This document provides an overview of the airline industry. It discusses how rail transportation was dominant until the early 20th century, and how the development of airplanes in 1903 began the rise of air transportation. The airline industry was launched in the 1920s through government subsidies of air mail routes. Major topics covered include types of carriers (private vs for-hire), market structure/competition, operating characteristics, equipment/facilities, costs, and taxes/fees involved in air transportation.

1. Management of
Transportation
Seventh Edition
Coyle, Novack, Gibson &
Bardi
© 2011 Cengage Learning
Chapter 7
The Airline
Industry
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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

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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

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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. 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
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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. Market Structure
Number of Carriers
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8. Market Structure
Number of Carriers
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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

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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

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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

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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

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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. 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
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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. Equipment and Facilities
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17. Taxes and Fees
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18. Taxes and Fees (continued)
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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. Cost Structure
Fixed vs. Variable Cost Components
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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

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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. 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
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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

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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

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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. Current Issues
Safety and Security
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28. Current Issues
Safety and Security
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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
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