# 8.4: Airlines' cost structure

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The calculus of economic costs constitutes a necessity within every single enterprise. It is valuable for measuring the efficiency of the different areas, deciding on new investments, and obviously to set the prices for the supplied products (in the case of airlines, services) is based on desired profits and estimated forecasts. Two important references in airlines’ economics are Doganis [5] and Doganis [4].

Focusing on costs, the breaking down taxonomy varies depending on the company. However they are typically adjusted to the cost classification stablished by ICAO. A fundamental division arises when dividing operational costs and non operational costs (also refereed to as operative and non-operative costs):

• Operational costs: Expenses associated with administering a business on a daily basis. Operating costs include both fixed costs and variable costs. According to a somehow canonical definition, fixed costs, such as infrastructures or advertising, remain the same regardless of the number of products produced; variable costs, such as materials or labour, can vary according to how much product is produced. In airlines terminology, they are referred to as Direct Operational Costs (DOC) and Indirect Operational Costs (IOC):
– DOC are related to the operation of the aircraft
– IOC are related to the running of the airline company and, therefore, regardless of the aircraft operation.
• Non-operational costs: associated to expenses not related to day to day operations, typically financial costs.

Table 8.10: Cost structure of a typical airline.

We could keep breaking down the different costs, however with this general framework we can expose a typical taxonomy of the cost structure of an airline company as illustrated in Table 8.10.

The non-operational costs are also refereed to as capital costs or simply financial costs. As pointed out above, they can be divided into:

• Loans amortization.
• Capital interests.

The concept loans amortizations refers to the distribution of an acquisition in different payment periods. This fact implies typically interests.

8.4: Airlines' cost structure is shared under a CC BY-SA 3.0 license and was authored, remixed, and/or curated by Manuel Soler Arnedo via source content that was edited to conform to the style and standards of the LibreTexts platform; a detailed edit history is available upon request.