1. Management of Transportation
Chapter 5
The Airline Industry

2. Introduction Wright Brothers first flight: 1903
Government development and promotion of air transport begins in 1920s:
U.S. Post Office air mail subsidy program helps launch commercial passenger airline industry
Competitive advantage: Speed (travel time savings)
Econ. Deregulation enables more competitive pricing

3. Types of Carriers Private Carriers
Definition:
A firm that transports company personnel or freight in planes to support its primary business
Preponderance of use is for transport of personnel
Subject to federal safety regulations administered by the Federal Aviation Adm. (FAA)

4. Types of Carriers For-Hire Carriers
Several different classification schemes
Classified by annual operating revenues
Majors (revenues of >$1 billion)
Nationals ($100 million - $1 billion)
Regionals (revenues of <$100 million)
Classified by type of service
All-cargo
Commuter
Charter
International

5. Market Structure Number of Carriers
Relatively small number of for-hire carriers
Most revenues earned by small number of majors
Several cycles of increasing, then decreasing number of airlines after 1978 deregulation
Private air transport
Over 500 corporations own/operate aircraft
About 60,000 corporate-owned planes exist
Thousands of private aircraft used for personal, recreational, and instructional purposes

6. Market Structure Number of Carriers

7. Market Structure Number of Carriers

8. Competition Intermodal and Intramodal
Very limited intermodal competition for long distance (500+ miles) trips
Air has decided advantage in transport speed
Freight: rising competition from time-definite motor carrier service
Passengers: some limited competition from personal automobile travel, rail, and bus service
Intense intramodal competition
Creates cycles of new entrants, excess capacity, reduced fares, carriers exiting markets

9. Competition Service Competition
Nature of passenger service competition
Flight frequency on given route
Timing of flights
Meals, in-flight communications, other services
No-frills alternatives intensify competition
Advertising used to differentiate carriers
Nature of competition for cargo, express traffic
Published schedules and rates
Door-to-door, time-definite service

10. Operating and Service Characteristics General
Due to value of time, air dominates for-hire, long-distance passenger market
When importance of speed outweighs cost, then air is attractive for freight
Emergency shipments
Typical commodities
Mail, fashion clothing, communications products, fresh flowers, racehorses, jewelry
Air freight cost vs. inventory cost tradeoff

11. Operating and Service Characteristics Speed of Service
Speed, travel time advantage can be off-set by
Low flight frequency, schedule timing
Smaller communities have experienced reduced frequencies
In-direct routing due to hub and spoke networks
Legacy majors moved to hub and spoke networks following deregulation to improve load-factors
Air traffic and ground congestion, security measures
Most relevant at major airports
Adds uncertainty to total travel time

12. Operating and Service Characteristics Length of Haul and Capacity
2007 average air trip length for passengers: miles
Aircraft capacity dependent on aircraft type
Wide-body, 4 engine jet
370 passengers and all-cargo capacity of tons
Boeing 777 carries 263 passengers
Most planes carry passengers

13. Operating and Service Characteristics Accessibility and Dependability
Air travel is generally highly reliable
Weather and congestion are the principal causes of schedule disruptions
Sophisticated navigation systems facilitate operation in poor weather conditions
Limited airport accessibility adds travel time and cost to air travel
Limited accessibility is the principal service disadvantage of air travel

14. Equipment and Facilities
Types of vehicles (aircraft)
Many aircraft types
Wide range of seating capacity, cargo payload, speed, fuel consumption, operating costs/hour
Key is to match operating characteristics to demand needs of route
Terminals (airports)
Airports financed by government
Federal construction assistance programs
State and local governments operate and maintain
Air carriers and users pay for use

15. Equipment and Facilities

16. Taxes and Fees

17. Taxes and Fees (continued)

18. Cost Structure Fixed vs. Variable Cost Components
High variable costs (80% of total operation costs)
About 38% attributable to flight operations
About 10% for maintenance
About 14% for aircraft and traffic servicing
Low fixed costs
Due to government investment in terminals and operating infrastructure
Increasing price competition creates pressure to reduce labor costs, increase productivity

19. Cost Structure Fixed vs. Variable Cost Components

20. Cost Structure, cont’d Fuel and Labor Costs
Fuel costs: rising fuel costs have major impact on total operating costs
A Boeing consumes 3,411 gal./hour
Airlines turn to more fuel efficient aircraft and smaller planes on low-density routes
Labor costs
Variety of job skills required by an airline
Pilots, flight engineers, attendants, communications personnel, mechanics, ground crew, administrative
Pilot wages vary depending upon the plane they are rated to fly and union affiliation

21. Cost Structure Equipment, Economies of Scale and Density
Cost per flight-hour higher for larger planes
But, cost per seat-mile lower for large planes
Example of EOS with respect to plane size (capacity)
Also, for any given plane size, low marginal cost to fill empty seats (example of econ. of density)
Plane
Seats
Operating Cost/Hr.
Operating Cost/Seat-Mile B
367
$8,443
$0.046
B ER
175
$3,873
$0.051
DC-9
101
$2,071
$0.069

22. Cost Structure Equipment, Economies of Scale and Density
Operating economies of scale at the firm level
Minor degree of economies of scale
Capital investment needed for integrated communication networks create some EOS
For the most part, EOS at the firm level are not significant
Significant economies of density at route level
Important consideration when choosing city-pairs to serve, and setting flight freq. and planes for each route

23. Rates Pricing Many passenger fare variations Cargo pricing
Price of same seat on flight may vary depending on restrictions at time of purchase
Advance purchase, time of day, competition
Yield management used to increase revenues and improve capacity utilization
Load factors average about 79.9% in 2007
Cargo pricing
Based mainly on weight or cubic dimensions
Over-dimensional charge for < 8 cu ft. density

24. Rates Operating Efficiency
Operating ratio = [Op. Exp./Op. Inc.] * 100
Industry average: :
2007: 94.7
Load Factor = [#Passengers/#Seats] * 100
Industry average climbs above 70%
Relationship between load factor, plane size, and operating cost

25. Rates Operating Efficiency
Plane
Seats
Pass.
Load Fac.
Op. Cost/Hr.
Op. Cost/Pass.-hr. B
367
239
65.1%
$8,443
$35.32 80
21.8%
$105.54
DC-10
101
79.2%
$2,071
$25.89

26. Current Issues Safety and Security
Air transport has lowest accident rates
Factors affecting airline safety
Airport security and threat of airline terrorism
Administrative agencies
Department of Homeland Security
Transportation Security Administration
Security-related initiatives
Passenger and luggage screening. carry-on limitations
Screening of freight carried on passenger airlines
Substance abuse
Drug testing policies, alcohol consumption guidelines

27. Current Issues Safety and Security

28. Current Issues Safety and Security

29. Current Issues Technology
Sophisticated equipment and programs facilitate the achievement of high speed transport
Automated information processing programs
Air Cargo Fast Flow Program
Paperless, speeds processing through customs
Improves shipment tracking
Improves communication between connecting carriers
Air traffic control system
Potential application of GPS navigation aids
Potential to reduce operating costs, improve service, and safety
Requires high cost investment for new technology on aircraft