Research Article
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Analysis of Cost Structures and Cost Control Strategies of Airlines: An Empirical Study on A Hypothetical Airline Company

Year 2022, , 42 - 49, 23.03.2022
https://doi.org/10.30518/jav.1024489

Abstract

In the context of controlling costs in the airline industry, this study aims to determine empirically until which available seat mile (ASM) should an airline continue its activities based on an analysis of the costs and revenues incurred relating to these ASM. The study is based on a hypothetical company and the data used indicated that the company has reached profitability between certain efficiency levels (ASM). The results also showed that the airline can still continue its activities at efficiency levels where it is making a loss but only in situations where its total income exceeds its total variable costs (creating positive added value). In the study, it is pointed out that companies in the airline industry, which are under the pressure of intense competition and uncontrollable factors, can still survive and maintain their competitive power through the cost control methods they can apply.

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Project Number

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References

  • Alamdari, F. and, Fagan, S. (2005). Impact of the adherence to the original low-cost model on the profitability of low-cost airlines. Transport Reviews, 25(3), 377-392. Alpaslan, H.İ. (2010). Faaliyet tabanlı maliyetleme ve havayolu işletmeleri üzerine bir uygulama. Doctoral Dissertation. Marmara University, Turkey.
  • Baltagi, B.H., Griffin, J.M. and Rich, D.P. (1995). Airline deregulation: The cost pieces of the puzzle. International Economic Review, 245-258.
  • Caves, D.W., Laurits, R.C., Tretheway, M.W. and Windle, R.J. (1987). An Assessment of the Efficiency Effects of U.S. Airline Deregulation via an International Comparison. In: Elizabeth E. Bailey, ed.: Public Regulation: New Perspectives on Instit utions and Policies. Cambridge, Mass.: MIT Press.
  • Chang, Y.H. and Shao, P.C. (2011). Operating cost control strategies for airlines. African Journal of Business Management, 5(26), 10396-10409.
  • Daraban, B. (2012). The low cost carrier revolution continues: evidence from the US airline industry. Journal of Business and Economics Research, 10(1), 37-44.
  • Diaconu, L. (2013). The impact of the economic crises from the xxist century on the European low-cost airlines’ market. The USV Annals of Economics and Public Administration, 12(1 (15)), 91-98.
  • Doganis, R. (1985). Flying Off Course. London: George Allen & Unwin.
  • Evripidou, L. (2012). M&As in the airline industry: motives and systematic risk. International Journal of Organizational Analysis. 20(4), 435-466.
  • Franke, M. (2004). Competition between network carriers and low-cost carriers—retreat battle or breakthrough to a new level of efficiency?. Journal of Air Transport Management, 10(1), 15-21.
  • Goh, M. and Yong, J. (2006). Impacts of code-share alliances on airline cost structure: A truncated third-order translog stimation. International Journal of Industrial Organization, 24(4), 835-866.
  • Hatty, H. and Hollmeier, S. (2003). Airline strategy in the 2001/2002 crisis – the Lufthansa example. Journal of Air Transport Management, 9(1), 51-55.
  • Hofer, C., Windle, R.J. and Dresner, M.E. (2008). Price premiums and low cost carrier competition. Transportation Research Part E: Logistics and Transportation Review, 44(5), 864-882.
  • Jordan, W.A. (1982). Performance of regulated Canadian airlines in domestic and transborder operations. Consumer and Corporate Affairs Report, Ottawa
  • Köse, Y. (2020). Havayolu Sektöründe Geleneksel ve Faaliyet Tabanlı Maliyetleme Uygulamalarının Karşılaştırılması: Analatik Bir İnceleme. International Journal of Entrepreneurship and Management Inquires. 227-236.
  • Kumar, B.R. (2012). Mergers and acquisitions in the airline industry. In Mega Mergers and Acquisitions (pp. 226-230). Palgrave Macmillan, London.
  • Lim, S.H. and Hong, Y. (2014). Fuel hedging and airline operating costs, Journal of Air Transport Management, 36, 33-40.
  • Merkert, R. and Morrell, P.S. (2012). Mergers and acquisitions in aviation–Management and economic perspectives on the size of airlines. Transportation Research Part E: Logistics and Transportation Review, 48(4), 853-862.
  • Meyer, J.R., Oster, C.V., Morgan, I.P., Berman, B.A. and Strassman, D.L. (1981). Airline Deregulation: The Early Experience. Auburn House, Cambridge, MA.
  • Morrell, P.S. and Taneja, N.K. (1979). Airline productivity redefined: an analysis of US and European carriers. Transportation, 8(1), 37-49.
  • Nolan, J., Ritchie, P. and Rowcroft, J. (2014). International Mergers and Acquisitions in the Airline Industry. The Economics of International Airline Transport (Advances in Airline Economics, Vol. 4), Emerald Group Publishing Limited, Bingley, 127-150.
  • O' Connell, J. (2007). The Strategic Response of full Service Airlines to the low Cost Carrier Threat and the Perception of Passengers to Each Type of Carrier Doctoral Dissertation. Cranfield University, Cranfield.
  • Oum, T.H. and Yu, C. (1998). Cost competitiveness of major airlines: an international comparison. Transportation part A: Policy and Practice, 32(6), 407-422.
  • Pryke, R. (1987). Competition among International Airlines. Aldershot, United Kingdom: Gower Smith, F.I. and Wilson, R.L. (1995). The predictive validity of the Karnani and Wernerfelt model of multipoint competition. Strategic Management Journal. 16(2), 143-160.
  • Stiglitz, J.E., McFadden, D. and Peltzman, S. (1987). Technological change, sunk costs, and competition. Brookings Papers on Economic Activity, 1987(3), 883-947.
  • Tretheway, M.W. (2004). Distortions of airline revenues: why the network airline business model is broken. Journal of Air Transport Management, 10(1), 3-14.
  • Tsoukalas, G., Belobaba, P. and Swelbar, W. (2008). Cost convergence in the US airline industry: An analysis of unit costs 1995–2006. Journal of Air Transport Management, 14(4), 179-187.
  • Uslu, S. and Cavcar, A. (2002). Havayolu işletmelerinde bir maliyet unsuru: Avrupa Hava Sahası’nda hava trafik yol ücretleri. Sosyal Bilimler Dergisi. https://www.acarindex.com/dosyalar/makale/acarindex-1423869770.pdf (accessed 01.11.2021)
  • Vasigh, B., Fleming, K. and Macay, L. (2010). Foundation of Airline Finance: Methodology and Practice, Routledge, England.
  • Vasigh, B., Fleming, K. and Humphreys B. (2015). Foundation Of Airline Finance: Methodology and Practice, Routledge, England.
  • Wensveen, J.G. (2007). Air Transportation: A Management Perspective, Ashgate, England.
  • Zuidberg, J. (2014). Identifying airline cost economies: An econometric analysis of the factors affecting aircraft operating costs. Journal of Air Transport Management, 40, 86-95.
  • https://thepointsguy.com/news/american-airlines-cost-cutting-2020-loss/, (accessed 29.10.2021)
  • https://www.sia-partners.com/en/news-and-publications/from-our-experts/partnerships-between-airlines-strategy-win-asian-market (accessed 30.10.2021)
Year 2022, , 42 - 49, 23.03.2022
https://doi.org/10.30518/jav.1024489

Abstract

Project Number

----

References

  • Alamdari, F. and, Fagan, S. (2005). Impact of the adherence to the original low-cost model on the profitability of low-cost airlines. Transport Reviews, 25(3), 377-392. Alpaslan, H.İ. (2010). Faaliyet tabanlı maliyetleme ve havayolu işletmeleri üzerine bir uygulama. Doctoral Dissertation. Marmara University, Turkey.
  • Baltagi, B.H., Griffin, J.M. and Rich, D.P. (1995). Airline deregulation: The cost pieces of the puzzle. International Economic Review, 245-258.
  • Caves, D.W., Laurits, R.C., Tretheway, M.W. and Windle, R.J. (1987). An Assessment of the Efficiency Effects of U.S. Airline Deregulation via an International Comparison. In: Elizabeth E. Bailey, ed.: Public Regulation: New Perspectives on Instit utions and Policies. Cambridge, Mass.: MIT Press.
  • Chang, Y.H. and Shao, P.C. (2011). Operating cost control strategies for airlines. African Journal of Business Management, 5(26), 10396-10409.
  • Daraban, B. (2012). The low cost carrier revolution continues: evidence from the US airline industry. Journal of Business and Economics Research, 10(1), 37-44.
  • Diaconu, L. (2013). The impact of the economic crises from the xxist century on the European low-cost airlines’ market. The USV Annals of Economics and Public Administration, 12(1 (15)), 91-98.
  • Doganis, R. (1985). Flying Off Course. London: George Allen & Unwin.
  • Evripidou, L. (2012). M&As in the airline industry: motives and systematic risk. International Journal of Organizational Analysis. 20(4), 435-466.
  • Franke, M. (2004). Competition between network carriers and low-cost carriers—retreat battle or breakthrough to a new level of efficiency?. Journal of Air Transport Management, 10(1), 15-21.
  • Goh, M. and Yong, J. (2006). Impacts of code-share alliances on airline cost structure: A truncated third-order translog stimation. International Journal of Industrial Organization, 24(4), 835-866.
  • Hatty, H. and Hollmeier, S. (2003). Airline strategy in the 2001/2002 crisis – the Lufthansa example. Journal of Air Transport Management, 9(1), 51-55.
  • Hofer, C., Windle, R.J. and Dresner, M.E. (2008). Price premiums and low cost carrier competition. Transportation Research Part E: Logistics and Transportation Review, 44(5), 864-882.
  • Jordan, W.A. (1982). Performance of regulated Canadian airlines in domestic and transborder operations. Consumer and Corporate Affairs Report, Ottawa
  • Köse, Y. (2020). Havayolu Sektöründe Geleneksel ve Faaliyet Tabanlı Maliyetleme Uygulamalarının Karşılaştırılması: Analatik Bir İnceleme. International Journal of Entrepreneurship and Management Inquires. 227-236.
  • Kumar, B.R. (2012). Mergers and acquisitions in the airline industry. In Mega Mergers and Acquisitions (pp. 226-230). Palgrave Macmillan, London.
  • Lim, S.H. and Hong, Y. (2014). Fuel hedging and airline operating costs, Journal of Air Transport Management, 36, 33-40.
  • Merkert, R. and Morrell, P.S. (2012). Mergers and acquisitions in aviation–Management and economic perspectives on the size of airlines. Transportation Research Part E: Logistics and Transportation Review, 48(4), 853-862.
  • Meyer, J.R., Oster, C.V., Morgan, I.P., Berman, B.A. and Strassman, D.L. (1981). Airline Deregulation: The Early Experience. Auburn House, Cambridge, MA.
  • Morrell, P.S. and Taneja, N.K. (1979). Airline productivity redefined: an analysis of US and European carriers. Transportation, 8(1), 37-49.
  • Nolan, J., Ritchie, P. and Rowcroft, J. (2014). International Mergers and Acquisitions in the Airline Industry. The Economics of International Airline Transport (Advances in Airline Economics, Vol. 4), Emerald Group Publishing Limited, Bingley, 127-150.
  • O' Connell, J. (2007). The Strategic Response of full Service Airlines to the low Cost Carrier Threat and the Perception of Passengers to Each Type of Carrier Doctoral Dissertation. Cranfield University, Cranfield.
  • Oum, T.H. and Yu, C. (1998). Cost competitiveness of major airlines: an international comparison. Transportation part A: Policy and Practice, 32(6), 407-422.
  • Pryke, R. (1987). Competition among International Airlines. Aldershot, United Kingdom: Gower Smith, F.I. and Wilson, R.L. (1995). The predictive validity of the Karnani and Wernerfelt model of multipoint competition. Strategic Management Journal. 16(2), 143-160.
  • Stiglitz, J.E., McFadden, D. and Peltzman, S. (1987). Technological change, sunk costs, and competition. Brookings Papers on Economic Activity, 1987(3), 883-947.
  • Tretheway, M.W. (2004). Distortions of airline revenues: why the network airline business model is broken. Journal of Air Transport Management, 10(1), 3-14.
  • Tsoukalas, G., Belobaba, P. and Swelbar, W. (2008). Cost convergence in the US airline industry: An analysis of unit costs 1995–2006. Journal of Air Transport Management, 14(4), 179-187.
  • Uslu, S. and Cavcar, A. (2002). Havayolu işletmelerinde bir maliyet unsuru: Avrupa Hava Sahası’nda hava trafik yol ücretleri. Sosyal Bilimler Dergisi. https://www.acarindex.com/dosyalar/makale/acarindex-1423869770.pdf (accessed 01.11.2021)
  • Vasigh, B., Fleming, K. and Macay, L. (2010). Foundation of Airline Finance: Methodology and Practice, Routledge, England.
  • Vasigh, B., Fleming, K. and Humphreys B. (2015). Foundation Of Airline Finance: Methodology and Practice, Routledge, England.
  • Wensveen, J.G. (2007). Air Transportation: A Management Perspective, Ashgate, England.
  • Zuidberg, J. (2014). Identifying airline cost economies: An econometric analysis of the factors affecting aircraft operating costs. Journal of Air Transport Management, 40, 86-95.
  • https://thepointsguy.com/news/american-airlines-cost-cutting-2020-loss/, (accessed 29.10.2021)
  • https://www.sia-partners.com/en/news-and-publications/from-our-experts/partnerships-between-airlines-strategy-win-asian-market (accessed 30.10.2021)
There are 33 citations in total.

Details

Primary Language English
Journal Section Research Articles
Authors

Yaşar Köse 0000-0003-0073-2095

Ceyda Aktan 0000-0001-7040-4711

Project Number ----
Publication Date March 23, 2022
Submission Date November 16, 2021
Acceptance Date February 10, 2022
Published in Issue Year 2022

Cite

APA Köse, Y., & Aktan, C. (2022). Analysis of Cost Structures and Cost Control Strategies of Airlines: An Empirical Study on A Hypothetical Airline Company. Journal of Aviation, 6(1), 42-49. https://doi.org/10.30518/jav.1024489

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