Air Transport in the 21st Century

1
Air Transport in the 21st Century

• Strong evidence to show that our global system is
  dependent upon air travel
• Civil aviation began in 1920s with earlier
  precursor in Germany pre-WW I
• High costs restricted widespread use of air
  travel
• But since 1960s declining costs have made
  recreational air travel commonplace
• Air freight increasingly important
• What are the defining characteristics of
  contemporary air transport?

2
Technology Driven Industry

• Through a cascade of innovations, technology has
  dramatically altered the size, range, speed and
  safety of aircraft
• Boeing 777 advanced technology and extended
  range, smaller crew
• Airbus 380- 555 passengers, range of 9,200 miles
  and 30 larger payload than the Boeing 747-400
  and operating costs 15-30 lower

3
The Dominance of Boeing and Airbus

• These two firms account for virtually all sales
  of aircraft with gt100 seats
• Aircraft manufacturing is a huge global
  production network
• B777 uses 3 million parts
• Japanese (fuselage), Italian (wing flaps), Canada
  (landing gears) and others are involved
• Highly competitive business with huge lobbying
  efforts required
• Does Airbus have an unfair advantage?

4
Technology Dynamics

• Concorde became the travel mode for the
  ultra-rich
• Mach 2 at 58,500 feet
• But extremely expensive and noisy
• Plus plagued by safety doubts
• Retired in October, 2003

5
Boeing 7E7 www.newairplane.com

• New environmentally sensitive aircraft 2007
• 15-20 less fuel than conventional wide bodies
• 200-250 passengers
• 7,500-8,000 nautical miles (Seattle-Moscow,
  Sydney- Dallas, Paris- Honolulu, Shanghai-
  Johannesburg)
• Mach .85 (85 of Speed of Sound)

6
Rise of the Airline Industry

• Prior to 2001, five decades of uninterrupted
  growth strong passenger and cargo growth
• Air fares have declined to make air travel more
  accessible to larger numbers of people
• Postwar safe and secure setting- pax Americana
• Broad geographic scale of economic activity
• Liberalization and greater freedom to set fares
  and open up new routes

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Deregulation of the U.S. Airline Industry

• Prior to 1978 airlines were subject to regulation
  by Civil Aeronautics Board
• Regulated level and structure of fares, entry of
  new carriers in general and in specific links
• In 40 years of regulation no new entry occurred
  in scheduled services
• Why regulation?

9
Reasons for Regulation

• Felt necessary to insure future economic growth
• Depression era produced a suspicion of free
  markets and potential havoc
• Feeling that excessive competition would produce
  instability in the infant industry
• Protect profitability of individual carriers and
  constrain growth of larger carriers

10
Winds of Change Deregulation

• By late 1970s restrictive policies of CAB came
  under attack
• Proponents of less government influence argued
  that lack of competitive threat dampened
  incentives for efficient airline operations
• Restrictions on price competition forced airlines
  to pursue non-price strategies such as schedule
  frequency, non-stop services, in-flight amenities
• Result was that airlines charged excessive fares
  and offered inefficient levels of service.
• Paid too little attention to controlling labor
  and other costs- no competitive pressures to
  deliver

11
Airline Deregulation Act 1978

• Gradual decontrol took place and CAB was phased
  out by 1985
• Initial consequences downward pressure on fares
  and price wars
• Load factors (level of occupancy) increased
• Route rationalization see next slide
• New aggressive entry- 25 new carriers between
  1978 and 1982
• Continued increase in employment

12
Route Rationalization

• Basically how can and have carriers changed their
  routing to enhance competitive position?
• Increase average length of haul- add longer
  routes and delete shorter ones
• Minimize cost of serving market and fare by
  flying larger aircraft at high load factors-use
  of wide bodies
• Route diversification reduce seasonality,
  improve traffic mix tourism, elderly, business,
  education
• Improve fleet utility

13
Hub and Spoke Networks
14
Changes in Route Structure

• Prior to deregulation services were taking place
  on a point-to-point basis.
• Two airline companies (red and blue) are
  servicing a network of major cities.
• Some direct connections exist, but mainly at the
  expense of the frequency of services and high
  costs (if not subsidized).
• Also, many cities are serviced by the two
  airlines and connections are inconvenient.

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Changes in Route Structure

• With deregulation, hub-and-spoke networks emerge
• Consequence is each airline assumes dominance
  over a hub (red airline over the orange hub and
  blue airline over the light blue hub) and
  services are modified so the two hubs are
  connected to several spokes.
• Both airlines tend to compete for flights between
  their hubs and may do so for specific spokes, if
  demand warrants it.
• However, as network matures, it becomes
  increasingly difficult to compete at hubs as well
  as at spokes, mainly because of economies of
  agglomeration.

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Changes in Route Structure

• As an airline assumes dominance of a hub, it
  reaches oligopolistic (if not monopolistic)
  control and may increase airfares for specific
  segments.
• The advantage of such a system for airlines is
  the achievement of a regional market dominance
  and higher plane loads, while passengers benefit
  from better connectivity
• But there are delays for connections and need to
  change planes more frequently

17
Advantages of Hub and Spoke

• By combining passengers with different origins
  and destinations, average passengers per flight
  will increase
• Traffic feed permits more frequent service or
  service with larger aircraft
• Either service strategy allows carrier to realize
  density economies
• For example double of flights w/o increasing
  ground crew
• Larger aircraft more economical in fuel use and
  labor costs
• Density economies allow larger carriers to offset
  input costs advantages of new entrants

18
Changing Winds Again 1990s

• Airlines order new, efficient and expensive
  aircraft anticipating increased air travel
• Higher jet fuel prices
• Depressed economy reduces demand
• Gulf War frightens tourist traffic
• Inefficiencies of hub and spoke raised
• Both United and American turn over short
  unprofitable routes to low cost or commuter
  airlines
• Demise of Eastern and Pan Am- Continental and
  TWA bankruptcy
• Low fare entrants Southwest
• September 11 further impacts carriers

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Crisis in the Airlines

• Global airline industry suffered worst year ever
  in 2001- losing US11.6 billion
• Sabena and Swissair collapsed
• United Airlines and US Air announced
  bankruptcy-both are still under Chapter 11
  currently
• Huge number of aircraft were idled
• What is the cause(s) of this state?

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Causes of Airline Crisis

• Airline industry has never really been
  profitable- why?
• Ordering of aircraft years in advance tends to
  foster boom-bust cycle
• Pervasive involvement of state has diverted
  industrys emphasis on profit making
• Romance of air travel draws overinvestment
• Economists argue that this is an empty core
  industry meaning a tendency towards
  unprofitability

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Structure of Airline Costs

• Fixed/Overhead- carriers capital especially
  aircraft 17
• Operating-Direct-dependent on type of aircraft
  flight crew, fuel, maintenance, depreciation,
  landing fees, leasing 60
• Operating-Indirect- passenger related passenger
  services, ticketing, station and ground costs,
  administrative 23

23
Labor Costs

• Labor costs represent significant proportion of
  total operating costs
• 1998 North America USAir 40 Delta 39 United
  38
• 1998 Europe Air France 34 BA 28 KLM 28
• 1998 Asia Korean 17 Thai 17 SIA 17 JAL 15

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Strategies for Reducing Labor Costs

• Private European carriers set crisis measures to
  reduce costs
• State owned carriers reduced costs as part of
  restructuring to qualify for EC aid
• Renegotiate terms and conditions of employment
  and cut staff numbers
• Set up low cost subsidiaries with lower wage
  scales-outsourcing loss making routes to low cost
  carriers
• Stock options for employees- UA offered shares to
  unions and 3 of 12 seats on Board in exchange for
  pay cuts

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The Plight of US Airways

• In early days of deregulation, USAir one of most
  profitablemonopoly in Northeast
• Wave of consolidation- USAir purchased Pacific
  Southwest and Piedmont -- 6 rank
• Both had lower cost structures but USAir rejected
  this
• 1990s scaled back and plugged plug on western
  routes but did not scale down crew bases,
  reservations centers, and training facilities
• Lead in east with hubs at Pittsburgh,
  Philadelphia and Charlottecaptive travelers
• CEO Wolf returns airline to profitability Airbus
  fleet, European destinations, closed facilities

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US Airways Plight contd

• Convinced pilots union to let airline buy
  regional jets
• Made labor concessions in exchange and to stave
  off strikes
• Endured by charging high fares to business
  customers but undermined by Internet
• In 2000 acquired by United for 4.3 bil and
  assumption of 7.3 bil debt
• Sept 11 hurt by slowdown and entered
  bankruptcy--900 mil loan guaranteed from Federal
  government allows it to emerge
• Southwest forced competition at Philadelphia
  hub-back to bankruptcy

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The Regional Jet Phenomenon

• Additional impact of deregulation was growth of
  feeder airlines
• Growth of RJs- 50 and 70 seat aircraft
• Range and speed of larger jets
• Cost less to purchase 23 mil vs 52 mil A320
• Burn less fuel
• Crews paid less
• Allows airlines to cope with fluctuating demand

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No Frills Airlines

• Financial viability of airlines is uncertain
• One response is to create low-cost, no-frills
  operations
• Lower fares, select destinations, no food,
  e-tickets, first come seat assignments, strict
  baggage allowance
• One type of aircraft B737 or A320
• Such carriers now account for 20 of seats
  nationwide

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No Frills Prototype

• Southwest Airlines begun over 30 years ago by
  Herb Kelleher
• 4th largest airline in U.S., 64 mil passengers
  annually to over 60 cities
• 355 aircraft less than 9 years old
• Based upon sound management principles
• Operates in largely short haul, low margin
  markets and eschews hub and spoke to better use
  aircraft and personnel in quick turnaround

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Southwest Airlines
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jetBlue Airways
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Air Tran Airlines
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Where the Future Touches DownAirports in a
Globalizing World

• Huge increases in air traffic have concentrated
  in a handful of airports
• Hubs paramount feature of the industry
• Major hubs whether for passenger or cargo
  articulate relations between regional economies
  and broader global economy
• Thus governments at all levels have invested
  heavily in new airports and upgrades

34
Major Passenger and Cargo Airports2002
Passengers (mil) and (metric tons)

• (1) Atlanta 76.9 (2) Chicago (66.5) (3) London
  Heathrow (63.3) (4) Tokyo (61.1) (5) LAX (56.2)
  (6) DFW (52.8) (7) FKT (48)
• (1) Memphis (3390) (2) Hong Kong (2516) (3)
  Anchorage (2027) (4) Tokyo Narita (2000) (5) LAX
  (1758) (6) Seoul (1705) (7) Singapore (1660) (8)
  FKT (1631) (9) Miami (1624) (10) NY-JFK (1574)
  (11) Louisville (1523)

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Atlanta Hartsfield IAhttp//www.aci-na.org/docs/U
S_Econ_Impact.pdf

• 75 million passengers annually
• 45K direct jobs,3.5K air freight, 2.1 ground
  transport
• Total payroll 1.9 bil
• Indirect impact of 3.8 bil on local-regional
  economy
• 17.3 bil total annual regional impact

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Ultra-Global Hubs Singapores ChangiAirport

• Opened in July 1981
• 2002 Passengers 29 mil
• 2002 Cargo 1,660,000 metric tons
• In 2006 Terminal 3 additions will add 20 mil
  passenger capacity bringing total to 64 mil
• Free Skytrain service between the terminals
• Mini edge city shopping

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Malaysias Super Multi Media Corridor
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Kuala Lumpur InternationalAirport www.klia.com.my

• Opened in 1998
• Express rail link 27 minutes from downtown KL
• Part of the Super Multi Media Corridor technology
  drive
• Destination itself
• Competing with Changi

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Schiphol Airport, Amsterdam

• 9th largest in world
• 40,736,009 passengers in 2001 and a 3 AGR
• 1,288,624 metric tons in 2001 and a 4.4 AGR
• Gateway to a nation with strong travel industry
• http//www.schiphol.nl

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Bluegrass Non-Stop Destinations

• Y2000- 4 non-stops Y2005-12 non-stops
• New York, Newark, Philadelphia, Pittsburgh,
  Washington, DC
• Atlanta, Charlotte, Orlando, Dallas, Houston,
  Memphis, St Louis
• Chicago ORD and Midway, Cincinnati, Detroit,
  Cleveland
• To be added in Y05-07-Denver and Minneapolis
• 4-5 percent increases in traffic per annum

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Direct Flight Connections 2004
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Controversies and Externalities

• Noise and conflicting land uses are the major
  problems
• Noise pollution severely limited the utility of
  the Concorde because it could not attain
  supersonic speed over land
• Airports occupy relatively little land
  areaOHare occupies only 9 sq mi- but proximity
  to cities is critical
• New runways and runway extensions are
  controversial topics

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OHare Airport Expansionhttp//www.flychicago.com
/ohare/about/about.shtm

• FAA approves 15 billion expansion to nations
  most delay prone airport
• 8 Year plan calls for 6 parallel and two diagonal
  runways
• 440 acres expansion requires city purchase and
  raze 550 homes, relocate 200 businesses and a
  cemetery dating to 1800s
• Claim to save 12 billion over two decades by
  reducing passenger and aircraft delays