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Air Transport in the 21 st Century Strong evidence to show that our global system is dependent upon air travel Strong evidence to show that our global.

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Presentation on theme: "Air Transport in the 21 st Century Strong evidence to show that our global system is dependent upon air travel Strong evidence to show that our global."— Presentation transcript:

1 Air Transport in the 21 st Century Strong evidence to show that our global system is dependent upon air travel Strong evidence to show that our global system is dependent upon air travel Civil aviation began in 1920s with earlier precursor in Germany pre-WW I Civil aviation began in 1920s with earlier precursor in Germany pre-WW I High costs restricted widespread use of air travel High costs restricted widespread use of air travel But since 1960s declining costs have made recreational air travel commonplace But since 1960s declining costs have made recreational air travel commonplace Air freight increasingly important Air freight increasingly important What are the defining characteristics of contemporary air transport? What are the defining characteristics of contemporary air transport?

2 Technology Driven Industry Through a cascade of innovations, technology has dramatically altered the size, range, speed and safety of aircraft Through a cascade of innovations, technology has dramatically altered the size, range, speed and safety of aircraft Boeing 777 – advanced technology and extended range, smaller crew Boeing 777 – advanced technology and extended range, smaller crew Airbus passengers, range of 9,200 miles and 30% larger payload than the Boeing and operating costs % lower Airbus passengers, range of 9,200 miles and 30% larger payload than the Boeing and operating costs % lower

3 The Dominance of Boeing and Airbus These two firms account for virtually all sales of aircraft with >100 seats These two firms account for virtually all sales of aircraft with >100 seats Aircraft manufacturing is a huge global production network Aircraft manufacturing is a huge global production network B777 uses 3 million parts B777 uses 3 million parts Japanese (fuselage), Italian (wing flaps), Canada (landing gears) and others are involved Japanese (fuselage), Italian (wing flaps), Canada (landing gears) and others are involved Highly competitive business with huge lobbying efforts required Highly competitive business with huge lobbying efforts required Does Airbus have an unfair advantage? Does Airbus have an unfair advantage?

4 Technology Dynamics Concorde became the travel mode for the ultra- rich Concorde became the travel mode for the ultra- rich Mach 2 at 58,500 feet Mach 2 at 58,500 feet But extremely expensive and noisy But extremely expensive and noisy Plus plagued by safety doubts Plus plagued by safety doubts Retired in October, 2003 Retired in October, 2003

5 Boeing 7E7 New environmentally sensitive aircraft 2007 New environmentally sensitive aircraft % less fuel than conventional wide bodies 15-20% less fuel than conventional wide bodies passengers passengers 7,500-8,000 nautical miles (Seattle- Moscow, Sydney- Dallas, Paris- Honolulu, Shanghai- Johannesburg) 7,500-8,000 nautical miles (Seattle- Moscow, Sydney- Dallas, Paris- Honolulu, Shanghai- Johannesburg) Mach.85 (85% of Speed of Sound) Mach.85 (85% of Speed of Sound)

6 Rise of the Airline Industry Prior to 2001, five decades of uninterrupted growth: strong passenger and cargo growth Prior to 2001, five decades of uninterrupted growth: strong passenger and cargo growth Air fares have declined to make air travel more accessible to larger numbers of people Air fares have declined to make air travel more accessible to larger numbers of people Postwar safe and secure setting- pax Americana Postwar safe and secure setting- pax Americana Broad geographic scale of economic activity Broad geographic scale of economic activity Liberalization and greater freedom to set fares and open up new routes Liberalization and greater freedom to set fares and open up new routes

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8 Deregulation of the U.S. Airline Industry Prior to 1978 airlines were subject to regulation by Civil Aeronautics Board Prior to 1978 airlines were subject to regulation by Civil Aeronautics Board Regulated level and structure of fares, entry of new carriers in general and in specific links Regulated level and structure of fares, entry of new carriers in general and in specific links In 40 years of regulation no new entry occurred in scheduled services In 40 years of regulation no new entry occurred in scheduled services Why regulation? Why regulation?

9 Reasons for Regulation Felt necessary to insure future economic growth Felt necessary to insure future economic growth Depression era produced a suspicion of free markets and potential havoc Depression era produced a suspicion of free markets and potential havoc Feeling that excessive competition would produce instability in the infant industry Feeling that excessive competition would produce instability in the infant industry Protect profitability of individual carriers and constrain growth of larger carriers Protect profitability of individual carriers and constrain growth of larger carriers

10 Winds of Change: Deregulation By late 1970s restrictive policies of CAB came under attack By late 1970s restrictive policies of CAB came under attack Proponents of less government influence argued that lack of competitive threat dampened incentives for efficient airline operations Proponents of less government influence argued that lack of competitive threat dampened incentives for efficient airline operations Restrictions on price competition forced airlines to pursue non-price strategies such as: schedule frequency, non-stop services, in-flight amenities Restrictions on price competition forced airlines to pursue non-price strategies such as: schedule frequency, non-stop services, in-flight amenities Result was that airlines charged excessive fares and offered inefficient levels of service. Result was that airlines charged excessive fares and offered inefficient levels of service. Paid too little attention to controlling labor and other costs- no competitive pressures to deliver Paid too little attention to controlling labor and other costs- no competitive pressures to deliver

11 Airline Deregulation Act 1978 Gradual decontrol took place and CAB was phased out by 1985 Gradual decontrol took place and CAB was phased out by 1985 Initial consequences: downward pressure on fares and price wars Initial consequences: downward pressure on fares and price wars Load factors (level of occupancy) increased Load factors (level of occupancy) increased Route rationalization –see next slide Route rationalization –see next slide New aggressive entry- 25 new carriers between 1978 and 1982 New aggressive entry- 25 new carriers between 1978 and 1982 Continued increase in employment Continued increase in employment

12 Route Rationalization Basically how can and have carriers changed their routing to enhance competitive position? Basically how can and have carriers changed their routing to enhance competitive position? Increase average length of haul- add longer routes and delete shorter ones Increase average length of haul- add longer routes and delete shorter ones Minimize cost of serving market and fare by flying larger aircraft at high load factors-use of wide bodies Minimize cost of serving market and fare by flying larger aircraft at high load factors-use of wide bodies Route diversification: reduce seasonality, improve traffic mix: tourism, elderly, business, education Route diversification: reduce seasonality, improve traffic mix: tourism, elderly, business, education Improve fleet utility Improve fleet utility

13 Hub and Spoke Networks

14 Changes in Route Structure Prior to deregulation services were taking place on a point-to-point basis. Two airline companies (red and blue) are servicing a network of major cities. Some direct connections exist, but mainly at the expense of the frequency of services and high costs (if not subsidized). Also, many cities are serviced by the two airlines and connections are inconvenient.

15 Changes in Route Structure With deregulation, hub-and-spoke networks emerge Consequence is each airline assumes dominance over a hub (red airline over the orange hub and blue airline over the light blue hub) and services are modified so the two hubs are connected to several spokes. Both airlines tend to compete for flights between their hubs and may do so for specific spokes, if demand warrants it. However, as network matures, it becomes increasingly difficult to compete at hubs as well as at spokes, mainly because of economies of agglomeration.

16 Changes in Route Structure As an airline assumes dominance of a hub, it reaches oligopolistic (if not monopolistic) control and may increase airfares for specific segments. The advantage of such a system for airlines is the achievement of a regional market dominance and higher plane loads, while passengers benefit from better connectivity But there are delays for connections and need to change planes more frequently

17 Advantages of Hub and Spoke By combining passengers with different origins and destinations, average passengers per flight will increase By combining passengers with different origins and destinations, average passengers per flight will increase Traffic feed permits more frequent service or service with larger aircraft Traffic feed permits more frequent service or service with larger aircraft Either service strategy allows carrier to realize density economies Either service strategy allows carrier to realize density economies For example double # of flights w/o increasing ground crew For example double # of flights w/o increasing ground crew Larger aircraft more economical in fuel use and labor costs Larger aircraft more economical in fuel use and labor costs Density economies allow larger carriers to offset input costs advantages of new entrants Density economies allow larger carriers to offset input costs advantages of new entrants

18 Changing Winds Again : 1990s Airlines order new, efficient and expensive aircraft anticipating increased air travel Airlines order new, efficient and expensive aircraft anticipating increased air travel Higher jet fuel prices Higher jet fuel prices Depressed economy reduces demand Depressed economy reduces demand Gulf War frightens tourist traffic Gulf War frightens tourist traffic Inefficiencies of hub and spoke raised Inefficiencies of hub and spoke raised Both United and American turn over short unprofitable routes to low cost or commuter airlines Both United and American turn over short unprofitable routes to low cost or commuter airlines Demise of Eastern and Pan Am- Continental and TWA bankruptcy Demise of Eastern and Pan Am- Continental and TWA bankruptcy Low fare entrants: Southwest Low fare entrants: Southwest September 11 further impacts carriers September 11 further impacts carriers

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20 Crisis in the Airlines Global airline industry suffered worst year ever in losing US$11.6 billion Global airline industry suffered worst year ever in losing US$11.6 billion Sabena and Swissair collapsed Sabena and Swissair collapsed United Airlines and US Air announced bankruptcy-both are still under Chapter 11 currently United Airlines and US Air announced bankruptcy-both are still under Chapter 11 currently Huge number of aircraft were idled Huge number of aircraft were idled What is the cause(s) of this state? What is the cause(s) of this state?

21 Causes of Airline Crisis Airline industry has never really been profitable- why? Airline industry has never really been profitable- why? Ordering of aircraft years in advance tends to foster boom-bust cycle Ordering of aircraft years in advance tends to foster boom-bust cycle Pervasive involvement of state has diverted industrys emphasis on profit making Pervasive involvement of state has diverted industrys emphasis on profit making Romance of air travel draws overinvestment Romance of air travel draws overinvestment Economists argue that this is an empty core industry meaning a tendency towards unprofitability Economists argue that this is an empty core industry meaning a tendency towards unprofitability

22 Structure of Airline Costs Fixed/Overhead- carriers capital especially aircraft 17 % Fixed/Overhead- carriers capital especially aircraft 17 % Operating-Direct-dependent on type of aircraft: flight crew, fuel, maintenance, depreciation, landing fees, leasing 60 % Operating-Direct-dependent on type of aircraft: flight crew, fuel, maintenance, depreciation, landing fees, leasing 60 % Operating-Indirect- passenger related: passenger services, ticketing, station and ground costs, administrative 23% Operating-Indirect- passenger related: passenger services, ticketing, station and ground costs, administrative 23%

23 Labor Costs Labor costs represent significant proportion of total operating costs Labor costs represent significant proportion of total operating costs 1998 North America: USAir 40%; Delta 39%; United 38% 1998 North America: USAir 40%; Delta 39%; United 38% 1998 Europe: Air France 34%; BA 28%; KLM 28% 1998 Europe: Air France 34%; BA 28%; KLM 28% 1998 Asia: Korean 17%; Thai 17%; SIA 17%; JAL 15% 1998 Asia: Korean 17%; Thai 17%; SIA 17%; JAL 15%

24 Strategies for Reducing Labor Costs Private European carriers set crisis measures to reduce costs Private European carriers set crisis measures to reduce costs State owned carriers reduced costs as part of restructuring to qualify for EC aid State owned carriers reduced costs as part of restructuring to qualify for EC aid Renegotiate terms and conditions of employment and cut staff numbers Renegotiate terms and conditions of employment and cut staff numbers Set up low cost subsidiaries with lower wage scales-outsourcing loss making routes to low cost carriers Set up low cost subsidiaries with lower wage scales-outsourcing loss making routes to low cost carriers Stock options for employees- UA offered shares to unions and 3 of 12 seats on Board in exchange for pay cuts Stock options for employees- UA offered shares to unions and 3 of 12 seats on Board in exchange for pay cuts

25 The Plight of US Airways In early days of deregulation, USAir one of most profitablemonopoly in Northeast In early days of deregulation, USAir one of most profitablemonopoly in Northeast Wave of consolidation- USAir purchased Pacific Southwest and Piedmont --# 6 rank Wave of consolidation- USAir purchased Pacific Southwest and Piedmont --# 6 rank Both had lower cost structures but USAir rejected this Both had lower cost structures but USAir rejected this 1990s scaled back and plugged plug on western routes but did not scale down crew bases, reservations centers, and training facilities 1990s scaled back and plugged plug on western routes but did not scale down crew bases, reservations centers, and training facilities Lead in east with hubs at Pittsburgh, Philadelphia and Charlottecaptive travelers Lead in east with hubs at Pittsburgh, Philadelphia and Charlottecaptive travelers CEO Wolf returns airline to profitability: Airbus fleet, European destinations, closed facilities CEO Wolf returns airline to profitability: Airbus fleet, European destinations, closed facilities

26 US Airways Plight contd Convinced pilots union to let airline buy regional jets Convinced pilots union to let airline buy regional jets Made labor concessions in exchange and to stave off strikes Made labor concessions in exchange and to stave off strikes Endured by charging high fares to business customers but undermined by Internet Endured by charging high fares to business customers but undermined by Internet In 2000 acquired by United for $4.3 bil and assumption of $7.3 bil debt In 2000 acquired by United for $4.3 bil and assumption of $7.3 bil debt Sept 11 hurt by slowdown and entered bankruptcy- -$900 mil loan guaranteed from Federal government allows it to emerge Sept 11 hurt by slowdown and entered bankruptcy- -$900 mil loan guaranteed from Federal government allows it to emerge Southwest forced competition at Philadelphia hub- back to bankruptcy Southwest forced competition at Philadelphia hub- back to bankruptcy

27 The Regional Jet Phenomenon Additional impact of deregulation was growth of feeder airlines Additional impact of deregulation was growth of feeder airlines Growth of RJs- 50 and 70 seat aircraft Growth of RJs- 50 and 70 seat aircraft Range and speed of larger jets Range and speed of larger jets Cost less to purchase $23 mil vs $52 mil A320 Cost less to purchase $23 mil vs $52 mil A320 Burn less fuel Burn less fuel Crews paid less Crews paid less Allows airlines to cope with fluctuating demand Allows airlines to cope with fluctuating demand

28 No Frills Airlines Financial viability of airlines is uncertain Financial viability of airlines is uncertain One response is to create low-cost, no- frills operations One response is to create low-cost, no- frills operations Lower fares, select destinations, no food, e-tickets, first come seat assignments, strict baggage allowance Lower fares, select destinations, no food, e-tickets, first come seat assignments, strict baggage allowance One type of aircraft: B737 or A320 One type of aircraft: B737 or A320 Such carriers now account for 20% of seats nationwide Such carriers now account for 20% of seats nationwide

29 No Frills Prototype Southwest Airlines begun over 30 years ago by Herb Kelleher Southwest Airlines begun over 30 years ago by Herb Kelleher 4 th largest airline in U.S., 64 mil passengers annually to over 60 cities 4 th largest airline in U.S., 64 mil passengers annually to over 60 cities 355 aircraft less than 9 years old 355 aircraft less than 9 years old Based upon sound management principles Based upon sound management principles Operates in largely short haul, low margin markets and eschews hub and spoke to better use aircraft and personnel in quick turnaround Operates in largely short haul, low margin markets and eschews hub and spoke to better use aircraft and personnel in quick turnaround

30 Southwest Airlines

31 jetBlue Airways

32 Air Tran Airlines

33 Where the Future Touches Down: Airports in a Globalizing World Huge increases in air traffic have concentrated in a handful of airports Huge increases in air traffic have concentrated in a handful of airports Hubs paramount feature of the industry Hubs paramount feature of the industry Major hubs whether for passenger or cargo articulate relations between regional economies and broader global economy Major hubs whether for passenger or cargo articulate relations between regional economies and broader global economy Thus governments at all levels have invested heavily in new airports and upgrades Thus governments at all levels have invested heavily in new airports and upgrades

34 Major Passenger and Cargo Airports 2002 Passengers (mil) and (metric tons) (1) Atlanta 76.9 (2) Chicago (66.5) (3) London Heathrow (63.3) (4) Tokyo (61.1) (5) LAX (56.2) (6) DFW (52.8) (7) FKT (48) (1) Atlanta 76.9 (2) Chicago (66.5) (3) London Heathrow (63.3) (4) Tokyo (61.1) (5) LAX (56.2) (6) DFW (52.8) (7) FKT (48) (1) Memphis (3390) (2) Hong Kong (2516) (3) Anchorage (2027) (4) Tokyo Narita (2000) (5) LAX (1758) (6) Seoul (1705) (7) Singapore (1660) (8) FKT (1631) (9) Miami (1624) (10) NY-JFK (1574) (11) Louisville (1523) (1) Memphis (3390) (2) Hong Kong (2516) (3) Anchorage (2027) (4) Tokyo Narita (2000) (5) LAX (1758) (6) Seoul (1705) (7) Singapore (1660) (8) FKT (1631) (9) Miami (1624) (10) NY-JFK (1574) (11) Louisville (1523)

35 Atlanta Hartsfield IA 75 million passengers annually 75 million passengers annually 45K direct jobs,3.5K air freight, 2.1 ground transport 45K direct jobs,3.5K air freight, 2.1 ground transport Total payroll $1.9 bil Total payroll $1.9 bil Indirect impact of $3.8 bil on local- regional economy Indirect impact of $3.8 bil on local- regional economy $17.3 bil total annual regional impact $17.3 bil total annual regional impact

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37 Ultra-Global Hubs: Singapores Changi Airport Opened in July 1981 Opened in July Passengers 29 mil 2002 Passengers 29 mil 2002 Cargo 1,660,000 metric tons 2002 Cargo 1,660,000 metric tons In 2006 Terminal 3 additions will add 20 mil passenger capacity bringing total to 64 mil In 2006 Terminal 3 additions will add 20 mil passenger capacity bringing total to 64 mil Free Skytrain service between the terminals Free Skytrain service between the terminals Mini edge city shopping Mini edge city shopping

38 Malaysias Super Multi Media Corridor

39 Kuala Lumpur International Airport Opened in 1998 Opened in 1998 Express rail link 27 minutes from downtown KL Express rail link 27 minutes from downtown KL Part of the Super Multi Media Corridor technology drive Part of the Super Multi Media Corridor technology drive Destination itself Destination itself Competing with Changi Competing with Changi

40 Schiphol Airport, Amsterdam 9th largest in world 9th largest in world 40,736,009 passengers in 2001 and a 3 % AGR 40,736,009 passengers in 2001 and a 3 % AGR 1,288,624 metric tons in 2001 and a 4.4 % AGR 1,288,624 metric tons in 2001 and a 4.4 % AGR Gateway to a nation with strong travel industry Gateway to a nation with strong travel industry nl nl nl nl

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42 Bluegrass Non-Stop Destinations Y non-stopsY non-stops Y non-stopsY non-stops New York, Newark, Philadelphia, Pittsburgh, Washington, DC New York, Newark, Philadelphia, Pittsburgh, Washington, DC Atlanta, Charlotte, Orlando, Dallas, Houston, Memphis, St Louis Atlanta, Charlotte, Orlando, Dallas, Houston, Memphis, St Louis Chicago ORD and Midway, Cincinnati, Detroit, Cleveland Chicago ORD and Midway, Cincinnati, Detroit, Cleveland To be added in Y05-07-Denver and Minneapolis To be added in Y05-07-Denver and Minneapolis 4-5 percent increases in traffic per annum 4-5 percent increases in traffic per annum

43 Direct Flight Connections 2004

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45 Controversies and Externalities Noise and conflicting land uses are the major problems Noise and conflicting land uses are the major problems Noise pollution severely limited the utility of the Concorde because it could not attain supersonic speed over land Noise pollution severely limited the utility of the Concorde because it could not attain supersonic speed over land Airports occupy relatively little land areaOHare occupies only 9 sq mi- but proximity to cities is critical Airports occupy relatively little land areaOHare occupies only 9 sq mi- but proximity to cities is critical New runways and runway extensions are controversial topics New runways and runway extensions are controversial topics

46 OHare Airport Expansion FAA approves $15 billion expansion to nations most delay prone airport FAA approves $15 billion expansion to nations most delay prone airport 8 Year plan calls for 6 parallel and two diagonal runways 8 Year plan calls for 6 parallel and two diagonal runways 440 acres expansion requires city purchase and raze 550 homes, relocate 200 businesses and a cemetery dating to 1800s 440 acres expansion requires city purchase and raze 550 homes, relocate 200 businesses and a cemetery dating to 1800s Claim to save $12 billion over two decades by reducing passenger and aircraft delays Claim to save $12 billion over two decades by reducing passenger and aircraft delays


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