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|Client Update - quarterly newsletter||
The Airline Industry
Barry's Accounting Services has helped clients in this industry get tax-related benefits to which they are entitled:-
Our practice includes budget and forecasting, route revenue analysis, state & federal excise tax (FET), fuel, and airport tax reporting. For private aircraft:- entertainment cost disallowance regulations, dead head flight rules and open jaw flights. For commercial pilots and flight crew:- the new rules for per diem calculations, crash pad and airport car limitations, fringe benefits, supplies, training costs, expenses, etc. Please call to discuss your specific issues.
Like other industries, this is a market-driven industry that is operating in a challenging world. As with any business, unexpected problems are part of this industry: Delays during preflight inspection, inclement weather conditions, flight cancellations, overbooking, aircraft turning back because of overweight, aircraft circling the airport in mid-air because landing gear can't work, broken fans in passenger cabins, labor disputes, lost and delayed baggage, and disruptive passengers.
Aviation tax issues are different for owner-pilot aircraft, company owned aircraft or aircraft operated by flight departments.
A large airline can handle about 200,000 calls and about 300,000 pieces of luggage daily. It can schedule 2,000 flights daily and have 50 different fares attached to each flight because there are many variables in its pricing system/mechanism. TSA screening does contribute to baggage delays causing 1% of the luggage not to be on the same flight with the customer. About 70% of the luggage that is handled by a carrier may have to be routed to connecting flights. Sometimes they may have to be sorted and driven to a lot of different planes.
A combination carrier model (passengers & freight) is the only model that has a future in this market. Hence, revenue from passengers and dedicated freight-forwarding contracts with other haulers will help the airline thrive. However, damaged and lost baggage/cargo can translate into lost profits for consignees and loss of confidence and future ticket sales and freight revenue for the airline. When positioning or benchmarking, the airline should be a leader on price or quality, but don't get stuck in the middle (This is a tough challenge for airlines that are burdened with "legacy costs,"). The aviation graveyard is filled with airlines that have failed. They were cutting price while simultaneously boosting service. Overbooking of passengers should be anticipated by airline personnel and timely arrangements made to add backup planes or add more seats to accommodate connecting passengers and get more traction on pricing to recoup money lost.
Jet fuel (Jet "A"), aviation fuel, is expensive and heavy to carry. Jet fuel can cost an airline up to $6 billion annually. A $1 increase in fuel price can increase the annual fuel bill by $70,000. Increases in fuel costs coupled with an economic slowdown can have an impact on tourism. A 10% reduction in airline capacity can translate into a 3% decline in hotel occupancy. Depending on the age, configuration, and condition of the aircraft, 5% of the fuel carried by the aircraft is burned during preparation for departure, including taxiing along the runway. To save on fuel costs in this volatile energy market, the airline should consider hedging at least 60% of jet fuel and it should consider adding home heating oil futures and other instruments to make the hedge work. It works for Southwest Airlines, and Lufthansa seemed interested in implementing that strategy. Hedging can be structured to provide protection against souring prices and benefits from falling prices. The airline should consider buying lighter planes and carrying less or lighter miscellaneous incidentals. It can save about $2 million in annual fuel costs if it can save one gallon of fuel for every 1.5 miles traveled. The pilot should not fill the fuel tank completely. Instead, s/he should consider taking enough fuel that will allow for departure, circling around a missed airport, and landing at the destination, then refuel for the return trip.
Clemson (Clem) Barry advises and prepares taxes for clients in the transportation industry. He has worked in the cargo industry for many years. He started out doing custom brokerage where he gained valuable experience in the airline and merchant marine industry. He has done extensive research on Southwest Airlines, a low-fare, no-frills carrier; Virgin Atlantic, a premium-class carrier; and two of the "legacy" carriers. He graduated from Travel Institute in 1981.