Airline Cost Management
Significant Periods of Change
The Early Years
(1938 to Deregulation)
• Civil Aeronautics Board Controlled
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Entry
– Exit
– Routes
– Fares
• CAB made sure that no one airline controlled the industry
• The industry was viewed as “still fragile”
The Pre-Deregulation Situation
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There were many large carriers that were quite ponderous
Seldom was there a carrier that had financial problems
There was excess capacity in the system
CAB:
– Propped up ailing airlines
– Used lucrative mail subsidies as a “tonic”
1976 Domestic Trunk Carriers
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American
Braniff International
Continental
Delta
Eastern
National
Northwest
Pan American
Trans World
United
Western
After Deregulation
• All barriers were removed
• Airlines could go and come as they pleased
• New entrants into the market had a keen sense of competition and service
• Low fare carriers like Peoplexpress, New York Air, Braniff made major inroads
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in the marketplace
Mergers were on the horizon
Prior to Deregulation, the airlines did not have to be too concerned about
marketing- everyone made money
After Deregulation, the domestic “open skies” that resulted made things
extremely competitive
There were several recessions as well as oil problems that made matters
worse
The 1980s was a decade of expansion and mergers like we will never see
again
Ability to Compete - Slots
(GAO Report- 1997)
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ORD
– 1986: American and United – 66%; Others – 28%; and New Entrants – 6%
– 1991: American and United – 83%; Others – 13%; New Entrants – 1%
– 1996: American and United – 87%; Others – 9%; and New Entrants – 1%
• LGA
– 1986: American, Delta, and USAir – 27%; Others – 58%; and New entrants
15%
– 1991: Now 43%; 39%; and 12%
– 1996: Now 64%; 14%; and 2%
• DCA
– 1986: American, Delta, and USAir – 25%; Others – 58%; and New Entrants
– 17%
– 1991: Now 43%; 42%; and 8%
– 1996: Now 59%; 20%; and 3%
• Financial Institutions hold many slots
Frequent Flier Program
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An attempt at gaining customer loyalty
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AMR was the first to limited award length- miles ran out if not used
Rewards for repeat business (free tickets, upgrades, memberships in
executive lounges)
SWA has the simplest program; Delta used to have a very complex one
Computer Reservation Systems
• The advent to the computer reservation system (CRS) changed the way airline
tickets are marketed
• The government is concerned though about an airline’s CRS (often leased to
travel agents) and whether a bias can be introduced by that carrier into the
architecture of the system
• Travel agents sold over ½ of all tickets during the 1980s and early1990s
Major 1980-90s Domestic CRS Systems
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Apollo (United, USAir)
EAASY SABRE (American)
System One (Continental)
Worldspan - PARS (Northwest, TWA)
Worldspan - DATAS II (Delta)
Note: All airlines have abolished travel agent commissions as of 2004
Unique Major Airline Costs: Labor
• Accounts from anywhere from 30 to 40% of airline costs
• Often, labor contracts that were forged decades ago are still in force
• Some of the strongest unions in the industry have been forced to re-negotiate
• Certain high paid segments of the workforce have been asked to “give back”
Unique Major Airline Costs: Fuel
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Fuel is the largest single uncontrollable operating cost (30- 40%)
Fuel prices have ranged from $.50 in 1998 to $1.00 per gallon in 1981
Average Fuel Price for the last 20 years is $.693 per gallon
Hedging requires good credit and an ample supply of money
Unique Major Airline Costs: Other
• Commission to Travel Agents
– Used to be 10%
– Lowered to 5%
– Lowered to a maximum of $50
– Abolished in recent years
• Landing Fees: To be discussed later
• B Scale: New hires started at a lower wage level but parity could be achieved
after about 20 years
ATA Airline Cumulative Net Profits (millions)
Chart High (or Low) Points
• Since 2001, the US air carriers have lost a total of $38B
• After Deregulation in 1978, the US air carriers have had 13 profitable years
and 12 where the industry has lost money
• In 1992, the US air carriers reached a point where the industry’s cumulative
net profits since 1938 were less than break-even
• Prior to Deregulation, the airlines always made money
• Should the industry be re-regulated?
10/24/08