1. SETARA ’11
Rated by MQA
AIR TRANSPORT ECONOMICS
1
MAY 2016
EK 2403
By : A K SINHA
2. • Outline the development of the modern air transport
industry.
• Describe the regulatory framework governing the air
transport industry.
• Discuss the major determinants of costs for airlines.
• Identify the major determinants of demand for air
transport and discuss methods of forecasting and
managing demand.
• Assess the suitability of various airline route systems.
COURSE LEARNING OUTCOMES
4. • 1914 First fare paying flight across Tampa Bay
– Connecting Tampa – St. Petersburg
– Fare US$ 5 (about $115 in todays dollar)
– Mayor of St. Petersburg became the first passenger
• Airlines were progressively developed over 3 main
periods
– The formative years (1918-1938)
– The growth years (1938-1958)
– Maturity years (1958-1978)
THE HUMBLE BEGINNING
5. • Post Office Dept Service (1918)
– First regular air mail route linked New York – Washington DC
– Joint venture between Post Office and War Dept
– Experimented regular night flying
– Lighted airways developed
– Weather forecasting and reporting system developed
– Development of aircraft designed to carry mail
THE FORMATIVE YEARS
11. • Civil Aeronautics Act 1938
– Civil Aeronautic Authority was formed to oversee safety
regulation
– Formation of Civil Aeronautics Board (CAB) 1940 for economic
regulations
– Regulations of:
• Passengers fare
• Air mail rates
• Route entry and exit
• Mergers and acquisition
• Intercarrier agreements
• FAA formation in 1958
Significant Historical Events in USA
12. • Main objective is to promote competition
• Relied in competition to provide efficient, innovative, low
price and good service air travel
• Promoted by Alfred Edward Kahn, then CAB chairman
• Airline Deregulation Act passed in 1978
• Restriction of entry into service is eliminated in 1981, as
long as CAB find the applicant that is “fit, willing and
able”
• New entrance must also pass FAA safety test
Airline Deregulation 1978
13. • Competition among established carries
– Formation of mega carriers as a result of bankruptcy of some
legacy carriers
– Development of hub and spokes systems
• Frequent flyers program
• Complex reservation systems
• Intense competition from new entrance
Immediate Consequences of Deregulations
14. • Paris Convention 1919
– Agreed that each nations has complete and exclusive
sovereignty of airspace above its territory
– US and Russia did not sign the agreement
• Havana Convention 1928
– Guaranteed the innocent right of passage
– Formulations of rules on air navigations, landing facilities, pilot
standards
– Right to set route to be flown over its territory
International Aviation History
15. • Warsaw Convention 1929
– The terms of “international carriage” is defined
– Limitation of air carries liability
– Requirements of passengers ticket and luggage tag
– Replaced by Montreal Convention of 1999
International Aviation History
16. • Chicago Convention 1944
– The needs of bilateral agreement air services agreement to
commence international aviation services
– Established the “Freedoms of the Air”
– Set the stage for the establishment of ICAO
• Convention on International Civil Aviation
– Ratified in 4 April 1947
– Officially formed the International Civil Aviation Organization
(ICAO)
– A specialized body under UN
International Aviation History
17. • ICAO has identified 9 freedoms (originally 5), but not all
are in practice or adopted by contracting states.
• Refer to Boeing’s slide
– (source: www.boeing.com)
Freedoms of the Air
18. • Agreement that formalized air transport services
between 2 countries
• The agreement controls:
– Market access
– Market entry
– Market pricing
• Degree of freedom will be specified
• Service frequencies (usually specified in weekly)
• Aircraft size may also be specified
Bilateral Air Services Agreement
19. • Bermuda Agreement 1946
– 1st bilateral agreement signed between US and UK
• Bermuda 2 Agreement 1977
• Both agreement put various restrictions on how air
services can be served by the airlines from both
countries
– Routes (Cities pairs can be served by the airlines)
– Airport access
– Fares
• Bermuda 2 had been amended several times to remove
some restrictions
Bilateral Services Agreement
20. • Agreement between countries (or union of countries, ie
EU, ASEAN) to liberalized air transport services
• Removed restrictions in bilateral service agreement
• Some open skies agreement relaxed foreign ownership
of local airlines
• US started to pursue open skies policies by passing the
International Air Transportation Competition Act of 1979
• Further info:
– http://europa.eu/legislation_summaries/external_relations/relatio
ns_with_third_countries/industrialised_countries/l24483_en.htm
– http://www.state.gov/e/eb/tra/ata/
Open Skies Policies
21. • How is Airline Deregulation Act 1978 significant to the
airline industry?
• Discuss the meaning of cabotage.
• Why some countries are againts cabotage?
• Discuss few major restrictions covered in Bermuda 2
agreement?
• In what way the Bermuda 2 agreements affecting the
airlines (both UK and US) economically?
• Discuss the term “international carriage” as defined in
Warsaw Convention 1929.
Tutorial 1
