Text 15. Airline Operating Costs

Full-service airlines have a high level of fixed and operating costs in order to establish and maintain air services: labor, fuel, airplanes, engines, spares and parts, IT services and networks, airport equipment, airport handling services, sales distribution, catering, training, aviation insurance and other costs. Thus all but a small percentage of the income from ticket sales is paid out to a wide variety of external providers or internal cost centers.

Moreover, the industry is structured so that airlines often act as tax collectors. Airline fuel is untaxed because of a series of treaties existing between countries. Ticket prices include a number of fees, taxes and surcharges beyond the control of airlines. Airlines are also responsible for enforcing government regulations. If airlines carry passengers without proper documentation on an international flight, they are responsible for returning them back to the original country.

Analysis of the 1992-1996 period shows that every player in the air transport chain is far more profitable than the airlines, who collect and pass through fees and revenues to them from ticket sales. While airlines as a whole earned 6% return on capital employed (2-3.5% less than the cost of capital), airports earned 10%, catering companies 10-13%, handling companies 11-14%, aircraft lessors 15%, aircraft manufacturers 16%, and global distribution companies more than 30%. (Source: Spinetta, 2000, quoted in Doganis, 2002).

In contrast, Southwest Airlines has been the most profitable of airline companies since 1973.

The widespread entrance of a new breed of low cost airlines beginning at the turn of the century has accelerated the demand that full service carriers control costs. Many of these low cost companies are able to eke out a consistent profit throughout all phases of the business cycle.

As a result, a shakeout of airlines is often occurring. Some airlines have declared bankruptcy. Some argue that it would be far better for the industry as a whole if a wave of actual closures were to reduce the number of "undead" airlines competing with healthy airlines while being artificially protected from creditors via bankruptcy law. On the other hand, some have pointed out that the reduction in capacity would be short lived given that there would be large quantities of relatively new aircraft that bankruptcies would want to get rid of and would re-enter the market either as increased fleets for the survivors or the basis of cheap planes for new startups.

Where an airline has established an engineering base at an airport then there may be considerable economic advantages in using that same airport as a preferred focus (or "hub") for its scheduled flights.

Exercise 105. Put five key questions on the text.

 

Exercise 106. Give Ukrainian equivalents.

Fixed costs, operating costs, full-service airlines, to maintain air services, airport handling services, sales distribution, catering, aviation insurance, tax collectors, to be untaxed, fees, surcharges, to enforce government regulations, player, to collect and pass through fees and revenues, return on capital employed, a new breed of low cost airlines, to accelerate the demand, to eke out a consistent profit, bankruptcy law, a wave of actual closures, to reduce the number of “undead” airlines, to be protect from creditors via bankruptcy law, to be short lived, to get rid of.

Exercise 107. Find proper definitions

Terms	Definitions
1. catering	a) a contract made by a company or society, or by the state, to provide a guarantee of compensation for loss, damage, illness, death, etc. in return for regular payments
2. insurance	b) the state of being bankrupt (unable to pay ones debts)
3. surcharge	c) the job or work providing food etc. for social events
4. lessor	d) the way sth is shared out or spread over an area (the transport and supply of goods to various people or places)
5. revenue	e) a person who gives smb. use of a property on        a lease
6. profit	f) an extra amount of money that one must pay in addition to the usual charge
7. bankruptcy	g) income, esp. the total annual income of a state or an organization
8. distribution	h) money gained in business, esp. the difference between the amount earned and the amount spent

 

Exercise 108. Match the prepositions with the verbs. More than one variant may be possible

1. to be responsible	a) through
2. to be paid	b) of
3. to be protected	c) to
4. to pass	d) for
5. to eke	e) out
6. to be able	f) from
7. to point	g) with
8. to get rid	h) –
9. to reduce
10. to compete

Exercise 109. Find in the text the noun-derivatives corresponding to the following verbs and adjectives: to collect, to distribute, to serve, to close, to insure, to provide, to treat, to govern, to regulate, to manufacture, to enter, to carry, profitable, cyclic(al), to bankrupt, argumentative, to quantify, to survive.

Exercise 110. Find in the text all -ing forms and say whether they are gerunds, verbal nouns or participles.

 

Exercise 111. Learn the following words and word combinations.

assign prices	– призначати ціни
attempt	– спроба
complicated	– ускладнений
computerized yield management system	– електронна система управління прибутком
loophole	– пролазка, викрут
force	– змушувати
make constant adjustments	– робити постійні регулювання
differentiated pricing	– диференційоване ціноутво-рення
booked load factor	– зарезервований коефіцієнт  навантаження
accomplish	– завершувати, досягати
origin destination control (“O&D control”)	– контроль з пункту відправлення до пункту призначення
advent	– прихід, прибуття, поява
perform cost-benefit analyses	– здійснювати витратно-прибутковий аналіз
advanced computerized reservations system	– прогресивна електронна система бронювання білетів
undercut	– збивати ціну, продавати за більш низькими цінами
“legacy” carriers	– успадковані перевізники; застарілі перевізники
quote prices	– призначати ціни
leg	– тут: етап
predict	– передбачати
overbook	– пpодавати більше квитків, ніж є посадкових місць
undertake massive cuts	– починати масове зниження цін
lack	– нестача, відсутність
average of	– у середньому

 

Exercise 112. Read, translate and give the gist of text 16.

Text. 16. Ticket Revenue

Airlines assign prices to their services in an attempt to maximize profitability. The pricing of airline ticket has become increasingly complicated over the years and is now largely determined by computerized yield management systems.

Because of the complications in scheduling flights and maintaining profitability, airlines have many loopholes that can be used by the knowledgeable traveler. Many of these airfare secrets are becoming more and more known to the general public, so airlines are forced to make constant adjustments.

Most airlines use differentiated pricing, a form of price discrimination, in order to sell air services at varying prices simultaneously to different segments. Factors influencing the price include the days remaining until departure, the booked load factor, the forecast of total demand by price point, competitive pricing in force and variations by day of week of departure and by time of day. Carriers often accomplish this by dividing each cabin of the aircraft (first, business and economy) into a number of travel classes for pricing purpose.

A complicating factor is that of origin-destination control ("O&D control"). Someone purchasing a ticket from Melbourne to Sydney (as an example) for AU$200 is competing with someone else who wants to fly Melbourne to Los Angeles through Sydney on the same flight, and who is willing to pay AU$1400. Should the airline prefer the $1400 passenger, or the $200 passenger plus a possible Sydney-Los Angeles passenger willing to pay $1300? Airlines have to make hundreds of thousands of similar pricing decisions daily.

The advent of advanced computerized reservations systems in the late 1970s, most notably Sabre, allowed airlines to easily perform cost-benefit analyses on different pricing structures, leading to almost perfect price discrimination in some cases (that is, filling each seat on an aircraft at the highest price that can be charged without driving the consumer elsewhere).

The intense nature of airfare pricing has led to the term "fare war" to describe efforts by airlines to undercut other airlines on competitive routes. Through computers, new airfares can be published quickly and efficiently to the airlines' sales channels. For this purpose the airlines use the Airline Tariff Publishing Company (ATPCO), who distribute latest fares for more than 500 airlines to Computer Reservation Systems across the world.

The extent of these pricing phenomena is strongest in "legacy" carriers. In contrast, low fare carriers usually offer preannounced and simplified price structure, and sometimes quote prices for each leg of a trip separately.

Computers also allow airlines to predict, with some accuracy, how many passengers will actually fly after making a reservation to fly. This allows airlines to overbook their flights enough to fill the aircraft while accounting for "no-shows," but not enough (in most cases) to force paying passengers off the aircraft for lack of seats. Since an average of  1/3 of all seats are flown empty, stimulative pricing for low demand flights coupled with overbooking on high demand flights can help reduce this figure. This is especially crucial during tough economic times as airlines undertake massive cuts to ticket prices in order to retain demand.

Exercise 113. Answer the questions.

1. Why do airlines assign prices to their services? 2. What is pricing of airlines tickets now largely determined by? 3. Why are airlines forced to make constant adjustments? 4. Why do most airlines use differentiated pricing? 5. What factors influence the price? 6. What is a complicating factor? 7. What system allowed airlines to easily perform cost-benefit analyses on different pricing structures? 8. What purpose do the airlines use the Airlines Tariff Publishing Company for? 9. What prediction allows airlines to overbook their flights enough to fill the aircraft while accounting for “non-shows”, but not enough to force paying passengers off the aircraft for lack of seats?

Exercise 114. Find proper definitions.

Terms	Definitions
1. yield	a) a person or company that carries goods or people for payment
2. segment	b) a written or printed piece of card or paper that gives the holder a certain right e.g. to travel by plane, bus etc. or to a seat in a cinema
3. demand	c) a part of smth which is separated from the other parts or which can be considered separately
4. price	d) the state of being correct or exact and without error, esp. as a result of careful effort
5. carrier	e) an amount of money for which smth may be bought or sold
6. reservation	f) the total amount that is produced
7. accuracy	g) ordering a seat, table etc. use by a particular person in future time
8. ticket	h) the desire of customer for goods or services which they wish to buy or use

 

Exercise 115 . Translate the following sentences into Ukrainian. Put questions to any two of them.

1. Airlines assign prices to their services in an attempt to maximize profitability. 2. Most airlines use differentiated pricing,     a form of price discrimination, in order to sell air services at varying prices simultaneously to different segments. 3.  The advent of advanced computerized reservations systems in the late 1970s, most notably Sabre, allowed airlines to easily perform cost-benefit analyses on different pricing structures. 4. The intense nature of airfare pricing has led to the term "fare war" to describe efforts by airlines to undercut other airlines on competitive routes. 5. For this purpose the airlines use the Airline Tariff Publishing Company (ATPCO), who distribute latest fares for more than 500 airlines to Computer Reservation Systems across the world. 6. The extent of these pricing phenomena is strongest in "legacy" carriers. 7. Low fare carriers usually offer preannounced and simplified price structure, and sometimes quote prices for each leg of a trip separately.   

Exercise 116. Match each sentence part on the left with its appropriate part on the right

1. Airlines assign prices to their services in an attempt	a) by computerized yield management systems
2. The pricing of airline tickets is now largely determined	b) so airlines are forced to make consistent adjustments
3. Because of complications in scheduling flights and maintaining profitability	c) in order to sell air services at varying prices simultaneously to different segments
4. Many of these airfare secrets are becoming more and more known to the general public	d) to maximize profitability
5. Most airlines use differentiated pricing, a form of price discrimination	e) to describe efforts be airlines to undercut other airlines on competitive routes
6. A complicating factor is	f) the days remaining until departure, the booked load factor, the forecast of total demand by price point competitive pricing in force, and variations by day of week of departure and by time of day
7. Factors influencing the price include	g) airlines have many loop-hold that can be used by knowledgeable traveler
8. The intense nature of airfare pricing has led to the term “fare war”	h) that of origin-destination control (”OLD control”)

Exercise 117 . Complete the following chart.

Person	Noun	Verb	Adjective
traveler
	analysis
		account
			competitive
predictor
	management
		perform
	reservation
		distribute
		purchase
	control
			stimulative

Exercise 118. Make up a dialogue about ticket revenue.

 

Exercise 1 19. Learn the following words and word combinations.

flow last in-first out	– рух запасів, останній прийшов перший пішов
inventories retirement evaluation	– оцінка вибуття запасів
inventories write-off evaluation	– оцінка списаних запасів
interpretation of expenses incurred	– інтерпретація пенсійних витрат
borrowing costs	– витрати на займи
interest credit expenses	– процентні витрати по кредитах
intangible assets cost	– вартість нематеріальних активів
without hiring general contractor	– не залучаючи підрядника
overspend costs	– перевищення витрат (на закупку)
network systems	– мережеві системи
amortization security	– амортизаційне забезпечення
water network item	– об'єкт водної мережі

Exercise 12 0 . Read, translate the text and compare the regulatory schemes of the accounting system in Great Britain and Northern Ireland and in Ukraine.

Text 1 7

After Ukraine had started a radical accounting reform in accordance with international standards, principal differences between Ukrainian and British financial accounting systems were eliminated. Today's concept of Ukrainian accounting conforms completely to generally accepted accounting principles.

As to the IAS system, Ukraine and Great Britain's national accounting systems preserve some peculiarities.

At the same time some differentiation within the limits of           the general IAS concept is considered possible. As is known, IAS allows for the application of so-called alternative accounting methods. But national systems of financial accounting and reporting effect such possibilities in different ways.

Let's give a few examples of discrepancies between the accounting of Ukraine and the United Kingdom.

In accordance with paragraph 23 of IAS 2 "Inventories", such       an accounting method of inventories flow as LIFO ("last in - first out") is optional. The LIFO method is acknowledged as a standard way of accounting along with other generally accepted ways of inventories retirement evaluation in cl. 20 of accounting Standards of Ukraine (ASU). At the same time British standard SSAP 9 directly prohibits the usage of this method in the accounting practices of Great Britain. Despite this fact British companies doing business outside Great Britain though subsidiary enterprises may use the LIFO mechanism if it is permitted by local accounting regulations.

Thus, if an enterprise of British origin functions in Ukraine, it may freely use a method of inventories write-off evaluation in accordance with the "last in - out" principle.

An interpretation of financial expenses incurred because of          an acquisition of fixed assets is another example of different applications of IAS alternatives.

IAS 23 "Borrowing Costs" in paragraph 11 as an alternative approach allows for the amortization of borrowing costs incurred due to the entering of qualified assets into the books.

Ukraine has not accepted this alternative. CI. 11 of UAS 8 “Intangible Assets” and cl.8 of ASU 7 "Fixed Assets" prohibit the inclusion of interest credit expenses into an intangible assets cost.

At the same time English FRS 15 permits in some situations to include such costs into the cost of fixed assets. But this method is deemed more an exception rather than a rule and is not encouraged as a primary approach. Thus, paragraph 19 of the standard says that an enterprise may make a decision to capitalise borrowing costs directly related to the building up of intangible assets as a part of the value of such assets. In connection with this, the total amount of the borrowing costs capitalised within a reporting period is not to exceed the total amount of borrowing costs incurred within this period.

There are also many discrepancies of a less conceptual character.

For example, when evaluating fixed assets such as constructions erected by the enterprise itself (without hiring a general contractor)       the British system highlights overspent costs. They are explained in      the following way. If extraordinary expenses were incurred during construction, an enterprise is to find a guilty person. If the overspending occurred because of internal inefficiency, it is not to be included into the value of the building and is to be written off in the period of its occurrence. Excessive spending on building materials, which do not correspond to the nomenclature of the construction, by the internal supply dispatcher is an example of such situation. If overspending was caused by external factors (e.g. legislative increase in workers' salary) underestimated expenses are to be capitalised by the general standards. An interpretation of selling expenses in accounting illustrates another discrepancy. In accordance with cl. 11 SAS 16 selling expenses are not to be included into the production cost; under cl. 17 of the same standard they are also not to be included into the cost of goods sold.

In practice, British accounting follows the same rule. But this general principle loses validity in the case of goods sold under the conditions "sale or return." Thus, goods at a buyer's warehouse remain     a seller's property. In such situations, a seller's expenses for package and delivery of goods to a buyer are to be included into the cost of goods.

The British are also eccentric in some nuances of charging amortization. British standard FRS 15, along with generally accepted methods, compises the so-called substitute method or renewals accounting. This method is based on the following precondition: some items of public infrastructure connected with water resources (water-mains, sewerage systems, reservoirs, dams, collectors) are not to be amortised, as such network systems are constantly maintained in an equally high-qualty condition. Hence, these items have an unlimited usefulness.

A renewals accounting, whose annual costs necessary to maintain the said infrastructure are acknowledged as an amortisation security, is applied to such assets As long as these expenses occur, they are to be amortised. As a result, both the cost of water network items and the amounts of their amortisation increase.

A forced transformation of Ukrainian accounting to the general European format expanded professional interests of Ukrainian accounting personnel.

Exercise 12 1 . Translate into English and make up your own sentences with them.

Радикальна бухгалтерська реформа, загальноприйняті бухгалтерські принципи, зберігати деякі особливості, дозволяти застосування, альтернативні бухгалтерські методи відмінності, рух засобів, оцінка списаних запасів, інтерпретація пенсійних витрат, основні засоби, витрати на займи, процентні витрати по кредитах, вартість нематеріальних активів, не залучаючи генпідрядника, перевищення витрат, мережеві системи, об’єкт водної мережі, амортизаційне забезпечення.

Exercise 122 . Translate the following sentences into Ukrainian. Put all kinds of questions to them.

1. After Ukraine had started a radical accounting reform in accordance with international standards, principal differences between Ukrainian and British financial accounting systems were eliminated.

2. Today’s concept of Ukrainian accounting conforms completely to generally accepted accounting principles.

3. IAS allows for the application of the so-called alternative accounting methods.

4. If an enterprise of British origin functions in Ukraine it may freely use a method of inventories write off evaluation in accordance with the “last in-first out” principle.

5. An interpretation of financial expenses incurred because of acquisitions of fixed assets is another example of different applications of IAS alternatives.

6. The British are also eccentric in some nuances of charging amortization.

7. A forced transformation of Ukrainian accounting to the general European format expended professional interest of Ukrainian accounting personnel.

 

Exercise 123 . Discuss the text with your partner using the following questions.

1. Why has Ukraine started a radical accounting reform in accordance with international standards?

2. What principles does today’s concept of Ukrainian accounting conform completely to?

3. What peculiarities do Ukraine and Great Britain’s national accounting systems preserve as to the IAS system?

4. What are discrepancies between the accounting of Ukraine and the United Kingdom? Give a few examples.

Exercise 124 . Match the verb in the first column with the most likely noun in the second column. More than one combination may be possible.

preserve	validity
allows for	interests
use	amortization
make	method
incur	application
capitalize	decision
cause	peculiarities
lose	expenses
expand	overspending
amortize	costs

 

Exercise 1 25 . Read the text, divide it into the paragraphs and give the title to each of them.

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