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|Client Update - quarterly newsletter||
An overview of the Airline Industry
Our practice includes Tax Preparation & Filing; Budget & Forecasting (Route Pricing); Revenue & Expense Analysis; State & Federal Excise Tax; Fuel Sales Tax; and Airport Tax reporting.
Industry Challenges:- 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; Go around or abort landing; Broken fans in passenger cabins; Lost and delay of baggage; Disruptive passengers; Strikes; Wage freeze; Furloughs; Layoffs; Mergers & Acquisitions; Economic Recessions; Government Bailouts; and COVID-19 pandamic shut down that almost decimate the industry. However, despite those obstacles, it remains Resilient, Aggressive and proactive while making Prudent and steady shifts/changes in its strategy. This industry is amazing.
Reservations, Passengers and Cargo:- A large carrier like American or Easy-Jet with about 4,000 pilots on its books can handle about 200,000 calls and about 300,000 pieces of luggage daily. It can schedule 1,800 to 2,000 daily flights and have about 50 different fares attached to each flight because there are many variables in its pricing system/mechanism. TSA screening, while it is important, does contribute to baggage delays causing 1% of the luggage not to be on the same flight with the customer/passenger. 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 aircrafts or planes.
A combination carrier model (passengers & freight) is considered the best commercial business model. Revenue from passengers and dedicated freight-forwarding contracts with other carriers/haulers will stabilize Cash-Flow and Working-Capital, and help the airline thrive. However, damaged and lost baggage/cargo can translate into lost profits for consignees/shippers; and loss of confidence and future ticket sales and freight revenues for the airline.
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 lost revenue .
The Airline Income
Aviation Fuel:- Jet fuel (Jet "A"), aviation fuel, is expensive and heavy to carry. It can cost an airline up to $6 billion annually. A $1 increase in fuel cost can increase the annual fuel bill by about $70,000. 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, some airlines have consider hedging at least 60% of jet fuel. It works for Southwest Airlines, and Lufthansa became interested in implementing that strategy.
Hedging is structured to provide protection against soaring prices; and it benefits from falling prices. Buying/Leasing lighter planes and carrying less or lighter miscellaneous incidentals onboard can save about $2 million in annual fuel costs if the airline can save one gallon of fuel for every 1.5 miles traveled. However, enough fuel must be available for departure, circling around a missed airport, and landing at the intended or scheduled destination, and then refuel for the return trip.
Tourism:- Increases in fuel cost coupled with an economic slowdown can have a negative impact on tourism. A 10% reduction in airline capacity can translate into 3% decline in hotel occupancy.
Aviation Tax:- Aviation tax issues are different for Owner-pilot aircraft, Company-owned aircraft; or aircraft operated by Flight Departments.
*****Clem Barry is a Transportation Tax-Accountant, and an IRS Enrolled Agent. He is a graduate of Travel Institute, N.Y.; and he has taken continuing education update at CUNY Aviation Institute, N.Y.