Presentation on theme: "Air Transport in the 21st Century"— Presentation transcript:
1Air Transport in the 21st Century Strong evidence to show that our global system is dependent upon air travelCivil aviation began in 1920s with earlier precursor in Germany pre-WW IHigh costs restricted widespread use of air travelBut since 1960s declining costs have made recreational air travel commonplaceAir freight increasingly importantWhat are the defining characteristics of contemporary air transport?
2Technology Driven Industry Through a cascade of innovations, technology has dramatically altered the size, range, speed and safety of aircraftBoeing 777 – advanced technology and extended range, smaller crewAirbus passengers, range of 9,200 miles and 30% larger payload than the Boeing and operating costs % lower
3The Dominance of Boeing and Airbus These two firms account for virtually all sales of aircraft with >100 seatsAircraft manufacturing is a huge global production networkB777 uses 3 million partsJapanese (fuselage), Italian (wing flaps), Canada (landing gears) and others are involvedHighly competitive business with huge lobbying efforts requiredDoes Airbus have an unfair advantage?
4Technology Dynamics Concorde became the travel mode for the ultra-rich Mach 2 at 58,500 feetBut extremely expensive and noisyPlus plagued by safety doubtsRetired in October, 2003
5Boeing 7E7 www.newairplane.com New environmentally sensitive aircraft 200715-20% less fuel than conventional wide bodiespassengers7,500-8,000 nautical miles (Seattle-Moscow, Sydney- Dallas, Paris- Honolulu, Shanghai- Johannesburg)Mach .85 (85% of Speed of Sound)
6Rise of the Airline Industry Prior to 2001, five decades of uninterrupted growth: strong passenger and cargo growthAir fares have declined to make air travel more accessible to larger numbers of peoplePostwar safe and secure setting- pax AmericanaBroad geographic scale of economic activityLiberalization and greater freedom to set fares and open up new routes
8Deregulation of the U.S. Airline Industry Prior to 1978 airlines were subject to regulation by Civil Aeronautics BoardRegulated level and structure of fares, entry of new carriers in general and in specific linksIn 40 years of regulation no new entry occurred in scheduled servicesWhy regulation?
9Reasons for Regulation Felt necessary to insure future economic growthDepression era produced a suspicion of free markets and potential havocFeeling that excessive competition would produce instability in the infant industryProtect profitability of individual carriers and constrain growth of larger carriers
10Winds of Change: Deregulation By late 1970s restrictive policies of CAB came under attackProponents of less government influence argued that lack of competitive threat dampened incentives for efficient airline operationsRestrictions on price competition forced airlines to pursue non-price strategies such as: schedule frequency, non-stop services, in-flight amenitiesResult 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
11Airline Deregulation Act 1978 Gradual decontrol took place and CAB was phased out by 1985Initial consequences: downward pressure on fares and ‘price wars’Load factors (level of occupancy) increasedRoute rationalization –see next slideNew aggressive entry- 25 new carriers between 1978 and 1982Continued increase in employment
12Route Rationalization Basically how can and have carriers changed their routing to enhance competitive position?Increase average length of haul- add longer routes and delete shorter onesMinimize cost of serving market and fare by flying larger aircraft at high load factors-use of wide bodiesRoute diversification: reduce seasonality, improve traffic mix: tourism, elderly, business, educationImprove fleet utility
14Changes 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.
15Changes in Route Structure With deregulation, hub-and-spoke networks emergeConsequence 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.
16Changes 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 connectivityBut there are delays for connections and need to change planes more frequently
17Advantages of Hub and Spoke By combining passengers with different origins and destinations, average passengers per flight will increaseTraffic feed permits more frequent service or service with larger aircraftEither service strategy allows carrier to realize density economiesFor example double # of flights w/o increasing ground crewLarger aircraft more economical in fuel use and labor costsDensity economies allow larger carriers to offset input costs advantages of new entrants
18Changing Winds Again : 1990s Airlines order new, efficient and expensive aircraft anticipating increased air travelHigher jet fuel pricesDepressed economy reduces demandGulf War frightens tourist trafficInefficiencies of hub and spoke raisedBoth United and American turn over short unprofitable routes to low cost or commuter airlinesDemise of Eastern and Pan Am- Continental and TWA bankruptcyLow fare entrants: SouthwestSeptember 11 further impacts carriers
20Crisis in the AirlinesGlobal airline industry suffered worst year ever in losing US$11.6 billionSabena and Swissair collapsedUnited Airlines and US Air announced bankruptcy-both are still under Chapter 11 currentlyHuge number of aircraft were idledWhat is the cause(s) of this state?
21Causes of Airline Crisis Airline industry has never really been profitable- why?Ordering of aircraft years in advance tends to foster boom-bust cyclePervasive involvement of state has diverted industry’s emphasis on profit makingRomance of air travel draws overinvestmentEconomists argue that this is an “empty core” industry meaning a tendency towards unprofitability
22Structure of Airline Costs Fixed/Overhead- carrier’s capital especially aircraft 17 %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%
23Labor CostsLabor costs represent significant proportion of total operating costs1998 North America: USAir 40%; Delta 39%; United 38%1998 Europe: Air France 34%; BA 28%; KLM 28%1998 Asia: Korean 17%; Thai 17%; SIA 17%; JAL 15%
24Strategies for Reducing Labor Costs Private European carriers set crisis measures to reduce costsState owned carriers reduced costs as part of restructuring to qualify for EC aidRenegotiate terms and conditions of employment and cut staff numbersSet up low cost subsidiaries with lower wage scales-outsourcing loss making routes to low cost carriersStock options for employees- UA offered shares to unions and 3 of 12 seats on Board in exchange for pay cuts
25The Plight of US Airways In early days of deregulation, USAir one of most profitable—monopoly in NortheastWave of consolidation- USAir purchased Pacific Southwest and Piedmont --# 6 rankBoth had lower cost structures but USAir rejected this1990s scaled back and plugged plug on western routes but did not scale down crew bases, reservations centers, and training facilitiesLead in east with hubs at Pittsburgh, Philadelphia and Charlotte—captive travelersCEO Wolf returns airline to profitability: Airbus fleet, European destinations, closed facilities
26US Airways Plight cont’d Convinced pilots’ union to let airline buy regional jetsMade labor concessions in exchange and to stave off strikesEndured by charging high fares to business customers but undermined by InternetIn 2000 acquired by United for $4.3 bil and assumption of $7.3 bil debtSept 11 hurt by slowdown and entered bankruptcy--$900 mil loan guaranteed from Federal government allows it to emergeSouthwest forced competition at Philadelphia hub-back to bankruptcy
27The Regional Jet Phenomenon Additional impact of deregulation was growth of feeder airlinesGrowth of RJs- 50 and 70 seat aircraftRange and speed of larger jetsCost less to purchase $23 mil vs $52 mil A320Burn less fuelCrews paid lessAllows airlines to cope with fluctuating demand
28No Frills Airlines Financial viability of airlines is uncertain One response is to create low-cost, no-frills operationsLower fares, select destinations, no food, e-tickets, first come seat assignments, strict baggage allowanceOne type of aircraft: B737 or A320Such carriers now account for 20% of seats nationwide
29No Frills PrototypeSouthwest Airlines begun over 30 years ago by Herb Kelleher4th largest airline in U.S., 64 mil passengers annually to over 60 cities355 aircraft less than 9 years oldBased upon sound management principlesOperates in largely short haul, low margin markets and eschews hub and spoke to better use aircraft and personnel in quick turnaround
33Where the Future Touches Down: Airports in a Globalizing World Huge increases in air traffic have concentrated in a handful of airportsHubs paramount feature of the industryMajor hubs whether for passenger or cargo articulate relations between regional economies and broader global economyThus governments at all levels have invested heavily in new airports and upgrades
34Major 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) 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)
35Atlanta Hartsfield IA http://www.aci-na.org/docs/US_Econ_Impact.pdf 75 million passengers annually45K direct jobs,3.5K air freight, 2.1 ground transportTotal payroll $1.9 bilIndirect impact of $3.8 bil on local-regional economy$17.3 bil total annual regional impact
37Ultra-Global Hubs: Singapore’s Changi Airport Opened in July 19812002 Passengers 29 mil2002 Cargo 1,660,000 metric tonsIn 2006 Terminal 3 additions will add 20 mil passenger capacity bringing total to 64 milFree Skytrain service between the terminalsMini edge city shopping
39Kuala Lumpur International Airport www.klia.com.my Opened in 1998Express rail link 27 minutes from downtown KLPart of the Super Multi Media Corridor technology driveDestination itselfCompeting with Changi
40Schiphol Airport, Amsterdam 9th largest in world40,736,009 passengers in 2001 and a 3 % AGR1,288,624 metric tons in 2001 and a 4.4 % AGRGateway to a nation with strong travel industry
42Bluegrass Non-Stop Destinations Y non-stops Y non-stopsNew York, Newark, Philadelphia, Pittsburgh, Washington, DCAtlanta, Charlotte, Orlando, Dallas, Houston, Memphis, St LouisChicago ORD and Midway, Cincinnati, Detroit, ClevelandTo be added in Y05-07-Denver and Minneapolis4-5 percent increases in traffic per annum
45Controversies and Externalities Noise and conflicting land uses are the major problemsNoise pollution severely limited the utility of the Concorde because it could not attain supersonic speed over landAirports occupy relatively little land area—O’Hare occupies only 9 sq mi- but proximity to cities is criticalNew runways and runway extensions are controversial topics
46O’Hare Airport Expansion http://www. flychicago. com/ohare/about/about FAA approves $15 billion expansion to nation’s most delay prone airport8 Year plan calls for 6 parallel and two diagonal runways440 acres expansion requires city purchase and raze 550 homes, relocate 200 businesses and a cemetery dating to 1800sClaim to save $12 billion over two decades by reducing passenger and aircraft delays