For a long period, the airline business has been categorized as lucrative. The notion that the airline business is lucrative is partly perpetuated by the fact that it is the most costly form of transport. Also, the huge capital base of the airline business makes it one of the most stable types of business. For instance, the assets of an airline at any given time include planes, hangers, and cargo bays, which translate into a lot of capital base for an airline.
Consequently, various airlines utilize a set of factors when they are coming up with different costs for their products and services. However, sources of revenue for an airline remain the most prominent determinant of cost. This is also the reason why there are big disparities in costs between different airlines. This report seeks to identify the factors that contribute to the cost of an airline using Air France as a model.
Besides, the report describes the different sources of revenue for the airline. Air France (AF) is the main airline in France and it has its headquarters in Paris. The airline is owned by the Sky Team Global Alliance jointly with Air France-KLM. AFs business includes cargo and passengers in both France and 93 other countries around the world. The airline has been in existence since 1933 as a result of a merger between several airline-businesses of the time.
Currently, the airline is categorized as a business leader due to the market share it commands in France and other parts of the world. Consequently, at any given time matters to do with costing and revenue are pertinent to AF. As a big business, AF encounters significant direct and indirect operating costs, which are correlated with revenue to determine appropriate costing. This report utilizes the annual financial report for AF to identify the factors that contribute to its costs about its various sources of revenue.
Direct Operating Costs
AFs direct operating costs constitute a wide range of factors but wages, salaries, and fuel dominate this category. Fuel costs make up the second-highest operating costs and they reflect global patterns in the airline industry. However, the escalating salary costs have to do with the size of the AF. As a giant airline, AF requires a higher threshold of employees for its maintenance needs. For its costing needs, the airline is more likely to rely on salary and wage costs because this factor is more stable than fuel prices. For instance, the companys long-term plans are often destabilized by changes in fuel costs.
Equipment and plant maintenance make up 9% of all direct costs at AF. This unexpected factor is constant and it is only expected to affect the prices of air tickets in the long term. Although fuel is only the second significant factor as far as direct costs are concerned, its fluctuating nature makes it a major determinant of short-term airline-costs. Catering and chartering costs makeup only a small portion of AFs online but the companys annual report reveals their significance in attracting and retaining customers (Air France 2012). For example, most of AFs advertisements focus on passenger comfort for the company to gain a much-needed market share.
Indirect Airline Operating Costs
The indirect airline operating costs are also a significant factor in airline costs although they do not carry as much weight as direct factors. Nevertheless, indirect operating costs are significant as far as industry standards are concerned. In the case of AF, most of its indirect operating costs are incurred through landing fees and en-route charges. These cost factors are important to AF because they are part of the core determinants of product costs.
For example, these types of costs are different and vary from one area of jurisdiction to the other. The airline does not have any powers to control these types of costs and the customer often bears these expenses directly. Handling charges and other operating costs also make up a significant portion of the indirect operating costs. This category of expenses is important for AF in the companys quest to maintain high standards. This cost factor is also static and it is directly passed on to consumers.
Another indirect cost factor is aircraft operating and lease costs. This factor changes by various stages of business. AF can use the lease costs to stabilize its business in instances of unstable environments. In early 2012, faced with negative results, the Air France-KLM Board of Directors set three priorities: restoring competitiveness through cost-cutting, restructuring the short and medium-haul operations and rapidly reducing debt (Air France 2012). For example, leased aircraft can be essential in bringing supply and demand equilibrium to the business. This cost factor is a good cost strategy for AF to gain lost ground in instances of slowdowns in performance
Revenues
Passengers are the main sources of revenue for AF and this trend aligns with the companys business model. Overall, AF generated approximately 25.63 billion Euros, and passengers accounted for 79% of this income. On the other hand, this revenue indicates success on the part of AF whereby the company can record a load factor of 83.1 %. Eventually, the companys costing practices are substantiated by the revenue it generates from its passenger service.
There is an ongoing struggle among various airline businesses to make cargo a significant income-generating factor. Consequently, all major airlines around the world endeavor to generate at least 10% of their revenue from cargo business. Unlike passenger-related prices, cargo costs remain largely stable. Therefore, the 12% revenue from the cargo business indicates that AF is indeed a global leader in the airline business. The most important costing factor for AF as per the companys revenue structure is fuel costs, human resource elements, and advertising costs. As a big company, AF manages to rake in revenue from its maintenance business whereby it handles 1,300 aircraft per year. Also, AF has managed to earn an additional 5% in revenue from its diversified business sources.
Conclusion
AF costs are mainly aimed at maintaining the airlines position as a market leader whilst managing to achieve positive growth. The airlines operations still follow the traditional business model of business whereby various types of products are offered with the view of maximizing revenue and catering to a wide range of customers. This costing method follows a model whereby the price is fixed and the main task of revenue management is to maximize returns by controlling capacity (Fedorco & Hospodka 2013). An analysis of AF indicates that wages, salaries, and fuel costs make up the majority of operating costs at 71%.
Consequently, these two factors have a significant impact on the costing strategies that are used by AF. Fuel constitutes 35% of AFs total direct-operational costs and this element is passed on to the customer directly. When the prices of oil keep changing from time to time, it becomes difficult for an airline to maintain stability in its prices. Some companies deal with this uncertainty by maintaining stable fare prices and adding fuel surcharges when necessary.
AFs pricing strategy is based on class categories where the number of seats in each passenger category remains fixed. Consequently, the complexities of customer service lead to high costs in employee wages and salaries. The fuel and wage factors are responsible for the constantly changing AF ticket prices. For instance, sometimes the prices of AF air tickets changes from week to week depending on forecasts and capacities. Other than fuel and wages, all other direct airline-operating costs for AF do not have any significant effects on costs. On the other hand, indirect operating costs also carry a significant pricing factor.
Most indirect costs affect passengers ticket prices depending on seasons. For instance, high-demand seasons naturally nullify the indirect costs factor in several ways. The major indirect costs for AF are landing and handling costs. If an airplane does not stay on the runway for a significant period, these costs automatically come down. The reason why the airline is focused on passenger satisfaction and accommodation too much is that this is the main revenue generator for AF. Consequently, AFs costs are dominated by employees wages because this factor directly contributes to obtaining more passengers.
The history of aviation development, as well as the corresponding regulations, includes the sad experience of aircraft incidents. One of the most prominent air crashes that has resulted in changing safety regulations is the Concorde Air France Flight 4590, F-BTSC of July 25, 2000 (Concorde Air France Flight 4590, F-BTSC, n.d). This flight operated from Charles de Gaulle Airport in Paris to John F. Kennedy International Airport in New York.There were 100 passengers on board, as well as 9 crew members (Concorde Air France Flight 4590, F-BTSC, n.d). The weather on the day of departure was clear with light winds, so Concorde’s takeoff was normal until the aircraft passed through V1. However, one of the tires soon hit a piece of metal that had become detached from the DC-10 engine that had taken off earlier (BEA, 2000; Concorde Air France Flight 4590, F-BTSC, n.d). After this, the tire failed, and its fragments fell into the lower part of the aircraft and into the well of the left wheel. This accident caused a pressure surge inside one of the fuel tanks, resulting in a massive fuel leak.
The fuel leak resulted in the ignition of engines 1 and 2 of the aircraft. The aircraft continued to take off, although it also began to drift to the left of the runway, forcing the pilot to rotate the aircraft. Within a few seconds, a fire alarm went off in engine 2, after which the engine was stopped. However, an aircraft that has already taken off cannot further gain altitude or speed. It soon became impossible to maintain level flight, the aircraft stalled and crashed into the hotel at Gonnesse (Jupp & Britton, 2003). This accident resulted in the death of all 109 aircraft passengers and crew members, as well as 4 people on the ground (Cramoisi, 2010, p. 9). The investigation of the Concorde accident “showed the need for progress in safety in various areas” (BEA, 2000, p. 179). This case also led to changes in regulations that focus on the safety and design of transport aircrafts.
Resulting Safety Initiatives
Revisions in the regulations concerned changes to the airworthiness structure requirements of fuel tanks for the Boeing Model 787, and the Airbus Model A350. Both the Federal Aviation Agency (FFA) and the European Aviation Safety Agency (EASA) decided to change safety requirements “to address the unique fuel tank failure mechanism experienced on flight 4590” (Resulting safety initiatives, n.d). Special condition for the Boeing Model 787 contains a requirement for changes in the structure of fuel tanks as part of the type certification basis to prevent fires due to fuel leaks (FAA, 2007). Special conditions for the Airbus Model A350 were the same but released later (FAA, 2014). In particular, both aircraft used “carbon fiber composite materials for most of the wing fuel tank structure”(FFA, 2007, p. 54529). However, the ability of this material to withstand damage that can be caused by tire debris has not been established. Thus, according to the new FFA requirements, these aircraft models must use aluminum instead of carbon composite to prevent possible penetration and fuel leaks.
Methods of Compliance Details
The FFA clearly sets out the procedures that are required to obtain the airworthiness of the aircraft certification. One of the methods of compliance is to conduct the necessary flight tests by the applicant (FFA, 2018). The document underlines that “flight test demonstrations are the preferred method to show compliance” (FAA, 2018, p. 3-2). The FAA independently determines the number of test flights that are required to demonstrate compliance with the required criteria. For example, for compliance with Wheels—§ 25.731 flight tests, all tests relevant to wheels, tires, and control brakes must be passed (FAA, 2018). Flight tests can be replaced by simulations, but only in certain situations such as extremely high risks, difficulty in attaining environmental of aircraft condition, etc.
Flight Test Plan
The following elements are critical in order to perform the necessary airworthiness substantiation activities to meet the regulation 25.149:
Verifying the critical engine;
Testing of static and dynamic condition for the minimum control speed (air);
Testing the minimum control speed (ground);
Testing the minimum control speed (approach and landing);
Testing the minimum control speed (approach and landing with two inoperative engines);
Testing of autofeather effects.
Safety Considerations
First of all, it should be noted that weight gain increases VMCA. However, this statement may vary depending on the environmental conditions and aircraft design. Thus, for the passage of flight tests, it would be more reasonable to limit the number of people on the plane. Within the framework of safety concerns, this assumption is also relevant as it reduces the risk of an accident. During the first flight test to determine VMCA it is better to have people on the plane in order to keep track of critical indicators. To minimize risks, the applicant must take into account any design features that may involve aerodynamic or propulsive changes. VMCA test poses an increased risk as one engine is deliberately disabled, requiring pilots to be extra vigilant (Lelaie, 2011). Thus, a second person is needed to quickly turn on the engine in case of an emergency and monitor the safety of the test flight.
Prior to tests, it is necessary to check all aircraft systems, including the serviceability of indicators, as well as the readiness of pilots to perform test flights. It is also critical to define V1 speed, check the atmospheric conditions as well as the state of the takeoff surface (Pilot guide to takeoff safety, n.d). These measures will help to avoid potential emergencies during test flights.
FFA. (2014). Special conditions: Airbus, Model A350–900 series airplane; tire failure – debris penetration or rupture of fuel tank structure. Federal Register, 79(9), 2388-2390.
FFA. (2007). Special conditions: Boeing Model 787– 8 airplane; tire debris penetration of fuel tank structure. Federal Register, 72(186), pp. 54529-54530.
France has been faced with threatening trends in her air travel industry in the recent past. Although declining economic and leisure demands for air travel are evident across the world due to various economic, political, and social factors, France seems to have experienced its fare share of this occurrence. The situation has even worsened following the decline of leisure and business demands that are dependent of air travel (Flottau & Buyck 2013, p. 33). In fact, it is projected that, within the next few months, there will be cancellation of flight bookings or complete cancellation of travel by clients.
This outcome is likely to worsen the situation in the air travel industry in France. Annulment of flights will mean increase in losses that the air travel industry is already experiencing. This termination by both domestic and international travellers will translate to a decline in economic returns in France. The economy of France is therefore in the verge of losing a large share of its income. With these threats ahead, there is a need to safeguard the economic position of the French airline.
Both financial and operational efforts must be put in place before the situation grows worse. Strategies to regulate flight fleets, routes, and resources required for the airline should be devised. This paper provides a rescue plan based on the witnessed operational and financial issues of flight fleets, routes, and resources in an effort to offer recommendations on survival measures.
Operational Predisposition
Operations in the aircraft industry demand a highly skilled workforce and high technology. There is a need for coordinated operations in the airport from the entrance, through the waiting bay to the control towers and the human resource offices. Proper operations management ensures that there is efficiency, security at the airport, security in the air, and that customers’ demands are satisfied prior to, during, and after the journey.
Efficiency Demands
In order to achieve efficiency and effectiveness, Air France must put in place mechanisms to ensure that the time spent carrying out a certain duty is worth the amount of work done. Knibb (2012, p. 28) observes that delays in airports continue to increase thus reducing the number of airplanes that can take off in a certain airport in a given period. There have been increased demands for efficiency in the French airports.
According Cabon et al. (2012, p. 44), due to the increased security risks and threats of terror attacks by terrorism groups such as the Al-Qaida and Taliban, airlines in France have increased the number of security checks. The airlines have also installed scanners for languages and individual cargos. Scanning and scrutinising these items may take a longer duration than the previous inspection methods.
According to Barros, Bin Liang, and Peypoch (2013, p. 668), inefficiency of the operation takes a lot of time. In some cases, it has resulted in flight delays. Travellers have therefore been complaining about delayed arrival and departure from various airports in France. Therefore, there are fresh demands for increased efficiency in France airports.
Passengers are demanding increased personnel for inspection, direction, and management of travellers both at the airport and in the airplanes. According to Wong and O’Connor (2011, p. 30), there are demands that the airlines installs modern technology devices that will enable them to carry out most of their operations online. Although airlines have installed computerised registration mechanisms and crowd-sourcing mechanisms, the delays are still evident as given below.
Net orders Jan 2012
Backlog 31-Dec-2012
Airbus
914
4682
Boeing
1339
4373
AR
74
221
Bombardier
138
291
Embraer
42
185
Source: (Carbon et al. 2012)
Despite all efforts, there has been a lot of paper work in the airport, which has increased the number of hours that passengers have to wait for clearance. Therefore, air travel companies in France should adopt the use of online bookings and/or promote it to ensure that the majority of travellers can access it.
According to Wong and O’Connor (2011, p. 30), customers should be able to do most of the travel arrangements and processing online in order to save the amount of time used in clearance and inspection at the airport. Barros, Bin Liang, and Peypoch (2013, p. 668) argue that, with increased efficiency in the airport, there will be an amplified number of flights and travellers hence increasing revenue for the government and private airline companies.
The number of travellers who demand air transport has also been on the rise. However, congestion and tight security checks in the airports have made the process of air travel very cumbersome.
It is therefore difficult for the airline management to keep the business on the profit side. Since there has also been an increase in the number of airlines in the world today, competition for customers of various classes has also increased. Many airlines are competing with the French airlines. The demand for better services continues to rise.
Bad weather condition is another cause of inefficiency of France airlines. Knibb (2012, p. 28) observes that poor weather conditions in various destinations and routes have resulted in cancellation of frights. This issue makes some routes and places inaccessible via airplanes. Increase in the number of inaccessible places because of poor weather conditions results in reduced revenue for the airlines.
The situation has become even worse with the increased greenhouse effect that has led to unpredictable changes in weather conditions. Increase in efficiency will increase the market share of these airlines. The airlines should also work to colonise new markets in order to increase their market chunk.
Use of alternative routes will also ensure that the airlines can deliver passengers at the same destinations via other routes. This strategy will ensure that their loyal customers will not move to other airlines hence saving on their revenue.
Security Provision and Air Safety
There has been an increase in demand for security assurance by air travellers across the globe. Governments and individual companies have called for tight security measures at airports especially after the September 11 attacks in the United States. Since then, the government of France has made a deliberate move to seal the loopholes that existed before in its airports.
It is worth noting that the 19 hijackers who terrorised the US airlines during the twin attacks went through the normal security checks and even shut the alarms of the metal detectors that the security men were using. Therefore, there is a need to install high-tech detectors and scanners at the airport.
The hijackers then made these planes fly into the World Trade Centre and the Pentagon crushing on the buildings. Thousands of people and those that came to respond to the attack died innocently portraying the fact that most of the airports in the world are unsecure.
Because of terrorism threats, airports in France need to adapt advanced screening devices with the ability of screening bomb materials and/or even metallic devices. Previously, passengers could not carry bottled water into the airport or the airplanes. The inception of new technology in airports has enabled passengers to carry such roles.
In France, computer companies such as Siemens will have to work with the airports in the process of installing baggage screeners, which allow passengers to drop any bag immediately they enter the airports for screening. This new luggage screening system will speed up the process of passenger and luggage screening.
A good example of an airline that has implemented this strategy is the Delta Airline, which has increased the number of luggage screened per hour from 200 to 500. This technology will ease congestion in the airport thus reducing the safety risk.
Cabon et al. (2012, p. 43) affirm that there is demand on the side of the government of France to provide good administration by investing on development of sophisticated sensors that have the ability to recognise dangerous persons such as those who carry explosives in their clothes long before they get into the gates of the airports.
These sensors should be portable to enable security agents to use them outside the airports to detect any dangerous people or even vehicles long before they cause any damages in the airports or n the airplanes.
In fact, Clemons and Madhani (2010, 43) observe that demand for non-computed tomography X-rays form of transmission, large scale ray detectors especially the gamma ray detectors, explosive trace-detectors, and the hand-held devices for detecting explosives has gone up. These devices will enable the airports to heighten up its security checks.
There is the need for the French airports to acquire advanced information technology devices that will enable the police and special units that deal with border patrol to exchange data faster. New technology will allow the police units and airport authorities to exchange information freely and quickly even when they are using different databases.
Sparaco (2011, p. 20) argues that the security personnel employed in airports should pass through a vetting process for any criminal record. It is worth noting that, before the September 11, some airports had hired employees with criminal records. For example, the Philadelphia International Airport had hired untrained security personnel with criminal accounts.
Clemons and Madhani (2010, p. 43) observe that airlines should also adopt the use of video surveillance gargets that enable monitors to supervise and detect abnormal behaviour in crowds. The technology will enable the security agent to identify the specific persons who commit crimes. For example, the equipment was able to identify the bomber who bombed the Times Square accurately amongst other people in a crowd.
The government of France should plan and establish a security unit, which will consistently investigate terrorism attacks besides taking pre-emptive actions to prevent any act of terror. In the wake of the September 11 attack, Nawaf-al-Hazmi, Majed Moqed, Khali al-Mihdhar, and even Salem al-Hazmi were able to set off all metal detectors and their alarms at the security checks.
The implication is that incompetent screening devices will just endanger the lives of passengers and airline operators. When passengers realise that a certain fleet is not competent enough to offer them good security, they simply avoid it. Consequently, the airline will lose much revenue.
Financial Predisposition
The issue of finance and financial management that ensures feasibility of airlines as an investment is at the heart of the French airport management. There is a need to make profit regardless of the increased demand for better remuneration, high prices of oil, rising consumer demands, shortage of staff especially pilots, and other financial risks.
New fuel Sources and Fuel Prices
There has been an increase in the need to turn to bio-fuels as a renewable energy. Bio-fuel has been highly preferred as an alternative for traditional fossil fuels. However, the process of producing bio-fuels is not feasible. The amount of bio-fuel available in the world today is not enough for the air transport. Production of fossil fuel is not feasible especially with the low quantity of production. There is a challenge of production of enough bio fuels for airplanes in France.
Investment in biological materials that produce bio fuel is supposed to be prioritised. There is also a need for France airways to join the Sustainable Aviation fuel Users Group (SAFUG). This initiative will enable France to be an active participant in the process of ensuring the success of bio-fuel production in the world. Thomas (2012, p. 24) affirms that aircraft fuel prices have increased in a very short duration.
Production of enough fossil fuels will reduce the cost of fuels hence increasing the profitability of French airlines. Proper investment in fossil fuels will enable France to save the high cost of fuels in the world today. According to Thomas (2012, p. 24), the financial implication of the high airplane fuels has made air travel very expensive for both domestic and international travellers. There is increased demand for industries in France and the world at large to go green.
The aviation industry in France is also challenged to reduce the amount of carbon emission in the air. In fact, carbon emission has resulted in financial implications to the stakeholders. Legislations are in place to regulate the amount of carbon emission. Taxes are levied as per the amount of carbon that airplanes release into the air. For example, airplanes from France are bound to be charged a huge amount of money as per the amount of green house gases that they emit into the air.
It is projected that taxation on green house gas emission from aircrafts is likely to go up to $ 8 billion within a period of eight years. Such a move is likely to influence the success of air transport in France negatively. Increase in the cost of using air transport is one of the drawbacks of air travel in France. In fact, with such strict measures, the airlines can result in making loses.
Modern Plane and Airport Designs
The demand for modern airplanes in France has been increasing. According to Harned, Sheehy, and Yao (2012, p. 80), modern airports are working to strengthen cockpit doors in a bid to counter terror attacks. This strategy ensures that no passengers or unauthorised persons can interfere with the pilot and the co-pilot especially when the airplane is airborne. Air safety is a concern for most of travellers and airport managers.
The doors of the airplanes are made bulletproof to prevent any forceful entry to the cockpit. This strategy has made it safer to the cabin crewmembers and even the passengers. The government of France has also been made to employ air marshals that board the flight for security purposes.
Cost-effective airplanes are on high demand today. The demand for cost efficient planes especially for commercial purposes has increased with time. Flottau and Buyck (2013, p. 33) confirm that airlines are nowadays purchasing airplanes that consume low fuel to make the whole process profitable and cost effective. The manufacturers of modern aircrafts are working on reducing the weight. Reduced weight saves the amount of fuel energy that the airplane needs to fly.
Reduced weight of the aircraft also provides space for increased number of passengers that the aircraft can carry. The extra weight is substituted with passengers. Increase in the number of passengers will boost revenue hence making the airline gather more returns. Modern airplanes are replacing bulky matter with lighter materials in a bid to reduce their weight. Such heavy and bulky materials are replaced with I-pads, hybrids, and tablets.
According to Harned, Sheehy, and Yao (2012, p. 80), modern aircrafts are also adopting the use of foldable wings that use low fuel in flight. The foldable wings have reduced the amount of fuel that modern aircrafts consume. Consequently, this case has positively influenced the financial returns of the airlines. Use of a new airplane design will decrease the volume of gas that airplanes take and hence saving on the cost.
France is also faced with the challenge of purchasing and designing aircrafts that meet the demands of the modern travellers. The new designs are made in a way that a whole family can travel together and enjoy the services of certain amenities.
Some of the aircraft manufacturing companies are changing the designs in order to capture the attention of a certain group of customers. For example, some modern aircrafts have separate cabins for different passengers. Passengers who want to enjoy some quiet time can book certain cabins while those who want to travel in the company of others can use other open cabins.
Consumer Demands
There has been a falling demand for air travel tickets by customers in France. With the increase in price of air tickets from one destination to the other, the number of air travellers has reduced. For the last ten years, the prices of air tickets have been on the rise. According to Flottau and Buyck (2013, p. 33), various governments have increased the passengers’ duty.
For example, passenger duty in France has gone up to 50 percent. Customers who prefer cheaper airlines have therefore abandoned most of the standard aircrafts as the following information reveals.
Type of service
2003
2009
Index
Regional service
147
219
+49
Full service
13,00
1,570
+21
Chartered
83
56
-33
Low cost
178
523
+194
Source: (Carbon et al. 2012)
Consequently, various airlines in France have begun making loses. Altanero (2005, p. 22) observes that most of the airline resources that are installed at very high cost are underutilised.
Air travellers are also demanding high technological care while on board. Labous (2013, p. 28) observes that there have been high demands for Wi-Fi internet connection in the aircrafts. Language translation demands have also come with the advancement of communication technology and high dependence on communication technology.
Altanero (2005, p. 22) also reveals how language translation and computer technology require advanced training of the cabin crew in information communication technology. People have adapted to working on the internet than working in the office. As they travel, they can also manage their offices and their investments online.
Customers would therefore prefer boarding aircrafts that offer such services. The levels of customer care services in various airlines in the world have made customers realise that it is possible to provide them with good hospitality services at the same travelling cost. Travellers that prefer lucrative services prefer airlines that have the ability to provide them with all the services that they need. For example, the Emirates airlines provide such services for business travellers.
These travellers are therefore able to pay high amounts of money for the services. It is therefore profitable to offer high quality and up-to-date services for the customers. For the airlines in France to be updated relative to other competitors in the air travel business, they must keenly observe the modern-day trends in air transport. Such a move will make them remain relevant to the market.
The 21st century has come with various changes in the air travel industry. There have been many changes in the way customers book their air ticket, have their baggage screened, label their cargo, and/or even conduct themselves in the aircrafts. Air France must therefore be up-to-date with the current computerised labelling of baggage, provide controlled check-in, facilitate the use of e-tickets, and the way it relates with customers.
Labous (2013, p. 28) affirms that airlines that still demand that customers show their passport and tickets must up their services to adapt the use of e-ticketing which saves time, money, and other resources. Efficiency is a demand that all travellers have today. The Air France must therefore invest in the modern-day technology to survive in the highly competitive air transport. In fact, the Delta airline has been able to survive the current elevated technology in air transport.
Conclusion: Critical factors for Survival
To bring the cost of service provision in the French air transport, Air France can purchase oil refineries. Having self-controlled oil refineries for the airlines will help to bring the prices of oil down hence making the business feasible. The government will also bring the prices of aircraft fuel under control. Freedman and Orr (2005, p. 102) suggest that the major target of the France airlines should be developing a method of bringing down the cost of service provision to raise profit levels.
In the modern-day world, various airlines have begun employing the use of non-union labour. Non-union labour ensures reduced demands for better remunerations. According to Sparaco (2011, p. 20), the use of non-union labour will also end the current wave of industrial action by employees. Such efforts will enable the airlines to make profits in the competitive market. France can also use of modern aircrafts with the provision of lucrative services.
Such modernisation of aircraft will appeal to travellers of all classes hence ensuring that the need of every customer is met. With such customised services, the French airlines can be guaranteed of good returns from the air travel business.
Freedman and Orr (2005, p. 100) assert that it is possible for the French airlines management to make profits against the projected possible losses. The airline should improve security and efficiency in a bid to maintain its customers and attract new ones. France should also train new and young pilots to cover up for the high number of retiring pilots.
References
Altanero, T 2005, ‘Translation At 35,000 Feet: The World Of Airline Menus’, Multilingual Computing & Technology, vol. 16 no. 8, pp.20-26.
Barros, P, Bin Liang, Q & Peypoch, N 2013, ‘The Efficiency Of French Regional Airports: An Inverse -Convex Analysis’, International Journal Of Production Economics, vol. 141 no. 2, pp. 668-674.
Cabon, P, Deharvengt, S, Grau, J, Maille, N, Berechet, I, & Mollard, R 2012, ‘Research And Guidelines For Implementing Fatigue Risk Management Systems For The French Regional Airlines’, Accident Analysis & Prevention, vol. 45 no. 2, pp.41-44.
Clemons, K & Madhani, N 2010, ‘Regulation Of Digital Businesses With Natural Monopolies Or Third-Party Payment Business Models: Antitrust Lessons From The Analysis Of Google’, Journal Of Management Information Systems, vol. 27 no. 3, pp. 43-80.
Flottau, J & Buyck, C 2013, ‘Rescue Attempts’, Aviation Week & Space Technology, vol. 175 no. 4, pp.33-33.
Freedman, M & Orr, D 2005, ‘The Long Haul’, Forbes, vol. 175 no. 6, pp. 100-106.
Harned, S, Sheehy, F & Yao, C 2012, ‘Safran: Winning With The Right Position In The Commercial Aircraft Aftermarket. Bernstein Black Book – Safran’, Winning With The Right Position In The Commercial Aircraft Aftermarket, vol.1 no.1, pp. 1-89.
Knibb, D 2012, ‘Model Muddle’, Airline Business, vol. 28 no. 10, pp. 28-31.
Labous, J 2013, ‘Continental Shift’, Business Traveller, vol.1 no. 1, pp. 24-30.
Sparaco, P 2011, ‘French Unrest’, Aviation Week & Space Technology, vol. 173 no. 39, pp.20-20.
Thomas, A 2012, ‘Unwrapping Packages’, Airline Business, vol. 28 no.10, pp. 54-56.
Wong, C & O’connor, P 2011, ‘French Online Travel Overview Seventh Edition’, Phocuswright Report: Global Edition, vol. 1 no. 1, pp. 1-40.
For a long period, the airline business has been categorized as ‘lucrative’. The notion that the airline business is lucrative is partly perpetuated by the fact that it is the most costly form of transport. Also, the huge capital base of the airline business makes it one of the most stable types of business. For instance, the assets of an airline at any given time include planes, hangers, and cargo bays, which translate into a lot of capital base for an airline.
Consequently, various airlines utilize a set of factors when they are coming up with different costs for their products and services. However, sources of revenue for an airline remain the most prominent determinant of cost. This is also the reason why there are big disparities in costs between different airlines. This report seeks to identify the factors that contribute to the cost of an airline using Air France as a model.
Besides, the report describes the different sources of revenue for the airline. Air France (AF) is the main airline in France and it has its headquarters in Paris. The airline is owned by the Sky Team Global Alliance jointly with Air France-KLM. AF’s business includes cargo and passengers in both France and 93 other countries around the world. The airline has been in existence since 1933 as a result of a merger between several airline-businesses of the time.
Currently, the airline is categorized as a business leader due to the market share it commands in France and other parts of the world. Consequently, at any given time matters to do with costing and revenue are pertinent to AF. As a big business, AF encounters significant direct and indirect operating costs, which are correlated with revenue to determine appropriate costing. This report utilizes the annual financial report for AF to identify the factors that contribute to its costs about its various sources of revenue.
Direct Operating Costs
AF’s direct operating costs constitute a wide range of factors but wages, salaries, and fuel dominate this category. Fuel costs make up the second-highest operating costs and they reflect global patterns in the airline industry. However, the escalating salary costs have to do with the size of the AF. As a ‘giant’ airline, AF requires a higher threshold of employees for its maintenance needs. For its costing needs, the airline is more likely to rely on salary and wage costs because this factor is more stable than fuel prices. For instance, the company’s long-term plans are often destabilized by changes in fuel costs.
Equipment and plant maintenance make up 9% of all direct costs at AF. This unexpected factor is constant and it is only expected to affect the prices of air tickets in the long term. Although fuel is only the second significant factor as far as direct costs are concerned, its fluctuating nature makes it a major determinant of short-term airline-costs. Catering and chartering costs makeup only a small portion of AF’s online but the company’s annual report reveals their significance in attracting and retaining customers (Air France 2012). For example, most of AF’s advertisements focus on passenger comfort for the company to gain a much-needed market share.
Indirect Airline Operating Costs
The indirect airline operating costs are also a significant factor in airline costs although they do not carry as much weight as direct factors. Nevertheless, indirect operating costs are significant as far as industry standards are concerned. In the case of AF, most of its indirect operating costs are incurred through landing fees and en-route charges. These cost factors are important to AF because they are part of the core determinants of product costs.
For example, these types of costs are different and vary from one area of jurisdiction to the other. The airline does not have any powers to control these types of costs and the customer often bears these expenses directly. Handling charges and other operating costs also make up a significant portion of the indirect operating costs. This category of expenses is important for AF in the company’s quest to maintain high standards. This cost factor is also static and it is directly passed on to consumers.
Another indirect cost factor is aircraft operating and lease costs. This factor changes by various stages of business. AF can use the lease costs to stabilize its business in instances of unstable environments. In early 2012, “faced with negative results, the Air France-KLM Board of Directors set three priorities: restoring competitiveness through cost-cutting, restructuring the short and medium-haul operations and rapidly reducing debt” (Air France 2012). For example, leased aircraft can be essential in bringing supply and demand equilibrium to the business. This cost factor is a good cost strategy for AF to gain lost ground in instances of slowdowns in performance
Revenues
Passengers are the main sources of revenue for AF and this trend aligns with the company’s business model. Overall, AF generated approximately 25.63 billion Euros, and passengers accounted for 79% of this income. On the other hand, this revenue indicates success on the part of AF whereby the company can record a load factor of 83.1 %. Eventually, the company’s costing practices are substantiated by the revenue it generates from its passenger service.
There is an ongoing struggle among various airline businesses to make cargo a significant income-generating factor. Consequently, all major airlines around the world endeavor to generate at least 10% of their revenue from cargo business. Unlike passenger-related prices, cargo costs remain largely stable. Therefore, the 12% revenue from the cargo business indicates that AF is indeed a global leader in the airline business. The most important costing factor for AF as per the company’s revenue structure is fuel costs, human resource elements, and advertising costs. As a big company, AF manages to rake in revenue from its maintenance business whereby it handles 1,300 aircraft per year. Also, AF has managed to earn an additional 5% in revenue from its diversified business sources.
Conclusion
AF costs are mainly aimed at maintaining the airline’s position as a market leader whilst managing to achieve positive growth. The airline’s operations still follow the traditional business model of business whereby various types of products are offered with the view of maximizing revenue and catering to a wide range of customers. This costing method follows a model whereby “the price is fixed and the main task of revenue management is to maximize returns by controlling capacity” (Fedorco & Hospodka 2013). An analysis of AF indicates that wages, salaries, and fuel costs make up the majority of operating costs at 71%.
Consequently, these two factors have a significant impact on the costing strategies that are used by AF. Fuel constitutes 35% of AF’s total direct-operational costs and this element is passed on to the customer directly. When the prices of oil keep changing from time to time, it becomes difficult for an airline to maintain stability in its prices. Some companies deal with this uncertainty by maintaining stable fare prices and adding fuel surcharges when necessary.
AF’s pricing strategy is based on class categories where the number of seats in each passenger category remains fixed. Consequently, the complexities of customer service lead to high costs in employee wages and salaries. The fuel and wage factors are responsible for the constantly changing AF ticket prices. For instance, sometimes the prices of AF air tickets changes from week to week depending on forecasts and capacities. Other than fuel and wages, all other direct airline-operating costs for AF do not have any significant effects on costs. On the other hand, indirect operating costs also carry a significant pricing factor.
Most indirect costs affect passenger’s ticket prices depending on seasons. For instance, high-demand seasons naturally nullify the indirect costs factor in several ways. The major indirect costs for AF are landing and handling costs. If an airplane does not stay on the runway for a significant period, these costs automatically come down. The reason why the airline is focused on passenger satisfaction and accommodation too much is that this is the main revenue generator for AF. Consequently, AF’s costs are dominated by employees’ wages because this factor directly contributes to obtaining more passengers.