Chapter 5
Air Carriers
BRIEF HISTORY p158
• In 1908 the development of air
transportation began with the U.S. Post
Office examining the feasibility of
providing air mail service.
• Although airplanes were used in World War
I, the use of air planes for mail transport can
be considered the beginning of the modern
airline industry.
BRIEF HISTORY cont’
• Passenger transportation services developed
as a by-product of the mail business and
began to flourish in selected markets.
• Since that time, airplanes have become
faster, bigger, and relatively more fuelefficient.
• Although the level and degree of
technological improvement have slowed in
the airline industry, there is still opportunity
for further innovation.
BRIEF HISTORY cont’
• Airline travel is a common form of
transportation for long-distance passenger
and freight travel and the only reasonable
alternative when time is of the essence.
• The tremendous speed of the airplane,
coupled with more competitive pricing, has
led to the growth of air transportation,
particularly in the movement of passengers.
INDUSTRY OVERVIEW AND
SIGNIFICANCE p158
• The airline industry is very dependent on
passenger revenues to maintain its financial
viability.
• However, to characterize airlines simply as
movers of people presents too simplistic a
view of their role in our transportation
system.
INDUSTRY OVERVIEW AND SIGNIFICANCE cont’
• Although their share of the freight
movement on a ton-kilometre basis is small,
the type of traffic that they carry (highvalue, perishable, or emergency) makes
them an important part of our total
transportation system.
• Emphasis upon total logistics cost in a
quick-response lead-time environment will
continue to con tribute to their growth in
freight movements.
TYPES OF CARRIERS p158
Private Carriers
• Air carriers can be segmented into for-hire
carriers and private carriers.
• A private air carrier is a firm that
transports company personnel or freight in
planes to support its primary business.
• Private air transportation is predominantly
used to transport company personnel,
although emergency freight is sometimes
carried on private airplanes as well.
For-Hire Carriers
• The for-hire carriers are no longer regulated on an
economic basis by the federal government and
cannot be easily categorized into specific types
because carriers provide many types of services.
• For our purposes, the for-hire carriers will be
discussed according to type of service offered (air
taxi, commuter, charter, and international) and
annual revenue (nationals, and regionals).
For-Hire Carriers cont’
• A classification frequently used by U.S. air
carriers is one based on annual operating revenues.
• The categories used to classify air carriers in terms
of revenue are as follows:
Majors -annual revenues of more than $1
billion
Nationals -annual revenues of S100 million to $1
billion
Regionals -annual revenues of less than $100
million
For-Hire Carriers cont’
• U.S. major carriers provide service between
major population areas within the United States
such as New York, Chicago, and Los Angeles.
• The routes served by these carriers are usually
high- density corridors, and the carriers use highcapacity planes
• U.S. national carriers operate between lesspopulated areas and major population centers.
These carriers operate scheduled service over
relatively short routes with smaller planes.
For-Hire Carriers cont’
• Regional carriers have operations similar to the
nationals. The carriers operate within a particular
region of the country and connect less-populated
areas with larger population centers
• The all-cargo carrier, as the name implies,
primarily transports cargo.
• all-cargo carriers can freely set rates, enter and
exit markets, and use any size aircraft dictated by
the market. Examples of all-cargo carriers include
FedEx and UPS Airlines.
For-Hire Carriers cont’
• The commuter air carrier is technically a
regional carrier.
• The commuter publishes timetables on specific
routes that connect less-populated routes with
major cities.
• As certified carriers abandon routes, usually lowdensity routes, the commuter enters into a working
relationship with the certified carrier to continue
service to the community.
For-Hire Carriers cont’
• The charter carriers, also known as air taxis, use
small to medium size aircraft to transport people
or freight.
• The supplemental carrier has no time schedule or
designated route.
• The carrier charters the entire plane to transport a
group of people or cargo between specified origins
and destinations.
• Many travel tour groups use charter carriers.
• The rates charged and schedules followed are
negotiated in the contract.
MARKET STRUCTURE p160
Number of Carriers
• Private air transportation has been estimated
to include approximately 60,000 companyowned planes, with over 500 U.S.
corporations operating private air fleets.
• In addition, thousands of planes are used
for personal, recreational, and instructional
purposes.
COMPETITION p162
Intermodal
• Due to their unique service, air carriers face limited
competition from other modes for both passengers and
freight.
• Air carriers have an advantage in providing time-sensitive,
long-distance movement of people or freight.
• Airlines compete to some extent with motor carriers for the
movement of higher-valued manufactured goods; they face
competition from automobiles for the movement of
passengers and, to a limited extent, from trains and busses.
• For short distances (under 800 km), the access time and
terminal time offsets the speed of the airline for the linehaul.
Intramodal
• Competition in rates and service among the
air carriers is very intense, even though the
number of carriers is small.
• Carriers may also have excess capacity (too
many flights and seat miles on a route) and
attempt to attract passengers by selectively
lowering fares to fill the empty seats.
Intramodal cont’
• New entrants to the airline market initially cause
overcapacity to exist on many routes.
• To counter this and add passengers to their aircraft, carriers
reduce prices and fare wars begin.
• This causes financially weaker carriers to exit the market.
• This is especially true of carriers with high operating costs
(many times due to high-cost union labour contracts), high
cost of debt, or high levels of fixed costs. (Many of these
maintain high fixed investments in hub-and-spoke terminal
operations.)
Intramodal cont’
• The remaining carriers begin to enjoy
economies of density (discussed later in this
chapter), and the cost per passenger
kilometre will decrease and margins will
increase, even in the existence of relatively
low fares.
• So, even with the discounted prices in
today’s airline market, many carriers have
been able to remain profitable.
Service Competition
• Competition in airline service takes many
forms, but the primary service competition
is the frequency and timing of flights on a
route.
• Carriers attempt to provide flights at the
time of day when passengers want to fly.
• Flight departures are most frequent in the
early morning (7:00 am. to 10:00 p.m.) and
late afternoon (4:00 p.m. to 6:00 p.m.).
Service Competition cont’
• In addition to the frequency and timing of flights,
air carriers attempt to differentiate their service
through the advertising of passenger amenities.
• Carriers promote such things as on-time arrival
and friendly employees to convince travellers that
it has the desired quality of service.
• Gourmet meals and on-board movies are some of
the amenities that a carrier uses to entice
passengers to use and reuse its service.
Service Competition cont’
• A postderegulation development in service
competition was no-frills service (Budget
airlines).
• The no-frills air carrier (for example,
Southwest Airlines) charges fares that are
lower than that of a full-service air carrier.
• However, passengers receive limited snacks
and drinks (coffee, tea, or soft drinks).
Service Competition cont’
• Another hall mark of such carriers is that they
only provide one class of service.
• Also, the passengers provide their own magazines
or other reading materials.
• Overall, there are fewer airline employees
involved in no-frills services operations, which
contribute to lower costs.
• The “no-frills” carriers have had a significant
impact on fares where their service is available.
Cargo Competition
• For cargo service, competition has become
intense.
• As a result of the complete deregulation of
air cargo in 1977, air carriers have
published competitive rates, but these rates
are still higher than those available via
surface carriers.
• Freight schedules have been published that
emphasize low transit times between given
points.
Cargo Competition cont’
• To overcome accessibility problems, some
carriers provide door-to-door service
through contacts with motor carriers.
• Major airline freight companies (e.g.,
FedEx, UPS Airlines, and DHL) have their
own fleets of surface delivery vehicles to
perform the ground portion of this door-todoor service.
OPERATING AND SERVICE
CHARACTERISTICS p164
General
• Air transportation dominates the for-hire,
long-distance passenger transportation
market.
• The majority of freight using air service is
high-value and/or emergency shipments.
• The high cost of air transportation is usually
prohibitive for shipping low-value routine
commodities unless there is an emergency.
• For emergency shipments, the cost of air
transportation is often inconsequential compared
to the cost of delaying the goods.
• For example, an urgently needed part of an
assembly line might have a $20 value, but if the
air-freighted part arrives on time to prevent the
assembly line from stopping, the “opportunity”
value of the part might become hundreds of
thousands of dollars.
• Thus, the $20 part might have an emergency value
of $200,000, and the air freight cost is a small
portion of this emergency value.
• Examples of commodities that move via air
carriers include mail, clothing, communication
products and parts, photography equipment,
mushrooms, fresh flowers, industrial machines,
high-priced livestock, racehorses, expensive
automobiles, and jewellery.
• Normally basic raw materials such as coal,
lumber, iron ore, or steel are not moved by air
carriage.
• The high value of these products provides a costsavings trade-off, usually but not always from
inventory, that offsets the higher cost of air
service. The old adage “Time is money” is quite
appropriate here.
Speed of Service
• Undoubtedly, the major service advantage of air
transportation is speed.
• The terminal- to-terminal time for a given trip is
lower via air transportation than via any of the
other modes.
• Commercial jets are capable of routinely flying at
speeds of 800 to 960 kilometres per hour, thus
making a New York to California trip,
approximately 4,800 kilometres, a mere 6-hour
journey.
Speed of Service cont’
• This advantage of high terminal-to-terminal speed
has been dampened somewhat by reduced
frequency of flights and congestion at airports.
• Air carriers have been concentrating their service
on the high-density routes like New York to
Chicago, for example.
• In addition, most carriers have adopted the huband-spoke terminal approach, in which most
flights go through a hub terminal; Atlanta (Delta)
and Chicago (United) are examples .
Speed of Service cont’
• These two factors have aggravated the air traffic
congestion and ground congestion at major
airports and have increased total transit time while
decreasing its reliability.
• The shippers who use air carriers to transport
freight are primarily interested in the speed and
reliability of the service and the resultant benefits,
such as reduced inventory levels and inventory
carrying costs.
Speed of Service cont’
• Acceptable or improved service levels can
be achieved by using air carriers to deliver
orders in short time periods.
• Stock-outs can be controlled, reduced, or
eliminated by responding to shortages via
air carriers.
Length of Haul and Capacity
• For passenger travel, air carriers dominate the
long-distance moves.
• The capacity of airplanes is dependent on its type.
A wide-body, four-engine jet has a seating
capacity of about 370 people and an all-cargo
carrying capacity of 16.6 tons.
• Table 5.3 provides capacity and operating statistics
for some of the more commonly used aircraft in
both domestic and international markets.
Length of Haul and Capacity cont’
• Normally, small shipments that are time-sensitive
are moved by air carriers.
• In addition to small shipment sizes, the packaging
required for freight shipped by air transportation is
usually less than other modes.
• The relatively smooth ride through the air and the
automated ground-handling systems contribute to
lower damage and thus reduce packaging needs.
Accessibility and Dependability
• Except in adverse conditions such as fog or snow,
air carriers are capable of providing reliable
service.
• The carriers might not always be on time to the
exact minute, but the variations in transit time are
small.
• Sophisticated navigational instrumentation permits
operation during most weather conditions.
• On-time departures and arrivals are within 15
minutes of scheduled times.
Accessibility and Dependability cont’
• Poor accessibility is one disadvantage of air
carriers.
• Passengers and freight must be transported
to an airport for air service to be rendered.
• This accessibility problem is reduced when
smaller planes and helicopters are used to
transport freight to and from airports, and
most passengers use automobiles.
• Limited accessibility adds time and cost to
the air service provided
Accessibility and Dependability cont’
• Even with the accessibility problem, air
transportation remains a fast method of
movement and the only logical mode when
distance is great and time is restricted.
• The cost of this fast freight service is high,
about three times greater than motor carrier
and 10 times greater than rail.
• Nevertheless, the high speed and cost make
air carriage a premium mode of
transportation.
EQUIPMENT p167
Types of Vehicles
• As previously mentioned, there are several
different sizes of airplanes in use, from small
commuter planes to huge, wide-body, four-engine
planes used by the nationals
• Table 5.3 compares some of the major aircraft
types in terms of seats, cargo payload, speed, fuel
consumption, and operating cost per hour.
• Airlines have many options to select from when
purchasing equipment.
Terminals
• The air carriers’ terminals (airports) are financed
by a government entity.
• The carriers pay for the use of the airport through
landing fees, rent and lease payments for space,
taxes on fuel, and aircraft registration taxes.
• In addition, users pay a tax on airline tickets and
air freight charges.
• Terminal charges are becoming increasingly more
commonplace for passenger traffic.
Terminals cont’
• The growth and development of air transportation
is dependent upon adequate air port facilities.
• Therefore, to ensure the viability of air
transportation, the government has the
responsibility of financially contributing to the
construction of airport facilities.
• The various state and local governments assume
the responsibility for operating and maintaining
the airports.
Terminals cont’
• At the airport, the carriers perform passenger,
cargo, and aircraft servicing.
• Passengers are ticketed, loaded, and unloaded, and
their luggage is collected and dispersed.
• Cargo is routed to specific planes for shipment to
the destination airport or to delivery vehicles.
• Aircraft servicing includes refuelling; loading of
passengers, cargo, luggage, and supplies (food);
and maintenance.
• Major aircraft maintenance is done at specific
airports.
Terminals cont’
• As carrier operations become more
complex, certain airports in the carriers’
scope of operation become hubs.
• Flights from outlying, less-populated areas
are fed into the hub airport, where
connecting flights are available to other
areas of the region or country.
Terminals cont’
• By using the hub airport approach, the
carriers are able to assign aircraft to feed
passengers into the hub over low-density
routes and to assign larger planes to the
higher-density routes between the hub and
an airport serving a major metropolitan
area.
• In essence, the hub airport is similar to the
motor carrier’s break-bulk terminal.
COST STRUCTURE p169
Fixed Versus Variable Cost Components
• Like the motor carriers, the air carriers’ cost
structure consists of high variable and low fixed
costs.
• Approximately 80 percent of total operating costs
are variable and 20 percent are fixed.
• The relatively low fixed cost structure is
attributable to government investment and
operations of airports and airways.
• The carriers pay for the use of these facilities
through landing fees, which are variable in nature.
Fixed Versus Variable Cost Components cont’
• As indicated in Table 5.5, 30.4% of airline
operating costs in 2002 was incurred for flying
operations; maintenance costs equalled 12.3% of
total operating costs.
• Both of these expenses are variable costs.
• The next major category of expense is aircraft and
traffic servicing, which totalled about 17% of total
operating costs.
• In 2002 depreciation accounted for about 6.0 % of
total operating expenses.
Fixed Versus Variable Cost Components cont’
• The increased price competition in the airline
industry has caused airlines to try to operate more
efficiently by cutting costs where possible.
• There has been much effort put forth to decrease
labour costs because the airline industry tends to
be labour-intensive compared to other modes, such
as railroads and pipelines.
• The air lines have negotiated significant labour
cost reductions with many of the unions
represented in the industry.
Fuel
• Escalating fuel costs have caused problems in the
past for the airlines.
• The impact that such fuel increases have had can
be shown by analyzing fuel consumption for
certain aircraft that are commonly used today.
• The Air Transportation Association’s annual report
shows that the number of gallons of fuel
consumed per hour for the following planes is as
follows (Table 5.3):
Fuel cont’
•
•
•
•
•
367-seat 747
3,411 gallons/hour = 12911 litres/hour
286-seat DC-10
2,405 gallons/hour = 9103 litres/hour
148-seat 727
1,289 gallons/hour = 4879 litres/hour
101-seat DC-9
826 gallons/hour = 3126 litres/hour
Using a cost of $0.77 per gallon, the fuel cost per hour is
$2,626.47 for a 747, $1,851.85 for a DC-10, $992.53 for a
727, and $636.02 for DC-9. Consequently, rapidly
escalating fuel costs in recent years have caused airlines to
suffer financially in an already depressed pricing market.
Fuel cont’
• When fuel costs rise, carriers scrutinize
planes in the fleet as well as routes served.
• More fuel-efficient planes have been
developed and added to carrier fleets.
• In the short run, carriers are substituting
smaller planes on low-density (low demand)
routes and eliminating service completely
on other routes.
Labour
• Labour costs represented over 65 percent of total
operating expenses in 2002. In 2002 carriers
employed about 601,000 people.
• Airlines employ people with a variety of different
skills:
• To operate the planes, the carrier must employ
pilots, co-pilots, and flight engineers.
• The plane crew also includes the flight attendants,
who serve the passengers.
Labour cont’
• Communications personnel are required to
tie together the different geographic
locations.
• Mechanics and ground crews for aircraft
and traffic service provide the necessary
maintenance and servicing of the planes.
• The final component of airline employment
consists of the office personnel and
management.
Labour cont’
• Overall employment has decreased as airlines
have moved aggressively to reduce costs to
improve their competitiveness and lower prices in
selected markets.
• Strict safety regulations are administered by the
CAA (South African Civil Aviation Authority).
• Acceptable flight operations, as well as hours of
service, are specified for pilots.
• CAA regulations also dictate appropriate
procedures for flight attendants to follow during
takeoff and landing.
Labour cont’
• The wages paid to a pilot usually vary
according to the pilot’s equipment rating.
• A pilot who is technically capable (has
passed a flight examination for a given type
of aircraft) of flying a jumbo jet will receive
a higher compensation than one who flies a
single-engine, six-passenger plane.
Equipment
• As mentioned earlier, the cost of operating
airplanes varies.
• Larger planes are more costly to operate per
hour than smaller planes, but the cost per
seat-kilometre is lower for larger planes.
• That is, the larger plane has the capacity to
carry more passengers; thus, the higher cost
is spread out over a large number of output
units.
• Table 5.3 shows the hourly operating costs for
four aircraft used by major carriers in 2002.
• The cost per block hour was $8,443 for the 367seat 747 and $2,071 for the 101-seat DC-9.
However, the cost per seat-mile was $0.0046 for
the 747 and $0.00686 for the DC-9.
• This reduced operating cost per seat-mile for the
larger planes indicates that economies of scale
exist in aircraft.
Economies of Scale/Economies of Density
• Large-scale air carrier operations do have
some economies of scale, which result from
more extensive use of large-size planes or
indivisible units.
• Of the small number of major and national
carriers, approximately 25 transport over 90
percent of the passengers, indicating that
large-scale operations exist.
Economies of Scale/Economies of Density cont’
• The information contained in Table 5.3 suggests
the existence of economies of scale with large-size
planes.
• Market conditions (sufficient demand) must exist
to permit the efficient utilization of larger planes
(i.e., if the planes are flown near capacity, the seatmile costs will obviously decrease).
• Contributing to the existence of economies of
scale for an aircraft is the inability to inventory an
unused seat.
Economies of Scale/Economies of Density cont’
• For example, a 367-seat 747 is about to close its
doors with 10 seats empty.
• If the plane takes off with the empty seats, the
seats are “lost” for that flight because the airline
cannot inventory the excess capacity for another
flight that might be overbooked.
• On the other hand, the marginal cost of filling
those 10 empty seats right before the doors on the
aircraft are closed are negligible.
• This is the same concept of economies of scale as
found in the railroad industry.
• The marginal cost of adding one more rail car to a
train right before departure is negligible.
Economies of Scale/Economies of Density cont’
• Another factor indicating large-scale operations
for air carriers is the integrated communication
network required for activities such as operating
controls and passenger reservations.
• Small local or regional carriers find the investment
required for such a communication system rather
staggering, but without the communication
system, the emerging carrier cannot effectively
operate (provide connecting service with other
carriers and ticketing to passengers).
• Such carriers have purchased passenger
reservation systems from large carriers to be
competitive.
Economies of Scale/Economies of Density cont’
• Industries characterized by high variable cost
ratios (airlines and motor carriers) can relatively
easily add equipment to a given market.
• As such, the ability to decrease fully allocated cost
per mile by adding aircraft does not exist.
• On the other hand, when high fixed-cost industries
(pipe and rail) add fixed capacity, they can
decrease fully allocated cost per mile by adding
volume to the fixed capacity.
• In high fixed-cost industries, however, capacity is
not easily added in small increments.
Economies of Scale/Economies of Density cont’
• Economies of density exist when a carrier has
significant volume between an origin-destination
pair to fully utilize capacity on forward-haul
movements as well as utilize significant capacity
on back-haul movements.
• This concept can exist across all modes of
transportation.
• Economies of density, then, are important for all
airlines to achieve to fully utilize capacity in a
given market.
• History has shown that this has been a successful
strategy for new entrants to the airline passenger
market.
RATES
Pricing
• Airline pricing for passenger service is
characterized by the discounts from full fare.
• Seats on the same plane can have substantially
different prices depending on restrictions attached
to the purchase, such as having to stay over a
weekend or having to purchase the ticket in
advance.
• Business people generally pay more for their
airline travel due to the more rigid schedules they
are on and the fact that they usually depart and
return during the high-demand times.
Pricing cont’
The price of seats on different flights and the
price of the same seat on a particular flight
can vary due to:
• competition with other airlines,
• the time and day of departure and return,
• the level of service (first class versus coach
or no-frills service), and
• advance ticket purchase.
Pricing cont’
• Cargo pricing is dependent mainly on
weight and/or cubic dimensions.
• Some shipments that have a very low
density can be assessed an over-dimensional
charge.
• This over-dimensional charge is used to
gain more appropriate revenue from
shipments that take up a lot of space but do
not weigh much.
Operating Efficiency
• An important measure of operating
efficiency used by air carriers is the
operating ratio.
• The operating ratio measures the portion of
operating income that goes to operating
expenses:
Operating Ratio = (Operating Expense
/Operating Income) x 100
Operating Efficiency
• Only income and expenses generated from
passenger and freight transportation are
considered.
• The over all profit margin is small, and a
loss is incurred when the operating ratio
exceeds 100.
Operating Efficiency cont’
• Another widely used measure of operating
efficiency is the load factor (previously
discussed).
• The load factor measures the percentage of a
plane’s capacity that is utilized.
Load Factor = (Number of Passengers/Total Number
of Seats) x 100
• Airlines have raised plane load factors to the 65to 70-percent range.
• The particular route and type of plane (capacity)
directly affect the load factor, as does price,
service level, and competition.
CURRENT ISSUES p174
Safety
• The issue of airline safety is of great importance to
the airline industry.
• Any incident involving airplanes receives a great
deal of publicity from the media because of the
large number of people affected at one time.
• (Accidents involving motor vehicles affect only a
few people in each incident but affect a greater
number of people than do airline accidents in the
long run.)
Safety cont’
• Several factors affect airline safety.
• First, airport security has come under close
scrutiny over the past several years because
of the September 11, 2001 terrorist attacks
on the twin towers.
• As a result, airport security has reached an
all-time high, causing more delays at airport
terminals.
Safety cont’
• However, air travel is still the safest way to travel.
• Even though there is a significant loss of life in an
airline tragedy, air travel is still the safest mode for
passenger travel, with automobiles being the most
dangerous.
• Finally, as with other transportation modes, the
issue of substance abuse concerning pilots and
ground crews has become important.
• Strict drug-testing policies and alcohol
consumption guidelines are in effect.