Management of Transportation

1. Management of Transportation Chapter 5 The AirlineIndustry

2. 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

3. Types of CarriersPrivate 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)

4. Types of CarriersFor-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

5. Market StructureNumber 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

6. Market StructureNumber of Carriers

7. Market StructureNumber of Carriers

8. CompetitionIntermodal 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

9. CompetitionService 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

10. Operating and ServiceCharacteristicsGeneral • 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

11. Operating and Service CharacteristicsSpeed 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

12. Operating and Service CharacteristicsLength 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

13. Operating and Service CharacteristicsAccessibility 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

14. 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

15. Equipment and Facilities

16. Taxes and Fees

17. Taxes and Fees (continued)

18. Cost StructureFixed 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

19. Cost Structure Fixed vs. Variable Cost Components

20. Cost Structure, cont’dFuel 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

21. Cost StructureEquipment, 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)

22. Cost StructureEquipment, 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

23. RatesPricing • 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

24. RatesOperating 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 cost

25. RatesOperating Efficiency

26. Current IssuesSafety 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 IssuesSafety and Security

28. Current IssuesSafety and Security

29. Current IssuesTechnology • 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