What impact do higher fuel costs and other changes have on American Airline’s break even point?

American Airlines Group (AAL), the world’s biggest airline, posted a loss in the first quarter of 2022, but expects to return to profitability as early as the second quarter of 2022.

Photo of American Airlines passenger jet.
American Airlines

Despite the large profit, airlines have been experiencing a large increase in the cost of oil. The price of oil has risen during 2022; we are spending much more at the gas pump to fill our cars.  The airlines are also experiencing the effects of higher oil prices; the price of jet fuel has increased significantly.

Increased revenues are contributing to the expected return to profit for American Airlines and others in the airline industry.  Overall, airfares are up 33% year-to-date in 2022 as compared to the same time period in 2021. In addition, planes have had a high occupancy rate in 2022.

In addition to the increased fuel costs, airlines are spending more on labor due to inflation and higher renegotiated labor contracts. Flight attendants are paid hourly wages during their flight time only. Flight attendants are not paid for the hours they spend waiting at the airport or on the plane before it departs.

View a quick tutorial video about changing conditions’ impact on break even at this link and this quick tutorial video about cost behavior at this link. Then answer the following questions.

Note to instructors: This post is assignable in Pearson’s MyLab and has questions that are auto-graded. All blog questions are found in Instructor Tools > Assignment Manager > Create Assignment > Create homework > And then change the chapter to “News. Accounting in the Headlines.” The “News. Accounting in the Headlines” chapter will be near the bottom of the list of chapters.

Questions

  1. What impact would each of the following changes have on an airline’s breakeven point (consider each item independently)?
    • An increase in airfare (ticket prices)
    • An increase in the price of per gallon of jet fuel
    • A decrease in the number of seats sold
    • A decrease in the total spent on jet fuel
    • An increase in the cost of labor contracts
  1. How could the per gallon cost of jet fuel increase yet the total cost of jet fuel decrease for an airline?
  2. Is jet fuel a variable, fixed, or mixed cost for an airline?

Copyright 2022 Wendy M. Tietz, LLC


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About Dr. Wendy Tietz, CPA, CMA, CSCA, CGMA

Dr. Wendy Tietz is a professor of accounting at Kent State University in Kent, Ohio, USA. She is also a textbook author with Pearson Education.

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