Cargo Airfrt Costs

B747-400F/SF B767-200/300 SF
‘Cost Characteristics of Airline Operations for Cargo Aircraft’ by D.J. Ghosh

2nd Annual Managing Airline Operating Costs Conference December 2005, Dublin, Ireland
A300-600RF A310-300F
www.american-friendship.com
Cost Characteristics of Airline
Operations for Cargo Aircraft
What are the typical cost profiles of cargo and freight

forwarding airlines?
What are the cost characteristics for both large and small
aircraft?
To what degree do these costs vary depending on the

nature of the operation, size and age of the aircraft?
GENERAL ECONOMIC PRINCIPLES FOR CARGO CARRIERS
REVENUE: In general, air cargo generates only half as much revenue

and yields have been falling. Older aircraft are better suited.
DIRECTION: Unlike passengers, cargoes move only in one direction,
creating directional imbalances and revenue shortfalls.
TRIP COSTS : Generally, trip costs are fairly constant with increasing
payload.
COMPETITION: Pure freight carriers usually cannot compete in markets
with the freight rates offered by the “belly capacity” of passenger
carriers since the latter are offered on a “marginal pricing” basis”.
GROSS PROFIT: Pure freight operators can maximize “gross profit
performance” by seeking more “high density-high value” cargoes that
command a higher revenue premium (e.g. semi-conductors).
REVENUE IS IMPORTANT
Revenue management enables airlines to sell the right product, to the

right customer, at the right time, for the right price, to achieve the
highest amount of revenue possible.
Cargo space is a perishable asset and empty space on a flight cannot

be resold.
A small percentage increase in revenue has a greater effect on

profitability than a much larger reduction in costs.
Most airline management tends to focus more on costs, because costs

are easier to control and measure. It is revenue that drives profits.
Lower cost doesn’t always win.
HOWEVER ONE OF THE BIGGEST COSTS OF A CARGO AIRLINE IS

“OPPORTUNITY COST”
Opportunity cost is the cost of not being able to utilize the asset for a
more productive use.
There are two types of opportunity costs for cargo airlines:
DIRECTIONAL IMBALANCES in the air cargo business create a lost

opportunity because freighters have to fly empty on one leg of the
voyage.
LOWER AIRCRAFT UITLIZATION is a lost opportunity, because the

asset could be deployed somewhere else.
QUESTION:WHAT ARE TYPICAL COST PROFILES OF CARGO AND FREIGHT

FORWARDING AIRLINES?
All cargo airlines have two unique cost profiles compared to their
passenger counterparts:
1)INTEGRATORS: Such as Fed Ex and UPS with a hub and spoke
system and higher yields typically “under utilize” their narrow body
aircraft.
2)GENERAL CARGO OPERATORS: Such as Cargolux, British Airways,
Singapore Airlines and Cathay Pacific who operate both new and older
wide body freighter aircraft suffer from directional imbalances and
lower yields.
AIRPORT COSTS:
Unlike passenger airlines, pure cargo airlines can fly into lower cost
“non hub” airports with lower landing fees, no noise restrictions and 24
hour access, thereby reducing costs.
QUESTION:
WHAT ARE COST CHARACTERISTICS FOR BOTH LARGE AND SMALL

AIRCRAFT?
ANSWER:
Larger cargo aircraft with their inherent disadvantage of directional

imbalances and lower yields, combined with a smaller pool of general
cargo operators, are more risky and more prone to a downturn in the
world economy.
Aircraft financiers are less willing to finance this type of aircraft unless
they are dealing with top tier airlines.
Smaller cargo aircraft which dominate the fleets of integrators enjoy
less directional imbalances and higher yields. Since integrators “under
utilize” them their ownership costs are higher.
QUESTION:
TO WHAT DEGREE DO THESE COSTS VARY DEPENDING ON THE

NATURE OF THE OPERATION, SIZE AND AGE OF THE AIRCRAFT?
ANSWER:
Larger airlines enjoy the benefits of economies of scale and fleet

commonality since they are able to spread their fixed costs over a wider
network.
Older aircraft, especially the newer generation of older B747-400’s,
B767-300’s and B757 have a huge advantage because of their lower
capital costs (almost 1/3 the cost of new factory built freighters) and
their significantly improved operating economics compared to the
older B747-200’s, B-727’s, L-1011’s and MD-80’s.
These “middle aged” aircraft will form the backbone of future freighter
fleets of the world.
Standard Body Aircraft
Cash Operating Cost Per Trip (With ownership cost)
25,000
20,000
USD / Trip
15,000
10,000
5,000
0
B-727-200F B-737- B-757- DC-8-63CF
700C-Frt 200SF
Based on 1000 NM trip
Medium Wide Body Aircraft
Operating Cost Per Trip (With ownership cost)
50,000
45,000
40,000
35,000
USD / Trip
30,000
25,000
20,000
15,000
10,000
5,000
0
A-300-600F A-310-200SF B-767-200SF B-767-300F
Large Wide Body Aircraft
Operating Cost Per Trip (With ownership cost)
120,000
100,000
80,000
USD / Trip
60,000
40,000
20,000
0
747-200SF 747- 400F DC-10-30F MD-11F

Standard Body Aircraft
Operating Costs Per Trip
100%
90%
80%
70%
60% % *Others
% Maintenance
50%
% Flight Crew
40%
% Fuel
30%
20%
10%
0%
B-727- B-737- B-757- DC-8-
200F 700C-Frt 200SF 63CF *Others: Interest, Insurance,
Landing Fees, Nav. & Com,
Depreciation, etc.
Medium Wide Body Aircraft
100%
90%
80%
70%
60% % *Others
% Maintenance
50%
% Flight Crew
40%
% Fuel
30%
20%
10%
0%
A-300- A-310- B-767- B-767-
600F 200SF 200SF 300F
*Others: Interest, Insurance,
Depreciation, etc.
Large Wide Body Aircraft
100%
90%
80%
70%
60% % *Others
% Maintenance
50%
% Flight Crew
40%
% Fuel
30%
20%
10%
0%
747- 747- DC-10- MD--11F
200SF 400F 30F *Others: Interest, Insurance,
Depreciation, etc.
Operating Economic Assumptions
Generic Analysis
Cost Level: 2005 US Dollars
Fuel: $1.95 per U.S. Gallon
Maintenance: 27.25/hour
Mature maintenance
assumed for all aircraft
Flight Crew: Function of maximum take-

off gross weight, number crew
members and block
time
Cost Characteristics of
Airline Operations for
Cargo Aircraft
Fuel
Consumption
of different
aircraft
CONCLUSION
Thus, the economics of a profitable cargo airline demand that
You stay away from markets where there is too much of “marginally
priced” belly capacity.
You find ways to address the imbalances in the air cargo business and
You research ways to double the utilization of smaller freighters
If you can, we wouldn’t have to worry so much about managing airline

costs.
Data courtesy of The Boeing Company
A310-300F B767-200/300 SF
B747-400F/SF
A300-600RF

Cargo Airfrt Costs

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B747-400F/SF B767-200/300 SF

‘Cost Characteristics of Airline Operations for Cargo Aircraft’ by D.J. Ghosh

What are the typical cost profiles of cargo and freight

To what degree do these costs vary depending on the

GENERAL ECONOMIC PRINCIPLES FOR CARGO CARRIERS

REVENUE: In general, air cargo generates only half as much revenue

Revenue management enables airlines to sell the right product, to the

Cargo space is a perishable asset and empty space on a flight cannot

A small percentage increase in revenue has a greater effect on

Most airline management tends to focus more on costs, because costs

Lower cost doesn’t always win.

HOWEVER ONE OF THE BIGGEST COSTS OF A CARGO AIRLINE IS

There are two types of opportunity costs for cargo airlines:

DIRECTIONAL IMBALANCES in the air cargo business create a lost

LOWER AIRCRAFT UITLIZATION is a lost opportunity, because the

QUESTION:WHAT ARE TYPICAL COST PROFILES OF CARGO AND FREIGHT

WHAT ARE COST CHARACTERISTICS FOR BOTH LARGE AND SMALL

Larger cargo aircraft with their inherent disadvantage of directional

TO WHAT DEGREE DO THESE COSTS VARY DEPENDING ON THE

Larger airlines enjoy the benefits of economies of scale and fleet

Based on 2000 NM trip

Based on 3000 NM trip

Fuel: $1.95 per U.S. Gallon

Flight Crew: Function of maximum take-

Thus, the economics of a profitable cargo airline demand that

You research ways to double the utilization of smaller freighters

If you can, we wouldn’t have to worry so much about managing airline

Data courtesy of The Boeing Company

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