Airline Economics: How much it costs to fly you?

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Last year, I was traveling from Bangalore to Mumbai and I booked a pretty cheap ticket of Rs 2500 with some card discounts. I was just doing the math in my mind, “Bangalore Mumbai distance is 1000km so I am paying 2.5Rs per kilometer which is great considering the luxury you get to travel plus the time it takes for the same alternate transports ( 1.5 Rs/km for bus travel ) and (1Rs /km) for Railway.”

Assuming I booked early and airlines follow the dynamic pricing rule (Prices follow an increasing trend as the date of travel) and many other factors which can be part of a broader discussion, I was wondering what it actually costs an airline to transport 1 ASK (Available seat kilometer). Ok simplifying the airline jargons a bit here.

ASK — Available seat kilometers (Let’s say this Bangalore-Mumbai flight is airbus 320 which has 180 seats so for this flight the ASK is 180 seats * 1000 (distance in km) = 180,000.

Ok, coming back to my earlier thought I was wondering whether it would cost me the same if I traveled 1000 km within the USA or Europe and if the costs that airlines incur are similar.

I went back to the drawing board and downloaded a few financial statements of domestic carriers of India, the USA, and Europe and this is the result I found.

Dividing the cost by ASK, we get the cost of 1 ASK. For the southwest airline, this cost is directly available in the annual statement (Though had to convert from USD and Miles). But the following was an interesting result that I found.

So basically it takes 3.5Rs for Indigo Airlines to transport 1 passenger seat for 1 km while it takes 5.5Rs for southwest airlines to do the same.

If we look at Indigo or India-based airlines Fuel is the biggest cost contributing to more than 40%, the next is ownership cost at 19%, and Compensation at 11%. Though we don’t have the distribution of other costs these would include maintenance, parking, landing charges, catering and much more so we won’t deep dive into that.

For typical US-based airlines, the major cost component is compensation at over 40 % followed by fuel which is over 20% and then Ownership cost at 13%.

The quick comparison tells us that fuel cost is the same for both airlines ( Major factors that might contribute to the difference: Fuel Tax in India is similar. Ownership cost as well is more or less similar.

The major difference is in compensation which is 0.38Rupees per KM for Indigo vs 2.35 Rupees for 1 ASK for Southwest contributing the major factor in the total cost from 3.5 Rs/km to 5.5 Rs/km.

Lessons learned

1) For an Indian airline to compensate for operating costs for 1000kms, they should charge 3500 Rs on average per seat assuming a 100% load factor. Check the distance you are traveling within India and if your ticket cost is less than this or up to 20% higher than this, then you are gaining from the travel and you are actually a loss-making customer to the airline

2) Domestic air travel is cheaper in India than in the USA

3) Indian Airlines are paying more for Fuel costs and are more affected because of fuel price fluctuations than their western counterparts

Impact on travel disruption

An air travel ban or another covid type situation would affect the western counterparts more as they are spending 40% of the money on compensation which won’t be affected even if you fly or not. So they need to take immediate measures (Furlough, Employee layoffs, reduced pay) to reduce costs). Indian Airlines can bear this cost for a longer period as it makes up only 11% of their operating cost. Though this is subjective assuming the airlines have similar cash in hand for their operations