Identifying airline cost economies: An econometric analysis of the factors affecting aircraft operating costs

• The results show substantial economies of density and no economies of scale.
• No evidence of economies of stage length and fleet commonality is found.
• Additional operating costs as a result of a multi-hub system exist.
• Ownership costs of new aircraft outweigh higher maintenance costs of older aircraft.
• Most cost economies found, refer to low-cost carrier characteristics.

This paper provides the results of an econometric analysis of the influences of airline characteristics on the average operating costs per aircraft movement. The analysis combines a comprehensive selection of airline-output variables, airline-fleet variables, and airline-market variables. The results confirm the existence of economies of density, economies of load factor, economies of aircraft utilisation and economies of aircraft size. The paper does not provide evidence of economies of scale, economies of stage length or economies of fleet commonality. Furthermore, airlines that additionally operate full freighters, airlines that are members of a worldwide alliance and airlines that operate a multi-hub system face higher average operating costs per aircraft movement. Surprisingly, the regression results demonstrate that airlines that use newer aircraft have higher average operating costs per aircraft movement, suggesting that ownership costs (depreciation and leasing costs) of new aircraft outweigh the increasing maintenance costs of old aircraft. Finally, the results show that airlines that have a dominant position at their hubs or bases have higher operating costs per aircraft movement, implying that the absence of serious competitive pressure enables airlines to charge higher ticket prices and, with that, leads to a limited focus on cost savings.