Answered Essay: What impact do lower fuel costs and other changes have on an airline’s net income? American Airlines Group ( AAL ), the

What impact do lower fuel costs and other changes have on an airline’s net income? American Airlines Group ( AAL ), the world’s biggest airline, has been reporting record profits in recent quarters. United Continental Holdings and Southwest Airlines also reported record profits. Part of what has contributed to the record profits has been the decline in the cost of oil. The price of oil has fallen during 2014; we are spending much less at the gas pump to fill our cars. The airlines are also experiencing the effects of lower oil prices; the price of jet fuel is down 18% since August 2014. Increased revenues have also contributed to the high profits in the airline industry. Overall, airfares are up 3% for 2014 according to Airlines for America, an industry trade group. In addition, planes have been about 85% full in 2014, which is a record high for the airline industry. On the other hand, airlines spent more on fuel in 2014 than in 2010. Airlines also spent more on labor due to higher renegotiated labor contracts. Questions

Would each of the following changes INCREASE or DECREASE an airline’s net income (consider each item independently)? What income statement account would be impacted by each item?

1.The 3% increase in airfare (ticket prices)

2.The 18% decrease in the price of per gallon of jet fuel

3.The increase in the number of seats sold

4.The increase in the total spent on jet fuel

5.The increase in the cost of labor contracts In your responses to others, discuss other factors that have impacted the revenue, expenses and net income of airlines.

Have you experienced higher or lower ticket prices over the last 2 years? What are other ways that airlines use to increase revenue? What are other causes for a decline in the revenue of airlines? What are other factors that increase or decrease expenses of airlines?

Expert Answer

 

1. Increase in airfare leads to: Increase in airfare increases the credit side balance of income statement, which result in the increase of net income. Ticket price is related to sales which will increase the sales revenue. 2. 18% decrease in price per gallon of jet fuel:-Jet fuel is the input material required for flights to render the flying service. Decrease in price of fuel will have a proportionate saving on purchase fuel cost which results in the increase of net income for the cost saving 3. The increase in number of units sold: - Increase in number of seats sold will directly impact the increase of revenue. The income is increased from the sales revenue generated by increase in number of units sold. 4. Increase in total spent on jet fuel: - Increase in total spent on jet fuel increase the costs which have an impact of increased debit balance in income statement. Hence, this will reduce the net income earned for the increased costs. 5. Increase in the cost of labor contracts: - The increase in cost of labor contracts will increase cost of salaries and wages heads in income statement. The cost increase will have an impact on the increased debit balance of income statement. Hence, net income will be decreased for the increased costs

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