Systems in Transportation: the case of the airline industry

1
Systems in Transportationthe case of the
airline industry

• by Pedro Ferreira
• for ESD.83
• November 27th, 2001

2
Outline

• Early History
• Deregulation
• Structure
• Economics
• Engineering
• Safety
• Environment
• University-based RD
• Conclusion

3
Early History

• 1903 Orville and Wilbur Wright, in NC, first
  flight with powered machine heavier than air
  (before only balloons and gliders)
• 1908 Charles Furnas, first American airplane
  passenger (flew with Orville Wright in NC)
• 1914 First scheduled air service, in FL, plane
  that could take off and land in water, designed
  by Glenn Curtiss
• WWI Increased demand for aircrafts, more
  powerful motors, larger aircrafts, but military
  focused (on the civil side, competition from
  railroads)
• Airmail Congress appropriated 100000 for
  experimental airmail service in 1917, conducted
  by the Army and the Post Office (DC-NYC)
• Beacons Night flights possible in Ohio with
  beacons visible at 10-second intervals

4
Early History

• Contract Act of 1925 (Kelly Act) Government
  moved airmail traffic to the private sector,
  using competitive bids, 5 contracts were granted
• Morrow Board Board to recommend a national
  aviation policy, chaired by Dwight Morrow, senior
  partner in JP Morgan. Government should set
  standards for civil aviation outside the military
• Air Commerce Act of 1926 Recommendations
  accepted and implemented by the Secretary of
  Commerce designate air routes, develop
  navigation systems, license pilots and aircrafts,
  investigate accidents
• Tin Goose Henry Ford bid for airmail contracts,
  in 1925 and developed the first duralumin
  aircraft, designed primarily for passengers
• Charles Lindberg First flight across the
  Atlantic ocean (NYC-Paris) in 1927, the Spirit of
  St. Louis, aviation became a more established
  industry

5
Early History

• Watres Act Designed by Postmaster General
  Walter Brown, allowed the Post Office to enter
  long-term contracts with rates based on volume
• Air Mail Act of 1934 Return of the airmail
  service again to the private sector after
  scandals in attributing routes under the Watres
  Act, also, the government forced dismantling
  vertical holding companies
• Aircraft Innovations Air-cooled engines,
  reduced weight, larger and faster planes, better
  altimeters, airspeed indicators, rate-of-climb
  indicators, compasses, artificial horizon, radio
  beacons
• Modern Airlines Boeing 247 (1933, 10 passengers
  at 155 mph), United Airlines bought 60 in 1933.
  DC-3, first passenger aircraft yielding profit
  (21 seats, 16 hours C2C)
• Pressurized Cabins introduced by Boeing in the
  Stratoliner, deriving from the B-17, could fly at
  20000 feet and reach 200 mph

6
Early History

• Civil Aeronautics Act of 1938 Creation of an
  independent agency, the Civil Aeronautics
  Authority (CAA), to regulate fares, mergers and
  routes.
• WWII In the US, mass production of planes
  (50000/year) Innovations Jet Engine (theorized
  by Newton, designed application by Whittle in
  1930, built by von Ohain in 1939) and Radar
  (British scientists in 1940)
• Cold War Fueled funding to develop jets, from
  military to commercial sector swept-back wing,
  kerosene Boeing 707, technology transfer from
  the KC-135 (jet tanker)
• Federal Aviation Act of 1958 Accidents Results
  in the creation of FAA in 1967 (along with the
  DOT) to run a broad air traffic control system,
  certification of aircraft designs, airline
  training and maintenance
• Wide-bodies and Supersonics Boeing 747 (1969, 2
  aisles, 4 engines, 450 passengers) DC-10 and
  L1011, 250 passengers Tupolev 144 (1968) and
  Concord two months later

7
Deregulation

• The airline industry is a SYSTEM it has inputs,
  serves a purpose and has acquired technological
  maturity it needs specific policy for
  development, design and management of
  dependencies and interactions among firms
• Wide-bodies boosted airline capacity oil embargo
  of 1973 skyrocketed prices
• CAB report of 1975 industry is competitive, not
  monopolistic
• Air Cargo Deregulation 1977, cargo carriers
  freedom to operate on any domestic route and
  charge whatever the market would bear
• Express Packet Delivery 1970s, express carriers
  allowed to operate overnight and according to
  demand for high-quality services
• Passenger Deregulation complete elimination of
  restrictions on routes and services by December
  1981, end of all rate regulation in January 1983.
  CAB ceased in 1985, some functions shifted to the
  DOT

8
Effects of Deregulation

• The airline industry is a SYSTEM it is
  organized as a network and the hub and spoke
  system proves to be the most efficient/profitable
  configuration
• Hubs strategically located airports used as
  transfer points for cargo and passengers,
  airlines schedule banks (dozens of planes within
  minutes) of flights in and out hubs per day. Hubs
  allow to serve far more markets with the same
  size fleet, relative to P2P service, hundreds of
  connecting flights, easier for an airline to keep
  passengers end-to-end and to achieve higher load
  factors
• New carriers (43 in 1978, doubled today) lead to
  increased competition (85 of the passengers have
  a choice of 2 or more carriers) and growth in air
  travel (240 million in 1977 to 640 million in
  1999, 80 of the US population has flown at least
  once)
• Fares have declined 35 since 1978, traveling
  public save 20 billion/year (55 due to discount
  fares, 45 increased service frequency)
• Other innovations frequent flyer programs,
  computer reservations, codesharing

9
Structure of the Industry

• The airline industry is a COMPLEX SYSTEM it has
  elements and it is organized into scales and
  levels of airlines
• What is an airline? Two certificates fitness
  (issued by the DOT, financing and management in
  place to provide scheduled service) and operation
  (issued by the FAA, requirements for operating
  aircrafts with 10 or more seats)
• Types of airlines Majors (1000 m/year),
  nationwide and worldwide service (12 US majors
  for passengers and 3 for cargo) Nationals
  (100-1000 m/y), particular regions and
  long-haul service, using medium and large-sized
  jets Regionals (20-100 m/y), within a region,
  planes up to 60 passengers
• Cargo Carriers follow the same revenue based
  taxonomy, with a different certificate from the
  DOT

10
Structure of an Airline

• Each airline is itself a SYSTEM its organic
  picture reflects the combination of functions
  assembled together to produce a final unique
  output

Line personnel
Sales and marketing
Operations
Sub-contractors
Maintenance
Reservations and ticketing
Staff personnel

• Line Personnel mechanics, pilots, flight
  attendants, reservation clerks, airport and gate
  personnel, ramp-service agents, security guards,
  
• Sub-contractors cleaning, fueling, security,
  food, maintenance (acknowledges the existence of
  a system surrounding the industry and
  inter-industry interactions)

11
Economics Management

• The airline system has very particular economics
  and therefore specific management concepts, tools
  and practices
• Airlines provide a service transport a passenger
  between two points at an agreed price. There is
  no physical product given, nor inventory created
  and stored
• Capital and Labor Intensive huge setup cost,
  needs airplanes, hangars, flight simulators. Most
  capital is financed through loans many employees
  also involved (from pilots to baggage handlers,
  from cooks to lawyers) take 1/3 of revenues
• Thin Seasonal Profit Margins net profit of 1-2
  , increases in the summer, as people take
  vacations, decreases in winter (expect for
  holidays), demand presents peaks and valleys,
  shift between through discounts and promotions
• Revenues 75 passengers, 15 cargo shippers 80
  of passengers revenues come from domestic travel,
  less than 10 pay full fares. Travel agencies,
  with computer-based systems are paramount in
  ticket sales (80)
• Costs operations, maintenance, traffic service,
  promotions, passenger service, administrative and
  amortization

12
Management Tools

• Break-even load factors of seats the airline
  has in service that it must sell at a given price
  in order to cover its costs. Usually around 66.
  Airlines operate near this margin (1-2 more seats
  on each flight make the difference between profit
  and loss)
• Seat-configurations more seats, more revenue at
  the same price, however less comfort. Analyze
  target market low price? many seats business
  community? fewer and larger seats with workspace
  at higher price
• Overbooking book more passengers for a flight
  than they have seats available rational is that
  people sometimes do not travel and unused seats
  cannot be returned to inventory for future use,
  analysis use historical flight data (overbooking
  no-shows)
• Pricing purely competitive, price changes
  according to the value given by different users
  to seats the airline goal is to maximize revenue
  in each flight offering the best menu of tickets
  (mix of full-fare, discount, upgrades). Complex
  optimization process, computer software, learning
  application
• Scheduling free since 1978, very complex
  procedure, also done using computer software,
  takes into account demand, crew availability,
  maintenance, airport restrictions, aircrafts

13
Engineering - Aircraft

• The aircraft is itself a (mechanical) SYSTEM
  engineering analysis, primarily based on Systems
  Dynamics, is largely used to improve flight
  conditions
• Bernoulli Principle airplanes fly when the
  movement of air across their wings creates an
  upward force on the plane that is greater than
  the force of the gravity (Daniel Bernoulli, 187th
  century Swiss mathematician studying fluids
  pressure exerted by a moving fluid is inversely
  proportional to its speed)

14
Engineering - Flight

• The flight can itself be seen as a SYSTEM it is
  sequence of phases with interfaces among them,
  computer simulation is used to estimate behavior,
  simulate flight, train people
• Push-back and Taxi-out doors closed, push
  aircraft (tug or power back) after clearance from
  the ATC
• Takeoff and climb release break, advance
  throttle, steering with pedals, rotate nose
  upward to leave the ground (after reaching VR),
  retract wheels
• Cruise reduce power after reaching cruising
  altitude (approved by the ATC) and follow
  airways, steering with pedals and using, for
  example, GPS
• Descent and landing keep reducing speed after
  entering the final approach area, lower land
  gear, land, pull back throttles, raise spoilers
  to disrupt airflow, brake
• Taxi-in and parking after controlling speed move
  plane to gate with own power

15
Safety and Assessment

• Accident analysis provide closed loop feedback
  control to the industry and the agencies
  enforcing safety are the mechanism to make it
  work
• Accidents are investigated by the National
  Transportation Safety Board (NTSB). In 1999,
  average of 0.3 (2 in 1978) fatal accidents per 1
  billion miles flown.
• In a typical three-month period, more people die
  on the nations highways than have died in all
  airline accidents since the advent of commercial
  aviation
• Major safety responsibility is granted to the FAA
  since 1967. It issues aircraft certification,
  operation certification (for an airline),
  certification of airline personnel and airports
  and develops and maintains the nations ATC
  system

Passengers and cargo
Transportation service
Airline industry
Design
Accidents
Safety Policy
16
Relation to the Environment

• Environmental concerns acknowledge a boundary
  between the airline industry and the remaining of
  the society and 2-way interactions across it
  that need to follow certain standards
• Fuel efficiency fuel is 10 of operating costs,
  constant research to develop more efficient
  engines and to find ways to use them just when
  needed
• Aircraft emissions 1960s, development of
  cleaner-burning combustion chambers 1970s, fuel
  price increased leading to more efficient
  engines, NOx emissions are now at 2-4 of total
  manmade, CO2 emissions around 3
• Aircraft noise major pollution challenge to the
  industry, dealt with design changes, reduction of
  the velocity of the engine exhaust (in parallel,
  the FAA has been providing grants to airports for
  soundproofing homes, schools and churches)
• Recycling, fuel management, de-icing management

17
Current University-based RD

• MIT (a good place to look at, given the strong
  relationship to the industry in wartime and
  throughout the cold war period)
• AERO/ASTRO Department, created in 1939, after the
  establishment of the Laboratory of Aeronautical
  Engineering in 1913
• Changed name in 1959 to Department of Aeronautics
  and Astronautics
• In 1963 The Center for Space Research was created
  joining the Experimental Astronomy Laboratory and
  the Space Propulsion and Man-Vehicle Laboratories
• In 1990s, the Cold War is over, focus is shifted
  to transportation, commerce and communications.
  The Cold War period lasted one academic
  generation. New faculty is eager to investigate
  in new areas for aerospace information
  engineering, vehicle engineering, systems
  architecture and engineering
• To provide students with a deep working
  knowledge of the technical fundamentals To
  educate engineers to be leaders in the creation
  and operation of new products and systems To
  instill in researchers an understanding of the
  importance and strategic value of their work

18
Current University-based RD

• It has not only laboratories in Materials (AMSL)
  and in Fluid Dynamics, but also structures as the
  Center for Information and Control Engineering,
  the Lean Aerospace Initiative, the Software
  Engineering Research Lab and the Center for
  Sports Innovation
• Exit analysis
• 1998-1999
• Further Study 4
• Industry 13 Aerospace Engineering Firms 7
  Government 1 Consulting 4 Other 1
• Military 5
• 1999-2000
• Further Study 10
• Industry 24 Aerospace Engineering Firms 8
  Government 2 Consulting 5 Other 9
• Military 3
• New courses
• 16.355J Advanced Software Engineering
• 16.36 Communication Systems Engineering
• 16.71J The Airline Industry
• 16.89 Space Systems Engineering (Dan Hastings)

19
Conclusion

• The airline industry is a network-based industry
  that lives from the interaction among the various
  parts of the system aircrafts, airports,
  passengers, aviation policy
• The airline industry and an airline are complex
  systems that require proper management concepts,
  tools and practices
• The aircraft is the result of understanding the
  dynamics of a system of air fluids and of
  designing and implementing a machine capable of
  taking advantage of that dynamic behavior to
  fulfill a purpose transport people
• The airline industry has set structures to
  analyze its behavior, particularly accidents, and
  retrofits that information into the design of the
  system and its components
• The airline industry takes into account the
  interactions to other industries, and
  particularly, to the environment, thus becoming
  part of a larger system
• RD moved from military focused (World Wars), to
  space (Cold Ward) and then to commercial
  transportation (1990s)