4Q 2022 PACI INDEX AVIATION ANALYSIS

As an aviation specialist, it is essential to closely monitor and analyze trends in the cost of inputs for the provision of air service. The A4A U.S. Passenger Airline Cost Index (PACI) serves as a valuable tool for this purpose. It provides insights into various components that contribute to the overall cost structure of airlines, including labor, fuel, aircraft ownership, airport landing fees, insurance, utilities, interest, and more. By examining the data from the 4th quarter of 2022, we can gain valuable insights into the cost trends and their potential impact on airfares and airline operations.

1. Labor Costs (30.0% of Operating Expenses)

Labor costs are a significant portion of operating expenses for airlines. In the 4th quarter of 2022, the labor cost index stood at 212.3, with a year-on-year change of 1.3%. This suggests a slight increase in labor costs compared to the same period last year. Factors such as collective bargaining agreements, inflation, and demand for skilled aviation personnel can influence labor costs for airlines.

2. Fuel Costs (23.3% of Operating Expenses)

Fuel costs have a substantial impact on airlines' financial performance. In the 4th quarter of 2022, the fuel cost index surged to 377.9, reflecting a significant year-on-year increase of 55.0%. This substantial rise in fuel costs could be attributed to global economic factors, geopolitical events affecting oil prices, and supply chain disruptions. Airlines must carefully manage their fuel hedging strategies and operational efficiency to mitigate the impact of rising fuel expenses.

3. Aircraft Rents & Ownership (5.6% of Operating Expenses)

The index for aircraft rents and ownership stood at 88.2 in the 4th quarter of 2022, showing a modest year-on-year decrease of 5.2%. This suggests that the costs associated with leasing and owning aircraft have slightly decreased during this period. Airlines often opt for leasing aircraft as a flexible way to manage fleet size and capacity in response to market demand.

4. Professional Services (8.8% of Operating Expenses)

Professional services, which encompass various support functions, had an index of 173.2 in the 4th quarter of 2022, with a substantial year-on-year increase of 16.1%. These services may include legal, consulting, and advisory services that airlines require for their operations. The increase in professional service costs may be attributed to higher demand or increased complexity in airline operations.

5. Food & Beverage (1.8% of Operating Expenses)

The cost index for food and beverage services on flights was 93.9 in the 4th quarter of 2022, indicating a notable year-on-year increase of 21.4%. Providing food and beverage options to passengers is an essential service offered by airlines, and this cost increase may be attributed to changes in catering prices or shifts in passenger preferences.

6. Landing Fees (1.8% of Operating Expenses)

The landing fees index stood at 211.2 in the 4th quarter of 2022, showing a significant year-on-year decrease of 16.3%. Landing fees are charges imposed by airports on airlines for using their facilities. The decline in landing fees may be due to factors such as renegotiated agreements with airports or changes in airport fee structures.

7. Maintenance Material (1.8% of Operating Expenses)

Maintenance material costs are crucial for ensuring aircraft safety and reliability. In the 4th quarter of 2022, the maintenance material cost index reached 136.5, indicating a substantial year-on-year increase of 24.3%. Airlines invest heavily in maintaining their fleets to comply with safety regulations and enhance operational efficiency.

8. Aircraft Insurance (0.0% of Operating Expenses)

The aircraft insurance index stood at 61.2 in the 4th quarter of 2022, reflecting a significant year-on-year decrease of 25.4%. While aircraft insurance is an essential aspect of airline operations, the decrease in this cost component might indicate a favorable insurance market with lower premiums.

9. Non-Aircraft Insurance (0.2% of Operating Expenses)

Non-aircraft insurance costs also experienced a notable year-on-year decrease of 19.6% in the 4th quarter of 2022, with an index of 120.9. This cost category may cover insurance for various aspects of airline operations, such as liability, property, and employee benefits.

10. Other Operating Expenses (7.3% of Operating Expenses)

The other operating expenses index was 203.9 in the 4th quarter of 2022, with a significant year-on-year increase of 23.6%. This category includes diverse expenses not covered in the above components. The rise in other operating expenses might be attributed to factors such as inflation, changes in regulatory requirements, or additional services offered to passengers.

Conclusion:

The A4A U.S. Passenger Airline Cost Index (PACI) for the 4th quarter of 2022 provides valuable insights into the cost trends impacting the aviation industry. The surge in fuel costs remains a key concern for airlines, while other cost components also experienced various degrees of change. As an aviation specialist, it is crucial to keep a close eye on these cost trends as they directly influence airline operating expenses and, ultimately, airfares. By understanding and analyzing these trends, airlines can make informed decisions to maintain financial stability and enhance the overall passenger experience.