The role of cost components in the effectiveness of airline operators: An analysis on European-based airline operators

The airline industry is a highly competitive sector and ticket prices are constantly falling. This requires airlines to have a detailed understanding of their cost drivers and to keep costs down. Approximately half of airlines' total costs are focused on two items: labour costs and fuel costs. Moreover, the airline industry is a capital intensive sector and has a very low margin. In particular, uncertain situations and processes (e.g. the 2001 terrorist attack, the 2008-2009 global financial crisis, and the protracted COVID-19 pandemic that started at the end of 2019) have caused the industry to experience financial difficulties. In such situations and processes, airlines with sustainable financial indicators can stand out from the competition. For these reasons, understanding and managing the cost structure and profitability of airline companies is extremely important in terms of efficiency and effectiveness. In this study, the financial data of 7 European airline operators are evaluated by applying input and output data envelopment analysis method. In the first two sections, the historical development and business models of the airline industry and the main cost components of airline operations are conceptually evaluated. In the last section, operational and financial costs obtained from the financial statements of airline operators and the variables of net profit margin and return on assets ratio from financial ratios are quantitatively analysed by correlation analysis and data envelopment analysis. A strong positive correlation was found between the return on assets ratio and net profit margin in terms of efficiency and profitability between 2017-2019. This indicates that an increase in one metric can increase the other, which can directly affect the financial performance of operators. According to the efficiency scores, some operators have the best performance, while others have poor performance. An increase in operational costs was found to directly reduce the efficiency score. Therefore, operational costs should be kept under control and reduced as much as possible. Keywords: Airline industry, cost effectiveness, operational cost, net profit ratio, return on assets ratio, data envelopment, efficiency score analysis