Airlines cost segmentation

airline Airline Economics costs fixed costs segmentation variable costs
New answer on Feb 28, 2020
6 Answers
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Anonymous asked on Feb 15, 2020

I would like your opinion on the following segmentation on airline costs, instead of the common fixed vs variable:

Flight costs

  • Aircraft lease
  • Maintenance
  • Fuel
  • COGS
  • Salaries
  • Flying Fees

Ground costs

  • Gates lease/Airport Fess
  • Facilities
  • Ground crew
  • Booking

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Luca
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replied on Feb 28, 2020
BCG |NASA |20+ interviews with 100% success rate| 120+ students coached |GMAT expert 780/800 score

Hello Theo,

Thi is fine, but consider that the differentiation between fixed and variable costs is fundamental when you have to do some considerations involving variable volumes.

Best,
Luca

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Anonymous replied on Feb 16, 2020

Hi Theo,

In general, trying to tailor a cost structure to a specific industry ahead of time is challenging, because you're trying to hit a moving target. Even if it's an airline case, what if you're solving for an airport operator (which operates planes for airlines like Delta), or lessor, or flight simulator manufacturer? The usefulness of starting with variable vs. fixed is that a) the interviewer can follow it easier (as that's probably how they're thinking about it, and how their numbers are structured), and b) having a bucket for variable ensures you can better tie costs to revenues. For the airline example, you'll have a whole series of costs related to food or luggage you might cover in a framework like yours that trys to get them all ahead of time.

Finally, MECE MECE MECE. that's the key for all of this.

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Clara
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replied on Feb 15, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

The challenge that I would make you is: how is this framework better than the fixed vs. variable cost one?

It might be more "original", but also less MECE -for the reasons outlined in the other comments, with which I totally agree-.

Furthermore, fixed vs. varibles is something that will always come to your mind when you are under stress -do not understimate this- and work.

Hope it helps!

Best,

Clara

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Antonello
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replied on Feb 16, 2020
McKinsey | MBA professor for consulting interviews

Hi Theo,
providing another segmentation is fine, but it is also important to distinguish fixed and variable costs, since they present an important difference.

Best,
Antonello

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Ash replied on Feb 15, 2020
Non-PL cases preferred, thx.

That looks a bit overlapping cause you are essentially doing "cross-functional" around 2 domain areas. You might want to replicate exactly the same structure and put those components into structure buckets. Say for example the overall cost will be fixed vs variable under ground and flight.

Or have a look around exhaustive components/workflows of ground vs flight.

Or breaking down the cost by company departments.

Examples:

- Marketing and advertising

- Agents

- Customer retention/differentiated offerings (loyalty programmes, etc.)

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Thad
Proficient
replied on Feb 15, 2020
Preparing for BCG interview currently as I continue applying

Hi Theo!

I think this is an interesting method to split costs and might work, but I see two instances where this is less than ideal.

  1. It is not completely MECE. You have salaries in both buckets (i.e. "Flight costs > salaries"; "Ground costs > salaries"). Additionally, what if there are additional costs that don't quite fall into these two categories? (I don't know if this is true, but perhaps.)
  2. There is mixed time/unit vs fixed financial values. In your "Flight costs" buckets, "fuel" is likely per mile while "aircraft lease" is time-dependent (e.g. year).

If you're interested in other potential frameworks, I wonder if another organization like below would work (and would be interested in what you/others think).

  • Plane
    • Fuel
    • Maint.
    • Cost/lease + turnover rate
    • Vehicle insurance
  • People
    • Salaries
    • Other compensation
    • Health insurance
  • Facilities
    • Gate fees
    • Others (?)

Hopefully this is helpful!

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Luca gave the best answer

Luca

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