OPERATING COST MODEL

An airline as a business is most sensitive to profitability and safety, and every aspect of the business
is looked at very carefully from these two perspectives. The operating cost and bottom lines being
critical parameters for sustainability in a dynamic financial environment such as today, leads to
optimisation of all activities within the airline business to maximize profits. An important aspect
therefore of this PhD is to understand the financial implications of various environmental taxation
scenarios.
DOC for economic analysis is frequently used as the measure of merit to evaluate aircraft in design
trade-off studies. Various literature have been consulted during the course of this PhD to establish
the requirements and hence formulate a model to calculate operating cost.
Clark[3.12] like other references [3.2] classifies an airline operating cost into essentially two parts:
Direct Operating Costs (DOC), being those costs which vary according to the aircraft type used and
Indirect Operating Cost(IOC), which are those costs that are not affected by aircraft type. The work
in this research essentially looks at optimised operations of conventional aircraft and hence
considers only the direct operating cost aspect as it will be affected by a change in operational
methodology.
A simple operating cost model has been built to enable the framework to feed the optimiser with
operating cost as an input and hence use it as an objective. A general schematic of the DOC model
used is as shown in figure 1.

Fig 1 General schematic indicating the flow of costs in an operating model

The model is based on the approach as described by Jenkinson [3.2] and largely on the concept of
Cost Index. The Cost Index method, essentially a trade-off between two key objectives fuel
consumed in a mission and time of the mission, and is one of the most prevalently used methods in
the industry while optimising operations cost. [3.14, 3.15]
The cost index is essentially the ratio of the cost of fuel and the time related cost in an airline
operation. The selected value of cost index reflects the relative value of the cost of fuel on cost of
mission as compared to the time dependant direct operating cost.
The following section describes the key elements of a direct operating cost model which is then
followed by the actual structure implemented with a justification of various assumptions made.
Fuel costs: The basic components of the fuel calculation usually comprise the price of fuel (expressed
in US$/ metric ton) the rate of consumption, the characteristics of fuel if different from standard fuel
and the network the aircraft operates in. Fuel expenses, forms a 35% to 40% and hence a major
component [3.5] of an airlines overall operating cost. Therefore every airline tries to reduce its fuel
costs through improved efficiency in operations, investment in improved technology and fuel
hedging.

Aircraft fuel consumption is a function of the design of the aircraft and hence the overall
operating cost diminishes when a fuel efficient aircraft is utilised. Literature [3.12] therefore
recommends that economic analysis must decide if the fuel burn should reflect brand new aircraft or
require an introduction of deterioration factor. The current study will be examining a set of
optimised trajectories of a single type of aircraft and hence be a comparative analysis. Therefore no
deterioration factor has been introduced and the aircraft is assumed to fly at its design efficiency.

Fuel characteristics and price: Standard aviation jet fuel and price of fuel as specified by
IATA, have been assumed for the study [4.8].
Maintenance costs: In terms of aircraft fleet planning and costing analysis, literature indicates that
these costs are considered to be one of the most difficult to account for by the industry. However
broadly, these costs for may be categorised in terms of direct and indirect maintenance cost. The
direct maintenance costs essentially consider labour and material costs associated with the
maintenance of airframe, components and engines. The indirect maintenance costs in turn consider
aspects such as tooling, and administration. As the focus of this study is to only consider direct
operating costs, therefore only the direct maintenance cost (DMC) will form a part of it [3.12, 3.2].
Literature indicates that one of the most frequently used analytical methods is based on the Air
Transport Association Chapter System. This system is used to derive, for labour and material costs
hourly and cyclic elements. There exist various data sources which enable modelling of maintenance
costs and some of the key sources include data from manufacturers and IATA. This data is then
adjusted for common assumptions to enable meaningful comparison to be made for similar
conventional aircraft. [3.12, 3.2]
The main factors influencing maintenance cost include the following;

Airline influence: This essentially depends on the strategy followed by the respective airline based
on whether the maintenance is subcontracted or is undertaken in-house thus resulting in differing
costs based on the levels of investment on facilities and labour costs. This aspect is known to
radically affect the aircraft selection process by an airline.
Aircraft influence: This influence is based on the aircraft type and is relevant when comparing two
competing technologies.
Geographical influence: Aircraft operating in demanding conditions such as at higher altitudes and
or in desert air strips will have higher maintenance costs and hence this influence is valid when
comparing operations of aircraft at different geographic locations.
Route network and operations: The influence of route network and type of operations (depending
on the average range of the aircraft, essentially short haul or long haul) is considered to be
significant. Reference 3.12 indicates that it is not uncommon for a same aircraft type to incur double
the DMC on a short haul compared to a long haul network. The average sector length that an aircraft
is operated on is a critical factor as it decides the average flight hour to flight cycle ratio. This is due
to the fact that certain cyclic effects such as acceleration and deceleration of engines, use of
movable devices (landing gear and lift control devices) and pressurisation and depressurisation of
the fuselage have fixed cyclical lives and hence can be operated only for a set number of cycles as
per allowed annual utilisation. Therefore higher average sector lengths and hence high flight hour to
flight cycle ratios will necessitate the aircraft to perform fewer cycles annually. Figure 3.12 shows
this relationship. This effect has been considered in the model and will be discussed with the
assumptions.

Fig 3.12 Maintenance costs- Influence of sector length

Standing charges: The standing / ownership charges are not directly linked to a specific mission of
the aircraft, but depend on the type and annual utilisation of the aircraft. These charges are
calculated by the operating cost model as a part of the direct operating cost when an aircraft is
assumed to be procured through outright purchase, as opposed to being leased [3.12]. These

charges are critical as they will apply even if the aircraft is not utilised as per its average annual
utilisation and hence form a critical part of operating cost calculations for a mission. These charges
include:
Aircraft insurance: The insurance costs of an aircraft depend on the probable risks involved
and following and loss, the potential for an operator to make the claim. Due to very high
safety standards within the airline industry and a categorisation of risks involved by various
airworthiness authorities, technical risk are easily estimated. However based on
geographical areas that the aircraft is being operated in, and based on a possibility of losing
aircraft due to extraneous causes (such as terrorist strike and essentially non-technical
occurrences), results in a varying rate of insurance fees in relation to the nature of the
operation. For a generic study such as undertaken in this research, reference indicates that a
rate of 1.5% is considered typical [3.2]
Interest on capital employed: The rate of interest on investment within the airline industry
varies drastically and is very difficult to generalise. These charges are known to be influenced
by the global economic scenario prevailing, local currency exchange rates, credit rating of
the company making the investment and the export subsidies given by a particular
government of the operator. These costs may also be influenced by offset agreements. Due
to this high variability these cost are sometimes ignored, but as recommended by references
and for completeness it is usually necessary to include these costs in a general business
plan.[3.2,3.12]
Depreciation of the capital investment: As per references [3.2, 3.12 ] depreciation isbe
dependent on numerous factors including the capital involved, the airline purchasing
policies, the accounting practices of the financial loan companies, the competition for capital
and the overall world economic conditions at the time the aircraft is purchased. However in
the model the depreciation in airline investments is calculated using a simple straight line
method by initially deciding two key factors: depreciation period and residual value. This
then allows the calculation of an hourly depreciation charge. Typically commercial aircraft
are considered to have an operational/ useful life of 15-20 years and hence most airlines fix
their depreciation period for their aircraft within this period. The model assumes the aircraft
life to be 20 years.
In order to calculate the standing charges, the methodology suggested requires the following basic
information for a particular type of aircraft

Cost of the aircraft with engines(aircraft specific)

 Insurance as a percentage of aircraft cost

/=
( %/100)
/ (  = % /100)

/(  = %/100)
/ = /+ /+ /

/ =
(/ )/ ()

Crew Costs: This essentially includes the cost of salaries for the flight and cabin crew. The number of
crew required per flight is dependent on airworthiness standards/ regulations and labour union
agreements. However usually there is a requirement of two flight crew for smaller aircraft (single
aisle narrow body) travelling shorter stages. The requirement of cabin staff is associated with the
number of passengers with a mandatory regulation of at least on cabin attendant for 30-50
passengers per cabin attendant. The costs of crew wages are calculated on per block hour basis
utilisation, but the rates differ between airlines and between aircraft type.
IMPLEMENTATION OF THE OPERATING COST MODEL
To enable the calculation of operating cost for the conventional aircraft (Boeing 737-800), data for
the inputs as discussed, was adapted from public domain references which contained maintenance
and operational data for the aircraft [3.16]. The assumptions for rates of interest, depreciation and
insurance and aircraft age were made on recommendations by Jenkinson [3.2]
a.
Time dependant costs: In order to calculate the time dependant costs the basics
assumptions for the various inputs discussed in the previous section include the following
i. Price of the aircraft and propulsion unit : The acquisition prices was set at US $ million 80.8
and 8.4(per unit) for the aircraft and propulsion unit respectively [3.17]
ii. Crew and salaries: The crew salaries in the model are calculated on an hourly basis and
assume the aircraft has 2 flight deck crew and 6 cabin crew. This is a standard assumption for
an aircraft of this type. The salaries have been set in the model for the flight deck crew and
cabin crew at US$ 140/hour and US$ 50/hour, per individual respectively.[3.12, 3.18]

iii. Standing charges: the following assumptions were for the inputs required to calculate the
standing charges as detailed earlier[3.2]:
1. Cost of airframe spares as a percentage of airframe cost: 10%
2. Cost of propulsion unit spares as a percentage of propulsion unit cost: 30%
3. Aircraft useful life : 20 years
4. Residual value of aircraft due to depreciation at end of life:10%
5. Interest on investment (Percentage of investment cost): 5.5%
6. Insurance on investment (Percentage of investment cost): 0.5%
iv. Airframe and engine maintenance charges: As discussed earlier the aircraft and engine
model were based on a conventionally used single aisle narrow body, short/medium range
aircraft - Boeing 737-800 with CFM 56 7B engines. As the aircraft has been in service since
1998, significant amount of information is available from literature[3.16].
While assessing the economic performance of an aircraft, every conventional aircraft is
assumed to have a certain average annual utilisation in terms of number of flying hours, flight
cycles and a ratio of flight hours to flight cycles (FH/FC). Based on the periodicity of the
maintenance routines and the average number of annual flying hours a cost of maintenance
per hour may be established. Table 3.3 lists the direct maintenance costs of the Boeing 737800 which has been calculated for an average annual utilisation of 3300 flight hours and 1700
flight cycles thus resulting in an average flight hour to flight cycle ratio of 1.95.
As discussed earlier, literature indicates that the same aircraft type, when compared to its
utilisation over a long haul route, may sometimes incur up to twice the direct maintenance
cost when used for short ranges. Primarily attributed to cyclic costs, short range utilisation
leads to higher number of cycles and hence higher cyclical costs and hence if the consolidated
cost (cyclic costs + hourly costs) is considered on an hourly basis (as available in the data in
table 3.3) , then as the time of the mission increases the hourly cost may be assumed to
reduce.[3.2]
To simulate the effect of different route networks (in terms of range) and their corresponding
effect on direct maintenance costs a certain number of assumptions are made in the model.
Depending on the range of the mission, and consequently the time of the mission, the model
recalculates the FH/FC ratio. If the FH/FC is less than that for which the maintenance cost data
is provided (1.95), the cost per hour is recalculated assuming the annual cost remains the
same and the aircraft does not exceed 1700 cycles per year. However if FH/FC ratio is greater
than 1.95, the hourly cost maintenance cost is assumed to remain the same as shown in table
3.3. An illustrative example may use to explain this assumption.

Annual Utilisation
Flight hours(FH)/ year
Flight cycles(FC)/year
FH/FC ratio
Airframe maintenance
Line and ramp checks ($/FH)
A checks ($/FH)
Base checks ($/FH)
Stripping and repainting ($/FH)
Interior refurbishment ($/FH)
Heavy component ($/FH)
LRU component support ($/FH)
Total airframe and component maintenance ($/FH)
Engine maintenance
CFM56-7B27 ($/FH)
Total maintenance cost (engine+ airframe) for FH/FC
ratio ($/FH)

3300
1700
1.95

110
32
65-70
5
28
130
235255
617.5
222.5
1062.5

Table 3.3 Direct maintenance cost for Boeing 737-800 [3.16]

From the data (table 3.3) above, it is seen that for a FH/FC ratio of 1.95, the maintenance cost
per hour is calculated to be US$ 1062.5. Therefore for 3300 hours of operation the annual cost
of maintenance for the airframe and engine (per unit) will be US$ 2,037,750 and US$ 734,250
respectively.
Consider an average mission of range 581 nm, for which the aircraft is assumed to have a
flight time of 102 min [3.16]. Therefore for this flight the flight hour per flight cycle ratio is 1.7.
If the annual cost of maintenance is then assumed to be the same as the data above for the
model, then it is further assumed that either the flight cycles or the flight hours per year must
be equal to the average stipulated utilisation, while not exceeding the other. Therefore in this
case for an average maximum utilisation of 1700 cycles, the aircraft will be able fly up to 2890
flight hours annually, instead of 3300, thereby achieving an average utilisation of 4.65 flights
per day (7.905 hours per day). This value is considered reasonable, as the utilisation per day
for this particular aircraft on for average mission of range of 727nm is 4.67 flights per day
(8.36 hours per day) [3.19]. If then, the total annual costs are assumed to remain the same,
then the engine and airframe maintenance cost will increase to US$ 254.06 and US$ 705.10
respectively (averaging a consolidated cost of US$ 1213.22 per hour).Further, based on this
method an equation was then generated to simulate the costs for missions of varying ranges
(figure 3.13).

Fig 3.13 Maintenance costs with varying mission time

As the method utilises a derived correlation and significant assumptions, it is not of high
accuracy in terms of actual maintenance cost calculations, but however given the wider scope
of this study the trend observed is considered representative of what may be observed and
hence was used in the model.
b.
Fuel dependant costs: These costs essentially depend on the cost of the fuel used and the
total amount of fuel consumed during the flight. Aviation Fuel price is available through IATA and the
model may also use a fuel price based on future scenarios. For the first section of the study analysing
operations, the fuel price has been assumed to be US$1098/mt, while for the second section
analysing technologies, the fuel price has been assumed to be US$1062/mt. This difference has
occurred because the studies have been carried out at different times during the course of the three
year PhD, and hence as these models have been demonstrated at various forums to industrial
partners, for illustration the prevailing prices at the time were assumed for analysis.
c.
Emission dependant costs: The model currently calculates the emission costs for a flight
based on the taxation scenario and the total amount of emissions (currently CO2 and NOx)
generated. As the framework calculates emissions per segment and also for a complete mission,
emission taxation can be applied segment wise (such as a specific tax for cruise NOx) and also for a
whole mission.