Flying costs per hour

You often see flying costs per hour in Parliamentary answers where the costs are expressed as Marginal Cost and Full Cost but what constitutes both is often not well understood.

The official definition is…

Marginal Cost

The marginal cost is the variable cost incurred in  using an aircraft or one additional flying hour and takes into account the following:

  1. The variable element of Forward (1st/2nd line) unit and stock consumption costs.
  2. Variable DE&S costs including Depth (3rd and 4th line) servicing and stock consumption.
  3. Fuel costs (wholly variable).

Marginal cost is the amount by which total costs are changed if volume of output is increased or decreased by one unit – JSP 368.

Full Cost

The full cost includes both fixed and variable costs incurred in using an aircraft. In addition to the Marginal Cost the full cost rate also includes:

  1. Pay, flying pay, employers’ ERNIC [Earnings Related National Insurance Contributions] and SCAPE [Superannuation Charges Adjusted for Past Experience] for pilots and aircrew, plus Support Costs and Higher Formation costs.
  2. Recovery of annual Aircrew Training costs.
  3. Forward support costs (where costs can be apportioned to aircraft).
  4. Fixed Depth servicing costs.
  5. Fixed DE&S costs.
  6. CoCC. [Cost of Capital charge]
  7. Depreciation of tangible assets and amortisation of intangible assets.

Full Cost is the total cost of all resources used in supplying goods or services, including direct costs of producing the output, a proportional share of overhead costs and any selling and distribution expenses. It includes both cash and non-cash costs – JSP 368

So there you go!

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Rocket Banana
October 9, 2013 7:34 pm

As clear as mud ;-)

So are you saying that the marginal costs do not take into account, for example, the pilots pay? If so it is not a marginal cost because the pay can be amortised over the average flight hours per year.

I sort of get that most of the “full costs” are non-variable, but, for example, the depreciation will increase per flying hour undertaken so should not be considered a fixed cost.

Furthermore, how is depreciation calculated for jet aircraft? 50% write-off per three-years like a car? 1/10000 of the procurement cost per hour (based on 10000 hours life and a linear depreciation)?

Seems a very sneaky way to make the marginal cost look less than it really is – not that I’m surprised :-)

Craig
Craig
October 9, 2013 8:38 pm

JSP 472 suggests Depreciation is to be calculated on the straight line method over the useful life of the asset, which in the case of Single Use Military Equipment (Air Systems – Fixed Wing) could be anything between 13 to 35 years, taking into account any residual value at the end and any change to useful life.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/86104/JSP472.pdf