Airline
Management
AVM 373
PROFESSOR GREG SCHWAB
US AIRWAYS
NEW EMPLOYEE
ORIENTATION
COURSE
INTRODUCTION
 OVERVIEW
 COURSE REQUIREMENTS
– HOW TO GET AN “A”
Chapter 1 Objectives
Air Transportation includes:
 All civil flying performed by the certified
air carriers and general aviation
– Does not include military but military activity
is tracked by the FAA
Interstate Air
Transportation:
 The carriage of persons or property for
compensation or hire
Aerospace Industry
 Research and Development
 Aerospace Systems
 Defense
 Spacecraft
 Propulsion, Guidance, Control Units
 Airborne and Ground Based Equipment
– Testing, Operations, and Maintenance
Principle Product Lines
 Aircraft
 Missiles
 Space Systems
 Engines
 Parts and Equipment
Product Lines
Characterized by:
 High Performance
 High Reliability
 High Technology
 High Unit Value
Industry activity is:
 Dominated by the DOD and
NASA
 The principle customer is the
DOD (is this changing?)
 The principle commercial product
is the airline transport
Prior to WWII
 There were over two dozen companies
designing and building commercial airliners
 Today the mayor players are down to two
– Boeing (72%)
– Airbus (28%)
 Historically, Boeing and McDonald-Douglas
have offset large R&D expenses by
benefiting from large military contracts
Government Contracts
 Government required to ask for “bidders”
 Request for Proposals
– Detailed Specifications
Industry Characteristics
 Air Transportation includes:
– all transportation by certified air carriers and general
aviation aircraft
 Transformation of Industry during the 1950’s due
to:
– production of jet powered military aircraft
 Late 1960’s
– fabrication of equipment to meet the nations goals in
space exploration
Changes compounded need for:
 More R & D (technology)
 Greater product complexity
 More personnel per unit produced
 Higher skill level
 Longer program development time
 The need for new facilities
Manufacturing Output
 1991: almost 65% of industry bought by federal
government
 Exports of aerospace represent 10% of total US
exports
 Aviation exports exceed aviation imports
Industry vital to US in:
 Trade balance
 Employment
– consistently employees ~1,000,000 people
R & D
 Impact on other industries
 Travel infrastructure
– travel related industries
General Aviation
 After record shipments in 1978, GA has experienced a 13
year downward trend in sales from 17,817 in 1978 to 1,104
in 1996
 Historically, the GA industry has closely paralleled that of
the nations economy (GNP)
– In other words, things have to be pretty good for
people to buy their own plane.
– More recently, GA sales have not responded to the
current economic recovery
Reasons for downward GA trend
 High aircraft prices
 High interest rates
 High operating expenses
 High product liability costs
 Changing lifestyles
 Tax laws
 Foreign competition
What is General Aviation
 All civil aviation except that which is
carried out by the certified airlines
 GA accounts for over 80% of operations at
towered airports
 GA accumulates over 80% of total hours
flown by GA and air carriers combined
What is General Aviation
 GA utilizes all of the nations 17,581 airports
 Air carriers serve about 800 of these
 75% of the air carrier traffic is concentrated
at 30 of the 800 airports
Business Aviation
 Business use of light aircraft remains strong
 Why?
– Fuel-efficient
– Can fly to GA airports
– Most often can fly direct to destination
– Efficient use of time
– Decentralization of business
– Concentrated airline service
Airline Aviation
 Fewer than 5% of US airports have airline
service
 Majority of flights serve only 30 major
centers
 Expected growth in commuter-regional
airline service to cities with low passenger
volumes
 Large carriers will concentrate on high
density markets
Airline Aviation
 By 1960, 1/3 of adult Americans had flown
commercially
 By 1981, 2/3
 By 1995, 80%
 Fare prices remain a bargain compared to
price increases of other products and
services over the past 40 years
Chapter 2 Objectives
Air Mail Service
 The first regular airmail route in the US
was established in May 1918 between New
York City and Washington DC
 218 miles in length
 Discontinued in May 1921
Why Regulate Aviation?
 Stabilize the industry
 Improve air safety
 Reduce cash subsidy by US government
Congress Rights
 Regulate interstate and foreign commerce
 Regulate the postal service
 Make treaties with foreign nations
 Provide for the national defense
The Air Mail ACT of 1925 (Kelly
ACT)
 Authorized the postmaster general to enter
into contracts with private persons or
companies for the transportation of mail by
air
Air Commerce ACT of 1926
 Duty of the Secretary of Commerce to
encourage air commerce by establishing
civil airways and navigational facilities to
aid aerial navigation and commerce
 Got the federal government into the aviation
business as a regulator for the air carriers
 Created by the Kelly Act
Air Commerce ACT of 1926
 Promote the development and stability of
commercial aviation in order to attract
adequate capital into the business and
provide the fledgling industry with the
assistance and legal basis necessary for its
growth
Air Commerce ACT of 1926
 Established regulations for:
– Licensing of Pilots
– Licensing of Mechanics
– Aircraft Inspection
– Operation of aircraft
– Marking of licensed and unlicensed aircraft
– Airways
 Lead to Bureau of Air Commerce
Air Mail ACT of 1930
 Passed to enhance growth, efficiency,
stability
– reckless competition was rampant
 Provided Postmaster General with unlimited
control over airmail route system
 Postmaster General could extend or
consolidate routes in public interest
 Spoils Conference
Air Mail ACT of 1934
 Authorized one year contracts subject to
review prior to renewal
 Signed into law by President Roosevelt
 Interstate Commerce Commission
– regulated rates and service equipment
The Civil Aeronautics ACT of
1938
 Substituted a single Federal Statute
replacing general and airmail statutes that
had up until this time provided direction for
aviation
 Created an overall administrative body
– 5 member Civil Aeronautics Board
– 3 Member Air Safety Board
– An overall administrator
The Civil Aeronautics ACT of
1938
 Members appointed by the President for 6
year overlapping terms
 Members not permitted financial interest in
aviation
 Members appointed by the President for 6
year overlapping terms
Members not permitted financial interest in
aviation
Civil Aeronautics Authority
 Congressional mandate to CAA to provide:
 Encourage and develop the air
transportation system
 Regulate to a high degree of safety
 Promote adequate, economical, and efficient
system
 Encourage development of civil aeronautics
Civil Aeronautics Authority
Exercised quasi-judicial and legislative functions
covering economic and safety regulations
Balance of personnel, property and unexpended
funds transferred from Bureau of Air Commerce and
Interstate Commerce Commission
Civil Aeronautic Board
 CAA Reorganized into the CAB
 CAB became the Civil Aeronautics
Administration (CAA)
 CAA became Federal Aviation Agency
(FAA)
 FAA became the Federal Aviation
Administration (FAA)
CAB: Road to Deregulation
 1977, President Carter appoints Chairman,
Alfred Kahn
 Strong proponent of deregulation
 Began processing and approving application
for airlines
 Better if airlines promised lower fares
 Renewals were based upon delivery of
promises
CAB: Road to Deregulation
 Strong opposition from unions and financial
institutions
 Deregulated air cargo in 1977
– initial success pushed CAB into support
Airline Deregulation ACT of
1978
 Mirrored other transportation deregulation Acts
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– highway, Waterway
Domestic Air Transportation System
Overriding theme was competition
Airline restrictions slowly removed
Essential Air Service
– Small community air service program
CAB sunset provision transferred duties to DOT in 1985
Deregulation Issues
 Prior to deregulation-problems existed:
– system suffered from overcapacity
– barriers to entry and exit from the industry
– lengthy regulatory process
Deregulation Issues
 Major changes under deregulation:
 Phasing out of the CAB by 1985
 Easing of restrictions into markets
– entry-exit
 CAB losing authority over fares by 1983
 Reduced reporting requirements for air carriers
 Federal preemption of any state economic regulation of air
transportation
Airline Deregulation
 Proponents Argued:
 Commuters would best serve low-density
markets
 Market place would best serve American
interests
Airline Deregulation
 Opponents Argued:
 Regulation has served the public interest as
well as air carrier interest
 Deregulation would destabilize the air
carrier market
Air Carrier Aircraft Development
 After wartime production of aircraft ended
in the late 1940’s, aircraft companies began
to focus on producing aircraft for business
transportation
Air Carrier Aircraft Development
 Good example: The Douglas DC-3
 Became the first aircraft to give airlines
three vital ingredients necessary to reach
financial break-even point
– speed
– safety
– economy
Air Carrier Aircraft Development
 DeHavilland Comet
– first commercial aircraft (worldwide)
– numerous crashes caused early cancellation
 Boeing 707
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–
–
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Military R & D effort
Boeing risked own funds for R & D
Technology transfer to civilian market
First U.S. jet to enter scheduled service (Pan Am)
Air Carrier Aircraft Development
 Boeing 727
– first tested 1963
– fielded 1964
– hugely successful airframe
 Boeing 737
– Most popular air carrier jet in service today
– 3,000+ flying worldwide
Aviation Aircraft Pioneers
 William Lear
– gambler, inventor, promoter
– developed lear jet
 Walter Beech
– Beech Aircraft Corporation
– Beech King Air
• most successful turbo-prop aircraft flown by
commuters and corporations
Aviation Aircraft Pioneers
 Clyde Cessna
– founded Cessna Corporation
– C-172 became most popular aircraft for
business and pleasure market
Chapter 3 Objectives
Department of Transportation
(www.dot.gov)
 Cabinet level office first requested as far back as 1870
 DOT created in 1966
– Alan Boyd first Secretary of Transportation
 President Johnson credited with authorship of DOT
– Advocated creation of DOT and NTSB
– Focused on need for system-wide coordination, safety,
and reorganization of transportation activities and
planning
– He rallied support for supersonic planes, aircraft noise
control, and high speed rail
Department of Transportation
 Primary Objectives
– stimulating technological advances
– provide general leadership
– coordination of transportation services
 Secretary of Transportation
– appointed by the President
– reports to congress
 Major Functions (see text)
Federal Aviation Administration
 Primary Objective:
– Promotion of aviation safety while ensuring the
efficient use of the nations navigable airspace
– www.faa.gov
Federal Aviation Administration
 Traces roots back to the Air Commerce Act
of 1926
 How does the FAA do its’ job?
– issues/enforces safety rules and regulations
– certifies airmen, aircraft, aircraft components,
air agencies, airports
– Manages/operates national airspace system
FAA Offices-Points of Contact
 National Headquarters-Washington D.C.
 Regional Offices
 Flight Standards District Office (FSDO)
 Air Traffic Control
– Flight Service Station
– Control Towers
– Air Route Traffic Control Center (ARTCC)
FAA Operating Certificates
 Airmen
– Pilots
– Mechanics
– Controllers
– Dispatchers
– Parachute Riggers
 Air Carrier Operating
– Part 121/135
FAA Operating Certificates
 Aircraft
1. Type: Prototype aircraft (experimental),
aircraft, engine, propeller, or appliance
2. Production: after test complete (factory may
begin production of a specific type of aircraft)
3. Airworthiness: unique to each airframe
produced
FAA Operating Certificates
 Air Navigation
– FAA inspects, classify, and rate facilities such as lights,
navigation facilities (VOR,VORTAC,NDB,RADAR)
 Air Agency
– Flight Schools, ATC Schools, Aircraft Dispatcher
Schools, Mechanic Schools
 Airport Operating
– Airports serving air carriers. Ensures a minimum level
of safety
– Part 139 (either full or limited certificate)
Airport Certification Examples
 FAA ensures airports meet standards
established in FAA Advisory Circulars:
 Environmental Compliance
 Fuel Storage
 De-Icier
 Fire Fighting
 Bird Hazards
 Snow Removal
FAA Enforcement
 Investigation
– all civil accidents
– probable cause reserved for NTSB
– safety concerns
– accident doesn’t have to occur
FAA Enforcement
 Operations
– ATC System
– NAVAIDS
– Airports
– Aeronautical Center
– Technical Center
 NASA Report
– FAA honors NASA Report’s that are properly filed
– but there are limitations
FAA Funding
 Airport and Airway Development Act of
1970
– allocated funds for airport construction projects
– later became the Planning Grant Program
(1980)
– birth of Airport Improvement Program (AIP)
FAA AIP Funding
 Incorporates local/State/Regional plans
 Master/Strategic Plans
 10 percent sales tax supported (*changing)
– Local share 5%
– State share 5%
– Federal share 90%
 Cost refunded to sponsors (State/Local)
Other FAA Initiatives
 Microwave Landing System (MLS)
 Global Positioning System (GPS)
 Continuous ATC System modernization
– STARS, ASDE, ADS, ADS-B
 Aeromedical and Human Factors
 R & D (Atlantic City,NJ)
NTSB
 National Transportation and Safety Board
 Appointed by President
– with advise and consent of Senate
 Five members
– 5 year overlapping terms
– chairman and one co-chairman
 Independent of DOT
– DOT must respond within 90 days of NTSB
Recommendation
 Offices throughout US and Alaska
Transportation Act of 1974
 NTSB established as entirely independent
agency
– Broad powers to investigate transportation
accidents
 Most recommendations directed at FAA
– airlines must state “why” they won’t comply
with recommendations within 90 days
NTSB Requirements of 1974
Transportation Act
 Conduct special studies on safety problems
 Evaluate effectiveness of government
agencies involved in transportation safety
 Evaluate safeguards used for transportation
of hazardous materials
 Review appeals from airmen and merchant
seaman whose certificates have been
suspended or revoked
NTSB Scope and
Responsibilities
 Investigate civilian accidents in:
– aviation
– selected highway accidents
– fatal pipeline accidents or substantial damage
– all passenger train accidents or fatal railroad
– major waterway and any involving public
vessel
NTSB Concerns
 Intention of flight by pilot
– flight doesn’t have to occur
– pilots may be violated based on intent
 Damage to aircraft
NTSB- When you need help
 Notification Process
– www.ntsb.gov
– Flight Standards District Office
– Air Traffic Control Facility
 When and Why you call:
– problem with flight controls
– crewmember can’t perform duties, i.e. drunk
– in-flight fire
– overdue aircraft
NASA Report
 Your “get-out-of jail-free-card”
 Only can use once in a 5 year period
 Must file within 10 days of a violation
 Some restrictions
NTSB Major Accident
Investigation
 Go-Team Activates- on 24 hour alert
 Accident Team Members:
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1 of 5 board members
air traffic controller
experts trained in:
witness investigation
aircraft operations
aircraft maintenance
human factors
meteorologists
hazardous materials
NTSB Major Accident
Investigation
 Aviation accidents have been on a flat line
since mid-1980’s
 Recently, the number of persons killed in
aviation accidents in the U.S. and its
territories dropped from
– 1,093 in 1996 (380 air carrier) ValueJet and
TWA 800
– 976 in 1997 (8 air carrier) (source NTSB 1998
report )
NTSB Major Accident
Investigation
 Year 2000 Statistics:
– Part 121 Carriers 49 Accidents : 92 deaths
(AK Flt 261, Embry DC-8)
• Accident per 100,000 Departures = 0.440
– Charter Carriers 5 Accidents : (no deaths)
• Accidents per 100,000 Departures = 1.131
– Part 135 Operators 80 Accidents : 5 deaths
• Accidents per 100,000 Departures= 3.23
– General Aviation: 1835 Accidents: 341 deaths
• Accidents per 100,000 Departures= 6.49
NTSB Investigation Steps
 Go-Team at site
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– 7-10 days for typical accident
Laboratory
– review black box
– review air traffic control tapes
Safety Recommendation
– boards end product
– vital to safety prevention
Public Hearing
– near crash site
Final Report
International Civil Aviation
Organization (ICAO)
 www.icao.org
 Composed of 185 countries (+/-)
– called the “Assembly”
 33 countries make up the “council”
 Meet once every three years
– additional meetings as required
ICAO Facts
 Purpose and Principal Aim:
– Develop principals and techniques to foster
planning and development of international air
navigation to ensure safe and orderly growth
ICAO Facts
 Other Aims:
– prevent economic waste caused by unreasonable
competition
– avoid discrimination between contracting states
– encourage development of airways, airports, and
navigation facilities for international civil aviation
 Normally adopts FAA and NTSB guidelines
 Headquartered in Montreal, Quebec, Canada
ICAO Issues
 FAA interface:
– some consider ICAO a puppet of the FAA
– much like United Nations considered an arm of
the United States government
 FAA interfaces with DOD, NTSB, ICAO
Major Aviation Associations
 Air Transport Association (ATA)
– schedules airline service organizations
– goals achieved through a system of councils
 Regional Airline Association
– airlines that deals with short, local, feeder
routes
– formally Commuter Airline Association
Major Aviation Associations
 Aerospace Industries Association (AIA)
– trade group representing aviation R & D interests
 National Business Aviation Association (NBAA)
• represents over 3000 aviation corporations
(www.nbaa.org)
 Aircraft Owners and Pilots Association (AOPA)
– represents over 250,000 members who fly and own
aircraft (www.aopa.org)
 Aeronautical Radio Inc (ARNIC), (www.arinc.com)
– company owned by the airlines and provide
communication services
Major Aviation Associations
 American Association of Airport Executives
(www.airportnet.org)
– represents airport officials and students of airport
management
 Air Traffic Control Association (ATCA) (www.atca.org)
– represents those interested in advancement of air traffic
control
 National Air Traffic Control Association (NATCA)
(www.natca.org)
– union that represents the FAA air traffic controllers
Chapter 4 Objectives
The General Aviation Industry
 Accepted definition of General Aviation
– All civil aviation except that carried by the
commercial airlines
 Aircraft termed “utility” to distinguish it
from larger aircraft
GA Airport Support
 Air Traffic Control
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– Flight Service Station provides primary support
Active aircraft means:
– aircraft must have current registration and flown during the past
year
17,581 airports nationwide
– public and private
– public-use private airports of concern to FAA
• why? vulnerability to sale
Private pilot certificates have increased but slowly
600+ Control Towers
GA Support Industry
 Manufactures
– shipments have steadily declined but some
turnaround may be seen in the future
– product liability issues have been resolved
 Corporate Aviation
– Executive Use
• Specific title used by FAA to describe use not for
compensation or hire
– greatest number of GA aircraft show business
as primary use
GA Support Industry
 Fixed Base Operators provide numerous services
–
–
–
–
–
line services
aircraft storage
aircraft maintenance
sales and service (largest sales = Cessna)
Flight instruction
• does not include proficiency flights
– Commercial Services
• Part 135 Passenger and Cargo Services
 Profit margins vary
GA Statistics
 90% of all civil air fleet is GA
 No reporting requirements
 181,341 active aircraft GA aircraft (1995)
– on a steady decline
 GA operations represent 75% of traffic at
control tower locations
 Approximately 254,002 active GA pilots
– 622,261 total U.S. pilots
NTSB Accident Investigation
 Aviation accidents have been on a flat line
since mid-1980’s
 Recently, the number of persons killed in
general aviation accidents in the U.S. and its
territories dropped from
– 631 in 1996
– 646 in 1997
– 341 in 2000 (source NTSB 2001 report )
GA Usage
 Business
– over 2/3 of fortune 500 companies operate
business aircraft
• many variations
 Personal flying
– personal transportation by air is not
economically regulated
 Instructional flying
GA Usage
 Commercial and Industrial Flying
– aerial application
– aerial observation
– other work use
– commuter air carrier
– air taxi
 Agricultural
Major Factors Affecting sales of
Aircraft
 Product liability claims
 Luxury taxes
 Subsidization of research, development,
production and financing
Economic Factors affecting GA
Aircraft
 Prior to 1978: changes to GA equaled changes in the
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economy
Late 1970’s: long slow decline in aircraft shipments
President Johnson’s “Great Society” social programs
4 Planes introduced in 1960’s: Cessna 172, Piper
Cherokee, Beech King Air 90, and Lear 23
More planes sold in the 1970’s than before or since
Airport Development Act of 1970
Many smaller companies purchased by larger companies in
the 1980’s.
Economic Factors affecting GA
Aircraft
 1970’s focused on product liability
– $50 per aircraft in 1962
– $2,111 per aircraft in 1972
– $70,000 per aircraft in 1985
 Companies self-insured to offset risk
 Airline Deregulation
– slowed business aviation initially
Chapter 5 Objectives
The Airline Industry
 A industry may be defined as a number of
firms that produce similar products and
services and therefore are in competition
with one another
 In the airline industry, United Airlines is the
largest and earned $16+ billion in revenues
1997
The Airline Industry
 Industry Structure
– Major
– Nationals
– Regionals
 Certified carriers employ over 500,000
employees
 Nearly 5,000 multi-engine aircraft in use by
U.S. carriers
The Use of Aviation in the United
States
 Social
 Political
The Social Use of Aviation in the
United States
 Transportation is civilization
 Aviation is an applied technology
– One jetliner contains:
•
•
•
•
•
4.5 million parts
100 miles of wiring
2,000 pieces of tubing
75,000 engine drawings
12,000 pages of Technical Orders
 U.S. Airfares are the lowest in the world
The Political Use of Aviation in
the United States
 National Defense
– CRAF
 Aviation allows position of world leadership
 Defense relies upon airpower and
diplomacy rather than physical barriers
 Air Power is Peace Power
The Political Considerations of
Selecting a Site
 Legislative and Regulatory actions
– Fuel Tax
– Landing Fees
– Property Taxes
The Airline Industry: Majors
 Annual gross revenues over one billion
dollars annually
 Major Airlines serving airports:
– American, Delta, Northwest,TWA, United,
Continental, Southwest, Alaska, UPS,FedEx,
DHL Airways, American West, US Airways
 Carry 80% of industry traffic
 B-737 most widely used aircraft
The Airline Industry: Nationals
 Sales between $100 million-$1 Billion
 Airlines:
– Numerous airlines (32) including: AirTran,
World
 Includes Supplemental air carriers, (i.e.,
ATA)
The Airline Industry:
Regional/Commuter
 Regionalized service
 Propeller driven (70%Turbo-prop, 25% piston)
– This is changing rapidly, moving toward business class jets
 Small, medium, and large regional
 Since deregulation, regionals have declined in numbers
 Code-Sharing with Nationals and Majors
The Airline Industry:
Regional/Commuter
 Large regional control 3/4 of regional traffic
 9 out of 10 airports receiving scheduled air service are
served by a Regional
 Primarily operate aircraft seating less than 60 passengers
 Operate over short distances between 100-300 miles
 Certified commuters are referred to as medium or large
regional
The Airline Industry:
Regional/Commuter
 Formerly air taxi operators
 Classified as small regionals (noncertificated carriers)
 Operate over short distances between 100-300 miles
 Regional Airline Association was formally the Commuter
Airline Association
– more descriptive of service offered
NTSB Major Accident
Investigation
 Aviation accidents have been on a flat line since mid-
1980’s
 Recently, the number of persons killed in air carrier
accidents in the U.S. and its territories dropped from
– 92 in 2000 (AK Flt 262, Embry Worldwide)
– 5 Commuter in 2000
– 71 Air Taxi in 2000
 Non-US Registered air carrier deaths were 236 (mainly
from Korean Air 747 craash in Guam in August 1997)
– (source NTSB 1998 report )
Deregulation affect on Airline
Industry
 All modes of transportation deregulated
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– highway, rail, water, air
Increased competition
Safety improved after deregulation, then leveled off
Economy experienced its worst recession in two decades
during first three years of deregulation of the 1980’s
Number of Regionals have decreased
– expect to grow at in the next 10 years
Airline Economic Considerations
 Load factors
 Airframe
 Fuel Flow
 Population
 Competition
Air Carrier Route Selection
Determinates
 Economic considerations:
 Business
 Pleasure
 Mail
 Cargo
 Seasonal operations
Geography Considerations
 Terrain
 Weather
 Navigational status
 Airport
 ATC Regulation
Section 401 Certificates
 Air Carrier Certificates- Three Types
– Primary of determination of fitness
– Determination of public convenience and
necessity
• carriers providing foreign service
– Continuing fitness review
Section 401 Certificates
 Airlines must pass fitness test:
– carrier site
– financial resources
– flight equipment
– strategy for operations
– past performance to legal requirements
 Recurrent evaluations
 Insurance certificate covering operations
Section 418 Certificates
 All-Cargo Certificates
 No passengers
Section 419 Certificates
 Commuter Air Carriers
 Must submit insurance certificates
 Also subject to Section 401 Continuing
fitness requirements
 Prior to beginning operations commuter
must have registration on file
Travel Agencies
»
?
Chapter 16 Objectives
International Aviation
 Sovereignty
 International Air Law
 Deregulation
 Growth
Air Transportation involves:
 Building airports
 Navigational aids
 Weather reporting systems
International systems
standardized include:
 Air Traffic Control
 Aircraft Design
 Personnel licensing
 Airports
International Air Law
 Looked closely at establishing universal
international jurisprudence
– i.e. World Court
Sovereignty in Airspace
 Should airspace above a nation be
considered within the sovereignty of each
nation?
 Or like the high seas, be considered
international?
Opposing Theories
 Air is Free
– states have no authority over it
 Air is Not Free
– states have air sovereignty over their soil
Paris Convention-1919
 Allied and associated nations met:
– International Commission on Air Navigation
 Enacted International Air Navigation Code
– Referred to as Paris Convention of 1919
Paris Convention- Outcomes
 Full and absolute sovereignty of each state
over the air above its territories, and waters
– states could not impose jurisdiction over the air
above
• Consider Captain Gary Powers flight (1960’s)
 No discrimination based on nationality
 Every aircraft must be registered to a state
Paris Convention- Outcomes
 Special treatment for military, naval, and state aircraft
 Right to transit without landing
 Right to use public airports
 Mutual identity
– cover damage done to another state
 Establish a permanent International Aeronautical
Commission
 Rights remain during time of war
Paris Convention- Outcomes
 To ensure safe navigation
 Each aircraft will have a certificate of
airworthiness and license for wireless
equipment
 Pilots will be licensed
 Right of Way rules to prevent collisions
 Rules for ground operations
Havana Convention- 1928
 Established special customs procedures for
aviation
 Reinforced 1919 convention agenda
Warsaw Convention- 1929
 Provided unification of rules relating to
international transportation by air
addressing:
 Passenger
 Merchandise
Warsaw Convention- Outcomes
 Convention provided that an air carrier is
liable for damage sustained by:
 Death or injury to passengers
 Destruction, loss, or damage to baggage or
goods
 Loss resulting from delay in the
transportation of passengers, baggage, or
merchandise
Warsaw Convention- Outcomes
 Set Standards for the following:
 Passenger tickets
 Cargo waybills
 Air travel documentation
Chicago Conference- 1944
 Foster development of international Civil
Aviation
 Based on theory of opportunity and sound
and economical operation
 Nation may provide reasonable search of
aircraft
 Transit aircraft will be provided fuel and oil
except from local duties (charges)
 Standard form of air transport agreement
Chicago Conference- 1944
 Standardized many rules/procedures
–
–
–
–
–
–
–
–
–
–
communication systems
airports
air traffic rules
licensing
airworthiness and registration
weather information exchange
logbooks
maps/charts
customs
accident investigation
Chicago Conference- 1944
 ICAO born
 Expenses divided between nations
– U.S. pay larger share (80%)
 Disputes may be settled by Permanent
Court of International Justice
– or special arbitration tribunal
 Power to suspend airline from international
operations
Two/Five Freedoms
 Privilege of flying across its territory without
landing
 Privilege of landing for non-traffic purposes
 Privilege of deplaning passengers, mail, and cargo
 Privilege of picking up passengers, mail, and
cargo
 Privilege of picking up/dropping off passengers,
mail, or cargo destined for 3rd country
International Air Transport
Association (IATA)
 www.iata.org
 To provide a means for collaboration among air
transport enterprises engaged directly or indirectly
in international air transport service
 Foster air commerce and study the problems
connected with air service
 Cooperates with ICAO
 Provides a forum to determine fares and route
structures
Post 1970’s
 International fares complicated and abused
U.S. Policy on International
Aviation
 Carter Policy
– U.S. conduct in international aviation
– Established to provide U.S. negotiators with
guidelines on objectives
 Goal: give consumer the most competitive
service available
U.S. Policy on International
Aviation
 Expand opportunities
– exploit technology to enhance international travel
– 34% of international traffic crosses the North Atlantic
routes
 President Carter policy to encourage competition
 Largest percentage increase between 1977 and 1986 was
between the U.S. and South Korea (business buildup)
International Concentration
 Inevitable
 Individual airlines do not possess global reach
 Force Multiplier
– power of the hub
– computer reservation system
– equipment usage (supplies, purchases)
 Cabotage
– foreign operators carrying passengers between two
domestic points in another country
International Air Transportation
Act of 1979
 Counter-part to Airline Deregulation Act of
1978
 Implements U.S. policy in international
aviation
 Few restrictions to airlines
 Ensure equality for American air carriers
 Only problem: no one cares in international
arena- not enforceable
International Aviation
 U.S. market share has lost share in several
European countries such as Italy
– Southern Europe not receptive to increases in
U.S. services
Air Carrier Globalization
 Airlines searching for global partners
 Advantages:
– large and widespread new route network
– dominate operations and marketing at large
hubs
– control distribution through computer
reservation systems
– ability to exercise price leadership
Air Carrier Globalization
 American, Delta, United
– equipment
– growing international routes
– favorable balance sheets
 Alliances
– KLM + Northwest
– SAS + Continental
– British Airways + American
Open Skies Treaties
 Agreement between U.S. and individual
countries
 Allows carriers to operate without
restriction between any point in either
country
 Guarantees open entry and unrestricted
capacity and frequency on all routes
Principle markets for Open Skies
 U.S. - Europe
 U.S. - South America
 U.S. - Far East
 Operations and reception varies
 Major trend for the future!
Chapter 6 Economic
Characteristics of the Airlines
 Review Chapter Objectives
Introduction: Oligopoly
 Typically characterized by high barriers to
entry
–
–
–
–
Substantial capital investments
Need for technical know-how
Control of patent rights
Few sellers in marketplace
– Airlines typically considered an Oligopoly
Oligopoly Characteristics
 Substantial economies of scale
– a decrease in a firms long-term average costs as
the size of its operations increases
– Typically requires large-scale production to
obtain low units costs
 Growth through merger
– the purpose of most mergers is to gain a
substantial increase in market share, greater
economies of scale, more buying power in the
purchase of resources
Oligopoly Characteristics
 Mutual dependence
– In oligopoly markets, it matters what your
competition does
– They must consider reactions
 Price rigidity and nonprice competition
– oligopoly like to maintain constant prices and
engage in nonprice competition, such as
advertising and customer service, to hold, or
increase their market share
The Airlines as Oligopolists
 High barriers to entry
– Access to markets are difficult due to scarce
terminal space
– Expenditures for advertising, personnel, and
aircraft operations
– If unable to recover startup costs, incoming
airline will fail
 Airport Terminal space is a barrier to entry
for new or existing
The Airlines as Oligopolists
 Capital Requirements
 Certificate of Public Convenience and
Necessity
 Requires large numbers of technicallyskilled personnel
The Airlines as Oligopolists
 Other
– Existing long-term leases held by other airlines
– Preferred relationship between Travel Agencies
and a hub airport by incumbent airlines
The Airlines as Oligopolists
 Majority-in-Interest Clauses
 Exclusive Use Agreements
 Dominated Hubs
 Noise restrictions
Price Rigidity and Non-price
Competition
 Basic characteristic of oligopolist firm
 Airlines would rather compete in non-price
competition
Government Financial Assistance
 Airport and Airway Improvement Act of
1982 provided federal funding of airways
and airport development
Load Factors
 Expresses relationship between available
seat miles and revenue passenger miles
– RPM
– ASM
High Technological Turnover
 Aircraft
 Airlines has led all other industries over the
past three decades in capital spending
High Labor and Fuel Expenses
 Labor Specialization
– Workers must specialize in various production
tasks
 Average industry salary $48,331 (1996)
The Competitive Advantage of
Schedule Frequency
 Perceived passenger advantage if offer more
trips
– allows last minute changes
Excess Capacity and Low
Marginal Costs
 Re-hubbing
– Develop another airport serving the same city
 Can contract out aircraft and services (by-
product)
– such as selling aircraft simulator time to
another airline
Sensitivity to Economic
Fluctuations
 Airlines must be very sensitive to economic
fluctuations
 Discretionary travel lags after economic
recovery by 12-18 months
 Airlines can not get out of fixed costs
Close Government Regulation
 Advisory Circulars (AC’s)
 Federal Aviation Regulations (FAR’s)
 Airworthiness Directives (AD’s)
 Operations Specifications
 Unscheduled directives (i.e. maintenance)
The Significance of Airline
Passenger Load Factors
 Capacity Versus Demand
 Pricing in relation to load factor
– traffic peaks and valleys
 Load factor most vital statistic in airline
business
 Must manage growth and contraction
Chapter 7 Airline Management
and Organization
 Review Chapter Objectives
Management
 The process of achieving an organization’s
goals through the coordinated performance
of five specific functions:
–
–
–
–
–
Planning
Organizing
Staffing
Directing
Controlling
Management
 Levels of Management
– Board of Directors
• Chief policy making body
– Policy is a broadly stated course of action that employees
follow in making decisions
–
–
–
–
Top Management
President
Middle Management
Operating Management
Decision Making
 Define the problem
 Analysis the problem
 Determine alternative solutions
Functions of Management:
Planning
 MBO- Management by Objective
– Goals should be quantifiable
– Follow-up discussions
– Appraisal of results
 Standardization (company manuals)
Functions of
Management:Organizing
 The division of work among employees and
determination of how much authority each
person has.
 Grouping of activities, delineating authority
and responsibility, and establishing working
relationships.
Functions of
Management:Staffing
 Stationing people to work in positions
provided for in the organizational structure
 Involves:
– selection
– training
– compensation
Functions of Management:
Directing
 Those variables required to monitor and
carry out objectives
Organization
 Organization is a plan to bring together the
resources of a firm (capital and labor) to the
position of greatest effectiveness, or
productivity. The plan consists of the
grouping of operations (labor and
equipment) to achieve the advantages of
specialization and the chain of command.
Principles of Organization
Planning
 Unity of Objectives
 Span of Control
 Departmentalization
 Delegation of Authority
 Levels of Management
 Clearly defined duties
 Flexibility
 Communication
Line and Staff Responsibilities
The Organizational Chart
 Unity of objectives
– Every department within an organization
contributing to the accomplishment of the firms
overall goals
Staff Departments
 Finance and Property
 Informational Services
 Personnel
 Medical
 Legal
 Corporate Communications
 Economic Planning
Line Departments
 Those administrations that are directly
involved in producing and selling air
transportation. They include flight
operations, engineering and maintenance,
and marketing and services.
Flight Operations
 Director of Operations
 Line Pilots
 Dispatch
 Weather
Engineering and Maintenance
 Small engineering team focused on
planning
 Route Scheduling
 About 1/5 of every revenue dollar
Maintenance Stations
 Maintenance Base (Hub)
– Best equipped
 Major Station
– Large numbers of people
 Service Station
– Fewer numbers of people and equipment
Contract Maintenance
 If outsourcing maintenance
 Property
 Leases
Marketing and Services
 Sales force -through daily contact with
customers
 Internal
– reservations, ticket agents
 External
– travel agencies
Marketing and Services
 Advertising
 Marketing Research and Development
 Service Planning
 Sales Planning
 Food Service
The Flight- Serving Passengers
 Meeting customers
 Purser (1st Flight Attendant)
 Image building
Employment
 Volume Related Employees
– Flight Attendance
– Ticket Agents
– Reservation Agents
 These positions budgeted commensurate with their
growth or contraction in a particular traffic volume
 Employee Stock Ownership Programs (ESOP)
Chapter 8: Forecasting Methods
 Review chapter Objectives
The Purpose of Forecasting
 Purpose:
– Short-term: Generally more accurate than
longer-term forecasts
– Long-term:
• Fleet Planning
• Forecast type and volume of activity
– Passengers
– cargo
– Parts
Forecasting
 Analysis
 Planning
 Control
Forecasting Methods
 Causal
– quantitative variable used to determine demand
 Times-Series or Trend Analysis
 Judgmental Methods
– accepted largely on the basis of the reputation
of the forecaster
Forecasting Methods
 Smoothing the variations can eliminate
irregular variations in forecasts
– Seasonal Variations
– Irregular Variations
 Accuracy of Time Series/Causal Models
Business Cycles
 Vary in length for individual businesses
 Magnitudes from peak to valley varies
considerably
 Government has not adequate explained the
business cycles
Chapter 9: Airline Passenger
Marketing
Marketing
 Marketing is that broad area of business
activity that directs the flow of services
provided by the carrier to the customer in
order to satisfy customers’ needs and wants
and to achieve company objectives.
The Marketing Mix
 Product
 Price
 Promotion
– a controllable variable
 Place
– a controllable variable
Uncontrollable Marketing
Variables
 Cultural and social differences
 Political and regulatory environment
 Economic Environment
 Existing competitive structure
 Resources and objectives of the company
The Consumer-orientated
Marketing Concept
 Market Segmentation
 Intensive growth strategies
 Marketing since deregulation
Market Segmentation
 The process by dividing potential customers
into customer group in order to identify
target markets
 Increasing the number of passengers in an
existing market
Intensive Growth Strategies
 Product development
– gain brand loyalty (i.e. special lounges at
airports)
 Market penetration
 Marketing development
Marketing Strategies Since
Deregulation
 Computerized Reservation Systems
 Frequent-flier Program
 Business-Class Service
 Code Sharing
 Hub-and Spoke Service
 Advertising and Sales Promotion
Chapter 10:
 Airline Pricing, Demand, and Output
Determination
 Law of Demand states that price and
quantity demanded are inversely related
Trends in Domestic Passenger
Fares
 Table 10-1 (page 327)
 Promotional
– only used when load factors are low
Pricing and Demand
 Determinants of Demand
 Changes in Demand
 Elasticity of Demand
– Inelastic Demand
• short haul market
– Elastic Demand
• airline “A” reduces fares betting that total revenue
increases
Determinants of Elasticity
 Competition
 Distance
 Business versus Pleasure
 Time
Air Fare Warfare
 Greater than 2000 price changes daily
 2 million individual fares between city pairs
 Carriers will only match low-frills fares to
meet competition
Types of Passenger Fares
 Time-Specific Fares




– i.e. night flight offered at 20-40% off comparable day
fares
Common Fares
Joint Fares
Excursion Fares
– used during seasonally weak periods of traffic
– usually require round-trip purchase
– fare penalties with cancellation
Promotional Fares
– Always will have some kind of restriction
The Pricing Process
 Airline Tariff Publishing Company
(ATPCO)
 Pricing Strategies and Objectives
 Pricing Tactics
 Pricing Analysis
 Inventory Management
Pricing Strategies and Objectives
 Survival - bankruptcy (chapter 11)
 Market share
 Premium quality
 Within these areas, carriers have a multi-
layered pricing matrix
Pricing Tactics
 Fare actions include
– Introduction fares
– Excursion fare sales
– Connection market sales
– Business fare sales
– mileage
– Zone
– Value added
– One-way versus round-trip fares
Pricing Analysis
 Subtract the following:
– refunds
– dilution
– advertising
– spill
– variable additional passenger costs
Inventory Management (page
346)
 Manage low-fare seat numbers versus coach
seat or business seats
 Minimize denied boardings
 Minimize spill and spin seats
Airline Costs
 Direct Operating Costs




– all flying expenses, all maintenance and overhaul costs and all
aircraft depreciation expenses
Indirect Operating Costs (costs remain unaffected by type of aircraft
flown)
– reservations, sales, promotion costs, station and ground expenses
– passenger service costs, general administration costs
Non-operating Costs and Revenues
– all profits and losses arising from owned commuter carrier
Variable Costs
– Fuel, meals, landing fees
Fixed Costs
– Property insurance, lease equipment payments, flight equipment
Pricing and Output
Determination
 Total Costs-Short Run
 Load Factors (Revenue versus Non-
revenue)
 Profit Maximization - Short Run
 Law of Diminishing Returns states that as
extra units of variable resources (labor) are
added to a fixed resource (existing fleet) the
extra output (ASM’s) will increase at a
decreasing rate
Chapter 11 Air Cargo
 Review Chapter Objectives
Historical Overview
 Air Freight
 Air Mail
– first air cargo service
 Air Express
 Overnight Air Express
– FedEx established for small packages
 The Arrival of Jumbo Jets
 Types of Carriers
Air Cargo Today
 Trend in growth over the last 25 years made
possible by larger and more efficient aircraft
 Largest Markets
– North Atlantic
– US Domestic
– Europe-Far East
Air Cargo: The Future
 Combination Carriers
– carry cargo and passengers
• no more than 5-10% passenger
– example: UPS
The Market for Air Freight
 Cannot compete to surpass air carrier
revenues due to:
– cost
– primarily designed to carry passengers
– no compelling reason to ship by air
The Market for Air Freight
 Air shipments attractive EXCEPT when…
– the commodity is low value relative to weight
(corn)
 When demand is frequent (bread/milk)
 When distribution problems are:
– low insurance for long transit periods
The Market for Air Freight
 Air shipments attractive when…
– specialty handling not required
 Packaging Cargo suggests the use of
shipping containers. Why?
– reduce pilferage loss
– reduce package cost
• producers are charged at a lower rate
Types of Air Freight Rates
 General Commodity Rates
 Specific Commodity Rates (i.e. tires)
 Exception Rates
 Joint Rates (shared with another company)
 Priority Reserved Air Freight
 Speed Package Service
 Container Rates
Special Freight Services
 Assembly Service
 Distribution Service
 Pickup and Delivery Service
 Other Specialized Services
 Restricted articles MIGHT be accepted by
one airline and not another
– dependent upon air carrier operations
specifications
Factors Affecting Air Freight
Rates
 Costs of the service
 Volume of traffic
 Directionality
 Characteristics of the traffic
 Value of the service
 Competition
Chapter 12: Principles of Airline
Scheduling
 Review Chapter Objectives
The Mission of Scheduling
 The constant search between adequate
service and economic strength for the
company
Equipment Maintenance
 Minimum out-of-service time
– maximum in-service utilization
 Allowable Time
 Personnel and Workload
 Use of Facilities
 Line Reserves
– extra available airplanes
Flight Operations and Crew
Scheduling
 Operational factors
– Runway lengths
– Aircraft fuel capacity
– Weather conditions
– Air Traffic Requirements and routings
– Crew time limits
– Employee agreements
Flight Operations and Crew
Scheduling
 Monthly schedules
– flight “line numbers” based upon seniority
 Must consider crew domicile
 Contract hours
Ground Operations and Facility
Limitations
 Always some limitations
 Cost must be considered
 Must avoid ground congestion
 Station Plotting Chart (figure 12-7)
 Staffing
Scheduling Planning and
Coordination
 Traffic Flow
 Schedule Salability
 Schedule Adjustments
 Load-Factor Leverage
 Most important responsibility is to evaluate
varied and conflicting objectives to achieve
an optimal balance to support the airline
Equipment Assignment and
Types of Schedules
 Must allow enroute service checks at each
stop
 Overnight
 Airframe Checks
–
–
–
–
A= Every 125 hours
B= Every 750 hours
C= Every 3000 hours/15 months
D= Every 20,000 hours/6-8 years
Hub-And-Spoke Scheduling
 Advantages
– Force multiplier
– lower fares with larger aircraft
– less schedule delay
 Disadvantages
– congestion delay
– delay increase travel time
– lost baggage
– ATC Stress
– environmental impact
Data Limitations in Airline
Scheduling
 Hard to get accurate data between air
carriers
 International even worse
Chapter 13: Fleet Planning- The
Selection Process
 Review Chapter Objectives
Factors in Fleet Planning
 Pre-deregulation Era
 Hub-and-Spoke System
 Fleet Commonality
 Long-Range Aircraft
 The Trend toward leasing
 Noise restrictions
Design and Development-The
Manufactures Viewpoint
 Boeing
– leading aircraft in order by ATA members is the B-737
– Faces stiff competition
• B747-400 designed to counter MD-11
• B-777 counters A-330
 Airbus
– european aircraft manufacturing consortium
– timing has always been a key to Airbus successes
– 85% common aircraft parts across production lines
• A-330 /A-340
The Fleet Planning Process
 Information Required
– Current Resources
– Corporate Objectives
– Projected Industry Environments
– Market Strategy
 System Constraints
– Runway capacity
– Environmental considerations
– maintenance constraints
The Fleet Planning Process
 Aircraft Evaluation
– design characteristics
– physical performance
– acquisition costs
 Tentative Fleet Plan and Financial Evaluation
 Presentation and Management Approval
The Decision To Upgrade or
Replace
 Fleet commonality
– desired results in large aircraft purchases
 Refurbishing aircraft can cost as mush as
the original cost
 Most difficult part:
– guessing operating economics
The Decision To Upgrade or
Replace
 Acquisition costs include:
– ground equipment
– maintenance training
– flight training
– cost to borrow money $$$
Leasing
 Industry trend is toward fleet leasing
 Popular since 1986 Tax Reform Act
 Lessor retains full title of the assets
 Operating Leases
Future
 Continued consolidation in airline industry
will lead to greater cooperation and
interdependence between the larger carriers
and manufacturers.
 Continued cost cutting by the airlines across
all accounts
Chapter 14: Airline Labor
Relations
 The Railway Labor Act and the Airlines
– covers airlines and railroads
 National Mediation Board
– attempts to help both parties find a common
ground for contract agreement
 Generally, airline labor unions are organized
on a “craft” basis
Railway Labor Act
 Purpose
– ensure the right of workers to organize and
bargain effectively
– to prevent interruption of service
– to assist in prompt settlement of disputes or
grievances arising out of existing contracts
– Applies to Railroads and Airlines
The Collective Bargaining
Process
 Step One: Collective Bargaining
– wages are negioated
 Step Two: National Mediation Board
 Step Three: Voluntary Arbitration
 Step Four: Emergency Board
 Final Option: Presidential Intervention
National Railway Adjustment
Board
 Juistication over grievance and
interpretations of agreements on pay,
working conditions, and rules
 Restrictive work rules
– increase the number of employees required
Criticism of the Process
 Is it Needed?
– Delta is not unionized
– Too many steps
• results in a long process that is not binding
Historical Overview of Airline
Union Activity
 Pre-jet Age
 Jet Age
 Key to airline success: high fuel costs
– 1990 impacted airline considerably costing
airlines $4 billion
Labor Relations Since
Deregulation
 Elimination of the automatic labor-cost
pass-through
 Labor unrest: 1980’s
 Consolidation Period: 1986-Present
 The future collective bargaining strategies
 Labor costs represents 30% of total
operating expenses
Strike Options
 Mutual Aid Pact
– provided strike insurance payments
– cancelled after deregulation
Future
 Hot-Button Issues
– Two-tier pay system
• averages down pilot wages
– out-sourcing
– low-cost second tier air carriers
Chapter 15: Airline Financing
 Review Chapter Objectives
Sources of Funds
 Internal
– Earnings
– Depreciation
– Deferred taxes
 External
– Equipment Trust Financing
– Public Equity Offering
– Private debt placement
Finding Financing
 Investment Bankers
– Primary function is to serve as consultants in finding
credit sources for carriers
 Equipment Trust Financing
– Financing aircraft by having a bank or group of banks
lend the required money, but, holds title to the aircraft
until a series of certificates are paid off
 Venture Capital
– Startup carriers need venture capital to get started
– FedEx championed venture capital to begin operations
Finding Financing
 Key consideration to gain financing
– debt/equity ratio is prime indicator of long-term borrowing power
• the higher the ratio, the less likely it is for the carrier to borrow
money
– Return on Investment (ROI) must be well grounded
• Net profits to assets
– Long-term cash forecasts are needed to appraise proposed capital
projects
– Reducing debt must be considered
• profits generated during the 1990’s have been used to reduce
debt incurred during the 1990’s
Finding Financing
 Short term cash forecasts are needed to:
– Anticipate the need for short-term financing
– Maintain good bank relations
– Provide for a basis for monitoring many items on the
balance sheet
 Debenture Bonds
– a bond not secured by any specific pledge of property
 Depreciation
– largest single source of internal funds for a carrier
Leases
 Operating
– short-term capacity enhancements
 Capital
– appear as long-term liabilities on balance sheet
 Why lease?
– Avoids progress payoffs to aircraft
manufactures
Cash Management and Financial
Planning
 Cash Flow
 Cash Budgeting