Management of Transportation

Management of Transportation

Chapter 5The Airline

Industry

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 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)

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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

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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

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Market StructureNumber of Carriers

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Market StructureNumber of Carriers

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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

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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

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Operating and Service CharacteristicsGeneral•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 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

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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

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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

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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

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Equipment and Facilities

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Taxes and Fees

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Taxes and Fees (continued)17

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

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Cost Structure Fixed vs. Variable Cost Components

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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

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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)

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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

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

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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

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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

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RatesOperating Efficiency

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Plane 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

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

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Current IssuesSafety and Security

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Current IssuesSafety and Security

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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

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