r t h i s i s the f a c t t h a t a p p r o x i m a t e l y  60$  One  of a i r l i n e  expenses a r e p a y r o l l c o s t s and p a y r o l l does n o t d e c l i n e a u t o m a t i c a l l y — i t has t o be pushed down.  Another reason i s  t h a t a v e r y l a r g e p a r t o f a i r l i n e expenses a r e c o m p r i s e d o f s u c h c o s t s as i n s u r a n c e , r e n t a l f o r t r a f f i c and f a c i l i t i e s , communications f a c i l i t i e s and  operating  installation,  maintenance and h e a d q u a r t e r s f a c i l i t i e s , r e n t a l s and depreciation.  O n l y s u b s t a n t i a l changes i n the s i z e  and  c h a r a c t e r o f the a i r l i n e i n t h e l o n g r u n p e r m i t s changes i n the c o s t s o f s u c h e l e m e n t s . I n the a i r l i n e i n d u s t r y i s I s n o t s o l e l y how  many  p a s s e n g e r s a r e f i l l i n g the s e a t s o f an a i r c r a f t , t h e d i s t a n c e , they are c a r r i e d i s a l s o a very important  factor.  c o u r s e , i s t r u e o f any form o f t r a n s p o r t a t i o n .  T h i s , of  24 These f i v e c h a r a c t e r i s t i c s o f the a i r l i n e  industry,  namely (1) perishable nature of the i n v e n t o r y , (2) short economic l i f e o f equipment, (3) preventative nature of maintenance, (4) p u b l i c s e r v i c e aspeet of the i n d u s t r y , and (5) the h i g h degree of f i x e d c o s t s , a l l combine t o present a challenge and a handicap a t the same time* financial  To achieve  s t a b i l i t y and success w i t h an economic r i d d l e l i k e  t h i s r e q u i r e s r a t h e r intimate knowledge and a n a l y s i s of cost behaviour, SUMMARY OP ECONOMIC FUNCTIONS OF COMMERCIAL AIRLINE OPERATION An a i r l i n e i s a l i c e n s e d p u b l i c u t i l i t y , providing a s e r v i c e of a i r t r a n s p o r t a t i o n of passengers and goods t o the public  As a s e r v i c e , i t s product i s i n t a n g i b l e , and i n the  eyes o f i t s users (and a t times i t s employees), i t has a uniqueness which makes i t d i s t i n c t from a l l conventional business e n t e r p r i s e s .  When the t o t a l a i r l i n e i s broken down  i n t o i t s f u n c t i o n a l components, and the economic f a c t o r s and business conditions w i t h i n which i t operates a r e described, the very wide range o f s i m i l a r i t i e s t o conventional  enterprises  become more r e a d i l y apparent. The f o l l o w i n g comparison of the key f a c t o r s and functions of an a i r l i n e t o a conventional the r e a l s i m i l a r i t i e s .  enterprise  illustrate  ?  2  Ecqnon4c Factors (a)  Markets:  For an a i r l i n e these are the geographic  population centres served by an a i r p o r t .  This i s the same  concept as a p p l i e s t o s a l e of durable or t a n g i b l e goods, i . e . , the market p l a c e • (b)  Services:  These a r e the d e s t i n a t i o n s , c i t i e s and  countries t o which the a i r l i n e operates from the Market. The customer r e s i d i n g i n Market X purchases the s e r v i c e of t r a n s p o r t a t i o n t o d e s t i n a t i o n Y. (c)  Competition:  This i s of three k i n d s :  Intermodal  competion w i t h other means of t r a n s p o r t a t i o n ; Intramodal competition w i t h other a i r c a r r i e r s both providing s e r v i c e t o the same d e s t i n a t i o n s ; and j u s t as Important, the competition by the a i r l i n e f o r the consumers d i s c r e t i o n a r y spending 1  d o l l a r , that i s , the purchases of autos, summer cottages, swimming p o o l s , e t c . competition  (a)  The r e c o g n i t i o n of t h i s type of  i s of v i t a l importance i n s e l l i n g .  Manufacturing:  Overhaul of a i r c r a f t accounts f o r  more than 20% of a i r l i n e operating cost ( i n c l u d i n g d e p r e c i a t i o n ) . The overhaul cost f o r a l a r g e j e t amounts t o approximately $500,000, which permits the a i r c r a f t t o operate f o r a period of 12 t o 15 months.  I n e f f e c t t h i s i s the manufacture of  3000 hours of a i r c r a f t performance.  26 (b)  Inventory:  The conventional view i s t h a t the  empty seats f l o w n , which a r e what a r e o f f e r e d f o r s a l e before f l i g h t , and which a r e wiped out as the f l i g h t operates, constitute inventory.  I n a c t u a l f a c t , the manufactured a i r -  c r a f t hours (overhauled) and r e s u l t i n g costs c o n s t i t u t e inventory and should only be charged as costs as these hours are  used/operated. (c)  Operations:  I n the a i r l i n e , t h i s i s the operation  of f l i g h t s and i s c l o s e l y s i m i l a r t o the operation of a process flow a t an o i l r e f i n e r y or chemical p l a n t . (d)  Capacity:  manufacturing  The l i m i t a t i o n s on the a b i l i t y of a  concern t o produce beyond i t s f u l l c a p a c i t y  e x i s t as w e l l f o r an a i r l i n e i n terms of demand f o r s e r v i c e . At peak hours of demand f o r a i r t r a v e l , the t o t a l a i r c r a f t f l e e t i s a t work and during o f f peak hours much of the c a p a c i t y i s i d l e or operating w i t h only marginal l o a d s .  As  a r e s u l t only 50$ t o 60% of the seats o f f e r e d a r e s o l d and used.  There e x i s t s a s i m i l a r c a p a c i t y l i m i t a t i o n a t an a i r -  port where ground f a c i l i t i e s a r e a l l i n use, or congestion of a i r c r a f t i n the a i r r e s u l t s i n delays before l a n d i n g . (e)  Distribution:  manufacturer—the  Dealing d i r e c t l y w i t h the  passenger reserves a seat and purchases h i s  t i c k e t from the a i r l i n e .  Dealing w i t h a w h o l e s a l e r — t h e  passenger reserves a seat and purchases h i s t i c k e t from a t r a v e l agent.  27 (f)  Selling:  Concentrates promotional s t a f f and  a d v e r t i s i n g i n markets having the p o t e n t i a l ; measures r e s u l t s i n terms of s a l e s by d e s t i n a t i o n s and s e r v i c e s offered. (g)  Customer S e r v i c e : The a i r l i n e attempts t o meet  the customer's requests f o r s e r v i c e , a t the time he wants i t , i n an e f f i c i e n t , pleasant and h e l p f u l manner. (h)  Production Runs:  The cost e f f i c i e n c i e s of a  durable goods manufacturer having a long production r u n , are d u p l i c a t e d i n the a i r l i n e average f l i g h t l e n g t h . The s h o r t e r the stage length (and the production l o t s i z e ) the greater the cost per u n i t — A v a i l a b l e Ton M i l e and Revenue Ton M i l e . I n summary, the preceding chapters provide background on f o u r aspects of the purpose of t h i s t h e s i s : 1.  The e a r l y h i s t o r y of the a i r l i n e s i l l u s t r a t e why c o s t i n g and p r i c i n g techniques were not e x p l o i t e d t o a much greater e x t e n t .  2.  The b r i e f o u t l i n e of e x i s t i n g accounting a p p l i c a t i o n s as they r e l a t e t o r e g u l a t o r y r e p o r t i n g requirements t e l l s what r o l e accounting i s presently playing.  3.  The reference t o the economic d e c i s i o n s w i t h i n management's span of c o n t r o l provide an i n s i g h t i n t o the type of d e c i s i o n s which are made and i n d i c a t e the nature of the i n f o r m a t i o n r e q u i r e d by management t o make informed, i n t e l l i g e n t decisions.  28  4.  The broad comparisons w i t h f u n c t i o n s of i n d u s t r i a l e n t e r p r i s e s points up how  c o s t i n g and p r i c i n g  techniques and s k i l l s can be u t i l i z e d t o develop a b a s i c f o r the p r i c i n g of f a r e s and f o r the planning of future operations as w e l l as p r o v i d i n g information f o r sound d e c i s i o n making. The next chapter o u t l i n e s the s t r u c t u r e , f u n c t i o n s and o r g a n i z a t i o n of a h y p o t h e t i c a l Canadian a i r l i n e .  CHAPTER I I I AIRLINE STRUCTURE, FUNCTIONS, AND ORGANIZATION THE COMPANY ACE A i r l i n e s i s a Canadian-owned and operated company, having i t s head o f f i c e i n Montreal,  I t provides a i r l i n e  s e r v i c e f o r the t r a n s p o r t a t i o n of passengers and commodities to s i x major Canadian c i t i e s and two centres each i n the U.S. and Europe. The company, operates a modern f l e e t o f t u r b i n e powered a i r c r a f t , made up o f s h o r t , medium, and long-range types.  F i v e thousand persons a r e employed i n the s e r v i c i n g  and o p e r a t i o n of t h i s f l e e t , as w e l l as the promotion and sales o f the company's s e r v i c e s , and a f u r t h e r f i v e hundred are employed i n v a r i o u s supporting and a d m i n i s t r a t i v e r o l e s . The company's f i n a n c i n g I s I n roughly equal p a r t s e q u i t y and borrowings; p r o f i t a b l e and s t a b l e operations have been the experience f o r the past t e n y e a r s , and t h i s s i t u a t i o n i s expected t o continue.  I t s estimated gross  revenues f o r the 1965 operating year are $100,000,000 and the a i r l i n e expects t o c a r r y 1,500,000 passengers. The f o r e c a s t p r o f i t before taxes i s $8,000,000.  29  30 AIRLINE EQUIPMENT, STRUCTURE, AND ROUTES The routes operated by ACE A i r l i n e s range from a short i n t e r - c i t y t r i p of 94 miles t o a 3,920 m i l e t r a n s - A t l a n t i c trip.  Because of the great variance i n average stage lengths  flown, three kinds of a i r c r a f t are used t o economically operate the v a r i o u s s e r v i c e s *  An i l l u s t r a t i v e map showing  these routes i s contained i n Figure 1*  Table I I l i s t s the  r e l a t i v e c h a r a c t e r i s t i c s of the a i r c r a f t operated. The Viscount and Vanguard are t u r b i n e - p r o p e l l e r powered, and the DC-8 i s a pure j e t a i r c r a f t *  I n support of  these a i r c r a f t an Integrated Overhaul Base i s operated i n Montreal, which provides f o r the complete r e p a i r and maintenance of a i r f r a m e , engines, and e l e c t r o n i c / m e c h a n i c a l components• Each s t a t i o n i s s t a f f e d and equipped t o provide minor equipment checks and s m a l l replacements and r e p a i r s on a i r c r a f t going through the s t a t i o n . The route s t r u c t u r e of ACE A i r l i n e s can be broken down i n t o three c l a s s e s : 1.  Inter-City:  Covering f l i g h t s and passengers  t r a v e l l i n g between the p o i n t s Montreal, Ottawa, Toronto, New York, and Chicago. 2.  T r a n s c o n t i n e n t a l : Covering t r a v e l t o Winnipeg, Edmonton, and Vancouver from p o i n t s Toronto and east.  FIGURE 1  31  ROUTES OPERATED  WITHIN CANADA MONTREAL MONTREAL OTTAWA TORONTO TORONTO TORONTO WINNIPEG EDMONTON  -  OTTAWA TORONTO TORONTO WINNIPEG EDMONTON VANCOUVER EDMONTON VANCOUVER  TO THE U.S.A. MONTREAL - NEW YORK TORONTO - NEW YORK TORONTO - CHICAGO TO EUROPE WINNIPEG TORONTO MONTREAL MONTREAL  -  LONDON LONDON LONDON PARIS  32  TABLE I I AIRCRAFT CHARACTERISTICS  Viscount  Vanguard  DC-8  20  12  6  Cost ( M i l l i o n s o f D o l l a r s )  1.0  3.0  6.3  Range (Miles)  800  1,800  5,000  50  110  150  315  425  55©  14,800  49,000  140,000  10,800  24,700  38,000  Number of A i r c r a f t  Passenger Seating (Number) A i r Cruise Speed (Miles Per Hour) F u e l Capacity  (Pounds)  Maximum Payload (Pounds)  33 3.  Atlantic:  Covering t r a v e l , from points i n North  America, t o and from London and P a r i s . A l l A t l a n t i c s e r v i c e s a r e operated w i t h long-range DC-8 j e t s . ACE A i r l i n e s operates a l l i t s equipment i n a b a s i c Economy c l a s s seating c o n f i g u r a t i o n — t h e s e a t i n g c a p a c i t i e s are as shown i n Table I I . The route mileages and f a r e s charged, f o r the sectors on which ACE A i r l i n e s i s l i c e n s e d t o provide a scheduled s e r v i c e , a r e shown i n Table I I I . FUNCTIONS OF THE AIRLINE A commercial a i r l i n e operation i n v o l v e s the performance of a very wide range of f u n c t i o n s and a c t i v i t i e s , and e x c l u s i v e of the n a v i g a t i o n , route f l y i n g a i d s , and a i r t r a f f i c c o n t r o l s operated by government agencies, the functions a r e normally performed by each a i r l i n e . Of the many aspects of an a i r l i n e , the four primary areas which cover the s i g n i f i c a n t cost elements of i t s operation a r e : 1.  F l y i n g Operations:  Includes f u e l , crew, overhaul,  maintenance support, and the major part of depreciation costs. 2.  Customer S e r v i c e :  Covers passenger r e s e r v a t i o n s ,  t i c k e t i n g , and a i r p o r t h a n d l i n g , and i n - f l i g h t passenger s e r v i c e .  TABLE I I I ONE WAY BASIC FARES AND ROUTE MILEAGES* (by Origin and Destination)  A i r Route Miles Basic Passenger Fares $ Canadian  Vancouver  Edmonton  524-  Vancouver Edmonton  $ 33.00  Winnipeg  63.OO  Winnipeg  Toronto  Chieago  1,179 768  2,116 1,705  2,562 2,151 1,387 446  $ 43.00  941  Toronto  109.00  89.OO  $ 52.00  Chicago (via Toronto)  142.00  122.00  84.00  New York (via Montreal)  129.00 116.00 120.00 309.25 331.85  112.00 96.00 100.00 299.25 321.85  73.00 58.00  Ottawa Montreal London Paris  63.OO  257.25 279.85  New York  *The round t r i p fare i s twice the one-way fare shown.  257.75  2,348 1,937 1,173 232 678  2,491  2,080 1,316 375  $ 32.00 28.00 19.00 $ 51.00 $ 29.00 23.00 52.00 25.00 — 219.25 236.85 241.85  Ottawa  444  $  Montreal  2,442  2,031 1,267  326 772 350 94  9.00  208.35 230.95  $199.35 221.95  London  Paris  5,109 4,698 3,930 3,646  5,336  4,092  4,925 4,159  3,873 4,319  —  3,414  3,641  3,320  3,502 —  35  3»  Sales:  Includes the a c t i v i t i e s of a d v e r t i s i n g ,  d i r e e t promotion and s o l i c i t a t i o n , and t r a v e l agency s a l e s promotion. 4.  Ground S e r v i c e s :  Covers a i r c r a f t and ground  s e r v i c i n g , handling of cargo and commissary s u p p l i e s , and a i r c r a f t load c o n t r o l . The remaining areas of the a i r l i n e c o n s t i t u t e e i t h e r supporting a c t i v i t i e s t o the primary operating areas, or perform i n an a d m i n i s t r a t i v e r o l e on behalf of the o v e r a l l company.  The s i g n i f i c a n t support and a d m i n i s t r a t i v e  a c t i v i t i e s are: 1.  Engineering:  Which e s t a b l i s h e s and p r e s c r i b e s  the company's maintenance p r a c t i c e s , provides the engineering s e r v i c e s f o r the m o d i f i c a t i o n s t o equipment, and plays the major r o l e i n the s e l e c t i o n of new a i r c r a f t and equipment. 2.  Purchases and Stores:  Purchasing  i s basically  an a d m i n i s t r a t i v e s e r v i c e t o a l l company departments.  The major Stores involvement i s i n  the support of the Overhaul Base f u n c t i o n . 3.  Finance: accounting  Two a c t i v i t i e s a r e i n v o l v e d — t h e f o r company income, expenses, a s s e t s ,  and l i a b i l i t i e s j an information s e r v i c e , i n c l u d i n g e l e c t r o n i c data processing, i s provided t o management i n various departments.  36 W i t h i n each of the foregoing f u n c t i o n s and a c t i v i t i e s , an extremely broad range of s p e c i a l i z e d tasks i s performed, many of which are of c r u c i a l importance t o an a i r l i n e . F l i g h t d i s p a t c h , and weight and balance c o n t r o l , which p l a y a major part i n the economics and s a f e t y of performance, are cases i n p o i n t . These f u n c t i o n s are common t o a l l a i r l i n e s , except i n those cases where the s e r v i c e i s purchased from outside firms.  D i s t i n c t however from these f u n c t i o n s , are the  d i f f e r e n c e s i n how a i r l i n e s organize t h e i r s t a f f s and departments t o c a r r y out these r o l e s . ORGANIZATION OF THE AIRLINE The formal o r g a n i z a t i o n s t r u c t u r e of ACE A i r l i n e s , which i s i l l u s t r a t e d by Figure 2 f o l l o w s l i n e s of a u t h o r i t y and r e s p o n s i b i l i t y which c l o s e l y agree w i t h the conventional l i s t i n g of f u n c t i o n s as p r e v i o u s l y o u t l i n e d . The s i g n i f i c a n t departments of the o r g a n i z a t i o n and t h e i r r e s p o n s i b i l i t i e s and scope of operation are as f o l l o w s : 1.  The President i s responsible t o the company Board of D i r e c t o r s , and i s Chairman of the Management Advisory Committee.  The committee i s  represented by h i s f o u r V i c e P r e s i d e n t i a l deputies. 2.  The Viee President - Purchases and Stores has two deputies:  FIGURE 2  37  ORGANIZATION CHART  BOARD OF DIRECTORS  PRESIDENT  MANAGEMENT ADVISORY COMMITTEE  DIRECTOR OPNS PLANNING  GEN. MGR. STORES  GEN. MGR. PURCHASING  STORES OFFICES: Vancouver Toronto Montreal London  GEN. MGR. MARKETING PLNG  GEN. MGR. SVC. IH FLT.  GEN . MGR. FLT . OPNS  REGIONAL OFFICES: Vaneouver Montreal London  REGIONAL OFFICES: Vancouver Montreal London  GEN. MGR. O'HAUL BASE MANAGERS: Production Planning Airframe Overhaul Engine Overhaul Component Overhaul  VICE PRESIDENT SALES and CUSTOMER SERVICE  VICE PRESIDENT FINANCE  VICE PRESIDENT OPERATIONS  VICE PRESIDENT PURCHASES & STORES  CHU ?:F ENGINlEER ENGINEERS: Equipment Planning A i r c r a f t Domifictns Line Maintenance  MANAGER EDP  GEN. MGR. STATION OPNS. STATION MANAGERS: Vancouver New York Edmonton Ottawa Winnipeg Montreal Toronto London Chicago Paris  MAN AGER ACCOUNTING  Revenues Disbursements Statistics  SALES PROMOTION CUSTOMER SERVICES MKT & CONSUMER RESEARCH  GENERAL MANAGER SALES AND CUSTOMER SERVICE DISTRICT MANAGERS: Vancouver Edmonton Winnipe g New York Chicago Ottawa Toronto Montreal London Paris  38 a)  Manager, Purchasing:  Responsible on b e h a l f  of a l l departments, f o r the a c q u i s i t i o n , purchase, and lease of equipment, s u p p l i e s , and f a c i l i t i e s .  A l l s t a f f are based i n head  office. b)  Manager, S t o r e s :  Responsible f o r r e c e i v i n g ,  storage, and issuance of a l l company m a t e r i a l s , s u p p l i e s (except s u n d r i e s ) , s t a t i o n e r y , and equipment.  Small s t o r e s are maintained a t  Vancouver, Toronto, and London.  The major  Stores i n s t a l l a t i o n i s i n the Overhaul Base where Stores becomes an i n t e g r a t e d p a r t of this activity.  At t h i s l o c a t i o n , i t i s a l s o  r e q u i r e d t o s t o c k , s t o r e , and i s s u e r e p a i r e d and overhauled p a r t s and a i r c r a f t components. The Viee P r e s i d e n t - Operations has s i x d e p u t i e s , w i t h r e s p o n s i b i l i t i e s as f o l l o w s : a)  General Manager, I n P l i g h t S e r v i c e s : Responsible f o r such i n - f l i g h t s e r v i c e s as cabin crew (stewardesses and purser/stewards), meals, and passenger s u p p l i e s .  The r e s p o n s i -  b i l i t y f o r performance i s f u r t h e r delegated to managers a t Vancouver, Montreal and London, which are crew bases. b)  General Manager, P l y i n g Operations:  Responsible  for p l a n n i n g , manning (crew), d i s p a t c h and  39 c o n t r o l of f l i g h t s .  Three r e g i o n a l o f f i c e s  are set up at Vancouver, Montreal and London. c)  General Manager, S t a t i o n Operations: Responsible f o r ground handling of a i r c r a f t , f u e l l i n g , handling of cargo and commissary s u p p l i e s , load p l a n n i n g , and l i n e maintenance of a i r c r a f t .  S t a t i o n operations Managers a t  each s t a t i o n are delegated r e s p o n s i b i l i t i e s . d)  General Manager, Overhaul Base (at Montreal): Has four deputies:  Coordinator, Planning and  Scheduling of Workload; Manager, Engine Overh a u l ; Manager, Airframe Overhaul; Manager, E l e c t r o n i c , E l e c t r i c , Mechanical Components (Units). e)  C h i e f Engineer:  Located i n Montreal, and  three deputies:  D i r e c t o r of New  has  Equipment  Planning/Evaluation who evaluates new  aircraft,  provides c o o r d i n a t i o n w i t h manufacturer,  acts  as t e c h n i c a l c o n s u l t a n t ; Manager, A i r c r a f t M o d i f i c a t i o n s , p r e s c r i b e s and provides engineering s p e c i f i c a t i o n s t o e x i s t i n g equipment t o be c a r r i e d out by Overhaul Base; D i r e c t o r , Line Maintenance, who develops  and  p r e s c r i b e s methods, procedures, and p r a c t i c e s f o r performance of l i n e maintenance of a i r c r a f t a t the s t a t i o n s .  40 f)  D i r e c t o r , Operations Planning:  Is a s t a f f  member, r e s p o n s i b l e f o r c o o r d i n a t i n g , w i t h i n the Operations Department and w i t h the r e p r e s e n t a t i v e s of the Sales Department, the schedules, equipment and frequencies of s e r v i c e t o be operated i n f u t u r e p e r i o d s . 4.  The V i c e President - Finance:  I n a d d i t i o n to  normal Finance Department r e s p o n s i b i l i t i e s of accounting f o r revenues and expenditures, t h i s department plays a major r o l e i n the planning and budgeting of revenues and expenses, and r e p o r t i n g of r e s u l t s .  The task of p r o v i d i n g f o r r e p o r t i n g  to r e g u l a t o r y bodies i s handled by t h i s department. There are two deputies: a)  General Manager, Accounting:  Responsible f o r  c a r r y i n g out the l i n e accounting f u n c t i o n w i t h i n the company, and p r e p a r a t i o n and submission of r e g u l a t o r y r e p o r t i n g . He three deputies:  has  Manager, Revenue Accounting,  covering accounting and a u d i t of cargo, express and m a i l revenues, and s a l e s and earned revenues from passenger t r a f f i c from f i e l d o f f i c e s ; Manager, Disbursements Accounting, ensuring c o l l e c t i o n of accounts r e c e i v a b l e ( c r e d i t card accounts), a u d i t of and payment of a l l accounts payable,  and  41  p a y r o l l accounting ( m a j o r i t y of r e g u l a t o r y r e p o r t i n g and f i n a n c i a l accounting c a r r i e d out w i t h i n t h i s d i v i s i o n ) ; Manager, S t a t i s t i c a l Information, r e s p o n s i b l e f o r e x t r a c t i o n , c o m p i l a t i o n and maintenance of corporate s t a t i s t i c s per government, t r a d e , company and department requirements, from accounting data processed. b)  Manager, Data Process S e r v i c e s :  Provides  Programming, computer, and r e p o r t i n g s e r v i c e s f o r the Accounting and other user departments. The V i c e P r e s i d e n t - Sales and Customer S e r v i c e has two deputies. a)  General Manager, Sales and Customer S e r v i c e : Has D i s t r i c t Managers of Sales and Customer S e r v i c e , a t each s t a t i o n / d i s t r i c t r e p o r t i n g t o him.  Each D i s t r i c t Manager has from two  t o f i v e d e p u t i e s , depending upon the s i z e and volume of business generated i n the d i s t r i c t , as f o l l o w s : Large D i s t r i c t  Small Dtefoftefr  Manager, Passenger Sales  Manager, Sales  Manager, Cargo Sales  Manager, Customer Service  Manager, Reservations Manager, T i c k e t O f f i c e s Manager, A i r p o r t Passenger Service  42 b)  General Manager, Marketing Planning and Services:  This Is a s t a f f p o s i t i o n  r e s p o n s i b l e f o r the research i n t o customer needs, the c o o r d i n a t i o n and planning of these needs w i t h the Operations Department, the p r o v i s i o n of s t a f f s e r v i c e s through and t o the General Manager, Sales and Customer Service t o d i s t r i c t s . There are three deputies:  D i r e c t o r , Sales  Promotion and Development, r e s p o n s i b l e f o r development, c o o r d i n a t i o n , and supply t o d i s t r i c t s of s a l e s programs, a d v e r t i s i n g , and the a d m i n i s t r a t i o n of s a l e s t r a i n i n g ; D i r e c t o r , Customer Services Planning,  provides  improved methods, procedures, and f a c i l i t i e s t o d i s t r i c t s f o r r e s e r v a t i o n s , t i c k e t i n g and a i r p o r t passenger s e r v i c e s ; D i r e c t o r , Market and Consumer Research, responsible f o r studying and recommending  on customer needs,  demands f o r s e r v i c e and p o t e n t i a l demand f o r service.  S p e c i a l i s t u n i t s concentrate  on the  d i s t i n c t markets served by ACE A i r l i n e s . Now t h a t the o r g a n i z a t i o n and main f u n c t i o n of a h y p o t h e t i c a l a i r l i n e have been described, the f o l l o w i n g chapter w i l l d e a l w i t h the budgeting and c o s t i n g p r a c t i s e s  4-3  f o r major elements of a i r l i n e c o s t s .  The chapter w i l l  i l l u s t r a t e the i n t e r - r e l a t i o n s h i p s of operating s t a t i s t i c s and passenger revenues t o i n d i c a t e the kinds o f u s e f u l management information which can be derived from these sources.  CHAPTER IV BUDGETING AND COSTING PRACTICES FOR MAJOR ELEMENTS OF AIRLINE COSTS SUMMARY OF AIRLINE PLANNING AND BUDGETING PRACTICES The i n i t i a l stage of a i r l i n e f i n a n c i a l planning i s the p r e p a r a t i o n of a f o r e c a s t of p o t e n t i a l demands f o r t r a n s p o r t a t i o n (passenger and commodity) f o r s t a t e d f u t u r e periods*  I n the case of ACE A i r l i n e s , t h i s covers the  operating and f i n a n c i a l year commencing November 1st t o the f o l l o w i n g October  31st.  The f o r e c a s t i s expressed i n terms of the monthly number of passengers and the weight f o r each commodity ( f r e i g h t , m a l l , and express) between a l l p a i r s of p o i n t s served.  H i s t o r i c p a t t e r n s of t r a v e l by day of the week and  seasonal trends by month of the year a r e used t o r e f i n e the demand i n t o a form s u i t a b l e f o r use I n the next stage o f planning.  This f o r e c a s t i n g process i s c a r r i e d out by the  Marketing Planning group i n the head o f f i c e of the Sales and Customer S e r v i c e department. The second planning stage i s a j o i n t e f f o r t w i t h the Operations Planning group, and i n v o l v e s the design of schedules and s e r v i c e s which w i l l meet customer needs, earn 44  45 s u f f i c i e n t revenues t o cover a l l c o s t s , and a t t a i n the established p r o f i t objective.  Involved i n t h i s process a r e  the convenience and p o p u l a r i t y of a r r i v a l / d e p a r t u r e times by p a i r s of c i t i e s , the a i r and ground handling f a c i l i t i e s and c a p a c i t i e s a v a i l a b l e t o handle the f l i g h t s , and p r o v i s i o n of overhaul, maintenance, and f l i g h t crews necessary f o r a safe and economic o p e r a t i o n . ^ The r e s u l t of these e f f o r t s i s a d r a f t p l a n of operations, which i s used as the b a s i s f o r estimating the probable revenues and costs i n v o l v e d .  I f t h i s p l a n should  meet or exceed the p r o f i t o b j e c t i v e , i t i s r e f i n e d and approved as the b a s i c company planning document. The p r e p a r a t i o n of the r e s p e c t i v e budgets i s then c a r r i e d out by a l l responsible o r g a n i z a t i o n l e v e l s w i t h i n the various departments. Sales budgets are prepared by each D i s t r i c t Sales and Customer S e r v i c e Manager; Operating cost budgets a r e compiled by each management o r g a n i z a t i o n u n i t .  The  c o n s o l i d a t i o n of these budgets form the t o t a l company p l a n which i s then submitted t o the Management Advisory Committee. A f t e r a thorough review and p o s s i b l e r e v i s i o n s are made, the Committee recommends i t s approval by the President and Board Directors. The Story of A i r l i n e Scheduling. A i r Transport A s s o c i a t i o n of America, Washington, D.C, 1 9 6 1 . x  The b a s i c company planning document, the Operations and Sales P l a n , contains the f o l l o w i n g i n f o r m a t i o n f o r each month of the p e r i o d , i n c l u d i n g the change i n volume (amount and percentage) from the p r e v i o u s , i . e . , current year: 1.  A v a i l a b l e a i r e r a f t f l e e t by type.  2.  A i r c r a f t i n overhaul by type.  3.  T o t a l f l e e t s i z e by type.  4.  Frequencies by type of a i r c r a f t by f l i g h t l e g .  5.  Airborne f l y i n g hours by type by l e g .  6.  Block (engines on) a i r c r a f t hours by type by l e g .  7.  Average block hours per a i r c r a f t by type.  8.  Passenger boardings and deplanlngs by o r i g i n and d e s t i n a t i o n .  9.  Cargo ( f r e i g h t , express and m a l l ) shipments  and  pounds inbound/outbound and o r i g i n a t i n g / terminating by s t a t i o n . 10.  Passengers by market o r i g i n (where t i c k e t issued) by o r i g i n and d e s t i n a t i o n .  11.  Passenger f a r e s (basic and net y i e l d ) I n e f f e c t by o r i g i n and d e s t i n a t i o n .  12.  Revenue Passenger M i l e s and A v a i l a b l e Seat M i l e s by a i r e r a f t type, f l i g h t , f l i g h t l e g , and d i r e c t i o n .  13.  Passenger percentage occupany of seats scheduled by o r i g i n , d e s t i n a t i o n , and f l i g h t l e g .  14.  Estimated seats a v a i l a b l e by departures a t through s t a t i o n s , by through f l i g h t s .  47 15.  D e t a i l e d f l i g h t schedules f o r a l l o f f i e e s . ACCOUNTING FOR LABOUR COSTS  Three f a c t o r s which are i n v o l v e d i n accounting f o r t h i s major element of a i r l i n e costs a r e : 1.  The type o f expenses.  2.  C l a s s i f i c a t i o n i n t o v a r i a b l e , s e m i - v a r i a b l e , and fixed categories.  3.  A l l o c a t i o n by cost centre and category.  The b a s i c types of labour expense which comprise the t o t a l a i r l i n e labour cost a r e o f three d i s t i n c t k i n d s : 1.  Wages p a i d f o r time worked.  2.  Premiums p a i d f o r s h i f t work and overtime.  3.  Company p a i d share o f employee b e n e f i t s , i n c l u d i n g pension, insurance, v a c a t i o n and i l l n e s s .  These  equal 15$ o f wages and premium expenses. A l l o c a t i o n of labour costs t o the various cost centres includes the costs of employee b e n e f i t s . With one or two minor exceptions, the i n c l u s i o n of these p e r i o d and s t a t u t o r y costs w i l l be r e f l e c t e d i n the labour c o s t s of each f u n c t i o n , since i f the s t a f f were not employed, these costs would not be i n c u r r e d .  I n ACE A i r l i n e s the p r i n c i p l e  i s followed that the f u l l e f f e c t of a l l changes w i l l be r e a d i l y apparent t o the formation saving or i n c u r r i n g the cost.  48  The c l a s s i f i c a t i o n of labour by degree of v a r i a b i l i t y i n an a i r l i n e , represents an extremely d i f f i c u l t task.  Many  elasses of labour employed represent a f a i r l y s t a b l e l e v e l of c a p a c i t y c o s t .  Other elements represent standby c o s t s ,  such as, s h i f t coverage f o r l i n e maintenance mechanics, where workload may  range from zero to overload on a  contingent b a s i s .  To overcome t h i s f a c t o r , c l a s s i f i c a t i o n  of labour I s made on a d i r e c t or a d m i n i s t r a t i v e burden b a s i s , with certain c l a s s i f i c a t i o n s  of senior management labour  costs being considered as overhead. The a l l o c a t i o n ,  or r a t h e r c l a s s i f i c a t i o n , by cost  centre does not r e f l e c t the d e t a i l e d type of wage or s a l a r y expense, that i s charged i n t o t a l .  Table IV shows the b a s i c  r u l e s f o r c l a s s i f i c a t i o n of labour costs by department, cost c e n t r e , and f u n c t i o n . ACCOUNTING FOR MATERIALS, SUPPLIES, AND  SERVICES COSTS  The large number and wide v a r i e t y of m a t e r i a l s , s u p p l i e s and s e r v i c e s costs Incurred i n an a i r l i n e are probably without peer i n other i n d u s t r i e s of comparable size.  With one or two exceptions f o r each of the f u n c t i o n s  of the a i r l i n e , the a c q u i s i t i o n and c o s t i n g of these are f a i r l y conventional.  The combination of a large number of  d e c e n t r a l i z e d o f f i c e s and the r e l a t i v e l y large share of t o t a l costs represented by labour, plus the d i v e r s i t y f u n c t i o n s , account f o r the l a r g e volume of  of  miscellaneous  49  TABLE IV LABOUR COST CLASSIFICATIONS BY FUNCTIONS AND DEPARTMENTS  Function or Department  Direct labour  Overhaul  Trades, mechanics, technicians, inspection.  Flight  F l i g h t crew.  Operations  In F l i g h t Service A i r c r a f t Ground Service  Cargo Handling Service Customer Service  Administration and C l e r i c a l  C l a s s i f i c a t i o n of Labour Allocated as Burden  Supervisors, foremen, managers, c l e r i c a l .  Costs of stores o f f i c e at overhaul base.  A l l labour and costs charged to overhaul.  General manager, personal s t a f f , and regional s t a f f .  Ramp agents, mechanics.  Supervisors, c l e r i c a l , s h i f t managers.  Cargo agents, freight agents.  Supervisors, c l e r i c a l s h i f t managers.  Passenger, t i c k e t , and reservations agents.  Managers, supervisors, and c l e r i c a l . Salesmen, managers, and c l e r i c a l .  Station manager and personal s t a f f .  Allocated 5Q# each to A i r c r a f t Ground Service and Cargo Handling Service.  Station manager and personal s t a f f , D i s t r i c t manager personal s t a f f .  a n d  General managers and other head office staff.  Allocated 50$ each to Sales and Customer Service.  D i s t r i c t manager and personal s t a f f .  Engineering  A l l staff.  Purchases  A l l staff. Stores and inventory clerks.  A l l s t a f f at overhaul base stores office.  Accounting Data Processing  General manager and personal s t a f f .  D e t a i l of A l l o c a t i o n of Burden  Stewardess, purser.  Sale 3  Stores  Department and Company Overhead  Regional stores s t a f f at other than Montreal base.  A l l labour and costs charged to Overhaul.  A l l staff. Machine operators and programmers.  Cost3 allocated to user departments' overhead.  Data processing cost allocated to user department overhead on basis of machine hours u t i l i z e d .  5© p a r t s , s u p p l i e s and m a t e r i a l s . Landing fees a r e assessed by the a i r p o r t operators against a i r l i n e s as a charge f o r use of the a i r p o r t and f o r the p r o v i s i o n of a i r t r a f f i c c o n t r o l and route n a v i g a t i o n services.  These vary by a i r c r a f t type and type of operation  such as a r r i v a l s from i n t e r n a t i o n a l o r i g i n s or from w i t h i n the same country.  I n some cases, they vary by a i r c r a f t  landing weight and may Include other f e e s .  I n the case of  ACE A i r l i n e s they are only assessed on revenue f l i g h t s .  An  a d d i t i o n a l f l a t monthly f e e i s p a i d f o r t r a i n i n g f l i g h t s c a r r i e d out a t the r e g i o n a l operations bases.  A t a b l e of  landing fees i n e f f e c t a t the a i r p o r t s i n t o which ACE A i r l i n e s operates i s shown as Table V. Accounting f o r f u e l costs should represent a f a i r l y s t r a i g h t f o r w a r d t a s k , except f o r variances i n f l y i n g conditions.  For example, excess ground t a x i time, or  e x c e s s i v e l y favourable or unfavourable winds, can account f o r f u e l consumption r a t e s v a r y i n g q u i t e w i d e l y from the average.  Since i t i s not p r a c t i c a l t o attempt t o compute,  on a c o n s i s t e n t b a s i s , the a c t u a l f u e l consumed by f l i g h t , I t i s necessary t o r e l y on standard r o u n d - t r i p consumption rates.  These are based on normal usage, plus an allowance  f a c t o r f o r abnormal consumption.  Standard r a t e s of consumption  by f l i g h t l e g are shown i n Table 71. The average p r i c e p a i d i s a l s o subject t o a f a i r l y wide v a r i a t i o n , due t o the handling charges, a i r p o r t  51  TABLE V TABLE OP AIRCRAFT LANDING FEES (By a i r c r a f t type and operation)  A i r c r a f t Type Area and Type  I n Canada* Domestic a r r i v a l s A r r i v a l s from U.S. A r r i v a l s from Europe In the U.S. (from Canada): At Chicago At New York In Europe: London Paris  Viscount  Vanguard  DC-8  $15 15  $43 50  $93 155 470  33 23  75 54-  120 118 73* 329  TABLE V I TABLE OP STANDARD FUEL CONSUMPTION COSTS " (By f l i g h t sector and a i r c r a f t type, t o t a l and per mile)  Route Number and F l i g h t Leg  Miles  Viscount Total Per M i . 0  Costs by A i r c r a f t Type Vanguard DC-8 Total Per M i . Total Per Mi, w  <f  10 I n t e r - C i t y 11 12 13 14 15 16  Montreal-New York Toronto-New York Toronto-Chicago Montreal-Ottawa Montreal-Toronto Toronto-Ottawa  350 375 446 94326 232  108.99 117.00 124.79 39»35 98.4-7 74.26  31.14 31.20 27.98 4-1.86 30.21 32.01  167.15 I87.75 194.62 53.55 152.48 111.75  4-7.75 50.07 43.63 56.97 46.77 4-8.17  941 1705 2116 768 524  212.08  22.54  327.10  34.76  277.05 228.15  , 36.07 43.54  325.90  99.97  698.40 1152.40 1431.7© 558.70 419.54  74.22 67.59 67.66 72.75 79.97  2514.05 379.40  63.97 65.28  20 Transcontinental 21 22 23 24 25  Toronto-Winnipeg Toronto-Edmonton Toronto-Vancouver Winnipeg-Edmonton Edmonton-Vancouver  177.63 150.15  23.13 28.65  ^0 T r a n s - A t l a n t i c 31 32 33 34  Winnipeg-London Toronto-London Montreal-London Montreal-Paris  3930 3645 3320 3502  2  2 1  22*!2  2278.35  LS^L  65,06  Note: F u e l costs r e f l e c t d i f f e r e n c e s i n average loaded cost plus t a x and assessments f o r Canada, the U.S., and Europe.  53 assessments, and taxes Involved (some subject t o r e b a t e ) . This l a s t f a c t o r , t a x e s , v a r i e s by country and province or s t a t e , and s i n c e f u e l picked up a t one centre may be consumed over s e v e r a l d i f f e r e n t f l i g h t l e g s , the a b i l i t y t o a r r i v e a t an accurate p r i c e per u n i t i s compounded. To overcome t h i s problem, average u n i t p r i c e s are estimated f o r the routes operated oh a r o u n d - t r i p b a s i s . Canada 16.000,  The average f u e l p r i c e s per g a l l o n a r e : U.S.  15.480, Europe 14.850.  Based on these r a t e s , the u n i t  costs f o r f l i g h t s operating as f o l l o w s a r e : 1.  W i t h i n Canada  16.000  2.  Between Canada and the U.S.  .  15*740  3.  Between Canada and Europe . .  15.430  These represent averages of the p r i c e s f o r the areas involved. I n f l i g h t passenger s e r v i c e c o s t s i n c l u d e a major c o n t r o l l a b l e item--passenger  meals expense.  ACE A i r l i n e s  purchases these meals from c a t e r i n g s e r v i c e s a t c e r t a i n of the centres across i t s system.  The c o n t r a c t s s p e c i f y p r i c e s  f o r the v a r i o u s kinds of meals provided, and c o n t r o l i s e x e r c i s e d by q u a n t i t i e s ordered i n terms of passenger loads on those f l i g h t s designated as having meal s e r v i c e . A tolerance of not more than 4$ on designated meal f l i g h t s m u l t i p l i e d by an average cost per passenger c a r r i e d , based on h i s t o r i c cost r a t e s experienced.  5*  A d v e r t i s i n g costs and t r a v e l agency commissions represent by f a r the major share of t o t a l promotion and sales c o s t s .  While the a d v e r t i s i n g expenditure i s t o a  considerable extent c o n t r o l l e d (not paid except on s a l e o f t r a n s p o r t a t i o n ) , proper accounting of the expenditures provides an e x c e l l e n t means of determining t h e i r v a l u e , and provides the b a s i s f o r making d e c i s i o n s concerning t h e i r use and e f f e c t on s a l e s p o l i c i e s . A d v e r t i s i n g serves two purposes, one of a p u b l i c r e l a t i o n s nature, and the other promotional.  The c o s t  incurred f o r p u b l i c r e l a t i o n s purposes i s charged t o the o f f i c e of the P r e s i d e n t as a company overhead expense. Promotional a d v e r t i s i n g expenditures are costed i n terms o f : 1.  The media used (TV, newspapers, magazines, e t c . ) .  2.  The market and t e r r i t o r y (normally a s a l e s d i s t r i c t ) on which the a d v e r t i s i n g i s intended to have i t s e f f e c t .  3.  The p a r t i c u l a r ACE A i r l i n e s s e r v i c e i t i s intended t o promote ( A t l a n t i c , trans-border, etc.).  4.  The expected period when the impact w i l l be r e f l e c t e d i n terms of increased s a l e s .  The accounting f o r sales and revenue r e s u l t s are provided on a comparable b a s i s .  To f a c i l i t a t e t h i s type of  a n a l y s i s , the a n a l y s i s of r e s u l t s a t t a i n e d i n r e l a t i o n t o c o s t s has g r e a t l y a s s i s t e d the ACE A i r l i n e s a d v e r t i s i n g  55 group i n s e l e c t i n g the best combination  of media, market,  s e r v i c e , and timing t o provide optimum sales r e s u l t s . Sales commissions, the second major item of s a l e s c o s t s , represents the payments t o t r a v e l agents f o r s a l e s on ACS A i r l i n e s s e r v i c e s . These are costed by: 1.  Market ( s a l e s t e r r i t o r y ) .  2.  S e r v i c e on which.the agency s a l e was made.  3.  Percentage agency s a l e s o f t o t a l f o r the d i s t r i c t .  This information a s s i s t s i n gauging the value t o ACE A i r l i n e s o f each agency and whether t h i s s e r v i c e can be used to supplement or r e p l a c e e x i s t i n g ACE A i r l i n e s t i c k e t o f f i c e s i n that a r e a .  I n a d d i t i o n t o the commissions c o s t , equivalent  gross s a l e s information i s provided by agency. ADMINISTRATION, BURDEN AND OVERHEAD COSTS Aside from labour, which was discussed e a r l i e r i n t h i s chapter, the three major items f a l l i n g w i t h i n these i n d i r e c t cost c l a s s i f i c a t i o n which e n t a i l s p e c i a l handling are: 1.  D e p r e c i a t i o n of c a p i t a l equipment and p a r t s .  2.  Non-capital one-time c o s t s .  C a p i t a l property and equipment investment i n ACE A i r l i n e s i s c l a s s i f i e d f o r cost purposes as i l l u s t r a t e d i n Table V I I .  56  TABLE V I I CAPITAL AND EQUIPMENT DEPRECIATION  1. A i r c r a f t plus spares and p a r t s ( a l l t y p e s ) : D e p r e c i a t i o n 9# f o r 10 years t o a 10$ r e s i d u a l value Annual Cost $10,346,940 2.  Overhaul equipment and f a c i l i t i e s : Equipment d e p r e c i a t i o n 10$ per year, no r e s i d u a l value Annual Cost $ 503,400 F a c i l i t i e s d e p r e c i a t i o n % per year Annual Cost $ 1,000,000  3.  Ground equipment, a i r e r a f t h a n d l i n g : D e p r e c i a t i o n 12.5$ per year, no r e s i d u a l value Annual Cost $  215,300  Ground equipment, cargo handling: D e p r e c i a t i o n 12o# per year, no r e s i d u a l value Annual Cost $  114,750  Customer S e r v i e e , Equipment: D e p r e c i a t i o n 10$ per year, no r e s i d u a l value Annual Cost $  132,000  Other f u r n i t u r e and equipment: D e p r e c i a t i o n 5# per year, no r e s i d u a l value Annual Cost $  174,600  4.  5.  6*  57 A i r c r a f t d e p r e c i a t i o n i s charged t o d i r e e t f l y i n g costs on the b a s i s of block hoars flown i n revenue s e r v i c e , c a l c u l a t e d as i n Table V I I I . A i r c r a f t insurance costs are c a l c u l a t e d and charged on much the same b a s i s as d e p r e c i a t i o n .  These costs are  i l l u s t r a t e d i n Table IX. The m a j o r i t y o f overhaul property and equipment i s n o n - s p e c i a l i z e d as t o type o f a i r c r a f t .  The s p e c i a l i z e d  a i r c r a f t equipment d e p r e c i a t i o n i s charged against the particular aircraft.  The common equipment d e p r e c i a t i o n  cost i s a l l o c a t e d t o each type of a i r c r a f t on the b a s i s of estimated d i r e c t labour hours expended on each of the a i r c r a f t types operated. ACCOUNTING FOR OPERATING STATISTICS AND REVENUES The importance of the d e t a i l generated i n accounting f o r revenues and operating s t a t i s t i c s f o r e f f e c t i v e a i r l i n e eosting i s c r i t i c a l .  While the i n t r o d u c t i o n of accounting  f o r revenues i n a t r e a t i s e on c o s t i n g may seem p e c u l i a r , i t nevertheless forms an i n t e g r a l part of the o v e r a l l management information needs.  The i n t e r - r e l a t i o n s h i p s of operating  s t a t i s t i c s and passenger revenues are a m p l i f i e d i n the f o l l o w i n g example. The example i s i l l u s t r a t e d by Table X and concerns ACE A i r l i n e s F l i g h t 100 from Montreal t o Toronto, w i t h a given number o f passengers connecting  t o ACE A i r l i n e s  58  i  TABLE V I I I AIRCRAFT DEPRECIATION  Viscount  Number o f a i r c r a f t  Vanguard  DC-8  20  12  6  6,00  6,03  8.18  Average block hours I n d a i l y revenue s e r v i c e  43,800  26,411  17,914  $2,219,400  $3,905,280  $4,222,260  $  $  Annual f l e e t block hours Fleet depreciation D e p r e c i a t i o n cost per block hour  $  50.67  147.87  235.7©  59  TABLE IX AIRCRAFT INSURANCE COSTS  Viscount  F l e e t Insurance Per a i r c r a f t year T o t a l year  $ 12,000 $240,000  Cost per block hour  $  5.48  Vanguard  $ 30,000 $360,000 $  13.63  DC-8  $ 60,000 $360,000 $  20.10  60  TABLE X COMPARISON OF ACTUAL YIELD TO STANDARD FARE  Route Mileage Standard one-way f a r e - s e c t o r Through f a r e t o Chicago  $  Montreal P s g r s . destined t o : Toronto Chicago Toronto Psgrs. t o Chicago  Flight 100  Flight 200  Total  326  446  772  23.00  $ $  3© 40  32.00 52.00  40 40  Passenger M i l e s by F l i g h t  22,820  35,880  58,700  Revenue a t Standard Fare  $1,610.00  $2,560.00  $4,170.00  A c t u a l Revenues  $1,560,00  $2,490.00  $4,050.00  Difference  $  $  $  Revenue per Psgr. M i l e a t : Standard Fare Aetual Y i e l d  % Variance from Standard  50.00 7.060  6.840  -3.1  70.00  7.130 6.940  -2.7  120.00 7.100 6.900  -2.8  61  F l i g h t 100 from Montreal t o Toronto, w i t h a given number o f passengers connecting t o ACE A i r l i n e s F l i g h t 200 a t Toronto, destined t o Chicago.  The example i l l u s t r a t e s how s p e c i a l  f a r e s which a r e i n existence can reduce the a c t u a l revenue or y i e l d per passenger mile below the standard y i e l d per passenger m i l e .  This i s a very c r i t i c a l point as the standard  y i e l d per passenger m i l e by route sector i s i m p l i c t l y used f o r management d e c i s i o n making when passenger load f a c t o r s are  used t o monitor and c o n t r o l gross p r o f i t margin. The reason f o r the variance per passenger mile from  the  standard published f a r e i s b a s i c a l l y because of discounts  allowed on through f a r e s .  There a r e s e v e r a l other f a r e s i n  existence which can have an equal e f f e c t on the d e c l i n e i n r a t e below standard f a r e s — f o r i n s t a n c e , s p e c i a l e x c u r s i o n f a r e s , h a l f - f a r e s f o r c h i l d r e n , s p e c i a l i n t e r l i n e through f a r e s , m i l i t a r y f a r e s , or s p e c i a l f a m i l y f a r e s .  Declines  i n y i e l d below the standard f a r e s range up t o 10% and 15%, and knowledge of t h e i r cause and e f f e c t on y i e l d per mile by route sector I s of c r i t i c a l importance.  I n t h i s example, the  d i f f e r e n c e i n t o t a l revenues was $120.00 and i t i n v o l v e d 110 passengers, which i s approximately $1.10 per passenger.  When  r e l a t e d t o the 1,500,000 passengers which are f o r e c a s t t o be c a r r i e d by ACE A i r l i n e s during 1965. the d i f f e r e n c e i n revenue amounts t o $1,650,000 which i s very s i g n i f i c a n t indeed.  62 P r i o r t o the advent of long-range j e t and  turboprop  a i r c r a f t , f a r e s were based on mileage t r a v e l l e d a t a f a i r l y constant r a t e per m i l e , regardless of d i s t a n c e .  The  ratio  of passengers c a r r i e d t o seats a v a i l a b l e (the passenger load f a c t o r ) was s u f f i c i e n t t o monitor and c o n t r o l the f a r e t o cost r a t i o .  With the operation of modern equipment and t h e i r  great range, the costs per mile decreased as f l i g h t lengths increased.  Figure 3 shows the operating costs a t various  ranges f o r the Viscount, Vanguard and  DC-8.  This brought about a change i n f a r e s , based on a d e c l i n i n g r a t e per mile as non-stop stage lengths increased. This b a s i c a l l y i s the cause f o r the revenue y i e l d per mile running under the published r a t e s f o r the various f l i g h t sectors.  A major f a c t o r of t h i s y i e l d per mile i s i t s e f f e c t  on the use of passenger load f a c t o r s as a means of Monitoring and c o n t r o l l i n g gross p r o f i t margin. Information on passengers, passenger m i l e s , seat miles and load f a c t o r s , represent inputs to the outputs of c e r t a i n cost and revenue r e l a t i o n s h i p s , without whieh i t would not be p r a c t i c a l t o consider a breakdown of costs i n t o more r e a d i l y c o n t r o l l a b l e segments, both as they r e l a t e t o f u n c t i o n s and o r g a n i z a t i o n r e s p o n s i b i l i t y c e n t r e s . The substance of subsequent chapters of t h i s t h e s i s w i l l elaborate on the e f f e c t s of costs by stage l e n g t h s . The i m p l i c a t i o n s and uses of t h i s information i n determining gross p r o f i t margin by a i r c r a f t type and f l i g h t s e c t o r l e n g t h ,  FIGURE ^ COST  TOTAL OPERATING .COST PER AVAILABLE SEAT NILE  U.oo*  DC-8  2  »°°0  3,000  [,,000  AIRCRAFT STAGE LENGTH IN MILES SOURCE:  TABLE XV  64  both f o r p r i e i n g and scheduling of a i r c r a f t , w i l l be t r e a t e d i n a f o l l o w i n g chapter. The purpose of t h i s b r i e f coverage of revenues and s t a t i s t i c s i s s o l e l y t o i l l u s t r a t e the kinds of performance information derived from these sources.  Their i n t e r p r e t a t i o n  f o r c o s t i n g and planning i s indispensable t o c o r r e c t d e c i s i o n making.  CHAPTER V THE COST OF OPERATING The preceding chapters have d e a l t w i t h the background and h i s t o r y of commercial a i r l i n e s , the o r g a n i z a t i o n and f u n c t i o n s of ACE A i r l i n e s , and the major elements of i t s costs.  Commencing w i t h t h i s chapter, these elements of  c o s t , i n concert w i t h the a i r l i n e f u n c t i o n s and o r g a n i z a t i o n , w i l l be brought together I n a more meaningful and u s e f u l form. A i r c r a f t operations a r e i n e f f e c t moving f a c t o r i e s which, as they operate, produce c a p a c i t y f o r t h e c a r r i a g e o f passengers or cargo.  I f the c a p a c i t y i s not s o l d before  departure, there can be no s t o r i n g of i n v e n t o r y , and the cost of the empty c a p a c i t y must be recovered from revenues earned f o r passengers and cargo shipments c a r r i e d .  While  t h i s i s b a s i c a l l y true of most forms of t r a n s p o r t a t i o n , scheduled a i r l i n e s are unable t o reduce c a p a c i t y i n the short r u n t o any appreciable degree.  The operating costs  i n e f f e c t become f i x e d f o r the l i f e of the schedule. The f o u r cost areas of operating c a p a c i t y — o v e r h a u l , d i r e c t f l y i n g o p e r a t i o n s , passenger i n - f l i g h t crew, and a i r c r a f t ground operating c o s t s — w i l l be covered i n t h i s chapter.  The remaining major f u n c t i o n s of s e r v i c e and  6*  m s a l e s , whose costs vary w i t h volumes of business a t t a i n e d , w i l l be the subjects of the f o l l o w i n g chapter. OVERHAUL COSTS An a i r c r a f t when purchased i s warranted by the manufacturer t o provide a guaranteed number of hours of operation.  C e r t a i n p a r t s of the main a i r c r a f t s t r u c t u r e  are equal t o a f u l l l i f e of over t e n or f i f t e e n years or more, w h i l e other s e c t i o n s and components may be warranted as low as f i v e hundred hours before overhaul.  This i s  p a r t i c u l a r l y t r u e i n the case of new a i r c r a f t .  The l i f e of  the u n i t remains a t t h i s l e v e l u n t i l s u f f i c i e n t experience Is b u i l t up by the a i r l i n e operators, and the necessary m o d i f i c a t i o n s t o extend the hours of Time Between Overhauls (TBO) can be made.  The adherence t o these r e g u l a t i o n s , as  embodied i n law by the government r e g u l a t o r y body i s s t r i c t l y enforced. The TBO i s expressed i n terms of t a k e - o f f t o touchdown a i r c r a f t hours f o r each plane operated.  Since each  component and major p a r t i s subject t o interchange between a i r c r a f t of the same t y p e , d e t a i l e d records are maintained f o r each.  While t h i s I s a l e g a l requirement and a n e c e s s i t y  f o r the a i r l i n e , i t does overcome the need f o r conventional inventory c o n t r o l p r a c t i c e s . The r o l e of overhaul i s t o re-manufacture  the a i r c r a f t  and i t s p a r t s when the a i r c r a f t TBO hours a r e used up, ACE  6*.  A i r l i n e s c a r r i e s out i t s overhaul work on a b l o c k overhaul b a s i s , wherein the e n t i r e a i r c r a f t i s overhauled t o f u l l TBO l i f e a t one time.  This e n t a i l s an out of s e r v i c e  p e r i o d of anywhere from t e n t o twenty days f o r each overhaul. A d i f f e r e n t b a s i s of overhaul i s p r a c t i s e d by some a i r l i n e s , where work i s c a r r i e d out on a progressive overhaul b a s i s . In that method, small s e c t i o n s or areas are overhauled p r o g r e s s i v e l y as the plane l a y s over between f l i g h t s a t the main overhaul base.  There i s no appreciable time out of  s e r v i c e f o r progressive overhaul, but t h i s i s o f f s e t by higher c o s t s . The net e f f e c t i s b a s i c a l l y the same I n terms o f accounting f o r the overhaul c o s t s . The planning f o r overhaul workload i s based on records on TBO hours f o r each a i r c r a f t , and the scheduled hours planned f o r the coming year.  Individual aircraft  are scheduled i n s e r v i c e t o a l l o w t h e i r f u l l TBO hours t o be used up, and are then scheduled i n t o the overhaul base on a t i m e l y and c o n s i s t e n t b a s i s . This provides a s t a b l e workload l e v e l a t the Overhaul f a c i l i t y , and b e t t e r planning of s t a f f and f a c i l i t i e s , w i t h a b e t t e r r e s u l t i n g c o n t r o l of costs. DIRECT PLYING OPERATIONS COSTS Where the overhaul f u n c t i o n re-manufactures or r e p l e n i s h e s a i r c r a f t hours, the d i r e c t f l y i n g operation represents the use of equipment i n the production of capacity for sale.  68  D i r e c t f l y i n g operations are by t h e i r nature the most complex and i n t e r e s t i n g , and because of the h i g h s k i l l l e v e l s and features of s a f e t y i n v o l v e d , represent the l a r g e s t s i n g l e part of the operation of a commercial a i r l i n e . The major cost areas i n v o l v e d i n d i r e c t f l y i n g expenditures, include the overhaul costs as o u t l i n e d above, the costs of f l i g h t crew and f u e l , and the d e p r e c i a t i o n and insurance costs of the a i r c r a f t . The meaningful i n t e g r a t i o n of these costs i s of paramount importance t o t h e i r understanding  f o r costing.  Once a s e t of f i r m f l i g h t schedules has been e s t a b l i s h e d , very l i t t l e c o n t r o l i s necessary t o a t t a i n the cost l e v e l s . The occurrence of s i g n i f i c a n t v a r i a n c e s , w i t h the exception of those due t o adverse weather c o n d i t i o n s , are a r a r i t y . The management and c o n t r o l of d i r e c t f l y i n g costs r e s t l a r g e l y i n t h e i r planning.  I t i s i n the planning phase  that d e c i s i o n s on f r e q u e n c i e s , departure and a r r i v a l times, and choice of a i r c r a f t types by f l i g h t s e c t o r , are made. An acute knowledge of a l l costs t o the f r a c t i o n of a cent I s imperative, as ACE A i r l i n e s produces over one and a h a l f b i l l i o n seat miles per year, and approximately five m i l l i o n a i r c r a f t miles.  A saving of 1/10  twenty-  of a cent per  seat m i l e , t h e r e f o r e , represents a p o t e n t i a l $1,500,000 saving. The a c t u a l route sectors and legs operated by ACE A i r l i n e s are those shown i n Table X I , and the d i r e c t f l y i n g  69  TABLE XI STANDARD PASSENGER REVENUB AND FUEL COST SPECIFICATIONS (Per mile by aircraft type and route leg)  VISC OUNT Route No.  Flight Leg  Air Miles  Basic Fare $ #/Miles  Hours BL A i r  MPH BL Air  Lbs  VANGUARD Fuel Miles  B. Hr  Hours BL Air  MPH BL A i r  (000's)  Lbs (OOO's)  DC-8 Fuel Miles  B. Hr  W  Inter-Citv  11  Montreal-New York  350  25  7.14  1.75  1.58  200  222  4.76  13.60  2.720  1.42  1.25  246  280  7.30  20.86  5.141  12  Toronto-New York  375  28  7.47  1.80  1.63  208  230  5.ii  13.63  2.839  1.58  1.41  237  266  8.20  21.87  5.190  13  Toronto-Chicago  446  32  7.17  2.00  1.83  5.45  12.22  2.725  1.58  1.41  282  316  8.50  19.06  5.380 4.600  14 Montrea1-Ottawa  223  244  .41  162  229  1.69  17.98  2.914  1.30  222  251  4.23  12.98  2.877  94  9  9.57  .58  15  Montreal-Toronto  326  23  7.06  1.47  16  Toronto-Ottawa  232  17  7-33  1.13  .96  205  242  3.19  13.75  30  Transcontinental  21  Toronto-ttlnnipeg  941  52  5.53  3.54  3-37  266  279  9.11  9.68  22  Toronto-Edmonton  1,705  89  5.22  23  Toronto-Vancouver  2,116  109  5.15  24 Winnipeg-Edmonton  768  43  5.60  2.88  2.21  267  283  7.63  9.93  524  33  6.30  2.14  1.97  244  266  6.45  12.31  188  285  2.30  24.47  1.22  1.05  267  310  6.55  20.09  5.369  2.823  .92  .75  252  309  4.80  20.68  5.217  2.573  2.83  2.66  333  354  14.05  14.93  4.965  • 50  • 33  2.649  2.25  2.08  341  3.014  1.71  1.54  306  Hours BL Air  MPH BL A i r  1.05  .88  310  2.22  2.05  424  3.68  3.51  463  4.38  4.21  483  1.63  427  1.21  380  369  11.90  15.50  5.290  1.80  340  9.80  18.70  5.731  1.38  Fuel Lbs Miles (OOO's)  B. Hr  14.00  42.94  459  30.00  31.88  13.514  486  49.50  29.03  13.451  503  61.50  29.06  14.041  471  24.00  31.25  13.333  433  18.00  34.35  13.043  370  13.333  25  Edmonton-Vancouver  30  Trans-Atlantic  31  Winnipeg-London  3,930  257  6.55  7.72  7.55  509  520  112.00  28.50  14.508  32  Toronto-London  3,645  219  6.03  7.07  6.90  515  528  106.00  29.08  14.993  33  Montreal-London  3,320  199  6.01  6.58  6.41  505  518  98.00  29.52  14.894  3*  Montreal-Paris  3,502  222  6.34  7.05  6.88  497  509  101.50  28.98  14.397  BL Air B. Hr  Block—engines on to engines o f f . Takeoff to touchdown. Block hour.  70 costs are charged t o these route s e c t o r s . U n i t s of output ( i n which u n i t s c o s t s / r a t e s are expressed) are s e a t s , seat m i l e s , and a i r e r a f t r o u n d - t r i p frequencies and m i l e s — a l l i d e n t i f i e d by a i r c r a f t type. A l l crew c o s t s , both f l i g h t and c a b i n , are expressed as a cost per block hour flown by a i r c r a f t type. The average cost d i f f e r s f o r each type of a i r c r a f t , due t o f l i g h t crew complement and the f a c t o r of speed.  Seniority  of crew which c a l l s f o r higher than average b a s i c s a l a r y r a t e , i s r e f l e c t e d i n DC-8 crew c o s t s .  I n a d d i t i o n t o the  i n c l u s i o n of the cost of Company p a i d b e n e f i t s , amounting t o 15$ of d i r e c t wages, a f u r t h e r 5% i s added t o d i r e c t labour t o cover the costs o f p i l o t check f l i g h t s and p r o f i c i e n c y and simulator t r a i n i n g . Attainment of b e t t e r than scheduled b l o c k speeds are u s u a l l y o f f s e t by overages due t o adverse weather.  Both of  these f a c t o r s are taken i n t o account i n scheduling and a c t u a l bloek times are minimal. The f o l l o w i n g are the f l i g h t crew complements by a i r c r a f t type, and t h e i r cost per block hour: Crew  Cost/Block Hour  Viscount  2  $ 60.00  Vanguard  2  $ 75.00  DC-8 — Canada  3  $ 90.00  DC-8 —  4  $115.00  Atlantic  F u e l costs which were described i n d e t a i l i n Chapter IV, are based on average consumption r a t e s a t t a i n e d , adjusted f o r incidences of abnormal operating c o n d i t i o n s . Engineered consumption r a t e s by a i r c r a f t type and f l i g h t l e g are c a l c u l a t e d f o r normal periods of operation i s c l o s e l y monitored. An excess consumption f a c t o r i s added t o the normal r a t e s based on h i s t o r i c incidence of abnormal conditions.  Lengthy ground t a x i time or a i r c r a f t h o l d i n g  above d e s t i n a t i o n because of ground ramp congestion ( f a c t o r s which are p e c u l i a r t o c e r t a i n a i r p o r t s ) , are s i m i l a r l y taken i n t o account i n c a l c u l a t i n g consumption by f l i g h t l e g and a i r c r a f t type. A c t u a l f u e l loading records by a i r c r a f t type and f l i g h t number are maintained, and variances between estimated f u e l consumption and a c t u a l amounts loaded are r e f l e c t e d i n the a c t u a l c o s t s . i n a s i m i l a r manner.  P r i c e variances are handled  Standard f u e l consumption costs by  block hour, a i r c r a f t t y p e , and by f l i g h t l e g are i l l u s t r a t e d by Table X I .  *  D e p r e c i a t i o n and insurance on f l i g h t equipment are f i x e d annual c o s t s .  A l l o c a t i o n of these costs t o d i r e c t  f l y i n g operations i s made on the b a s i s of a i r c r a f t type by block hour, operated. The r a t e i s based on the estimated b l o c k hours planned f o r the operating y e a r , d i v i d e d i n t o the f i x e d d e p r e c i a t i o n and contract insurance r a t e s i n e f f e e t f o r each type of a i r c r a f t ( r e f e r t o Chapter I V ) . The costs  72  by f l i g h t l e g and a i r c r a f t type a r e shown i n Tables X I I , X I I I , XIV. IN FLIGHT PASSENGER SERVICE CREW COSTS While the cabin crew i s i n f a c t a s e r v i c e c o s t , i t i s being included i n the cost o f operating as a part of the f i x e d operating c a p a c i t y c o s t , since the cabin crew complement i s standard f o r each a i r c r a f t type and s e r v i c e operated and the costs w i l l not vary as volumes of passengers carried fluctuate. Those passenger i n f l i g h t s e r v i c e costs which do vary i n r e l a t i o n t o passengers c a r r i e d are not included here but are included I n passenger s e r v i c e costs t o be covered i n Chapter V I .  Accounting f o r c a b i n crew costs i s c a r r i e d out  on the same b a s i s as o u t l i n e d f o r f l i g h t crew costs e a r l i e r i n t h i s chapter.  The crew complement and cost per block  hour on ACE A i r l i n e s f l i g h t s a r e as f o l l o w s : Cabin Crew  Cost/Block Hour  Viscount  1  $18.00  Vanguard  3  $35.00  DC-8 — Canada  4  $48.00  DC-8 — A t l a n t i c  5  $58.00  The foregoing (overhaul, f l i g h t crew, f u e l , d e p r e c i a t i o n and insurance, and c a b i n crew) represent the f i x e d and committed costs of p r o v i d i n g scheduled c a p a c i t y  73 TABLE  XII  TABLE OF VISCOUNT AIRCRAFT OPERATING CAPACITY COSTS By Round T r i p Frequency by F l i g h t Sector  Fit Crew  Variable Capacity Costs Direct Direct Cabin Lndng O'Haul Flying Crew Fees  No.  F l i g h t Sector  Miles  11  Montreal-New York  350  12  Toronto-New York  375 216.00 234.00 97.80  13  Toronto-Chicago  446  14  Montreal-Ottawa  9  15  Montreal-Toronto  16  Fuel  Dir AC Gr Svc  Direct Optng  O'Haul Burden  Fixed Capacity Cost Deprc Total Mi. Produced & Ins. Optng Acrft Seat  63.OO  38.00 84.00 707.48 66.68 177.43 951.89  700 35,000  64.80  38.OO  733.60 67.79 183.05 984.44  750 37,500  72.00 48.00 89.OO 8O8.38 77.23 205.50 i09i.ll  892 44,600  172.90  20.88 30.00 88.00  311.78 17.30  326 176.40 196.94  78.00 451.34  52.92 30.00 81.00  615.26  Toronto-Ottawa  232 135.60 148.52  57.60 341.72  40.68  21  Toronto-Winnipeg  941 424.80 424.16 202.20 1051.16 127.44 30.00 83.OO 1291.60 142.21 378.45 1812.26 1,882 94,100  24  Winnipeg-Edmonton  768 34-5.60 355.26 162.60 863.46  25  Edmonton-Vancouver  524  4  210.00 217.98 94.80 522.78  240.00 249.58 69.6O  547.80  109.80 599.38  78.70 24.60  256.80 300.30 118.20 675.20  83.OO  30.00 88.00 500.40  46.04  375.12  188  54.86 146.00  816.12  652 32,600  107.80 648.71  464 23,200  40.51  103.68 30.00 89.OO 1086.14 114.36 77.04  304.33  1504.83  30.00 90.00 872.34 83.13 221.23 1176.70  9,400  1,536 76,800 1,048  52,400  74  TABLE  XIII  TABLE OF VANGUARD AIRCRAFT OPERATING CAPACITY COSTS By Round Trip Frequency by F l i g h t Sector  Variable Capacity Costs Direct Direct Cabin Lndng O'Haul Flying Crew Fees  D i r AC Gr Svc  Direct Optng  O'Haul Burden  Fixed Capacity Cost Deprc Total Ml. Produced & Ins. Optng Acrft Seat  No.  F l i g h t Sector  Miles  Fit Crew  11  Montreal-New York  350  213.00  334.30  225.00  772.30  99.40  104.00  84.00  1859.70  215.63  458.66  1733.99  700  77,000  12  Toronto-New York  375  237.00  375.00  253.80  866.30  110.60  104.00  83.00  1163.90  243.23  510.34  1917.47  750  82,500  13  Toronto-Chicago  446  237.00  389.24  253.80  880.04  110.60  125.00  89.OO  1204.64  243.23  510.34  1958.21  892  98,120  14  Montreal-Ottawa  94  75-00  107.10  59-40  24-1.50  35.00  86.00  88.00  450.50  56.93  161.50  668.93  188  20,680  15  Montreal-Toronto  326  183.00  304.96  189.00  676.96  85.40  86.00  81.00  929.36  181.13  394.06  1504.55  652  71,720  16  Toronto-Ottawa  232  138.00  223.50  135.00  496.50  64.40  86.00  88.00  734.90  129.38  297.16  1161.44  464  51,040  21  Toronto-Winnipeg  941  424.50  654.20  478.80  1557.50  198.10  86.00  83.00  1924.60  458.85  914.10  3297-55  1,882  207,020  24  Winnipeg-Edmonton  768  337.50  554.10  374.40  1266.00  157.50  86.00  89.00  1598.50  358.80  726.75  2685.05  1,536  168,960  25  Edmonton-Vancouver  524  256.50  456.30  277-20  990.00  119.70  86.00  90.00  1285.70  265.65  552.33  2103.68  1,048 115,280  Fuel  75  TABLE  XIV  TABLE OF DC-8 AIRCRAFT OF BRAT ING CAPACITY COSTS By Round Trip Freque ncy by Flight Sector  No.  Flight Sector  Miles  Fit Crew  Fuel  Direct O'Haul  Direct Flying  Cabin Crew  Landing Dir AC Fees Gr Svc  Direct Optng  O'Haul Burden  Deprc & Ins  Total Optng  Miles Produced Acrft Seat  15  Montreal- Toronto  326  189.00  651.80  239.36  1,080.16  100.80  186.00  146.00  1,512.96  198.55  537.18  2,248.69  652  97,800  21  Toronto-Winnipeg  941  399.60  1,396.80  557.60  2,354.00  213.12  186.00  150.00  2,903.12  462.52  1,135.75  4,501.39  1,882  282,390  22  Toronto-Edmonton  1,705  662.40  2,304.80  954.72  3,921.92  353.28  186.00  155.00  4,616.20  791.93  1,882.69  7,290.82  3,410  511,500  23  Toronto-Vancouver  2,116  788.40  2,863.40  1,145.12  4,796.92  420.48  186.00  151.00  5,554.40  949.86  2,240.80  8,745.06  4,232  634,800  24  Winnipeg-Edmonton  768  324.00  1,117.40  443.36  1,884.76  172.80  186.00  161.00  2,404.56  367.76  920.88  3,693.20  1,536  230.400  25  Edmont on-Vane ouver  524  248.40  838.IO  329.12  1,415.62  132.48  186.00  162.00  1,896.10..  273.00  706.00  2,875.10  1,048  157,200  31  Winnipeg-London  3,930  1,775.60  5,028.10  2,053.60  8,857.30  895.52  1,204.00  235.00  11,191.82  1,703.43  3,949.55  16,844.80  7,860  1,179,000  32  Toronto-London  3,645  1,626.10  4,758.80  1,876.80  8,261.70  820.12  1,204.00  229.00  10,514.82  1,556.80  3,617.00  15,688.62  7,290  1,093,500  33  Montreal-London  3,320  1,513.40  4,399.60  1,743.52  7,656.52  763.28  1,204.00  231.00  9,854.80  1,446.22  3,366.33  14,667.35  6,640  996,000  34  Montr eal-Paris  3,502  1,621.50  4,556.70  1,871.36  8,049.56  817.80  799.00  269.OO  9,935.36  1,552.27  3,606.78  15,094.41  7,004  1,050,600  76 f o r the c a r r i a g e of passengers and cargo.  Changes I n volume  of e i t h e r passengers or cargo w i l l have no appreciable e f f e c t on these c o s t s .  With the exception of d i r e c t a i r -  c r a f t ground s e r v i c e costs (which are t o be covered i n the next s e c t i o n ) , a i r l i n e cost of c a p a c i t y bears a very strong resemblance t o the more conventional i n d u s t r y c o s t i n g s i t u a t i o n s where f i x e d p l a n t c a p a c i t y i s a major f a c t o r i n e s t a b l i s h i n g long range u n i t cost l e v e l s f o r p r i c i n g purposes.  The a i r l i n e i s fortunate i n that the d e r i v a t i o n  of normal c a p a c i t y costs i s inherent i n I t s b a s i c planning. AIRCRAFT GROUND OPERATING COSTS This area of operation covers those costs a s s o c i a t e d w i t h the s e r v i c i n g of a i r c r a f t on the ground.  The costs  i n v o l v e d i n s e r v i c i n g l o a d , e i t h e r passengers or cargo, are exluded.  A more c o r r e c t statement i s that those costs  are r e l a t e d d i r e c t l y t o the number and types of a i r c r a f t handled, and changes i n volume of load c a r r i e d w i l l have no e f f e c t on the l e v e l s of a i r c r a f t ground operating costs incurred. Landing fees represent the f i r s t major element of cost Incurred f o r a i r c r a f t ground s e r v i c i n g , s i n c e i t i s i n c u r r e d as the a i r c r a f t lands.  The nature and method of  handling t h i s cost item was f u l l y o u t l i n e d i n Chapter IV. The costs f o r landing fees i n e f f e c t f o r ACE A i r l i n e s a t i t s various s t a t i o n s were shown i n Table V.  The bulk of the a i r c r a f t ground operating cost i s i n c u r r e d i n the s t a t i o n i t s e l f .  The whole s t a t i o n s t a f f ,  under the S t a t i o n Operations Manager, i s broken down i n t o two cost c e n t r e s — t h o s e s t a f f and c o s t s r e s p o n s i b l e f o r a i r c r a f t ground s e r v i c i n g , and those concerned w i t h loading and o f f l o a d i n g , and performing whatever processing necessary f o r cargo, m a i l , baggage and company m a t e r i a l .  Both of  these sub-groupings are under an A s s i s t a n t Manager, who I n t u r n i s responsible t o the S t a t i o n Operations Manager. Among the major d u t i e s and work c a r r i e d out by a i r c r a f t ground s e r v i c e a r e : 1.  Perform maintenance f l i g h t checks and perform minor s e r v i c i n g tasks on the a i r c r a f t .  2.  F u e l l i n g — M o n i t o r and supervise c o r r e c t loading and placement i n tanks by the f u e l tender.  3*  Groom c a b i n , c l e a n and dispose of waste.  4.  A n t i - f r e e z e or a i r c r a f t weather s e r v i c i n g .  5.  Spot and place a i r c r a f t on ramp apron.  6.  Load and place passenger meals and s u p p l i e s ; place passenger stand and power supply u n i t s .  S t a f f and equipment are mustered i n teams t o s e r v i c e each f l i g h t a r r i v a l , t h e i r number and complement v a r y i n g w i t h the type of a i r c r a f t . Costing of the a i r c r a f t ground operating f u n c t i o n i s based on the number of a i r c r a f t f l i g h t s handled (an a r r i v a l plus a departure represents one f l i g h t handled) as  78 the u n i t of output.  Since the r e l a t i v e work-load v a r i e s by  type of a i r c r a f t , a weighting f a c t o r i s employed t o a r r i v e at a unit cost.  The weighting f a c t o r i s based on the number  of ramp agents, attendants, and l i n e maintenance mechanics i n the teams s e t up t o handle each type of a i r c r a f t .  The  weightings, based on average labour involvement, are as follows: DC-8  1.8 Viscounts  Vanguard  1.0 Viscounts ( s e l f - c o n t a i n e d i n t e g r a l passenger s t a i r s ) 1.0 Viscounts  Viscount  The major costs i n c u r r e d by a i r c r a f t ground operations are f o r labour and equipment, or f o r costs d i r e c t l y r e l a t e d t o one or the other.  I n the area of f i x e d c o s t s , d e p r e c i a t i o n  of ground equipment i s a s i g n i f i c a n t item, p r i m a r i l y because of the large investment i n s p e c i a l i z e d equipment r e q u i r e d t o handle each type of a i r c r a f t . The processing and handling of costs i n c u r r e d or charged t o an a i r c r a f t ground operating formation i s b a s i c a l l y s i m i l a r t o the method of accounting f o r the cargo s e r v i c e , customer s e r v i c e , and s a l e s formation c o s t s .  Costs  are segregated by types i n t o two groupings. 1.  D i r e c t Costs:  Includes those costs which can be  expected t o change i n d i r e c t r e l a t i o n to the volume of product handled.  This i n c l u d e s costs of d i r e c t labour and  a s s o c i a t e d expenses, and other miscellaneous s u p p l i e s and services.  2.  A d m i n i s t r a t i o n Costs:  Represent the f i x e d and  committed costs of maintaining and managing the f u n c t i o n . These costs do not change over the short r u n as a r e s u l t of changes i n volumes handled.  The major cost items i n c u r r e d  are management* supervisory and c l e r i c a l labour* b u i l d i n g and f a c i l i t i e s r e n t a l s and d e p r e c i a t i o n . Planning and c o n t r o l of costs a r e based on past experience of a t t a i n e d cost per a i r c r a f t handled, f o r each of the d i r e c t cost types. The costs of the S t a t i o n Operations Manager's s t a f f and i t s a s s o c i a t e d expenses are a l l o c a t e d e q u a l l y t o the a i r c r a f t ground s e r v i c i n g f u n c t i o n and the loading and o f f loading f u n c t i o n on a 50-50 b a s i s .  Only the d i r e c t costs  ( a i r c r a f t ground handling) per f l i g h t a r e r e f l e c t e d i n a route sector cost a n a l y s i s . The i n c l u s i o n of a d m i n i s t r a t i o n and the a l l o c a t e d p o r t i o n of the S t a t i o n Operations Manager's costs (being r e l a t i v e l y f i x e d ) would tend t o d i s t o r t u n i t c o s t s of f l i g h t s handled as volumes change. Excluding these two elements of f i x e d costs w i l l f a c i l i t a t e studies of p r o f i t a n a l y s i s by f l i g h t and route s e c t o r s . Tables of a i r c r a f t operations c a p a c i t y c o s t s by a i r c r a f t type by f l i g h t s e c t o r , whieh i n c l u d e d i r e e t a i r c r a f t ground s e r v i c e , are shown as Tables X I I , X I I I and XIV. I n terms of a s e t schedule, these costs w i l l remain constant. The scheduling of a i r c r a f t i s b a s i c a l l y a planning process, where an extremely l a r g e number or requirements  80 (some of them i n c o n f l i c t ) are taken i n t o account. U l t i m a t e l y , compromises between the c o n f l i c t i n g needs of customers, overhaul, ground c a p a c i t y overload, and peak hour operating c a p a c i t y , are necessary.*  These s i t u a t i o n s  f r e q u e n t l y r e s u l t i n the l e s s than optimum economic use of each a i r c r a f t type.  This does not obviate the need f o r  cost information which w i l l t e l l what the cost i m p l i c a t i o n s of these d e c i s i o n s a r e . I t was b r i e f l y mentioned e a r l i e r that very minor savings i n seat mile costs per u n i t can r e t u r n very major savings i n c o s t s .  An i l l u s t r a t i o n of one of the f a c t o r s  which can r e a l i z e t h i s saving i s i n the s e l e c t i o n of a i r c r a f t types f o r the various f l i g h t s e c t o r s operated. Table XV makes a comparison of the seat mile costs f o r d i f f e r e n t f l i g h t s e c t o r s by each type of a i r c r a f t , i l l u s t r a t i n g the costs and p r o d u c t i v i t y of each.  On a  200  mile stage l e n g t h , the Viscount would provide the lowest c o s t , and over 1200  m i l e s , the DC-8  cost of any of the types operated. i l l u s t r a t e d by Figure  would have the cheapest This was g r a p h i c a l l y  3.  The use of r o u n d - t r i p costs by f l i g h t l e g i s intended t o overcome the d i f f e r e n t costs f o r eastbound as opposed t o westbound f l i g h t s .  Because of normally p r e v a i l i n g w e s t e r l y  T^B Story of A i r l i n e Scheduling. A i r Transport A s s o c i a t i o n of America, Washington, D.C, 1961. 1  L  til  TABLE XV TOTAL OPERATING COST PER AVAILABLE SEAT MILE BY AIR'CRA FT TYPE  DC-8  VANGUARD  VISCOUNT  Available Seat Miles  Round Trip Mileage  Total Operating Cost  Available Seat Miles  Cost Per A.S.M.  Total Operating Cost  94  188  $ 375.12  9,400  3-991*  $ 668.93  20,680  3.235*  232  464  648.71  23,200  2.796  1161.44  51,040  2.276  326  652  816.12  32,600  2.503  1504.55  71,720  2.098  350  700  951.89  35,000  2.720  1733-99  77,000  2.252  375  750  984.44  37,500  2.625  1917.47  82,500  2.324  446  892  i09i.ll  44,600  2.446  1958.21  98,120  1.996  524  1048  1176.70  52,400  2.246  2103.68  115,280  768  1536  1504.83  76,800  1.959  2685.05  941  1882  1812.26  94,100  1.926  3297.55  1705  Route Sector Mileage  Cost Per A.S.M.  Total Operating Cost  Available Seat Miles  Cost Per A.S.M.  ___  2,248.69  97,800  1.825  2,875.10  157,200  1.829  168,960  1.589  3,693.20  230,400  1.603  207,020  1.593  4,501.39  282,390  1.595  3410  7,290.82  511,500  1.425  2116  4232  8,745.06  634,800  1.378  3320  6640  14,667.35  996,000  1.473  3502  7004  15,094.41  1,050,600  1.436  3645  7290  15,688.62  1,093,500  1.435  3930  7860  16,844.80  1,179,000  1.429  Source:  ——  Tables XII, XIII and XIV.  2.299*"  82 winds a t upper f l i g h t a l t i t u d e s , westbound f l y i n g times are from 10% t o 20% higher than eastbound f l i g h t s .  This  r e s u l t s i n lower a i r c r a f t ground speeds on westbound f l i g h t s and lower p r o d u c t i v i t y i n m i l e s and seats per block hour.  To overcome t h i s , route c o s t s f o r a s i n g l e  l e g are taken as one-half the round t r i p c o s t s .  CHAPTER V I THE COST OF SERVICE AND SALES This chapter deals w i t h the remaining two major f u n c t i o n s of an a i r l i n e .  The previous chapter, Cost of  Operating, d e t a i l e d the major areas of the d i r e c t c o s t s associated with providing capacity.  Once f i r m a i r l i n e  schedules have been e s t a b l i s h e d the costs of operating the schedule w i l l i n e f f e c t become f i x e d i n terms o f t o t a l c o s t s . This chapter w i l l d e a l w i t h those f u n c t i o n s and c o s t s which w i l l increase or vary d i r e c t l y w i t h the volumes o f business a t t a i n e d , the cost o f g e t t i n g t r a f f i c ( e i t h e r passenger or cargo), which i s the cost o f s a l e s , and the costs of s e r v i c i n g and handling i n c u r r e d on the ground. THE COST OF SERVICE The s e r v i c e f u n c t i o n i n v o l v e s three d i s t i n c t elements of c o s t : 1.  I n f l i g h t s e r v i c e , covering passenger meals and s u p p l i e s .  2.  Cargo handling s e r v i c e , f o r m a i l , cargo, and passenger baggage.  3.  Customer s e r v i c e , f o r r e s e r v a t i o n s , t i c k e t , and a i r p o r t o f f i c e c o s t s .  83  84 A l l of these costs can be d i r e c t l y r e l a t e d t o the volumes of t r a f f i c a t t a i n e d . Passenger Meals and ACE A i r l i n e s  Supplies 1  meal s e r v i c e i s provided by  c a t e r i n g firms on a c o n t r a c t b a s i s . meals provided  outside  The various types of  ( b r e a k f a s t , lunch, and dinner) are so  scheduled that over a two-week c y c l e the costs and contents of types of meals provided f o r each day of the p e r i o d w i l l balance out.  While c e r t a i n of these meals vary i n p r i c e ,  over two week p e r i o d s , the average cost per meal ordered w i l l be s u f f i c i e n t to cover a l l c o s t s . An h i s t o r i c r a t i o of breakfasts to lunch and  dinner  meals i s a p p l i e d t o the average of the contract p r i c e s of each type of meals, f o r purposes of determining  this cost.  Passenger s u p p l i e s , representing the costs of newspapers and magazines, the l o s s , p i l f e r a g e and breakage of passenger s e r v i c e items, and other miscellaneous  supplies  are charged on the b a s i s of experience i n previous  periods.  Ordering of meals and s p e e l a l passenger requirements i s handled by the r e s e r v a t i o n s o f f i c e i n each c i t y , on the b a s i s of e x i s t i n g passenger bookings, plus a s a f e t y margin as o u t l i n e d i n Chapter IV. The f o l l o w i n g are the amounts a l l o c a t e d per passenger f o r passenger meals and supplies by s e r v i c e :  85 Horth American  Atlantic  Meals  $1.50  $2.25  Supplies  $ .30  $  .60  The amounts shown f o r meals i n c l u d e the 4-% s a f e t y margin allowance f o r meals i n excess of a c t u a l passengers boarded. Cargo Handling S e r v i c e This a c t i v i t y , along w i t h a i r c r a f t ground s e r v i c e , which takes place on an a i r p o r t ramp when an a r r i v i n g or departing a i r c r a f t i s being loaded or s e r v i c e d , i s the p i c t u r e of chaos.  I n a c t u a l f a c t , the o r g a n i z a t i o n and  s p e c i a l i z a t i o n of the very numerous tasks c a r r i e d out p l a y a key r o l e i n the economics of a i r l i n e o p e r a t i o n . E f f e c t i v e planning and m a r s h a l l i n g of teams of agents and equipment, r e s u l t i n minimum ground time f o r each a i r c r a f t and i t s keeping t o schedule. An improvement of f i v e minutes i n ground time per landing which can be used during periods of demand, permits an equivalent Increase i n a i r c r a f t u t i l i z a t i o n a t no Increase i n the cost of a i r c r a f t d e p r e c i a t i o n and insurance. The r e s u l t i n g f a c t o r of improved customer s e r v i c e , while i n t a n g i b l e , i s of considerable value t o the a i r l i n e .  The  b u i l d i n g of these a t t a i n e d ground handling times i n t o f l i g h t schedules, provides f o r the sometimes necessary margin f o r adverse weather enroute.  8£ An important element of r e s p o n s i b i l i t y of cargo s e r v i c e i s the adherence t o load placement i n the a i r c r a f t . A i r c r a f t centre of g r a v i t y weight and balance c o n t r o l i s a major s a f e t y f a c t o r i n a i r c r a f t operations and i t must be Integrated w i t h the required storage by hold f o r downline o f f l o a d i n g and loading on m u l t i - s t o p  flights.  Proper execution of t h i s r e s p o n s i b i l i t y i s representative  o f the unseen cost e f f i c i e n c i e s r e a l i z e d i n  t h i s and other phases of a i r l i n e  operation.  Costing of the cargo s e r v i c e f u n c t i o n i s s i m i l a r t o the c o s t i n g f o i r a i r c r a f t ground handling s e r v i c e , as outl i n e d i n Chapter V. The expression of costs i n terms of u n i t s of output, of course, i s d i f f e r e n t . The u n i t s handled by cargo s e r v i c e s a r e — t h e number of pieces or shipments of passenger baggage, m a i l , and cargo ( a i r f r e i g h t and express). The r e l a t i v e l y l a r g e r average weight f o r f r e i g h t shipments and the added processing a d d i t i o n of a 1.75 shipments.  time involved are equalized by the  f a c t o r t o a c t u a l (or planned) cargo  The u n i t s used represent u n i t s loaded and  unloaded, and each shipment w i l l therefore c a r r y a double cost:  The cost a t the boarding s t a t i o n and the cost a t the  destination station.  87 Customer S e r v i c e This f u n c t i o n i n c l u d e s the costs of the a c t i v i t i e s w i t h which r e g u l a r t r a v e l l e r s are f u l l y f a m i l i a r .  Telephone  r e s e r v a t i o n s , t i c k e t o f f i c e s , and a i r p o r t check-in h a n d l i n g , are the three processes i n v o l v e d i n the p u b l i c ' s i n i t i a l contact w i t h the a i r l i n e . Their importance t o the a i r l i n e s , i n e s t a b l i s h i n g a favourable impression on contacts w i t h e x i s t i n g and p o t e n t i a l t r a v e l l e r s , plays a key r o l e i n r e t a i n i n g r e g u l a r customers and i n favourably a f f e c t i n g the choice of a i r l i n e of travellers-to-be.  The care and expense goes beyond the mere  c r e a t i o n of an image; the need t o provide w e l l - t r a i n e d and capable s t a f f t o e f f i c i e n t l y and courteously s a t i s f y customer needs, i s an i n v a l u a b l e advantage over competing a i r l i n e s and other modes of t r a n s p o r t a t i o n . While the true value of t r a n s p o r t a t i o n , i n terms of value and u t i l i t y l i e s i n the elements of s a f e t y , speed and convenience, a t low f a r e s , the i n i t i a l contacts c o n t r i b u t e at l e a s t as much t o the passenger's impressions and thus t h e i r f u t u r e patronage.  The e n t i r e r o l e of t r a n s p o r t a t i o n  represents a s e r v i c e , the q u a l i t y of which i s what the customer i s paying f o r , and h i s degree of s a t i s f a c t i o n w i t h a l l of i t s aspects IS of prime importance t o an a i r l i n e . Repognition of t h i s importance i s r e f l e c t e d i n the nature of the customer s e r v i c e costs Incurred.  88 Telephone, t i c k e t and a i r p o r t passenger agents, plus s u p e r v i s i o n and management account f o r approximately 75% of customer s e r v i c e c o s t s ( t h i s includes i n d i r e c t wages as o u t l i n e d i n Chapter IV on c o s t i n g of l a b o u r ) .  The a d d i t i o n  of f a c i l i t i e s and s e r v i c e to inconvenienced passengers, accounts f o r over $0% of the cost of t h i s f u n c t i o n . U n i t s of output f o r customer s e r v i c e are the passenger boardings a t the a i r p o r t s e r v i n g the c i t y .  The  passengers  are those who were s o l d l o c a l l y and are now commencing t r a v e l , and those passengers s o l d by other d i s t r i c t s and now boarding f o r r e t u r n to t h e i r p o i n t of o r i g i n .  This  d i s t i n c t i o n w i l l be covered more f u l l y i n the f o l l o w i n g chapter. The average d i r e c t costs of s e r v i c e — w h i c h include handling of passenger baggage, meal and passenger s u p p l i e s , and the costs of customer s e r v i c e — f o r AGE A i r l i n e s are i l l u s t r a t e d i n Table XVI. Because of f l i g h t d u r a t i o n , a l l passengers t r a v e l l i n g on A t l a n t i c f l i g h t s are considered as meal passengers. The average c o s t s shown f o r each item w i l l , and do, vary by c i t y , u s u a l l y due t o the f a c t o r of volume.  For  example, the r e l a t i v e l y higher eosts f o r A t l a n t i c passengers. This i s a r e f l e c t i o n of low f l i g h t frequencies w i t h the r e s u l t i n g poor u t i l i z a t i o n of d i r e c t labour s t a f f .  Range of  variance f o r North American o f f i c e s i s very s m a l l because of the volumes handled.  09  TABLE XVI THE DIRECT COSTS OP SERVICE  Passenger Meals Per Meal P l i g h t Passenger Per Each Boarding Passenger Passenger Supplies Per Boarding Passenger  Travel w i t h i n Canada and U.S.A.  T r a v e l t o and from Europe  $1.5© —  ~ $2.50  .3©  .60  Passenger Baggage Per Boarding Passenger  1.45  2.9©  Customer Service; Per Boarding Passenger  2.5©  4-.00  $5.75  $10.00  90 The i n t e r a c t i o n of the costs of s e r v i c e per passenger and the f i x e d cost of operations  capacity w i l l be a m p l i f i e d  i n a l a t e r chapter. THE COST OF SALES This area of a i r l i n e costs i s c l o s e l y r e l a t e d t o the cost of s e r v i c e .  Between the two areas there i s a hazy l i n e  which i s intended to define the functions of each.  In a c t u a l  p r a c t i c e , there i s a very close i n t e g r a t i o n of t h e i r r o l e s . C e r t a i n items which are c l a s s e d as customer s e r v i c e c o s t s , i n f a c t play a s i g n i f i c a n t part i n the s a l e of a i r l i n e seats. An e x c e l l e n t example i s the meal s e r v i c e i n f l i g h t .  In a  true sense, t h i s i s a cost of customer s e r v i c e , but where an over-elaborate  meal s e r v i c e i s provided, i t may be a  valuable competitive  advantage.  P r o v i s i o n of s e r v i c e over a necessary b a s i c and sound l e v e l f o r t h i s purpose must u l t i m a t e l y be s e l f - d e f e a t i n g , f o r as the competitive advantage accrues t o one c a r r i e r , i t w i l l be matched by c o m p e t i t o r s — w i t h  no gain t o e i t h e r and  d e f i n i t e l y a t a cost t o the passenger. These elements of sales and s e r v i c e do add to the c o s t , but add l i t t l e I f anything to the value of a i r t r a n s portation.  The answer, i n s o f a r as i t i s p o s s i b l e to give  one, i s to state that what an a i r l i n e i s s e l l i n g i s i n f a c t a service.  9*  The ACE A i r l i n e s s a l e s promotion program u t i l i z e s three mediums t o accomplish i t s s a l e s o b j e c t i v e s : Advertising For which i t has a c e n t r a l s t a f f group charged w i t h the task of developing a d v e r t i s i n g programs t a i l o r e d t o the various markets ( d i s t r i c t o f f i c e t e r r i t o r i e s ) t o promote the s e r v i c e s which are operated.  I t represents the medium of  mass promotion. Promotion and S o l i c i t a t i o n These are the Sales Managers and Sales Representatives assigned t o c a r r y out s e l e c t i v e promotion i n d i s t r i c t s a l e s t e r r i t o r i e s , concentrating on business accounts, agencies, business and s o c i a l c l u b s , and  travel  non-competitive  a i r l i n e s whose s e r v i c e s complement those operated by  ACE.  These work i n concert w i t h company s a l e s programs, but are charged w i t h the r e s p o n s i b i l i t y of maintaining continuous s a l e s development programs. selective  These two o b j e c t i v e s represent  promotion.  T r a v e l Agencies These are i n e f f e c t r e t a i l e r s of t r a v e l .  In a d d i t i o n  to p l a y i n g a major r o l e i n the development of s a l e s , they provide a s e r v i c e o u t l e t f o r i s s u i n g t i c k e t s where ACE A i r l i n e s are not represented, or because of d i s t a n c e which  92 may be inconvenient  t o the passenger.  An e f f e c t i v e agency,  which c a r r i e s out i t s own development and promotion, i s more than worth i t s commission cost t o an a i r l i n e ( t h i s i s on i n t e r n a t i o n a l s a l e s and 5$ f©r Canada and U.S. s a l e s ) . There i s a very close c o o r d i n a t i o n of the r o l e s of these three processes, i n the planning and execution of s a l e s programs.  This i s secured p r i m a r i l y by means of  s p e c i a l s a l e s and marketing planning programs.  The  promotional costs i n c u r r e d (Including a d v e r t i s i n g and s a l e s commissions) are r e f l e c t e d against the d i s t r i c t s a l e s o f f i c e formations which represent the market areas where the costs were i n c u r r e d and where the r e s u l t s expressed i n s a l e s are realized. The u n i t of output i s $100 of s a l e s .  Thus, costs  are expressed as so much per hundred d o l l a r s of s a l e s , as w e l l as a percentage of s a l e s . Table XVII gives the average d i r e c t s a l e s costs estimated f o r the operating year I965.  This t a b l e shows  the cost per $100 of s a l e s (and the percentage) of A t l a n t i c and North American s a l e s . The methods and d e t a i l s I n the c o s t i n g of a d v e r t i s i n g and t r a v e l agency s a l e s commissions were o u t l i n e d i n d e t a i l i n Chapter I I I . The use of s a l e s d o l l a r s , as d i s t i n c t from revenues, i s intended t o s t r e s s t h e i r b a s i c d i f f e r e n c e s :  93  TABLE XVII THE DIRECT COSTS OF SALES  Cost Element  Advertising Agency Commissions Other Cost per $100 of Sales  Domestic Sales Cost %  A t l a n t i c Sales Cost %  $1.50  1.5  $ 3.00  3.0  2.00  2.0  6.00  6.0  .50  0.5  1.00  1.0  $4.00  4.0  $10.00  10.0  94 1.  Revenues can be expressed by f l i g h t s e c t o r , a i r -  c r a f t type, f l i g h t , and a breakdown of one  continuous  passenger journey by revenues f o r each of the s e c t o r s operated by an a i r l i n e . 2.  Sales are a broader concept.  I t I s intended t o  r e f l e c t the l o c a t i o n of a s a l e s and the p a r t i c u l a r s e r v i c e being s o l d .  For example, i n the case of a passenger  purchasing a t i c k e t i n Vancouver f o r t r a v e l t o P a r i s v i a Montreal, t h i s would be elassed as a C o n t i n e n t - A t l a n t i c s a l e s , made i n the Vancouver market area ( i . e . , d i s t r i c t ) . For revenue purposes, the journey would be r e f l e c t e d on a t r a n s c o n t i n e n t a l and an A t l a n t i c route s e c t o r f o r one or more a i r c r a f t types and route s e c t o r s . This d i s t i n c t i o n i s a necessary c o n f l i c t between the needs f o r operating p r o f i t a b i l i t y measurements, and the information needs f o r sales promotion and market r e s e a r c h . The i n t e g r a t i o n of the s a l e s costs w i t h the c o s t s of operating and s e r v i c e , w i l l be covered i n the next chapter.  CHAPTER V I I SUMMARY OF PLANNING, CONTROL AND ANALYSIS Optimum customer s e r v i c e and a i r l i n e costs are subjects more n e a r l y s u i t e d t o a d i s c u s s i o n of economic concepts, as i n Chapter I I , than to c o s t i n g and p r i c i n g of a i r l i n e s e r v i c e s . They have, however, s p e c i a l meaning i n the context of t h i s chapter, and w i l l provide a key t o the question of why c e r t a i n areas of a i r l i n e costs should be t r e a t e d i n c e r t a i n ways. The i l l u s t r a t i o n of a i r c r a f t operating costs by f l i g h t l e n g t h , as shown by Figure 3,  represents the b a s i c  cost f a c t o r which always must be considered i n a i r l i n e planning.  As distance Increases beyond 1,000  miles, a i r -  l i n e operating costs reach t h e i r most economic l e v e l (except n a t u r a l l y w i t h short range a i r c r a f t ) •  Two reasons  for t h i s are: 1.  Greater seat mile p r o d u c t i v i t y due t o r e l a t i v e l y l e s s time i n climb-out and descent of a i r c r a f t , which give higher block speeds.  2.  (Table XI.)  The f u e l burned i n climbing t o c r u i s e a l t i t u d e per ground mile t r a v e l l e d i s approximately  three  times greater than the average c r u i s e consumption rates.  96  97 The c o n f l i c t of these b a s i c costs of operation a r i s e s from the passenger t r a v e l d i s t r i b u t i o n by length of t r i p which r e v e a l s that 75% of a i r t r a v e l i s concentrated i n t r i p s below 1,000 m i l e s .  An i l l u s t r a t i o n of t h i s d i s t r i b u -  t i o n of passenger one-way t r i p length f o r U.S. a i r l i n e s i s shown i n Table X V I I I . Optimum customer s e r v i c e , a s i d e from the f a c t o r s of s a f e t y and speed, r e s t s i n the p r o v i s i o n of non-stop d i r e c t f l i g h t s t o the customer's d e s i r e d d e s t i n a t i o n . The equivalent of an optimum a i r l i n e cost i s t o operate equipment t o t h e i r maximum economic range i n non-stop f l i g h t s .  The  c l o s e r the a i r l i n e s approach t h i s p o i n t , the b e t t e r the s e r v i c e t o t h e i r customers and the lower the costs and f a r e s . These c o n s i d e r a t i o n s are a t the heart of c o s t i n g f o r management needs around which a l l planning and d e c i s i o n making are made. SUMMARY STATEMENTS A summary of the f i v e cost elements d e a l t w i t h i n previous chapters, along w i t h i n t e r e s t expense f o r borrowed c a p i t a l , i s shown i n a summary statement of revenues and costs i n Table XIX. This represents a p r e s e n t a t i o n more comparable i n form t o those used i n more conventional enterprises.  The elements p r e v i o u s l y discussed a r e :  1. A i r c r a f t operating costs  (Ghapter  2.  (Ghapter VI)  D i r e c t s e r v i c e costs  V)  98 TABLE X V I I I PASSENGER ONE WAY TRIP LENGTH U.S.  D O M E S T I C T R U N K A N D L O C A L S E R V I C E O P E R A T I O N S , 1961 ALL  Domestic passenger one-way trip length (miles)  500550600650700750600850900950-  -Number  Simple  Cumulative  (3)  (4)  Number (thous.) (5)  1 1 1 1 1 1 1 1  211 725 027 308 501 605 614 640 602 595  0-5 19 2- 7 3- 4 39 4- 2 42 4-3 4-2 4-2  0-5 2-4 5-1 8-5 12-4 166 20-8 25-1 29-2 33 4  139 840 1 904 3 552 3725 2 903 2 907 1 915 1 765 1 613  1 1 1 1 1 1 1 1 1 1  544 570 483 440 389 309 259 165 136 036  40 4-1 3-9 3-7 3 6 34 3-3 30 30 2-7  37-4 41 5 45-3 49 1 52-7 56-1 59-4 62-4 65-4 68-1  1 036 1 283 988 1 106 1 606 480 964 616 758 696  Passenger-miles  Per cent Simple  (*)  Cumulative (7)  Number (thous.) (8) 4 744 69 320 239 945 635 436 826 229 794 675 954 551712106 740 367 762 441  03 2-1 4-7 8- 8 9- 3 72 7-2 48 44 40  0-3 2-4 72 160 25-3 32 5 39-8 44-6 490 530  6 3- 2 25 28 40  546 583 741 102 614 499 743 321 1 154 292 370113 798 041 537 786 704 947 675 326 946 1 534 315 864 413 399 221 486 309 290  Per cent Simple  Cumulative  (»)  (10)  0-3 0-9 2-3 3 0 29 3 5 2-6 2-7 28  0- 3 1- 1 3-4 6-4 9-3 12-8 15-4 180 20-8  20 2-7 .2-2 2-7 4-2 1- 3 2- 9 1- 9 2- 6 2-4  22-8 25-5 27-7 30-4 346 35-9 38-8 40-8 43-3 45-8  559 555 270 740 682 759 139 230 664 521  3-4 5 6 1-1 3-1 1-S 1-4 08 1-8 1-1 1-1  49-2 54-8 55 9 590 60-5 620 62-8 64 6 65- 7 66- 7  1-7  55-6 58-7 61-2 640 680 69-2 71-6 73-1 75 0 76-7  1 1 1 1 1 1 1 1 1 1  000-1 049 050-1 099 100-1-149 150-1 199 200-1 249 250-1 299 300-1 349 350-1 399 400-1 449 450-1 499  967 875 766 710 692 637 591 547 470 484  2-5 2-3 20 1-8 1-8 1-7 1-5 1-4 1-2 1-3  70-6 72-9 749 76-7 78-5 80- 2 81- 7 83- 1 84- 3 856  927 1 410 281 734 338 316 167 355 217 197  2- 3 3- 5 0- 7 1- 8 0-8 08 0-4 0-9 0-5 0-5  790 82- 5 83- 2 85-1 85- 9 86- 7 87- 1 880 88- 5 890  1 1 1 1 1 1 1 1 1 1  500-1 550-1 600-1 650-1 700-1 750-1 800-1 850-1 900-1 950-1  549 S99 649 699 749 799 849 899 949 999  436 404 368 373 349 357 327 311 266 272  1-1 1-1 10 10 09 0-9 0-9 08 0-7 0-7  86- 7 87- 8 88- 7 897 90- 6 91- 6 92- 4 93- 2 93- 9 94- 6  274 193 177 115 454 128 96 241 148 198  0-7 0-5 0-4 0- 3 1- 1 0-3 02 06 0-4 05  89- 7 90- 2 90-6 90-9 92-1 92-4 92- 6 93 2 93- 6 94- 1  415 479 304 998 287 906 191 762 788220 226 783 175 031 448 623 284 388 389 750  1-S 1- 1 10 07 2- 9 0- 8 06 1- 6 10 1-4  68- 2 69- 3 70- 4 71- 1 73- 9 74- 8 75- 4 770 780 79-5  2 0 0 0 - 2 049 2 0 5 0 - 2 099 2100-2149 2150-2199 .2 2 0 0 - 2 249 2 2 5 0 - 2 299 2 3 0 0 - 2 349 2 350-2 399 2 4 0 0 - 2 449 2 4 5 0 - 2 499  259 195 194 194 163 182. 165 169 138 124  0-7 0-5 05 0-5 0-4 0-5 0-4 0-4 0-4 0-3  95- 3 95 8 96- 3 968 97- 2 97- 7 . 98- 1 98-6 98-9 99 3  124 96 167 90 46 140 209 156 640 120  0-3 0-2 0-4 0-2 01 0-3 0-5 0- 4 1- 6 03  94- 4 946 950 95- 3 95-4 95- 7 962 96- 6 98-2 98-5  253155 200 466 355 674 196 866 103 300 318610 484 634 372 392 1 560 489 294 631  0-9 0- 7 1- 3 0-7 0- 4 1- 2 1-8 1-3 5-7 1-1  80818283838486879394-  99 75 50 33 22 6 3  0-3 0-2 0-1 0-1 01  99-5 99-7 998 99-9 1000 1000 1000  89 416 15 61 9 1  0-2 10 02  98- 7 99- 8 998 1000 1000 1000 1000  224 845 1 070 396 39164 163 666 25 421 2 029 84  0-8 39 0-1 0-6 0-1  95-3 99-2 99-3 99-9 1000 1000 1000  38 432  1000  100 0  40142  1000  1000  27-586 705  100-0  100 0  2 2 2 2 2 2 2  549 599 649 699 749 799 849 899 949 999  Passengers  Per cent  0) Under 50 SO99 1 0 0 - 149 150-199 2 0 0 - 249 2 5 0 - 299 3 0 0 - 349 3 5 0 - 399 4 0 0 - +49 4 5 0 - 499  CLASSES O F SERVICE  City pair*  5 0 0 - 2 549 5 5 0 - 2 599 6 0 0 - 2 649 6 5 0 - 2 699 7 0 0 - 2 749 7 5 0 - 2 799 8 0 0 - 2 849  A l l trips •  Less than 0-05 p e r cent,  2-  1 2  2-4 1-5 1 9 :  t  t Less than 500.  Source: C.A.B. Handbook of A i r l i n e S t a t i s t i c s , 1962.  4 1 4 1 5 6 4 7 4 5  i  TABLE XIX ACE AIRLINES SUMMARY OF ESTIMATED REVENUE, COSTS AND PROFIT For the year ending October 31, 1965 Amounts shown are I n $000*3  Domestic  Passenger Atlantic  Total  Cargo  Mail  Total  Estimated Revenues  67,000  25,212  92,212  4,500  3,500  100,213  Less Estimated Operating and D i r e c t Costs: A i r c r a f t operating S e r v i c e costs Sales costs Total  40,765  2,680 50,683  12,579 1,100 2,512 16,191  5,192 6^874  1,300 225 1,525  "550 25 575  5,442 68,974  16,317  9,021  25,338  2,975  2,925  31,238  10,|2| 18;588  850 375 1,225  475 200 675  12,248 8,240 20,488  Estimated Net Operating P r o f i t  6,750  1,750  2,250  10,750  Less I n t e r e s t Expense  2,750  Estimated P r o f i t before Taxes  4,000  Estimated Gross Operating P r o f i t Less Estimated Expenses o f : Admin. Costs Overhead Expenses Total  7,238  2,750 1,750  2,250  8,000  100 3.  D i r e c t s a l e s costs  (Chapter VI)  4.  Administration costs  (Chapter  5.  Overhead expenses  (Chapter IV)  V and VI)  The s u b t r a c t i o n of cost items 1 t o 3 , from the revenues from passenger, cargo and m a l l , provides the gross? operating p r o f i t f o r each and the t o t a l f o r the company.. A d m i n i s t r a t i o n c o s t s and overhead expenses f o r cargo and m a i l , represent those expenditures d i r e c t l y r e l a t e d t o and s o l e l y r e s p o n s i b l e f o r t h e i r a d m i n i s t r a t i o n .  The  a d m i n i s t r a t i o n f o r these two products occurs a t both the f i e l d o f f i c e l e v e l and a t the headquarters l e v e l . The e x c e s s i v e l y large operating p r o f i t before taxes on m a i l and c a r g o — A $ of t o t a l revenues and 50$ of operating p r o f i t — i s due t o the f a c t t h a t these commodities are t r e a t e d as by-products and only the added d i r e c t costs are a p p l i e d t o determine t h e i r p r o f i t a b i l i t y . RATIOS OF AIRCRAFT AND ROUTE PROFITABILITY Before proceeding t o the p r a c t i c a l uses of the a i r l i n e costs as d e s c r i b e d i n the previous chapters, a b r i e f review of t h e i r fundamental i m p l i c a t i o n s i s d e s i r a b l e . These represent a t e s t of the reasonableness and v a l i d i t y of the p r i n c i p l e s a p p l i e d t o the three prime elements of a i r l i n e costs: 1.  Operating—Based on a f i r m schedule of f l i g h t s  f o r each route and the frequency f o r each type of a i r c r a f t ,  101 the l e v e l of costs w i l l vary w i t h i n a very narrow range, and t o a l l i n t e n t s and purposes, the o v e r a l l schedule cost represents a f i x e d and committed c o s t . 2.  D i r e c t Service C o s t s — T h e elements which go t o  make up these c o s t s , p r i m a r i l y d i r e c t l a b o r , are planned f o r and c o n t r o l l e d on the b a s i s of passenger output, cargo or baggage.  There w i l l be a range of v a r i a t i o n per u n i t of  output, but the use of an average r a t e of output and  cost  per u n i t of output f o r a s t a t e d period w i l l be v a l i d f o r purposes of t r e a t i n g and using these costs as d i r e c t l y v a r i a b l e per u n i t of output. 3.  Sales Costs—Assuming that a d v e r t i s i n g e f f e c t i v e -  ness per d o l l a r of expenditure w i l l continue a t past r a t e s , and bearing In mind that the planning e n t a i l s a r e l a t i o n s h i p to planned s a l e s r e t u r n s , t h i s element w i l l be maintained a t a given f i x e d r a t e per u n i t of output, i . e . , w i l l be a variable cost. Sales commissions, assuming a f i x e d r a t e of agency sales as a percentage of t o t a l a i r l i n e s a l e s , w i l l be a t a constant r a t e per $100  of t o t a l s a l e s .  The remaining minor  element of d i r e c t s a l e s costs i s a l s o based on the r a t e per $100 of s a l e s . The remaining a d m i n i s t r a t i v e and overhead expenditures being b a s i c a l l y f i x e d or committed i n nature, are budgeted and c o n t r o l l e d a c c o r d i n g l y .  These costs are assumed t o be  s t a b l e and f i x e d over a period of time, despite the  102 occurrence of minor random v a r i a t i o n s by month. The second area of c l a r i f i c a t i o n necessary i s the measure o f passenger volume and revenues.  Passengers  include only f a r e paying customers, which w i l l Include c h i l d r e n a t h a l f f a r e , but not i n f a n t s .  Sales value per  passenger f o r a given t r i p segment which i s the p r i c e or f a r e quoted i n the a i r l i n e ' s t a r i f f s , w i l l not be used as a measure of revenue.  The sale of t r a v e l t o a passenger f o r a  t r i p Montreal t o Winnipeg on a through f a r e of $63.00, who breaks h i s journey f o r a stopover i n Toronto,*- i n e f f e c t represents two passengers and i s counted as such. I f he were i n f a c t two d i f f e r e n t passengers, the sums c o l l e c t e d would be $75.00, an Increase of $12.00 f o r the same t r a n s p o r t a t i o n provided. I n d i r e c t r o u t i n g s p e r m i s s i b l e on a d i r e c t f a r e , I n t e r l i n e p r o r a t i o n of j o i n t f a r e s , and other causes render t a r i f f values per passenger unusable f o r revenue/cost a n a l y s i s purposes. The r e a l revenue y i e l d f o r t r a v e l over s e l e c t e d route segments w i l l be used where both sales and revenues are  r e f e r r e d t o . The v a l i d i t y and r e a l i t y of these revenues  i s without q u e s t i o n , as they represent the a c t u a l money received. •^The route prorate between revenue f l i g h t sectors would be made on the b a s i s o f the one-way f u l l t a r i f f r a t e i n e f f e c t f o r the two segments—Montreal-Toronto $23.00, Toronto-Winnipeg $52.00, t o a t o t a l of $75.00: Montreal - Toronto 63 23 $19.30  ;  Toronto-Winnipeg  63  x  x  73  s  52 = $43.70  73  103 The conventional a i r l i n e Industry measure of breakdown—the passenger load f a c t o r - - i s not a v a l i d base on which t o assess the r e l a t i v e r o u t e / a i r c r a f t p r o f i t a b i l i t y . One of the l e a s t understood features of the commercial a i r l i n e i n d u s t r y are the f a c t o r s that make i t pay o f f economically. The mere f e a t of f i l l i n g up an a i r p l a n e does not a u t o m a t i c a l l y produce a p r o f i t .  As the cost c h a r a c t e r i s t i c s p r e v i o u s l y  discussed suggest, i t i s not how many passengers a r e f i l l i n g up the seats so much as how f a r they are c a r r i e d .  I t often  takes as much s e r v i c i n g of a short-haul passenger as a longhaul one. This i s g e n e r a l l y the case as the r e s e r v a t i o n and t i c k e t i n g costs f o r a passenger t r a v e l l i n g 100 miles are the same as f o r a passenger t r a v e l l i n g 1^00 m i l e s . This c h a r a c t e r i s t i c i s t r u e of a large p o r t i o n of ground operations c o s t s , customer s e r v i c e c o s t s , landing fees, etc. distance.  These items cause a sharp taper i n costs w i t h Since the range of variances i s very g r e a t , the  determination of t h i s type of information must be c a r r i e d out on an i n d i v i d u a l b a s i s . I t i s t h i s understanding of the break-even f a c t o r s i n t r a n s p o r t a t i o n — b r e a k - o v e n of costs and revenues i n terms o f a i r c r a f t type/route s e c t o r combinations, and not of an ^This i s the percentage of a v a i l a b l e seats occupied by revenue passengers. I t has wide use w i t h i n the a i r l i n e i n d u s t r y as an across-the-board measure ( a l l r o u t e s ) . When used as a t o t a l system operation measure of break-even, i t c a r r i e s the connotation of a l l f l i g h t s e c t o r s having an equivalent break-even load f a c t o r .  104 a r b i t r a r y seat load f a c t o r which g e n e r a l l y i s not taken i n t o account by management and r e g u l a t o r y bodies. The twenty-eight a i r e r a f t t y p e / f l i g h t sector combinations operated by ACE A i r l i n e s , a l l have d i f f e r e n t costs and d i f f e r e n t s a l e s p r i c e s , both of which vary on d i f f e r e n t bases f o r each route and a i r c r a f t type.  These  conditions p r o h i b i t any across-the-board assessment of t h e i r p r o f i t a b i l i t y t o the a i r l i n e . The f i x e d cost nature of a f i r m l y e s t a b l i s h e d schedule of f l i g h t s , plus the two major cost items which w i l l vary w i t h volumes of passenger t r a f f i c a t t a i n e d , provide an e x c e l l e n t base on which t o d i s c u s s the e f f e c t s of s p e c i f i c techno-economic f o r c e s and apply r a t i o s of p r o f i t a b i l i t y as w e l l as i l l u s t r a t e these e f f e c t s i n a g r a p h i c a l form.  Some  l i b e r t y has been taken w i t h the standard usage and terminology, t o take advantage of s i m i l a r terms i n use w i t h i n the a i r l i n e industry. Breakeven R a t i o - Breakeven Faetor The method of c a l c u l a t i n g t h i s r a t i o i s adapted t o show the r e l a t i o n s h i p s of passenger load f a c t o r s seat occupancy) t o the p r o f i t breakeven p o i n t .  (percentage The r a t i o  i s based on the d i r e c t s a l e s and s e r v i c e costs and the a i r c r a f t operating eosts which i n c l u d e an a l l o c a t i o n of 40$ t o cover a d m i n i s t r a t i o n , overhead and i n t e r e s t expense.  The type of a n a l y s i s i n v o l v i n g t h i s r a t i o i s used t o i n d i c a t e p r o f i t c o n t r i b u t i o n under v a r y i n g load f a c t o r s and a l s o i s used i n planning as supporting data f o r r e g u l a r p e r i o d i c reviews.  I t i s a valuable t o o l as i t measures the  c o n t r i b u t i o n towards f i x e d costs as w e l l as t o p r o f i t . I t s value r e s t s p r i m a r i l y I n spurring studies i n t o ways of improving s p e c i f i c route costs and i n the s e l e c t i v e use o f a i r c r a f t type by r o u t e . The breakeven r a t i o has been t i t l e d the Breakeven Factor.  I t i s expressed i n revenues, passengers and the  passenger load f a c t o r e q u i v a l e n t . Gross Operating P r o f i t C o n t r i b u t i o n Factor (G.O.P.) This r a t i o i n d i c a t e s the r e l a t i o n s h i p s of passenger load f a c t o r s t o a breakeven p o i n t excluding eompany overhead eosts.  As c e r t a i n i n t e r - c l t y high volume routes are  marginal i n terms of t h e i r net p r o f i t a b i l i t y , and even more important, because of the large c o n t r i b u t i o n they make t o company overhead, the breakeven concept I s used t o r e f l e c t the r e l a t i v e gross operating p r o f i t c o n t r i b u t i o n of each route and a i r c r a f t combination.  As w i t h the Breakeven  F a c t o r , the r a t i o i s expressed i n revenues, passengers arid the passenger load f a c t o r e q u i v a l e n t . The b e n e f i t s of t h i s method are s i m i l a r t o those of the Breakeven F a c t o r .  The a b i l i t y t o p i n p o i n t t r o u b l e spots  and generate a c t i o n i n s e l e c t i v e areas can g r e a t l y ease  106 workload and Increase the e f f i c i e n c y i n the use of management time.  Two f l i g h t sectors (Montreal-Toronto and  Toronto-  Winnipeg) f o r each of the three a i r c r a f t types are used t o compile each of the r a t i o s o u t l i n e d above.  Tables XXI and  XXII and Figures 4, 5 and 6 i l l u s t r a t e the Breakeven Factor and Tables X X I I I and XXIV and Figures 7, 8 and 9 i l l u s t r a t e the G.O.P. F a c t o r .  Table XX shows the a i r c r a f t operating  costs and the d i r e c t s a l e s costs are those shown i n Table XVII. XVI.  The d i r e c t s e r v i c e costs are those l i s t e d i n Table The f l i g h t s used i n the examples are assumed t o be  non-meal f l i g h t s . Probably the major b e n e f i t s of these two a n a l y s i s methods w i l l be those a c c r u i n g i n the area of planning. Previous references were made t o the cost savings a r i s i n g from s m a l l f r a c t i o n a l savings i n the costs of o p e r a t i n g . These savings l i e b a s i c a l l y i n the areas of schedules design and the s e t t i n g of f a r e s f o r obvious reasons.  In  design of a i r l i n e schedules, needs other than cost have p r i o r i t y , i n c l u d i n g the s a f e t y and l e g a l operating r e q u i r e ments.  The p r o v i s i o n of s e r v i c e t o meet customer needs,  ground and a i r c r a f t c a p a c i t y l i m i t a t i o n s , and the l i c e n s e d routes operated, a l l conspire t o present d i f f i c u l t i e s t o r e a l i z i n g cost r e d u c t i o n s .  TABLE XX COMPARATIVE ROUND TRIP ROUTE SECTOR OPERATING COSTS BY AIRCRAFT TYPE F l i g h t Sectors: Toronto-Montreal and Toronto-Winnipeg Toronto-Montreal Viscount Vanguard  DC-8  Toronto-Winnipeg Viscount Vanguard  DC-8  Route Mileage A i r c r a f t Block Speed MPH A i r c r a f t Miles Seats Produced Seat M i l e s Produced (ooo»s)  326 222 652 100 32,600  326 267 652 220 71,720  326 UO 652 300 97,800  941 266 1,882 100 94,100  941 333 1,882 220 207,020  94-1 424 1,882 300 282,390  D i r e c t F l y i n g Costs: Crew Fuel D i r e c t Overhaul T o t a l D i r e c t F l y i n g Costs  176.40 196.94 78.00 451.34  I83.OO 304.96 I89.OO 676.96  I89.OO 651.80 239.36 l,080.l6  424.80 424.16 202.20 1,051.16  424.50 654.20 478.80 1,557.50  399.60 1,396.80 557.60 2,354.00  Cabin Crew Landing Fees D i r e c t A/C Grnd Hndlg T o t a l D i r e c t Operating Costs  52.92 30.00 81.00 615.26  85.40 86.00 81.00 929.36  100.80 186.00 146.00 1,512.96  127.44 30.00 83.00 1,291.60  198.10 86.00 83.00 1,924.60  213.12 186.00 150.00 2,903.12  Overhaul Burden Depreciation & Insurance T o t a l Operating Costs  54.86 146.00 8l6.12  181.13 394.06 1,504.55  198.55 537.18 2,248.69  142.21 378.45 1,812.26  458.85 914.10 3,297.55  462.52 1,135.75 4,501.39  $0,944 I.8870  $1,425 I.2960  $2,320 1.5470  $0,686 1.3730  $1,023 0.93#  $1,543 1.0280  $1,252 2.5030  $2,308 2.098$?  $3,449 2.2990  $0,963 1.926tf  $1,752 1.5930  $2,392 1.5950  D i r e c t Operating Cost Per A i r c r a f t M i l e Per Seat M i l e T o t a l Operating Cost Per A i r c r a f t M i l e Per Seat M i l e  o  108 TABLE XXI MONTREAL TORONTO FLIGHT SECTOR BREAKEVEN FACTOR  Per Passenger  $23.00  Fare Yield Sales Cost (4% o f $23.00 S e r v i c e Cost  21.30  .92  4.25  BREAKEVEN FACTOR A i r c r a f t Sector T o t a l Operating Cost + 40# Psgr. Y i e l d Less D i r e c t S a l e s and S e r v i c e Costs  DC-8 2248.69 2  2248.69 _  +  -  21.30  40 100  2  5.17  IgijH  - 98 =  Ps  g r s  .  6|# Load F a c t o r  VANGUARD 1504.55 2  21.30 1 0  1504.55 2  +  x  40 100°  -  5.17  ft-l?  =  65 P s g r s .  =  59$ Load F a c t o r  16.13 VISCOUNT 83,$. 1 3  816.13  +  2  21.30  2  x  _42  100  5.17  -  571«28 = 35 P s g r s . =  70% Load F a c t o r  BREAKEVEN FACTORS P s g r . Revenue  DC-8 Vanguard Viscount  $2087.40 $1384.50 $ 745.50  Passengers  98 65 35  Load F a c t o r  65# 59# 70%  109  TABLE XXII TORONTO-WINNIPEG FLIGHT SECTOR BREAKEVEN FACTOR  Per Passenger $52.00 47.94 2.08 4.25  Fare Yield Sales Cost (4JG of $52.00) Service Cost BREAKEVEN FACTOR  Aircraft Sector Total Operating Cost + Psgr. Yield Less Direct Sales and Service Costs DC-8  4501.39 2 47.94  -  3 ? -? 41.61 1  4501.39 2 6.33  +  0  8  _40 100  x  = 76 Psgrs. =  5l# Load Factor  VANGUARD 2 47.94 2  2_ 6.33  -  30 -26 41.61 8  100  = 55 p grs. S  = 50# Load Factor  VISCOUNT 1812.26 2 52.00  + -  ;? 41.61  1 2 6 8  1812.26 2 6.33  x  _4Q  = 30 Psgrs.  8  = 60% Load Factor  BREAKEVEN FACTORS DC-8 Vanguard Viscount  Psgr. Revenue  Passengers  Load Factor  $3307.86 $2444.94 . $1342.32  76 55 30  5U* 505G 605?  111 FIGURE  5  MONTREAL - TORONTO FLIGHT SECTOR BREAK-EVEN FACTOR  VANGUARD  20% .  ;  kO%  60%  60%  • 100%  PASSENGER LOAD FACTOR•  FIGURE  112  6  MONTREAL - TORONTO FLIGHT SECTOR BREAK-EVEN FACTOR VISCOUNT  20%  UO%  60%  80%  •  100%  PASSENGER LOAD FACTOR .  TABLE X X I I I MONTREAL TORONTO FLIGHT SECTOR G.O.P. FACTOR  GROSS OPERATING PROFIT CONTRIBUTION FACTOR: A i r c r a f t Sector T o t a l Operating Cost , " Psgr. Y i e l d Less D i r e c t Sales and S e r v i c e Costs DC-8 2248.69 2 21.3© - 5.17  16.13  -  70 Psgrs.  =  47^ Load Factor  VANGUARD 1504.55 , 2, 21.30 - 5.17  a  752.28  16.13 =  47 Psgrs.  =  43$ Load Factor  =  408.06  =  25 Psgrs.  =  50$ Load Factor  VISCOUNT 816.12 2 2 1 . 3 0 - 5.17  16.13  GROSS OPERATING PROFIT CONTRIBUTION FACTORS Psgr. Revenue DC-8 Vanguard Viscount  $1491.00 $1001.10  $ 532.50  Passengers 70 47 25  13^  114 TABLE XXIV TORONTO-WINNIPEG FLIGHT SECTOR G.O.P. FACTOR  GROSS OPERATING PROFIT CONTRIBUTION FACTOR A i r c r a f t Sector T o t a l Operating Cost Psgr. Y i e l d Less D i r e c t Sales and Service Costs DC-8  4501.39 2 ... 47.94 - 6.33  =  2250.70 41.16  =  54 Psgrs.  a  36$ Load Factor  VANGUARD 3297.55 2 47.94 - 6.33  =  1648.76 41.61  =  40 Psgrs.  =  36$ Load Factor  =  906.13 41.61  =  22 Psgrs.  =  44% Load Factor  VISCOUNT.  1812.26 2 47.94 - 6.33  GROSS OPERATING PROFIT CONTRIBUTION FACTORS Psgr. Revenue DC-8 Vanguard Viscount  $2349.06 $1725.84 $ 958.80  Passengers  Load Factor  54 40 22  44  36  115  7  FIGURE  MONTREAL - TORONTO FLIGHT SECTOR G.O.P, FACTOR DC-8  REVENUES AND COSTS  i  - ! 1  1  I I 1 rr T T j  1  1  1  --  T  1 |  1  —r IL 4IjI_  -  --  1 1  1  !  1  $3000  1  ' 1  1  -  -  --  1  --- - r  --  -  -  -  1  y  1  -1  -- - --  --  1  -  ~  i t i t 12 REVENUES' .4/f-I  jI 1  I  1  -  -  -•  1  !  ziz~  i  1  j$2000  -  -- -1  -  -  _L - I ! —  -  -  --  -  -  1  $1000  --  - -- -  1 1  1  1  ......  -  X  1  -_ _ . J  M  —  1  -l-f  1  - _M  r 1  I  1 r*  — __  --  M i l  15  -45--  1  ]  1_ _ t_ r  ' m'~  i  Ii  ! 1 |  i 1  \  i n  f1 1  !  itH§"tTTiT T -j. i 1 IS 1 1\\1 \\ i, ! 1 |. 1  ±±1 X  _  ]  1 I 11J  4-1/ *x  r1  i t  1 1  ^  1 -- —)/r  1  1 1  i  ...  ^  ! 1 4 4-1  1 44  -- - T -  ^  M  -  - 1 ! I  j .  --  - 1 - - - 1 ix - -- r - X J i - i. -- r\ .1... T._ _L l l _ -M 1 y 4 j ! i '1 •"iyxSr l  i .  1!1 • 1 1 i,, 1  1 1 1  i i1  — .  1  •1  -  4'and SERVICE COSTS •1 ;  -  -- -  !  .. l.I.. .  -  rCOn/ir T UrlLKAIllMU — -  1  OUOTO  ) r-  -  --  1  | |  1  1  -- 1  1i 1 1 1-  r  j r1  4-/4 4-l-ii 1 n 4 • i 1 —; 1 ! X \ i 1 1 1 " i t _ J I t i 1 i !1 +H- 4fi§: 1 1 j I 1' • 1 1r 1 1 L.L 444_|. •ri-tx 1 1x i : j | : ! i I 4. J- 1 . .i. .'. .i. ffi r .. ._ i 11 ni 4M .LJ...L.I. 4 if: -M-I5 M ' /..:..x. 1 4-P i •7 n T i t M r• A M I . 1 " MM M M  f  M__L.i_ M M J I M  -1  -  ±  20%  U0%  60%  B0% . • 100%  PASSENGER LOAD FACTOR  116 FIGURE  8  MONTREAL - TORONTO FLIGHT SECTOR G.O.P. FACTOR VANGUARD  117 9  FIGURE  MONTREAL - TORONTO FLIGHT SECTOR G.O.P. FACTOR VISCOUNT  1  REVENUES AND COSTS  I i i  1  -  _ i _ —t— 1 i  i  1 I  1  -  -  --  -  -  1  -  -  i  -  -- -  -  •••  -  --  -  -- -  ---  -  1  $1,000  - --  --  1  -  -  -  -  -  --  1  i  .1.  J. :  J  -- -  --  $500  A T F. R • i 1  J J  ana bii.ttVJ.UJi; COSTS "T • ; 'i i T~I-1  r  !  ...J :  TVTRF.("!T  -  1  1  i  i .  - - - --  REVENUES - /~ r  -  1  -  -  -- - - - - _ ii _ i 1  -  1  -  -  ~r  -  i  -  -  -  ! i  --  - - --- -  - --  --  - _ j _i  -  ---  -  --  --  -  ---  -- -  - -  -  _  -  -  -  - - -- -  -  -- -  --  -  --  -  r  I  -  - --  --  i  i 1 I I  -  1  -  -  ~h Y  -  -  -  -  -  —  -  --  -  r  /  / i  -  i 1  J  AIRCRAFT  4 OPERATING  ,7it  COSTS  TT  ± _  - ! - L  _4-  ho%  60%  80%  100%  PASSENGER LOAD FACTOR  118 However, as mentioned at the beginning of t h i s chapter, there are many areas remaining i n which cost i s a decisive factor.  The p r o v i s i o n of more d i r e c t s e r v i c e  j u s t i f i e d by an equivalent or improved gross p r o f i t c o n t r i b u t i o n r a t e are i n the best i n t e r e s t s of the a i r l i n e and would c e r t a i n l y be welcomed where poor route s t r u c t u r e s are evident—the  case g e n e r a l l y f a c i n g a l l r e g i o n a l c a r r i e r s .  Pares are another area which bound w i t h r e s t r i c t i o n s and l i m i t a t i o n s : i n t e r l i n e p r o r a t i n g of common f a r e s , i n t e r n a t i o n a l f a r e s subject t o other governments' approvals,  but  w i t h i n which there are areas where s u f f i c i e n t l a t i t u d e f o r action exists.  In summary, despite these recognized  factors,  areas of f l e x i b i l i t y do e x i s t which provide scope f o r the of meaningful cost  use  information. CARGO CONSIDERATIONS  ACE A i r l i n e s operates i t s a i r c r a f t f l e e t i n f u l l passenger c o n f i g u r a t i o n , and f l i g h t s are scheduled i n a l l cases on the b a s i s of passenger demand.  In cases of  i r r e g u l a r operating c o n d i t i o n s , n e c e s s i t a t i n g blocked space for  extra f u e l — m a i l and cargo r e c e i v e the lowest p r i o r i t y .  Their c a r r i a g e i s therefore on the b a s i s of i d l e weight space, whose cost w i l l be i n c u r r e d whether used f o r cargo or m a i l , or flown empty.  Should mixed passenger and cargo  a i r c r a f t be purchased, a p o r t i o n of a i r c r a f t operating  costs,  excluding passenger s e r v i c e , cabin crew and r e l a t e d c o s t s ,  119 would be a l l o c a t e d t o cargo.  The a l l o c a t i o n would be made  on the b a s i s of equivalent passenger seating displacement. For example, w i t h a f u l l passenger seating c o n f i g u r a t i o n of 150, and a mixed c o n f i g u r a t i o n of 100 passengers and weight space f o r cargo, 50/15© ot the a p p l i c a b l e operations cost would be charged t o cargo. Mixed passenger and cargo c a r r i e r s have an advantage over a l l - c a r g o c a r r i e r s i n the number of schedules o f f e r e d as every passenger a i r c r a f t can p o t e n t i a l l y h a u l f r e i g h t . The a l l - c a r g o c a r r i e r s are l i m i t e d i n comparison. The r e a l advantage of a passenger a i r l i n e i n f r e i g h t movement l i e s i n the nature of t h e i r incremental c o s t s . When f r e i g h t i s handled on passenger a i r c r a f t , i t can be t r e a t e d as a by-product o f passenger s e r v i c e and w i l l a v o i d any d i r e c t t r a n s p o r t a t i o n charges.  The only charges t h a t  t h i s t r a f f i c w i l l bear are the t e r m i n a l charges a t the beginning and end of the f l i g h t . The d e c i s i o n of whether t o operate a l l - c a r g o or passenger and cargo a i r c r a f t I s one which can be more e a s i l y determined w i t h accurate c o s t i n g and p r i c i n g i n f o r m a t i o n . N a t u r a l l y the two types of a i r c r a f t are ( i n a sense) i n competition w i t h each o t h e r — o n e using a l l cargo a i r c r a f t and the other using mixed passenger and cargo a i r c r a f t . The existence of c o m p e t i t i o n between the two types of c a r r i e r s depends upon the presence of a homogeneous market. I f there i s cross e l a s t i c i t y of demand and supply among the  120  c a r r i e r s , then the market i s s a i d t o be homogeneous. Evidence of t h i s can be found i n the t a r i f f s charged as there i s u s u a l l y no appreciable d i f f e r e n c e s i n r a t e s .  While some  t e c h n i c a l d i s t i n c t i o n s are made i n maximum s i z e s ,  schedule,  speed and frequency, no p r i c e d i s t i n c t i o n s a r e made by the c a r r i e r s o f f e r i n g both types of s e r v i c e . This same homogeneity i s evidenced on the demand s i d e f o r the two elasses of c a r r i e r s .  Shippers are p a r t i c u l a r l y s e n s i t i v e  to r a t e d i f f e r e n c e s and t h i s i s r e f l e c t e d i n intense competition shown by c l o s e l y matched p r i c e l i s t s i n the carriers' t a r i f f s .  I n summary, there i s l i t t l e d i s t i n c t i o n  i n the market between the two types of s e r v i c e and they can be considered t o be i n d i r e c t competition w i t h each other. As mentioned p r e v i o u s l y , the cost of moving f r e i g h t f o r a passenger a i r c r a f t I s l e s s than f o r an a l l - c a r g o a i r craft.  The cost f o r an a l l - c a r g o a i r c r a f t includes not  only the t e r m i n a l c o s t s , but a l s o the costs of operating the a i r c r a f t .  These i n c l u d e crew s a l a r i e s , f u e l , maintenance,  insurance and d e p r e c i a t i o n as o u t l i n e d e a r l i e r .  These c o s t s  vary w i t h the type of a i r c r a f t flown, the route s e c t o r mileage and the a i r l i n e ' s operating and maintenance policies.  Costs vary a l s o w i t h the volume of t r a f f i c and  thus become incremental i n the sense that they are proportionate t o the amount of f r e i g h t c a r r i e d .  3  ^An incremental eost i s the cost Incurred f o r the next u n i t of output.  121 I f i t i s not a by-product of passenger s e r v i c e , a shipment w i l l i n c u r d i r e c t costs of t r a n s p o r t a t i o n from one a i r p o r t t e r m i n a l t o another, plus a p o r t i o n of the t e r m i n a l cost which can be charged t o that p o r t i o n of t r a f f i c .  In a  longer view, the cost of a i r f r e i g h t includes not only these d i r e c t l y i n c u r r e d expenses, but other costs such as s a l e s , a d m i n i s t r a t i o n and other overhead expense items which are i n d i r e c t l y r e l a t e d t o the a i r f r e i g h t side of the a i r l i n e business. The importance of the incremental cost eoncept then i s i n t r a c i n g the way i n which these costs behave w i t h changes i n the volume of t r a f f i c .  The costs of passenger  a i r l i n e s d i f f e r from those of the a l l - c a r g o a i r l i n e s beeause of the by-product element of f r e i g h t on passenger a i r l i n e s . As an a i r l i n e develops f r e i g h t t r a f f i e , i t w i l l f i r s t seek t o u t i l i z e i t s lowest cost c a p a c i t y , i . e . , the c a p a c i t y a v a i l a b l e on i t s passenger a i r c r a f t .  4  Because of package  s i z e r e s t r i c t i o n s , l i m i t e d schedules o f f e r e d a t the most opportune times f o r f r e i g h t movements, and the low revenue p r i o r i t y f o r f r e i g h t as compared t o m a i l , express, and baggage, t h i s immediate c a p a c i t y may be f i l l e d before demand i s s a t i s f i e d , and then the c a r r i e r must e i t h e r convert to more f r e i g h t c a p a c i t y or t o some a l l - e a r g o a i r c r a f t t o  ^ P o t e n t i a l l y t h i s can represent a large amount of a v a i l a b l e l i f t . Each Douglas DC-8 has a baggage compartment c a p a c i t y of approximately 14,000 pounds.  122 supplement the s e r v i c e o f f e r e d on the mixed c o n f i g u r a t i o n aircraft. To summarize, the Incremental cost of c a r r y i n g f r e i g h t f o r the passenger a i r l i n e s has two s t e p s .  The f i r s t  r e f l e c t s the lower cost o f by-product c a p a c i t y .  The second  i s where a l l - c a r g o c a p a c i t y i s used and therefore shows higher c o s t .  The tendency then i s t o minimize the use of  a l l - c a r g o equipment.  However, w i t h increases I n f r e i g h t  t r a f f i c which do not f i t the passenger schedules or where no more c a p a c i t y i s a v a i l a b l e , schedules must be met by the use of a l l - c a r g o a i r c r a f t . For the a l l - c a r g o a i r l i n e s , costs can be p r o j e c t e d more e a s i l y .  A l l changes i n the volume of t r a f f i c are  r e f l e c t e d e v e n t u a l l y i n changes i n a i r c r a f t miles flown, and the costs are d i r e c t l y proportionate t o the t r a f f i c . For both c a r r i e r groups i t appears that changes i n a i r f r e i g h t volume independent of other demands r e q u i r e the use of a l l cargo equipment.  This i m p l i e s p a r a l l e l  incremental costs of f r e i g h t operation r e f l e c t i n g the use of high operating cost resources.  I f by-product and a l l -  cargo costs are averaged f o r each c a r r i e r , the passenger a i r l i n e s c l e a r l y have lower costs because t h e i r average costs i n c l u d e the f i r s t step of by-product c a p a c i t y .  The  r e l e v a n t costs f o r management d e c i s i o n making, however, are not the averages but the costs of supplying the next u n i t of c a p a c i t y which are the incremental costs of a l l - c a r g o s e r v i c e .  123 Cos.t-Rftte R e l a t i o n s h i p s Now  that a f u r t h e r onus f o r c o s t i n g i n f o r m a t i o n has  been placed upon a i r c a r r i e r s , b r i e f c o n s i d e r a t i o n of s p e c i f i c techno-economic forces a c t i v e on a i r cargo c a r r i e r s w i l l be given.  Such f a c t o r s as c o s t , r a t e , u t i l i z a t i o n and  p r o f i t w i l l be i n c l u d e d . Short Run,.  I n the short run (tomorrow, next week or  next month) an a l l - c a r g o c a r r i e r i s faced w i t h : 1.  a given f l e e t s i z e  2.  a given f l e e t  3•  a c e r t a i n cargo volume hauled under a f i x e d  composition  schedule and r a t e s t r u c t u r e 4.  some f l e x i b i l i t y t o vary schedules, hours, and thereby costs and  profits.  The data given i n Table XXV summarize i n s i m p l i f i e d form some of the important cost elements f a c i n g an a l l - c a r g o c a r r i e r i n the short run. from the C r i l l y Report.-*  The cost elements shown were taken They are r e l a t e d t o the costs of  passenger operations p r e v i o u s l y o u t l i n e d i n nature and format and are r e p r e s e n t a t i v e of t y p i c a l costs of an a l l - c a r g o carrier.  ^ C r i l l y , W i l l i a m M., The I n d i r e c t Operating Costs of Commercial A i r Cargo T r a n s p o r t a t i o n . Planning Research Corporation, Los Angeles, C a l i f o r n i a , November 1955-  TABLE XXV TYPICAL SHORT-RUN COST ELEMENTS FOR AN ALL-CARGO OPERATION  COST ELEMENTS  300 0/ATM  F l y i n g Costs Crew Fuel Maintenance Insurance Depreciation T o t a l F l y i n g Costs Landing Costs T o t a l D i r e c t Operating Costs F l y i n g & Ground Op. Overhead Exp. S t a t i o n Ground Operating Exp. Cargo Loss and Damage Expense Ground & I n d i r e c t Maint. Expense Merchandising Expense General & Adm. Expense Ground Equip. Deprec. Expense Total T o t a l Operating Costs Revenue Ton-Miles/Week A v a i l a b l e Ton-Miles/Week Load Factor  £/RTM  UTILIZATION (HR/WEEK) 500 590 hrs./wk. £/ATM £/RTM £/ATM £/RTM  1.60 3.54 1.60 1.26 4.43  2.68 5.94 2.68 2.12 7.44  1.60 3.54 1.60 .76 2.66  .47 12.90  .79 21.65.  .47 10.63  .73 16.40  .36 .50 .05 .96 .47 1.91 .16 4.41  .60 .84 .08 1.61 .79 3*20 .27 7.39  .36 .50 .05 .96 .47 1.14 .09 3-57  .56 .7°' .Oo 1.49 '73 1.77 .14 5.55  14.20  21.95  17.31 558000 935000 59.7  29.04  t  '  1010000 1560000 o4.5  2.48 5.50 2.48 1.18 4.13  1.60 3.54 1.60 .64 2.25 .47 10.10 .36 .50 .05 .96 .47  2.48 5.47 2.48 0.99 3.48 0.72 15.62  3.39  0.55 0.77 0.08 1.49 0.72 1.50 0.12 5.23  13.49.  20.85  [ol  1187420 1840000 64.6  700 */ATM  1.60 3.54 1.60  tf/RTM  900 #/ATM tf/RTM  2.74 6.05 2.74 .92 3.24  1.60 3.54 1.60  .47 .80 9.64 16.49  .47 9.11  .62 .86 .09 1.64 .80 1.40 .12 5.53  .36 .50 .05 .96 .47 .64 .05 3.03  1.89  .36 • 50 .05 .96 .47 .82 .07 3.23  12.87 2 2 . 0 2 1275000 2180000 58.5  .42  3.33 7.36  1.48  12.14  3.08 18.95 .75 1.04 .10 2.00 .98 1.33 .10 6.30 25.25  1350000 2810000 48.1 •1^  12?  As can be seen from the data given i n the t a b l e , a c a r r i e r has some f l e x i b i l i t y t o vary the cost s t r u c t u r e i n the short run by varying the hours o f operation. The d e t a i l e d data given i n Table XXV i s summarized i n g r a p h i c a l form i n Figure 10.  Note the d i m i n i s h i n g returns  that occur w i t h an increase i n f l e e t u t i l i z a t i o n i n the short run; and the r e l a t i o n s h i p of t o t a l u n i t costs (cost per revenue ton mile) t o the load f a c t o r which i n t u r n i s r e l a t e d to f l e e t u t i l i z a t i o n i n a given market w i t h a given f l e e t composition. To c a r r y t h i s a n a l y s i s a l i t t l e f u r t h e r , c e r t a i n of the cost elements i n Table XXV and Figure 1© were projected onto a market element background i n Figure 11.  The curve  RTMC i s a p l o t of the revenue ton-mile cost taken from the data i n Table XXV.  I t gives an i n d i c a t i o n of the v a r i a t i o n  of t o t a l u n i t cost i n the short run over a span o f revenue ton-mile production r a t e s corresponding t o 300-900 hours of operation f o r the s p e c i f i c a l l - e a r g o f l e e t being  considered.  The curve MG i n Figure 11 depicts the incremental cost of producing a revenue ton-mile over the production ranges shown.  Curve MC I n t e r s e c t s curve RTMC a t the minimum. I n  e f f e c t , MC, r e f l e c t s the instantaneous r a t e o f change o f t o t a l cost over a d i f f e r e n t i a l change I n production. The curve AR I n Figure 11 depicts the average revenue r a t e which the c a r r i e r e n j o y s — i t i s the demand curve f a c i n g the c a r r i e r .  Obviously premium goods w i l l c a r r y the highest  FIGURE l Q  126  PRODUCTION/COST RELATIONSHIPS FOR AN ALL-CARGO OPERATION AVAILABLE TON MILES PRODUCED (MILLIONS)  LOAD FACTOR  PRODUCTION 1  I 1  1 1 1 t*  1  1 1 I  y  1 1  «•  L»  »•»•  -  -  «• »• »•  *  •*  ' 1  1  1  -  --  -  —  -  •* 1  1  1  *•  .« •< •«  •>  1  >•  •  »'  »' •  T  i«-  ._•  10% ••  So%  1  RE VEIN MI 1 i  :.«!^ I."  i "*  1  * *  -  --  1  rl 1 I-1200! i  -- --  i  1 —t  iiOO  600  . 800  1000  FLEET UTILIZATION - HOURS / WEEK  TOTAL OPERATING COSTS PER REVENUE 1TON MILE i30«S  LOAD FACTOR  COSTS  200  i+OO  •  600  800  FLEET UTILIZATION - HOURS / WEEK  1000  FIGURE 11  127  COST/RATE RELATIONSHIPS FOR AN ALL-CARGO CARRIER  0  200  k o o 6 0 0  / ; . ' • 8 0 0 PRODUCTION  1000 (RTM)  128 r a t e s and goods of secondary importance w i l l c a r r y lower  and  lower r a t e s . The curve MR i n Figure 11 d e p i c t s the incremental revenue r a t e over the volume of goods which could be  hauled—  the marginal revenue. From the data compiled i n Figure 12 i t i s shown t h a t the c a r r i e r should operate a t p o i n t E where curve MC i n t e r s e c t s MR i n order t o maximize p r o f i t s .  I f the c a r r i e r operates a t  the point of minimum cost F i t w i l l reduce the p r o f i t of the operation.  I n other words the c a r r i e r should r e j e c t a l l  f r e i g h t a v a i l a b l e t o him a t r a t e s below p o i n t A even though acceptance of t h i s a v a i l a b l e f r e i g h t would lower h i s net operating c o s t s . Lone Run.  This type of a n a l y s i s can a l s o be used f o r  long run considerations as over a long time span the a i r cargo c a r r i e r can assume t h a t : 1.  a i r cargo volumes w i l l go up s i g n i f i c a n t l y as mentioned i n recent w r i t i n g s  2.  f l e x i b i l i t y w i l l e x i s t t o change the s i z e and composition of a i r cargo f l e e t s  3.  reductions i n c o s t s accompanied by reductions i n r a t e s should a c c e l e r a t e the volume of a i r - c a r g o moved.  ^Brewer, Stanley H., A i r Cargo Future. Boeing A i r p l a n e Company, Transport D i v i s i o n , Renton, Washington, I960.  FIGURE  129  12  PROFIT RELATIONSHIPS FOR AN ALL-CARGO CARRIER  PRODUCTION  (RTM)  130 The data presented i n Figure 13 d e p i c t the impact of a long r u n growth trend i n a i r cargo movement under c o n d i t i o n s of f i x e d cost and r a t e s t r u c t u r e s . I t can he seen that i f the volume of a i r cargo moved i n a l l commodity c l a s s e s increases a t constant commodity r a t e s , then the volume hauled f o r a s p e c i f i c c a r r i e r w i l l increase from p o i n t E t o point E  1  profit.  i n Figure 13 t o maintain the p o s i t i o n of maximum The demand curve AR and the incremental revenue  curve MR are forced i n the d i r e c t i o n ARG and MRG through growth i n a i r cargo volume.  A l l commodities formerly  hauled a t r a t e s below A*" would be r e j e c t e d under the expanded operating c o n d i t i o n s .  I n expanding operations from E t o E^  p r o f i t s would increase t o  AIMNB*.  I n the long r u n i t i s expected that f l e e t s i z e s and composition w i l l change, t h e r e f o r e , the cost s t r u c t u r e of the a i r cargo Industry and of the c a r r i e r s composing the Industry w i l l change over time.  Competitive f o r c e s w i l l  tend t o push curve RTMC of Figure 13 down and t o the r i g h t . Curve MC would f o l l o w and a l s o s h i f t t o the r i g h t .  The  r e s u l t i n g decreases i n r a t e s w i l l tend t o r e s t r i c t the movement of curves MR and AR t o p o s i t i o n s as high as MRG and ARG.  FIGURE  H  131 GROWTH RELATIONSHIPS FOR AN ALL-CARGO CARRIER. (Under F i x e d C o s t / R a t e S t r u c t u r e s )  PRODUCTION (RTM)  132 AIRCRAFT SCHEDULING AND FARES I n the preceding s e c t i o n s of t h i s chapter both economic forces and break-even p o i n t s as they r e l a t e t o planning were discussed and now an example (using the data on Montreal-Toronto and Toronto-Winnipeg f l i g h t sectors by a i r c r a f t types) w i l l be given t o show how schedules and f a r e s are i n v o l v e d I n planning.  I t w i l l I n d i c a t e how  e f f e c t i v e schedules can reduce c o s t s , provide b e t t e r s e r v i c e and as a by-product improve the gross operating p r o f i t c o n t r i b u t i o n on e x i s t i n g r o u t e s . The purpose of the a n a l y s i s i s t o determine the revenue, cost and p r o f i t i m p l i c a t i o n s of a d i r e c t s e r v i c e between Montreal and Winnipeg.  DC-8  At present these  passengers are r e q u i r e d t o t r a v e l v i a Toronto, and i t i s proposed t o route one of the DC-8 f l i g h t s d i r e c t t o Winnipeg.  The d e t a i l of the f l i g h t sector costs by a i r -  c r a f t type are shown i n Table XX.  There are 850 passengers  per day t r a v e l l i n g i n each d i r e c t i o n between Montreal and Toronto i n a d d i t i o n t o 150 passengers per day t r a v e l l i n g i n each d i r e c t i o n between Montreal and Winnipeg.  There are  a l s o 350 passengers per day t r a v e l l i n g i n each d i r e c t i o n between Toronto and Winnipeg (excluding the 150 between Montreal and Winnipeg a l r e a d y mentioned). Table XXVI i l l u s t r a t e s the magnitude of the improved y i e l d per passenger which w i l l r e s u l t from the d i r e c t  133  TABLE XXVI EXISTING AND PROPOSED REVENUES AND YIELD  Montreal-Toronto Psgrs Return Revenue  Toronto-Winnipeg Psgrs Return Revenue  Existing Mtl-Tor  850  $23.00 $19,550.00 350  Tor-Wpg Mti-Wpg  150  Total  1000  19.30  Y i e l d - Per Psgr - %  2,895.00  150  $22,445.00  500  $52.00 $18,200.00 43.70  6,550*00 $24,755.00  $22.45 97.6%  $  49.51 95.2%  $47.200.00  T o t a l E x i s t i n g Revenues Proposed, Mtl-Tor  850  $23.00 $19,550.00 350  Tor-Wpg  $52.00 $18,200.00  Mtl-Wpg v i a Tor  75  19.30  Total 925 Y i e l d - Per Psgr - %  1,447.50  75  $20,997.50 $22.70  425  98.7$  Mtl-Wpg D i r e c t 75 $ 6 3 . 0 0 Y i e l d - Per Psgr - %  43.7Q  3,277.50 $21,477.50 $ 50.51 97.1$  $4,725.00  $63.00 100$  T o t a l Proposed Revenues  $47.200.00  134 r o u t i n g of one f l i g h t .  The improved y i e l d per passenger on  the two f l i g h t sectors w i l l be: Montreal-Toronto sector  -  1.1$  Toronto-Winnipeg sector  -  1.9$  The t o t a l passenger flows and revenues are the same except f o r the DC-8 d i r e c t j e t s e r v i c e which now w i l l c a r r y 75 passengers d i r e c t from Montreal t o Winnipeg.  Of the  e x i s t i n g 150 passengers per day t r a v e l l i n g i n each d i r e c t i o n between Montreal and Winnipeg, only the 75 as shown are expected to use the d i r e c t s e r v i c e .  The remainder, because  of inconvenient departure time, w i l l continue t o t r a v e l v i a Toronto. Since what i s a c t u a l l y o c c u r r i n g i s a change I n the schedule, the d i r e c t operating costs can be used t o determine the change i n cost l e v e l s .  The d i r e c t f l i g h t  w i l l r e s u l t i n a decrease of a i r c r a f t b l o c k hours and t a k e o f f t o touchdown hours (which r e s u l t s i n a d i f f e r e n t a l l o c a t i o n t o the f i x e d cost overhaul burden and depreciation/insurance c o s t ) and the d i r e c t operating cost excludes these items. The r e s u l t i n g annual saving i s $249,314.00 as shown by Table XXVII. The d i r e c t s e r v i c e , Montreal-Winnipeg, permits a more d i r e c t r o u t i n g , w i t h a saving i n a i r c r a f t m i l e s from 1,267  v i a Toronto t o 1,180  m i l e s on a d i r e c t f l i g h t .  A  comparison of d i r e c t operating seat costs f o r each r o u t i n g f o r a Montreal-Winnipeg passenger shows:  TABLE XXVII EXISTING AND PROPOSED DIRECT OPERATING COSTS  EXISTING DC-8 Round T r i p D i r e c t Operating Cost Montreal-Toronto  $1512.96  Toronto-Winnipeg  2903.12  Reduction on C a n c e l l a t i o n  $4,416.08  PROPOSED DC-8 Round T r i p D i r e c t Operating Cost Montreal-Winnipeg D i r e c t D a i l y Saving  $3,457.18 $  958.90  Annual Saving (On 2 6 0 Monday t o Friday Flights)  Source:  Table XIV.  $249,314.00  136 D i r e c t Operating Seat Costs Montreal-Toronto-Winnipeg ($4,416.08 7 300)  $14,72  ($3,457.18 7 300)  $11.52  Montreal-Winnipeg D i r e c t  $3.20  Reduction or  21.7$  While i t i s not p r a c t i c a l t o gauge the e f f e c t s o f the higher per passenger revenue y i e l d on the MontrealToronto s e c t o r because o f other passenger flow over t h i s sector o r i g i n a t i n g o r terminating i n Vancouver, Edmonton and Chicago, an appreciable increase i n y i e l d per passenger should accrue. This chapter has d e a l t w i t h the i n t e g r a t i o n of s a l e s costs w i t h the costs of operation and the costs of s e r v i c e . I t has summarized the fundamental i m p l i c a t i o n s posed i n e a r l i e r chapters and presenteda  proposed method f o r  determining breakeven p o i n t s f o r various a i r c r a f t type/ route sector combinations.  I t has i l l u s t r a t e d how schedules  and f a r e s become i n v o l v e d i n the planning network performed by a i r l i n e personnel charged w i t h scheduling and long range planning. The f o l l o w i n g chapter attempts t o t i e together the preceding chapters i n t o a meaningful whole.  I t deals w i t h  present problems f a c i n g the commercial a i r l i n e i n d u s t r y and some p o s s i b l e s o l u t i o n s . The c o n f l i c t s and s i m i l a r i t i e s o f a i r l i n e r a t e p o l i c i e s v i s - a - v i s the p u b l i c i n t e r e s t a r e considered as i s the p a r t , I b e l i e v e , cost f i n d i n g should p l a y i n the determination of an a i r l i n e r a t e s t r u c t u r e .  CHAPTER T i l l COMMENTS AND CONCLUSIONS The background, h i s t o r y and nature of a i r l i n e operations provide an i n d i c a t i o n of some of the d i f f i c u l t i e s experienced i n the a p p l i c a t i o n of c o s t i n g and p r i c i n g techniques. The treatment  of a i r l i n e costs a r e as v a r i e d i n  number probably as there a r e a i r l i n e s i n the world.  They  range from the s t r i c t use of cost information p r e s c r i b e d by r e g u l a t o r y bodies t o f u n c t i o n a l treatments based on the broad spectrums of o r g a n i z a t i o n s .  The f i r s t disregards  the needs r e q u i r e d f o r d e c i s i o n making, while the second overlooks the i n t e r - r e l a t i o n s h i p s and behaviour  of the  f u n c t i o n a l costs which are common t o a l l p r o f i t - m o t i v a t e d airlines. The preceding s e c t i o n s have i n d i c a t e d that a i r l i n e s should be w e l l aware of the value of t r a f f i c c o s t i n g data as a managerial t o o l and that cost f i n d i n g should be the s t a r t i n g point i n r a t e making.  However, ^ c o s t  M  is a  concept t h a t , though o f t e n used, r e q u i r e s s p e c i f i c answers to t e c h n i c a l and p o l i c y questions i f i t i s t o be e f f e c t i v e l y used i n p r a c t i s e . These answers r e q u i r e d e f i n i t i o n s of cost as short r u n or long r u n , f u l l y a l l o c a t e d or  137  138 incremental, cost t o the c a r r i e r or f u l l s o c i a l c o s t , a l l o c a t i o n s between passengers and cargo and m a i l , apportionments f o r route and market d i f f e r e n c e s , e t c . The three prime a i r l i n e c o s t s — o p e r a t i n g , s e r v i c e and s a l e s — i n a d d i t i o n t o a d m i n i s t r a t i o n , overhead and i n t e r e s t expense, were woven i n t o a uniform network and t r e a t e d i n a l o g i c a l and methodical manner. Operating costs a r e only t r u l y v a r i a b l e u n t i l such time as f i r m schedules a r e e s t a b l i s h e d , t h e r e a f t e r they become f i x e d and committed c o s t s .  The economic and  p r o f i t a b l e operation of a f l e e t o f a i r c r a f t i s dependent on the e f f i c i e n c y of the equipment, and more important on the s k i l l s and a b i l i t i e s of management, and on the accuracy of the i n f o r m a t i o n a v a i l a b l e t o the personnel charged w i t h planning. The primary determinant of an a i r l i n e ' s f i n a n c i a l success i s probably i t s route s t r u c t u r e , e s t a b l i s h i n g a c e i l i n g on i t s p o t e n t i a l market.  The second determinant  i s probably the choice of a i r c r a f t , f i x i n g the order o f magnitude of most of i t s expenses and a great d e a l of i t s competitive success i n reaching i t s p o t e n t i a l market. Coincident w i t h these i s another key determinant, the q u a l i t y of i t s management, f i x i n g how much of i t s p o t e n t i a l i t actually realizes. Management, of course, has a f f e c t e d the f i r s t determinant of route s t r u c t u r e i n so f a r as i t has used  139 sound judgment i n designing and obtaining route changes.  It  i s completely responsible f o r the second determinant, equipment s e l e c t i o n . I t i s a l s o responsible f o r the major p o l i c i e s and a d m i n i s t r a t i o n of scheduling,  operating,  maintaining and overhauling, c o n t r o l l i n g c o s t s , n e g o t i a t i n g w i t h personnel, and the vast number of other managerial d e c i s i o n s r e q u i r e d t o run an a i r l i n e . D i r e c t s a l e s and s e r v i c e costs are t r e a t e d as the v a r i a b l e s of securing and s e r v i c i n g passenger and cargo traffic.  The emphasis i n these areas was not on the  economies as such, but on the e f f e c t i v e n e s s of the resources  used.  The a d m i n i s t r a t i o n , overhead and i n t e r e s t costs are measures of f i n a n c i n g and the e f f i c i e n c y of a d m i n i s t r a t i o n of the a i r l i n e .  E f f e c t i v e n e s s i n both areas are the key t o  the economic h e a l t h of an a i r l i n e and should u l t i m a t e l y r e s u l t i n a p r o f i t a b l e operation. P r o f i t s a r e , of course, the balance remaining a f t e r paying out the aggregate of a l l expenses from the aggregate of a l l revenues.  They depend upon the net p r o f i t s and  l o s s e s of many a c t i o n s .  The ways and means by which to  accomplish the goal of r a i s i n g a i r l i n e p r o f i t s t o adequate l e v e l s w i l l not be a s i n g l e or simple a c t i o n , but the complex r e s u l t of many s p e c i f i c a c t i o n s on r o u t e s , equipment, r a t e s , r e g u l a t i o n and management.  The r e s p o n s i b i l i t i e s of  management are t i g h t l y interwoven w i t h the functions of  140 management t o f o s t e r or discourage an a i r l i n e ' s a b i l i t y t o make i t s expenses and a reasonable p r o f i t . The c o s t i n g by a i r e r a f t type f o r route sectors f o r various areas of a i r l i n e a c t i v i t i e s r e f l e c t t h e i r I n d i v i d u a l c h a r a c t e r i s t i c s . The one major innovation i s the d e t a i l e d break-out of f l y i n g operations by type of a i r c r a f t and r o u t e .  These have c o n v e n t i o n a l l y been t r e a t e d as  averages, e i t h e r as types of equipment or s e r v i c e s and groups of r o u t e s , as b e f i t s the background on r e g u l a t o r y needs• The use of average c o s t s , values and amounts r e q u i r e s a c o n t i n u a l reminder of t h e i r make-up.  For c o s t i n g and  p r i c i n g , the average cost can be used as a means of c o n t r o l l i n g and p l a n n i n g — i t i s an extremely poor t o o l , however, I n d e t a i l e d a n a l y s i s of the many diverse elements (cost and other) which go t o produce the output.^ L a t e l y the a i r l i n e i n d u s t r y has been faced w i t h a problem of s p e c i a l g r a v i t y .  For competitive reasons, the  t r a n s i t i o n t o the jet-age has l e d t o general excess c a p a c i t y throughout the i n d u s t r y .  This would i n d i c a t e that f u r t h e r  t r a f f i c growth has t o be stimulated.by  lower f a r e s , and f o r  t h i s reason a i r l i n e s should be aware of a l l t h e i r costs of  •'•The f a t e o f the s t a t i s t i c i a n who was drowned i n a small stream, whose average depth was only one f o o t , i s a p e r t i n e n t reminder t o a l l who use averages.  141 operation.  I t must be borne i n mind, however, t h a t lower  f a r e s only generate more t r a f f i c as long as the market shows some e l a s t i c i t y .  I f this e l a s t i c i t y declines, i t  can w e l l happen that a general r a t e r e d u c t i o n causes the breakeven points to r i s e too sharply and thus a general r a t e r e d u c t i o n can defeat i t s purpose, the f i n a n c i a l r e s u l t g e t t i n g worse. To f i n d the r i g h t answer f o r each market s i t u a t i o n i s c e r t a i n l y not a simple and easy t a s k .  Management must  evaluate c a r e f u l l y the market f o r c e s , the cost s i t u a t i o n , and the impact of r a t e v a r i a t i o n not only On load f a c t o r s but a l s o on breakeven load f a c t o r s as discussed i n the previous chapter.  While one s i t u a t i o n may r e q u i r e r a t e  increases due t o Increasing cost elements and a l a c k of market e l a s t i c i t y , i n another market area a general r a t e r e d u c t i o n may y i e l d a good f i n a n c i a l r e s u l t , and i n a t h i r d case c a r e f u l l y elaborated c r e a t i v e f a r e s might be the r i g h t answer • PROBLEM AREAS A i r t r a n s p o r t f a r e s and r a t e s should be the  lowest  p o s s i b l e c o n s i s t e n t w i t h economical c a r r i e r costs and  fair  p r o f i t s — t h i s i n a nut s h e l l i s the goal which a l l a i r l i n e s should s t r i v e t o a t t a i n .  To achieve t h i s goal p o l i c i e s  should be developed t o r e l a t e passenger and cargo r a t e s t o costs.  A major problem which a r i s e s i s t o decide when and  142 t o what extent departures from a cost b a s i s are j u s t i f i e d . Another problem i s t o adequately define the cost concept before using i t e f f e c t i v e l y i n p r a c t i s e . A t h i r d problem i s t o e s t a b l i s h what e f f e c t the general l e v e l of f a r e s has on the t r a f f i c volume of various market areas.  This e l a s t i c i t y of demand should be measured  so that the probable f u t u r e change i n the volume of any market area can be adequately f o r e c a s t p r i o r t o proposed changes i n f a r e s and c o n d i t i o n s . PROBLEM SOLUTIONS P r i c i n g p r i n c i p l e s and standards should be defined and adopted.  Fare s t r u c t u r e s and l e v e l s should be based  p r i m a r i l y on the long-run marginal costs o f the route s e c t o r s , i n c l u d i n g r e t u r n on investment and p r o f i t . In the long run, the r a t e p o l i c y I n t e r e s t s of the a i r l i n e s c o i n c i d e w i t h those of the p u b l i c since a i r l i n e success u l t i m a t e l y depends on consumer acceptance a t the right price.  I n the short run, however, there i s sometimes  c o n f l i c t between the a i r l i n e ' s r a t e p o l i c i e s and the p u b l i c i n t e r e s t i n low f a r e s .  Small r a t e reductions may produce  no immediate t r a f f i c i n c r e a s e , or not enough t o make up f o r both the revenue l o s t on s e l f - d i v e r t e d t r a f f i c and the added cost of handling greater volume. hypothesized  Conversely i t i s  t h a t a small increase i n r a t e s has l i t t l e  e f f e c t on t r a f f i c volume but increases revenues.  Naturally  143 the r e s u l t w i l l vary by market area depending upon the p r i c e e l a s t i c i t y of each. I n a d d i t i o n , lower r a t e s by themselves w i l l not a u t o m a t i c a l l y produce much more t r a f f i c .  Considerable  i n t e l l i g e n t promotional and s e l l i n g e f f o r t by the a i r l i n e is also essential. Promotional passenger f a r e s are p a r t of a i r l i n e managerial i n i t i a t i v e aimed a t moving more of the p u b l i c a t lower f a r e s , e s p e c i a l l y i n markets w i t h poor load f a c t o r s . However, they r e q u i r e some reasonable l i m i t s . F i r s t , they should be considered i n the aggregate, not j u s t one a t a time.  Any s i n g l e promotional f a r e may  produce l i t t l e change i n t r a f f i c r e l a t i v e t o the t o t a l . The increased t r a f f i c i s , t h e r e f o r e , sometimes considered as c o s t i n g p r a c t i c a l l y nothing i n the way of c a p a c i t y c o s t s because i t f i l l s space otherwise unused.  However, the  t r a f f i c produced by a l l I n d i v i d u a l promotional f a r e s when combined w i t h r e g u l a r t r a f f i c may induce the c a r r i e r t o increase c a p a c i t y , and t h e r e f o r e may be r e s p o n s i b l e f o r f u l l costs. Time l i m i t s and revenue-cost t a r g e t s should be e s t a b l i s h e d when a new f a r e i s t r i e d , probably f o r two periods i n each of which the t r a f f i c growth m u l t i p l i e d by the u n i t revenues should cover a predetermined cost l e v e l . I n t h i s way, an experiment should not be allowed t o continue i n d e f i n i t e l y a t a l o s s t h a t burdens the a i r l i n e ' s other services.  144 A t h i r d and l e s s d e f i n a b l e l i m i t a t i o n i s t o achieve a degree of s t a b i l i t y and s i m p l i c i t y i n the f a r e s t r u c t u r e . Although new experiments may be t r i e d , a i r l i n e  personnel  should always be able t o compute f a r e s r e a d i l y and the p u b l i c should be able t o understand them e a s i l y . One of the key determinants  of cost i s load f a c t o r .  A prime source of economic t r o u b l e i n a i r t r a n s p o r t , as I n many other i n d u s t r i e s , i s p e r i o d i c c a p a c i t y i n exeess of that needed t o handle the c u r r e n t l y e f f e c t i v e demand.  In  the short run w i t h e x i s t i n g a i r c r a f t f l e e t s , c a p a c i t y i s somewhat i n f l e x i b l e although there i s s t i l l room to  schedule  fewer plane-miles and save a t l e a s t some d i r e c t operating costs.  I n the long run c a p a c i t y i s c o n t r o l l a b l e by  management, although g r e a t l y complicated by scheduling.  competitors*  Because of the re-equipment c y c l e w i t h  h i s t o r i c a l l y r e c u r r e n t periods of massive a i r c r a f t o r d e r i n g , a i r l i n e s u s u a l l y a l t e r n a t e between over-capacity when new a i r c r a f t are d e l i v e r e d p r i o r t o the development of the hoped-for t r a f f i c growth, and undercapacity i f new orders are h e l d back u n t i l assurance of t r a f f i c  aircraft  uptrends.  A prime i n g r e d i e n t of r e l a t i n g f a r e s t o costs i s therefore a determination of reasonable  long term load f a c t o r s ,  i n c l u d i n g considerable year-to-year v a r i a t i o n s , f o r the estimated equipment c y c l e . E l a s t i c i t y of demand i s the change i n t r a f f i c volume e f f e c t e d by r a t e changes.  I t , i n t u r n , a f f e c t s costs since  145  u n i t costs u s u a l l y vary i n v e r s e l y w i t h volume of t r a f f i c . These changed u n i t costs i n t u r n provide a new b a s i s f o r r a t e r e v i s i o n s and so on. The normal p r i c i n g p o l i c y i n most i n d u s t r i e s t r i e s t o maximize p r o f i t a f t e r t a k i n g i n t o account the e l a s t i c i t y of demand. E l a s t i c i t y of demand should be evaluated i f p o s s i b l e . Two b a s i c approaches should be t r i e d . method:  One i s the aggregate  r e l a t e volume of t r a f f i c i n t o t a l and by major  c l a s s e s t o indexes of economic a c t i v i t y such as gross n a t i o n a l product, disposable personal income, corporate p r o f i t s , e t c . , and t o r e l a t i v e changes i n a i r t r a n s p o r t y i e l d s as compared t o other t r a n s p o r t and non-transport price levels.  The other approach i s the case study method:  f o r each i n d i v i d u a l s p e c i a l r a t e secure i n f o r m a t i o n on p r i c e , t r a f f i c volume, promotional e f f o r t , and other c o n d i t i o n s before and a f t e r the s p e c i a l r a t e i s plaeed i n e f f e c t . AIR CARGO The cargo r a t e s t r u c t u r e should be designed t o help develop cargo t r a f f l e as r a p i d l y as i s economically f e a s i b l e . A i r cargo has been d i s a p p o i n t i n g i n i t s r a t e of growth.  The r e l a t i v e percentage increase has been good,  but has lagged badly when judged by the "breakthrough and estimates of the past.  11  hopes  The major reason f o r t h i s i s  u s u a l l y given as high r a t e s which i n t u r n have awaited a low-cost cargo a i r c r a f t .  The f i r s t of such a i r c r a f t are now  146 operating i n Canada, and f u l l advantage should soon be taken of the hoped-for economies. Hew  equipment i s o f t e n acquired because i t i s  b e l i e v e d t o be a prime reducer of c a p a c i t y c o s t s , and should lead t o comparably lower r a t e s i f performance l i v e s up t o advance estimates.  There the c l a s s i c c o n f l i c t  u s u a l l y begins between the a i r l i n e w i t h new  equipment  wanting lower r a t e s t o achieve the maximum competitive advantage and the a i r l i n e w i t h investments i n the older equipment who are not yet prepared t o commit themselves to more modern f a c i l i t i e s . The most d e s i r a b l e p o l i c y t o f o l l o w should be the one which w i l l give the p u b l i c the f u l l b e n e f i t s of the competitive advantage brought about by t e c h n o l o g i c a l change. This can be accomplished by reducing r a t e s i n two steps: a moderate decrease f o r the i n i t i a l h i g h cost p e r i o d , f o l l o w e d l a t e r by r e d u c t i o n t o the long run achievable r a t e based on experiences cost trends.  For a temporary p e r i o d ,  competitors w i t h o l d e r equipment can a f f o r d t o operate a t r a t e s l e s s than f u l l a l l o c a t e d c o s t .  Lower r a t e s may  also  be i n s t i t u t e d i n sequence, on each route and i n each area t o the extent that the lower eost planes begin s u b s t a n t i a l competitive o p e r a t i o n , and not as a sudden u n i v e r s a l r a t e breaker f o r the e n t i r e cargo operations.  147 THE AIRLINE DECISION Cost f i n d i n g i s an e s s e n t i a l long term research program.  I t i s necessary t h a t a i r l i n e management examine  a l l p o s s i b l e c o s t i n g p h i l o s o p h i e s and approaches, analyze costs by various accounting and s t a t i s t i c a l techniques, o b t a i n data f o r r e g u l a r r e p o r t s , observe operations and define true cost centres of a c t i v i t y , d i s c u s s s i m i l a r s t u d i e s w i t h i n d u s t r y and government e x p e r t s , and r e v i s e methods as experience I s accumulated and as changes occur i n a i r t r a n s p o r t technology and economics. The two major cost areas of passengers and cargo r e q u i r e an i n i t i a l j o i n t a n a l y s i s f o r common c o s t s , but t h e r e a f t e r they a r e f a i r l y separable. I n c o n c l u s i o n , i t appears t h a t there i s a need a t t h i s time f o r a bridge between the theory and the p r a c t i s e employed by a i r l i n e management i n the area o f planning. More experimental studies a r e necessary before management w i l l be able t o grasp the e s s e n t i a l s of c o s t i n g and p r i c i n g analysis.  The use of t h i s type of data w i l l f u r n i s h  management a guide as t o what i t should expect when i t i s considering changing f a r e s , changing a i r c r a f t / r o u t e s e c t o r s o r changing any other market f a c t o r s over which i t has control.  This type of a n a l y s i s should not be considered  an answer g i v i n g device but r a t h e r a v a l u a b l e a i d t o d e c i s i o n making.  148  C o s t i n g , p r i c i n g and a l s o planning information must be judged i n terras of i t s usefulness f o r making d e c i s i o n s . Any improvement i n the q u a l i t y of the d e c i s i o n s derived from a b e t t e r knowledge of the cost s i t u a t i o n as o u t l i n e d i n t h i s paper must be balanced a g a i n s t the cost of c o l l e c t i n g and maintaining the data.  A i r l i n e s face a  s p e c i a l c o m p l i c a t i o n i n t h i s area as they bear the costs of data c o l l e c t i o n but the r e g u l a t o r y agencies s p e c i f y the information t o be c o l l e c t e d and are the users of the data. The a i r l i n e i n d u s t r y can ignore the p o t e n t i a l i t i e s of t r a f f i c c o s t i n g , p r i c i n g and planning only a t the cost of continued misinformation.  Nevertheless, i n the l a s t  a n a l y s i s i t i s a i r l i n e management who must r e c o n c i l e the considerations of cost w i t h respect t o the many other marketing f a c t o r s .  BIBLIOGRAPHY  BIBLIOGRAPHY 1.  BOOKS  Cherington, Paul W. A i r l i n e P r i c e P o l i c y . P r e s s , Norwood, Massachusetts, 1958. Wolfe, Thomas. A i r T r a n s p o r t a t i o n . Company Inc., New York, 1950. 2.  The Plimpton  McGraw H i l l Book  PERIODICALS  A l d r i c h , Grahame H. " A i r l i n e Passenger Market—The Next 10 Years," A v i a t i o n Age. March, 1954. A l t s c h o e l , S. "Why the S t r e t c h i n J e t Depreciation?" A i r l i f t : World A i r Transportation. February, 1963* P. 35. McGregor, Gordon R. " F a r e s - C a p a e i t y - F l i g h t , " A i r l i f t j World A i r Transportation. May, 1963, pp. 24-2b. Vandyke, A. "The World's A i r l i n e s , " A i r l i f t : World A i r Transportation. May, 1963, p. 21. Wallace, C.L. "How F i x e d - V a r i a b l e Cost C o n t r o l Helps," Factory Management and. Ma^teflance, June, 1963, pp. 126-129. Wright, Theodore P. "Some Economic Factors i n A i r Transportation." A e r o n a u t i c a l Engineering Review? A p r i l , 1957. 3.  PUBLICATIONS OF THE GOVERNMENT AND OTHER ORGANIZATIONS  A i r Canada.  Annual Report. Montreal,  1964.  A i r Canada. Handbopfr o£ T.C,A. Facta and F i g u r e s . Montreal, 1964.  150  151 Brewer. Stanley H. A i r Cargo—The Next 1© Years (1956122,5) • Boeing A i r p l a n e Company, Transport D i v i s i o n , Renton, Washington, 1956. • Canada, A i r Transport Board. O r i g i n and D e s t i n a t i o n S t a t i s t i c s . M a i n l i n e Scheduled T r a f f i c Survey of Revenue Passengers. 1955-1959. Ottawa, May, I960. Canada, A i r Transport Board. Report t o the M i n i s t e r o f Transport. T r a n s c o n t i n e n t a l A i r S e r v i c e s . Ottawa,  1959.  Canada, A i r Transport Board. The D i r e c t Operating Cost of Transport A i r c r a f t . Ottawa, November, 1955• Canada, Commercial A i r S e r v i c e s Regulations. Order i n C o u n c i l , P.C. 1954-2032, December 22, 1954. Canada, Dominion Bureau of S t a t i s t i c s . C i v i l A v i a t i o n (Annual). Queen's P r i n t e r and C o n t r o l l e r o f S t a t i o n e r y , Ottawa. C r i l l y , W i l l i a m M. The I n d i r e c t Operating Costs o£ Commercial A i r Cargo T r a n s p o r t a t i o n . Planning Research Corporation. Los Angeles, C a l i f o r n i a , November, 1955* Doyle, General J.P. "Transportation P r i c i n g i n the P u b l i c I n t e r e s t , " T r a n s p o r t a t i o n Marketing. Railway Systems and Management A s s o c i a t i o n , Chicago, I l l i n o i s ,  1964.  Economic Pr^nc^pl.e§ £o£ Prfrcftng. Airport? S e r v i c e s . Stanford Research I n s t i t u t e . South Pasedena, C a l i f o r n i a , November, 1961. Gouge, A r t h u r . " S i z e i n Transport," JJie J o u r n a l o£ the Roval AePPflau,Uca;i S o c i e t y . 3°th Wilbur Wright Memorial L e c t u r e , L I I (1948). Howe, C D . Canada Spreads i t s Wings.  May, I94I7  External A f f a i r s ,  Langdon, J e r v i s . "Current Aspects of Minimum Rate Regulation," T r a n s p o r t a t i o n Marketing. Railway Systems and Management A s s o c i a t i o n , Chicago, I l l i n o i s ,  1964.  O f f i c i a l A i r l i n e Guide. August, I963. P u b l i c a t i o n , Inc., Chicago, 1963.  American A v i a t i o n  152 Speas, R.D. Economic A p p r a i s a l o f J e t Transport Performance. A i r Transport Conference. New York u n i v e r s i t y , May, 1962. Sayward, P. " P r i c i n g A i r F r e i g h t S e r v i c e s , " T r a n s p o r t a t i o n Marketing. Railway Systems and Management A s s o c i a t i o n . Chicago, I l l i n o i s , 1964. S t r u c t u r e and Growth of the Canadian A i r Transport Industry. Canadian P o l i t i c a l Science A s s o c i a t i o n Conference on S t a t i s t i c s . Kingston, June, i960. The Story of A i r l i n e Scheduling. A i r Transport A s s o c i a t i o n of America. Washington, D.C, 1961. Trans-Canada A i r l i n e s . Montreal.  Annual Report. Years 1956-1963.  Trans-Canada A i r l i n e s . Economic C h a r a c t e r i s t i c s of Canadian Communities and the R e l a t i o n s h i p t o A i r l i n e Passenger T r a f f i c . Montreal, 1951. Trans-Canada A i r l i n e s .  1957.  Forecasting and Planning.  Montreal,  U.K., M i n i s t r y o f A v i a t i o n . Costing the E f f e c t ££ A i r T r a f f i c C o n t r o l R e s t r i c t i o n s on North A t l a n t i c T r a f f i c Royal A i r c r a f t Establishment. London, 1963. U.S.A., A s s o c i a t i o n o f American R a i l r o a d s . I n i t i a l Study of A i r T r a n s p o r t a t i o n . R a i l r o a d Committee f o r the Study of T r a n s p o r t a t i o n , Subcommittee on A i r Transport, January, 1944. U.S.A., C i v i l Aeronautics A u t h o r i t y . S t a t i s t i c a l Handbook ££ C i v i l A v i a t i o n . 196l. U.S. Government P r i n t i n g O f f i c e . Washington, B.C., 1962. U.S.A., C i v i l Aeronautics Board. Handbook o f A i r l i n e S t a t i s t i c s . 1Q61. U.S. Government P r i n t i n g O f f i c e . Washington, B.C., I962. U.S.A., Department o f Commerce. A i r l i n e Passengers. C i v i l Aeronautics A d m i n i s t r a t i o n . Washington, D.C.,  1961.  U.S.A., F e d e r a l A v i a t i o n Agency. A i r T r a f f i c Patterns and Community C h a r a c t e r i s t i c s . A i r T r a f f i c S e r v i c e . Washington, D.C, 1963. Wilson, J.A. Th£ Influence o f C i v i l A v i a t i o n i n the Development o£ Canada's A i r Power. Department o f Transport. Canada, 194-3.  

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