Cost accounting is an important
tool in deciding which make of airline should be purchased, otherwise you could
drive the operation under water filling seats with dead weight. This offering
won't explain cost accounting in detail, because textbooks start at 600 pages
long in business school. This is just one book per class taken on cost
accounting for that matter. But I will hope to explain the strategic importance
of knowing what airplane to buy for what business plan in play. That decision
has the element of cost accounting and revenue tracking in a seat/unit
relationship selling airplanes to airline customers. Its not about the bigger
is better, or smaller is cheaper, its more of lining up the line graphs for one
seat and finding the sweet spot for profitability. The secret is finding the
right tool for the right job.
Its all about the seats not the
wings when Cost Accounting is in play.
Analogy: Equipment is the key. If you have a landscaping business
what will you buy, a Backhoe, Bobcat, or Bulldozer? Probably a Bobcat, which is
a small piece of equipment that can do many things in a client’s back yard. No
Bulldozers needed here, for making piles of cash.
Back to cost accounting and Revenue units:
Each Airplane has seats that drives the mechanism for revenue and
profit. What diminishes the earnings margin are costs flows against the revenue
stream. The question then arises, how much does it cost to fly each seat
weather it’s filled or not? A two hundred seat 787 fly's empty for..., what cost?
Finally, how many seats sold where the variable cost plus fixed cost are paid
for by the margin? There are some variable cost found in the breakeven model
such as fuel, maintenance and direct cost related to the flying activity. At
this point, bean counters are just opening up briefcases sorting out the
financial mechanism of flying the 787. The next question is what are the fixed
cost on a 350 seat Airbus vs a 323 seat 787-10? So far more questions
before even one answer.
Fixed costs are defined by my "dummy definition", as a
cost of operating that airplane whether it operates or not. Such as salaries,
space costs, Administration and so forth. Variable cost are defined as those
costs associated with flying those seats every time the 787 leaves the ground
on a revenue flight. The variable is seat space or the number of tickets sold,
as measured against cost of flying all seats. A filled 200 seat 787 has costs
accruing from crew by the hour, fuel as it burns, and maintenance when it
lands, and so forth. The complexity deepens as the book turns its pages in cost
accounting. This is why accountants always talk to CEO's with the broad stroke
of saying "The Bottom Line", or what falls out in the plus column
every time we fly a certain route filling 200 seats. That brings it back to
what an airplane can do as a profit engine when we fly on a certain route? Do
we fly the Bobcat, or the Bulldozer, The 787-10 or the A350-9. Many airlines
are buying both types from the two manufacturers to hedge the bet.
Example, a one aircraft airline:
Airline Fix Cost = $1,000,000 a year whether it flies or not.
Variable Cost = $250 per seat. Or the actual cost of flying that
seat from point A to B
Ticket Price = $300 value per seat
Contribution Margin (CM) for each seat.= $50. Revenue (Ticket
Price)- Variable Cost (VC) of each flight = CM. Or R-VC=CM.
So, if 250 seats sold at $300 each = $75,000
Contribution Margin towards a profit= $12,500 on this flight and
for every flight when sold out ($50 x 250 seats) or in formula mode (75,000 R)-($62,500 vc) = $(12,500 cm)
Or using a calculator you figure the $50 CM will take 20,000 seats
sold in a year at $300 to breakeven on the fixed cost of 1 million. The
airplane must make 80 fully loaded flights to reach its breakeven point in this
example, and start making a profit. If the airline doesn't fill to capacity or
lowers its seat price in this model, then the big spreadsheet will change
progress to a profit at different rate. Airline ticket prices on an
extremely efficient, fuel savings of 20% and maintenance cost reductions of 30%
could allow airlines to beat the competition on lower airline ticket prices and
make more money than its competitors. The 787-10 will make a dent on competing
Boards thinking and its strategy making, which should come in form of 2014
787-10 Order's Books. That should be a great year for the 787-10 on orders,
commitments, and options.
Anybody asleep yet? Back to Seats:
Airlines want to know how many gallons of Jet A burned per seat.
Boeing claims a 30% maintenance cost reduction in operating the 787 overcurrent
aircraft. It reports a 20% fuel reduction compared to current aircraft. This is
what the bean counters listen to before inputting information to the CEO's on
what aircraft they should buy. The question then becomes how much money do we
want to make? A silly question, but one that is answered anyways.
The 600 page book on cost accounting needs to boil down to a one
blogger page in a hurry.
All the accounting/cost accounting and revenue accumulation is
broken down into little tiny accounting pieces, and then summed up on one
gigantic spread sheet. The kind I used to make. Reduce one tiny piece down by
1% and the big spreadsheet's bottom line changes by .00001% Change a
thousand combinations of cost inputs whether fixed or variable, the operations
numbers change dramatically by X%. Bean counters get onto engineering's
necks, imploring for financial efficiencies on design parts and innovation.
Engineers don't like bean counters! CEO's and VP's are referees between these
groups and types of company people. In the meantime buyers listen to the sales spiel
on and on.
The thing that makes a difference on the 787-10, as in: Which A350
will it nullify on the cost function, and what is the right size for the right
route filling seats? This will take some time to prove out. However when the
777X comes on it will complicate Airbus' sales team or simplify Boeing's sales
team job with its Big spreadsheet presentation.
Remember A Seat Is Just Not A Seat. It’s a revenue source towards
the Contribution Margin driving the company past Breakeven on a flight. Total
Fixed Cost Operations + Total Variable Costs (in seat Units) determines
when that point is reached and profitability starts.
The Break Even Point is shown "in a seat that has a green
line painted on the floor” for Akbar Al Baker on his 787.
Caption added: (Every seat forward of this
keyboard is pure profit (CM) on this aircraft. Everything behind you pays for
the flight)
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