Fuel and employee costs remain as industry-wide concerns
The U.S. airline industry’s major cost drivers include fuel and employee costs. Both comprise more than half of the total operating costs of airlines. Companies can’t directly control these costs. The reasons are that fuel prices are volatile and determined by industry demand and supply dynamics and employee costs are at the mercy of union negotiations.
JetBlue Airways’ (JBLU) costs have been on a rising trend growing at a four-year compound annual growth rate (or CAGR) of 13.6%. In 2013, JetBlue’s largest cost—fuel—had increased by 5% even though fuel cost per gallon decreased from 3.21 to 3.14 in 2012. This is because fuel efficiency measured by gallons of fuel consumed per available seat mile (or ASM) has not improved. Fuel costs remain a concern for JetBlue, as a percentage of its total fuel costs is the highest compared to its peers. JetBlue’s fuel costs comprise 38% of its total cost. Southwest Airlines’ (LUV) and American Airlines Group’s (AAL) fuel costs are around 35%, and United Continental Holdings’ (UAL) and Delta Air Lines’ (DAL) are around 33%. Fuel expense is expected to increase by $22 million in 2014.
The operating cost per ASM, excluding fuel costs, increased at a CAGR of 3.6%. It was driven by salary, wages, and benefits, which have grown at a CAGR of 10% in the past four years and have increased because of other expenses such as maintenance costs, aircraft rent, landing fees, depreciation and amortization, sales and marketing. Read Part 9 of the series for more details about JetBlue’s employee costs.
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