Air Transport in the 21st Century
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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
High costs restricted widespread use of air travel
But since 1960s declining costs have made
recreational air travel commonplace
Air freight increasingly important
What are the defining characteristics of
contemporary air transport?
Technology Driven Industry
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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
Airbus 380- 555 passengers, range of
9,200 miles and 30% larger payload than
the Boeing 747-400 and operating costs
15-30 % lower
The Dominance of Boeing and Airbus
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These two firms account for virtually all sales of
aircraft with >100 seats
Aircraft manufacturing is a huge global
production network
B777 uses 3 million parts
Japanese (fuselage), Italian (wing flaps),
Canada (landing gears) and others are involved
Highly competitive business with huge lobbying
efforts required
Does Airbus have an unfair advantage?
Technology Dynamics
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Concorde became the travel mode for the ultrarich
Mach 2 at 58,500 feet
But extremely expensive and noisy
Plus plagued by safety doubts
Retired in October, 2003
Boeing 7E7 www.newairplane.com
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New environmentally
sensitive aircraft 2007
15-20% less fuel than
conventional wide
bodies
200-250 passengers
7,500-8,000 nautical
miles (SeattleMoscow, SydneyDallas, ParisHonolulu, ShanghaiJohannesburg)
Mach .85 (85% of
Speed of Sound)
Rise of the Airline Industry
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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
Postwar safe and secure setting- pax Americana
Broad geographic scale of economic activity
Liberalization and greater freedom to set fares
and open up new routes
Deregulation of the U.S. Airline
Industry
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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
In 40 years of regulation no new entry
occurred in scheduled services
Why regulation?
Reasons for Regulation
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Felt necessary to insure future economic
growth
Depression era produced a suspicion of
free markets and potential havoc
Feeling that excessive competition would
produce instability in the infant industry
Protect profitability of individual carriers
and constrain growth of larger carriers
Winds of Change: Deregulation
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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
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.
Paid too little attention to controlling labor and
other costs- no competitive pressures to deliver
Airline Deregulation Act 1978
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Gradual decontrol took place and CAB was
phased out by 1985
Initial consequences: downward pressure on
fares and ‘price wars’
Load factors (level of occupancy) increased
Route rationalization –see next slide
New aggressive entry- 25 new carriers between
1978 and 1982
Continued increase in employment
Route Rationalization
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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
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
Improve fleet utility
Hub and Spoke Networks
Changes in Route Structure
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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.
Changes in Route Structure
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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.
Changes in Route Structure
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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
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Advantages of Hub and Spoke
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
Either service strategy allows carrier to
realize density economies
For example double # of flights w/o
increasing ground crew
Larger aircraft more economical in fuel use
and labor costs
Density economies allow larger carriers to
offset input costs advantages of new
entrants
Changing Winds Again : 1990s
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Airlines order new, efficient and expensive aircraft
anticipating increased air travel
Higher jet fuel prices
Depressed economy reduces demand
Gulf War frightens tourist traffic
Inefficiencies of hub and spoke raised
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
Low fare entrants: Southwest
September 11 further impacts carriers
Crisis in the Airlines
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Global airline industry suffered worst year
ever in 2001- losing US$11.6 billion
Sabena and Swissair collapsed
United Airlines and US Air announced
bankruptcy-both are still under Chapter 11
currently
Huge number of aircraft were idled
What is the cause(s) of this state?
Causes of Airline Crisis
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Airline industry has never really been
profitable- why?
Ordering of aircraft years in advance tends
to foster boom-bust cycle
Pervasive involvement of state has
diverted industry’s emphasis on profit
making
Romance of air travel draws
overinvestment
Economists argue that this is an “empty
core” industry meaning a tendency
towards unprofitability
Structure of Airline Costs
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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%
Labor Costs
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Labor costs represent significant
proportion of total operating costs
1998 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%
Strategies for Reducing Labor Costs
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Private European carriers set crisis
measures to reduce costs
State owned carriers reduced costs as part
of restructuring to qualify for EC aid
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
Stock options for employees- UA offered
shares to unions and 3 of 12 seats on
Board in exchange for pay cuts
The Plight of US Airways
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In early days of deregulation, USAir one of most
profitable—monopoly in Northeast
Wave of consolidation- USAir purchased Pacific
Southwest and Piedmont --# 6 rank
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
Lead in east with hubs at Pittsburgh, Philadelphia
and Charlotte—captive travelers
CEO Wolf returns airline to profitability: Airbus
fleet, European destinations, closed facilities
US Airways Plight cont’d
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Convinced pilots’ union to let airline buy regional
jets
Made labor concessions in exchange and to stave
off strikes
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
Sept 11 hurt by slowdown and entered bankruptcy-$900 mil loan guaranteed from Federal
government allows it to emerge
Southwest forced competition at Philadelphia hubback to bankruptcy
The Regional Jet Phenomenon
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Additional impact of
deregulation was
growth of feeder
airlines
Growth of RJs- 50
and 70 seat aircraft
Range and speed of
larger jets
Cost less to purchase
$23 mil vs $52 mil
A320
Burn less fuel
Crews paid less
Allows airlines to cope
with fluctuating
demand
No Frills Airlines
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Financial viability of airlines is uncertain
One response is to create low-cost, nofrills operations
Lower fares, select destinations, no food,
e-tickets, first come seat assignments,
strict baggage allowance
One type of aircraft: B737 or A320
Such carriers now account for 20% of
seats nationwide
No Frills Prototype
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Southwest Airlines begun over 30 years ago
by Herb Kelleher
4th largest airline in U.S., 64 mil passengers
annually to over 60 cities
355 aircraft less than 9 years old
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
Southwest Airlines
jetBlue Airways
Air Tran Airlines
Where the Future Touches Down:
Airports in a Globalizing World
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Huge increases in air traffic have
concentrated in a handful of airports
Hubs paramount feature of the industry
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
Major Passenger and Cargo Airports
2002 Passengers (mil) and (metric tons)
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(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)
Atlanta Hartsfield IA
http://www.aci-na.org/docs/US_Econ_Impact.pdf
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75 million passengers
annually
45K direct jobs,3.5K
air freight, 2.1 ground
transport
Total payroll $1.9 bil
Indirect impact of
$3.8 bil on localregional economy
$17.3 bil total annual
regional impact
Ultra-Global Hubs: Singapore’s Changi
Airport
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Opened in July 1981
2002 Passengers 29 mil
2002 Cargo 1,660,000
metric tons
In 2006 Terminal 3
additions will add 20 mil
passenger capacity
bringing total to 64 mil
Free Skytrain service
between the terminals
Mini edge city shopping
Malaysia’s Super Multi Media Corridor
Kuala Lumpur International
Airport www.klia.com.my
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Opened in 1998
Express rail link 27
minutes from
downtown KL
Part of the Super
Multi Media Corridor
technology drive
Destination itself
Competing with
Changi
Schiphol Airport, Amsterdam
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9th largest in world
40,736,009 passengers
in 2001 and a 3 % AGR
1,288,624 metric tons in
2001 and a 4.4 % AGR
Gateway to a nation with
strong travel industry
http://www.schiphol.
nl
Bluegrass Non-Stop Destinations
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Y2000- 4 non-stops Y2005-12 non-stops
New York, Newark, Philadelphia, Pittsburgh,
Washington, DC
Atlanta, Charlotte, Orlando, Dallas, Houston,
Memphis, St Louis
Chicago ORD and Midway, Cincinnati, Detroit,
Cleveland
To be added in Y05-07-Denver and Minneapolis
4-5 percent increases in traffic per annum
Direct Flight Connections 2004
Controversies and Externalities
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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
Airports occupy relatively little land area—O’Hare
occupies only 9 sq mi- but proximity to cities is
critical
New runways and runway extensions are
controversial topics
O’Hare Airport Expansion
http://www.flychicago.com/ohare/about/about.shtm
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FAA approves $15 billion
expansion to nation’s most
delay prone airport
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
Claim to save $12 billion over
two decades by reducing
passenger and aircraft delays