ABSTRACT
Chapter Overview
The unit cost of output is the last of four elements in the operating performance model around which Part 2 of the book has been structured.
Traffic × Yield > < Output × Unit Cost
= OPERATING PERFORMANCE (i.e., PROFIT or LOSS)
Unit cost is total operating cost divided by output, and is therefore expressed as cost per ASM (ASK) or ATM (ATK). This chapter will look first at different definitions of cost and approaches to the accounting treatment of costs, and will then briefly review significant airline cost drivers. Broad approaches to cost management within the industry will be discussed. Three critical points to take from the chapter are that:
most costs are open to a variety of definitions and interpretations;
passengers do not care about airline costs, but most do care about fares;
the purpose of incurring any cost is to generate revenue. It is possible in some markets to make money with a high-cost/high-yield product as well as with a low-cost/low-yield product. From a financial perspective, what matters is how productive each dollar of expenditure is in generating revenue. From a competitive perspective, what matters is how an airline’s costs compare with those of competitors targeting the same customers – because a carrier with lower costs can in principle use its advantage to earn higher margins and/or to price aggressively and gain market share.
