Transport Management & Theory Practices (7)

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Transport Management & Theory Practices (7)

  1. 1. Management of Transportation Seventh Edition Coyle, Novack, Gibson & Bardi © 2011 Cengage Learning Chapter 7 The Airline Industry 1© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  2. 2. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2 Introduction • Rail: dominant mode from 1850s to WW II – Superior in both price and service quality to road transport for most of this period – Superior in service quality to water transport • Development facilitated by standardization of track gauge and rolling stock • Pivotal role in U.S. economic development – Great expansion in track mileage, post-1870s – Financed by private capital – Too much track mileage relative to demand
  3. 3. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3 Introduction • Wright Brothers first flight: 1903 • Government development and promotion of air transport begins in 1920s: – U.S. Post Office air mail subsidy program helps launch commercial passenger airline industry • Competitive advantage: Speed (travel time savings) • Econ. Deregulation enables more competitive pricing
  4. 4. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4 Types of Carriers Private Carriers • Definition: – A firm that transports company personnel or freight in planes to support its primary business • Preponderance of use is for transport of personnel • Subject to federal safety regulations administered by the Federal Aviation Adm. (FAA)
  5. 5. Types of Carriers For-Hire Carriers • Several different classification schemes – Classified by annual operating revenues • Majors (revenues of >$1 billion) • Nationals ($100 million - $1 billion) • Regionals (revenues of <$100 million) – Classified by type of service • All-cargo • Commuter • Charter • International © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5
  6. 6. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6 Market Structure Number of Carriers • Relatively small number of for-hire carriers – Most revenues earned by small number of majors – Several cycles of increasing, then decreasing number of airlines after 1978 deregulation • Private air transport – Over 500 corporations own/operate aircraft – About 60,000 corporate-owned planes exist – Thousands of private aircraft used for personal, recreational, and instructional purposes
  7. 7. Market Structure Number of Carriers © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7
  8. 8. Market Structure Number of Carriers © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8
  9. 9. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9 Competition Intermodal and Intramodal • Very limited intermodal competition for long distance (500+ miles) trips – Air has decided advantage in transport speed – Freight: rising competition from time-definite motor carrier service – Passengers: some limited competition from personal automobile travel, rail, and bus service • Intense intramodal competition – Creates cycles of new entrants, excess capacity, reduced fares, carriers exiting markets
  10. 10. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10 Competition Service Competition • Nature of passenger service competition – Flight frequency on given route – Timing of flights – Meals, in-flight communications, other services – No-frills alternatives intensify competition – Advertising used to differentiate carriers • Nature of competition for cargo, express traffic – Published schedules and rates – Door-to-door, time-definite service
  11. 11. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11 Operating and Service Characteristics General • Due to value of time, air dominates for- hire, long-distance passenger market • When importance of speed outweighs cost, then air is attractive for freight – Emergency shipments – Typical commodities • Mail, fashion clothing, communications products, fresh flowers, racehorses, jewelry – Air freight cost vs. inventory cost tradeoff
  12. 12. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12 Operating and Service Characteristics Speed of Service • Speed, travel time advantage can be off-set by – Low flight frequency, schedule timing • Smaller communities have experienced reduced frequencies – In-direct routing due to hub and spoke networks • Legacy majors moved to hub and spoke networks following deregulation to improve load-factors – Air traffic and ground congestion, security measures • Most relevant at major airports • Adds uncertainty to total travel time
  13. 13. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13 Operating and Service Characteristics Length of Haul and Capacity • Length of haul – 2007 average air trip length for passengers: 1078 miles • Aircraft capacity dependent on aircraft type – Wide-body, 4 engine jet • 370 passengers and all-cargo capacity of 16.6 tons – Boeing 777 carries 263 passengers – Most planes carry 120-260 passengers
  14. 14. Operating and Service Characteristics Accessibility and Dependability • Air travel is generally highly reliable – Weather and congestion are the principal causes of schedule disruptions – Sophisticated navigation systems facilitate operation in poor weather conditions • Limited airport accessibility adds travel time and cost to air travel – Limited accessibility is the principal service disadvantage of air travel © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14
  15. 15. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15 Equipment and Facilities • Types of vehicles (aircraft) – Many aircraft types • Wide range of seating capacity, cargo payload, speed, fuel consumption, operating costs/hour • Key is to match operating characteristics to demand needs of route • Terminals (airports) – Airports financed by government • Federal construction assistance programs • State and local governments operate and maintain – Air carriers and users pay for use
  16. 16. Equipment and Facilities © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16
  17. 17. Taxes and Fees © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17
  18. 18. Taxes and Fees (continued) © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18
  19. 19. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19 Cost Structure Fixed vs. Variable Cost Components • High variable costs (80% of total operation costs) – About 38% attributable to flight operations – About 10% for maintenance – About 14% for aircraft and traffic servicing • Low fixed costs – Due to government investment in terminals and operating infrastructure • Increasing price competition creates pressure to reduce labor costs, increase productivity
  20. 20. Cost Structure Fixed vs. Variable Cost Components © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20
  21. 21. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21 Cost Structure, cont’d Fuel and Labor Costs • Fuel costs: rising fuel costs have major impact on total operating costs – A Boeing 474-400 consumes 3,411 gal./hour – Airlines turn to more fuel efficient aircraft and smaller planes on low-density routes • Labor costs – Variety of job skills required by an airline • Pilots, flight engineers, attendants, communications personnel, mechanics, ground crew, administrative – Pilot wages vary depending upon the plane they are rated to fly and union affiliation
  22. 22. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22 Cost Structure Equipment, Economies of Scale and Density • Equipment economies of scale and density – Cost per flight-hour higher for larger planes – But, cost per seat-mile lower for large planes • Example of EOS with respect to plane size (capacity) – Also, for any given plane size, low marginal cost to fill empty seats (example of econ. of density) Plane Seats Operating Cost/Hr. Operating Cost/Seat-Mile B747-400 367 $8,443 $0.046 B767-300ER 175 $3,873 $0.051 DC-9 101 $2,071 $0.069
  23. 23. Cost Structure Equipment, Economies of Scale and Density • Operating economies of scale at the firm level – Minor degree of economies of scale • Capital investment needed for integrated communication networks create some EOS • For the most part, EOS at the firm level are not significant • Significant economies of density at route level – Important consideration when choosing city-pairs to serve, and setting flight freq. and planes for each route © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23
  24. 24. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24 Rates Pricing • Many passenger fare variations – Price of same seat on flight may vary depending on restrictions at time of purchase • Advance purchase, time of day, competition – Yield management used to increase revenues and improve capacity utilization • Load factors average about 79.9% in 2007 • Cargo pricing – Based mainly on weight or cubic dimensions – Over-dimensional charge for < 8 cu ft. density
  25. 25. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25 Rates Operating Efficiency • Operating ratio = [Op. Exp./Op. Inc.] * 100 – Industry average: 1994-2000: 94.7-96.9 2007: 94.7 • Load Factor = [#Passengers/#Seats] * 100 – Industry average climbs above 70% – Relationship between load factor, plane size, and operating costPlane Seats Pass. Load Fac. Op. Cost/Hr. Op. Cost/Pass.-hr. B747-400 367 239 65.1% $8,443 $35.32 B747-400 367 80 21.8% $8,443 $105.54 DC-10 101 80 79.2% $2,071 $25.89
  26. 26. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26 Current Issues Safety and Security • Air transport has lowest accident rates • Factors affecting airline safety – Airport security and threat of airline terrorism • Administrative agencies – Department of Homeland Security – Transportation Security Administration • Security-related initiatives – Passenger and luggage screening. carry-on limitations – Screening of freight carried on passenger airlines – Substance abuse • Drug testing policies, alcohol consumption guidelines
  27. 27. Current Issues Safety and Security © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27
  28. 28. Current Issues Safety and Security © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28
  29. 29. Current Issues Technology • Sophisticated equipment and programs facilitate the achievement of high speed transport – Automated information processing programs • Air Cargo Fast Flow Program – Paperless, speeds processing through customs – Improves shipment tracking – Improves communication between connecting carriers – Air traffic control system • Potential application of GPS navigation aids – Potential to reduce operating costs, improve service, and safety – Requires high cost investment for new technology on aircraft © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29

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