Chapter 7 Airlines

[Audio] Welcome to TL 882, today we will talk about chapter 7 airlines..

[Audio] Outlines: Development and significance of the airline industry Overview of the airline industry market structure and competition Operating and service characteristics of air carriers Air carrier equipment Cost structure and air service pricing Current issues facing the airline industry.

[Audio] Development and Significance of the Airline Industry.

[Audio] The wright brothers made their first flight in 1903 and sold it to the federal government. US Post office began development of air transportation in 1908 for air mail service. Airplane was used during World War I ( 1919- 19918) but the use of airplanes for mail transport can be considered the beginning of modern air industry. Passenger transportation service as a by-product of the main business and began to flourish. Speed of the airplane coupled with more competitive pricing has led to the growth of air transportation..

[Audio] Airline industry is very dependent on passenger revenues to maintain its financial viability. Although their share of freight movement on a ton-mile basis is small, the type of traffic that they carry (high-value, perishable, emergency) make them an important part of our total transportation system.

[Audio] Overview of the Airline Industry. Overview of the Airline Industry.

[Audio] Private air carrier is a firm that transports company personnel or freight in planes that it owns or leases. The for-hire carries cannot be easily categorized into specific types because carriers provide many types of services. Similar as for railroads, classification can be categorized based on annual operating revenues: Major (more than 1 billion annual revenue, 13 of them), Nationals (between 100 million and 1 billion) such as Frontier, and regionals (less than 100 million) such as Atlantic coat airlines Based on types of services they can be categorized as air taxis (or charter carriers, small or medium aircraft to transport people or freight, often provide transportation service for bands, or athletic teams or travel tour groups), all cargo (primarily transports cargo, after deregulation in 1977 all cargo carrier can set their rates freely, FedEx, UPS), commuter (typically regionals carriers, publish timetables on specific routes) , and international (operate between US and foreign countries, since the service has an effect on US international trade and relations, US president) Deregulation in 1977 result in a larger number of airlines but the number of airlines has stay steady over the last several years..

[Audio] More than 96% of total industry revenue was generated by the top 10 carriers. In general the major revenue source for air carriers is passenger transportation, from 2016 to 2017, about 99.2% of total operating revenue miles were derived from passenger transportation, air dominates the for-hire, long-distance passenger transportation. For freight air service, the majority of freight are high-value and/or high emergency.

Market Structure ( cont ). The Table has 10 rows and 8 columns. The columns have the following headings from left to right. Airline rank, Passengers in millions, Airline rank, passenger miles in millions, Airline rank, Freight ton miles in millions, Airline rank, Total operating revenues in millions. The row entries are as follows. Row 1. Airline rank, Southwest. Passengers in millions, 151740. Airline rank, American. passenger miles in millions, 198832. Airline rank, Fed Ex. Freight ton miles in millions, 10791. Airline rank, U P S. Total operating revenues in millions, 60906. Row 2. Airline rank, American. Passengers in millions, 144190. Airline rank, Delta. passenger miles in millions, 189707. Airline rank, U P S. Freight ton miles in millions, 7741. Airline rank, Fed Ex. Total operating revenues in millions, 50365. Row 3. Airline rank, Delta. Passengers in millions, 142286. Airline rank, United. passenger miles in millions, 185187. Airline rank, Atlas. Freight ton miles in millions, 3516. Airline rank, American. Total operating revenues in millions, 40422. Row 4. Airline rank, United. Passengers in millions, 99770. Airline rank, Southwest. passenger miles in millions, 124801. Airline rank, United. Freight ton miles in millions, 2805. Airline rank, Delta. Total operating revenues in millions, 39850. Row 5. Airline rank, Jet Blue. Passengers in millions, 38241. Airline rank, JetBlue. passenger miles in millions, 45627. Airline rank, Polar Air Cargo. Freight ton miles in millions, 2680. Airline rank, United. Total operating revenues in millions, 36556. Row 6. Airline rank, SkyWest. Passengers in millions, 31205. Airline rank, Alaska. passenger miles in millions, 32804. Airline rank, American. Freight ton miles in millions, 2430. Airline rank, Southwest. Total operating revenues in millions, 20425. Row 7. Airline rank, Alaska. Passengers in millions, 24370. Airline rank, Spirit Airlines. passenger miles in millions, 21582. Airline rank, Delta. Freight ton miles in millions, 1980. Airline rank, Jet Blue. Total operating revenues in millions, 6632. Row 8. Airline rank, Express Jet. Passengers in millions, 22184. Airline rank, Sky west. passenger miles in millions, 17548. Airline rank, Kalitta Air. Freight ton miles in millions, 1557. Airline rank, Alaska. Total operating revenues in millions, 5828. Row 9. Airline rank, Spirit Airlines. Passengers in millions, 20998. Airline rank, Frontier. passenger miles in millions, 15876. Airline rank, Southern Air. Freight ton miles in millions, 1058. Airline rank, Hawaiian Air. Total operating revenues in millions, 2442. Row 10. Airline rank, Frontier Airlines. Passengers in millions, 14773. Airline rank, Hawaiian Air. passenger miles in millions, 15465. Airline rank, A B X. Freight ton miles in millions, 674. Airline rank, Spirit Airlines. Total operating revenues in millions, 2322..

[Audio] Due to their unique service, air carriers face limited competition from other modes for either passengers or freight as they have an advantage in providing time-sensitive, long-distance movement of people or freight Competition in rates and service among air carriers is very intense, even though the number of carriers is small. New entrants to the airline market initially cause overcapacity to exist on many routes. To counter this and add passengers to their aircraft, carriers reduce prices and fare wars begin. Carrier to expand their market coverage will reduce the prices, financially week carrier will have to exit the market Carrier may also have excess capacity and attempt to attract passengers by lowering fare to fill the empty seat.

[Audio] Competition in airline service takes many forms. Service competition exist in the form of frequency and timing of flights on a route. Carrier attempt to provide flights at the time of day when passengers want to fly. Flight departures are most frequent in the early morning ( 7- 10am） and late afternoon（ 4- 6pm). Other attempts are differentiate service through advertising such as on-time arrival, friendly employees, live satellite television on seat, frequent flyer programs and other special services. No-frills service charges fares are lower than that of a full-service air and passengers receive limited snacks/ drinks. In general, fewer airline employees involved in no-frills services operation which contribute to lower costs. Cargo Competition has become intense. Major airline freight companies ( UPS, FedEx) have their own fleets of surface delivery vehicles to perform the ground portion of door-to-door service resulting low transit time. Competition for non-passenger travel will become even greater as more carriers attempt to eliminate excess capacity resulting from currently reduced passenger travel patterns..

[Audio] Operating and Service Characteristics of Air Carriers.

[Audio] Speed of service is the major advantage of air transportation. It can be dampened by reduced frequency of flight schedule and congestion at airports. The Hub-and-Spoke terminal approach have aggravated the ground congestion at major airports. Speed and reliability of the service are equally important for the customers. Adverse weather is the main reason cause the unreliable service. On-time departures and arrivals are within 15 minutes of scheduled time. Definition: departure time is defined as the time the aircraft door is closed and in passenger aircraft, it is the time that the aircraft is pushed away from the gate. Arrival time is defined as the time when the aircraft wheels touch down on the runway. Accessibility is one disadvantage of air carriers. Bother passenger and freight must be transported to an airport for air service to be rendered. It adds s time and cost to the air service..

[Audio] Partial table 7- 2 is shown here, with the largest air craft having 370 seats and the smaller one with only 33 seats ( SD340B) Seat capacity, payload, speed, size, fuel efficiency, and operating cost..

[Audio] The air carriers' terminals ( airports) are financed by a government entity. The carries pay for the use of the airport through landing fees, rent and lease payment As carrier operations become more complex, certain airports become Hubs. Flights from outlying, less-populated areas are fed into the hub airport, where connecting flights are available to other areas of the region. Chicago, Denver, and Washington-Dulles are major hub airports for United airlines. Delta uses the Atlanta and Cincinnati airports as hub. Hub airport is similar to the motor carrier's break-bulk terminal.

[Audio] Cost Structure and Air Service Pricing. Cost Structure and Air Service Pricing.

[Audio] We look at air carrier industry cost structure from fixed cost + variable cost perspective Different than rail industry, air carriers' cost structure consists of high variable cost and low fixed cost thanks state and local government investment and operations on airports and airways. Airlines are considered as labor intensive compared to other modes, and there has been much effort put forth to decrease labor costs. (can you think of why?). Wages vary with pilot's equipment rating and whether a person works for union airline or not. escalating fuel costs have caused problems in the past for airlines. Development on fuel-efficient planes have been the focus for airlines. ( examples, smaller planes on low-density routes, commuter lines pick up the abandoned routes by major and national carriers. Result decrease on average cost per gallon of fuel but increase on total fuel consumption) Safety regulations are administrated by the FAA with acceptable flight operation, hours of service, specifics for pilots..

[Audio] Economies of density also exists when a carrier has significant volume between an origin-destination pair to fully utilize capacity on forward haul movements as well as utilize significant capacity on back-haul movement. Hubs are important Subsidies (public service revenues) to air carriers to provide service to less-populated area. Subsidies is intend to ensure air carrier service over particular routes where operating expense exceed operating incomes. The subsidies enable regional carriers to provide service to less-populated areas that otherwise would probably not have air service..

[Audio] This over-dimensional charge is used to gain more appropriate revenue from shipments that take up a lot of space but do not weigh much.

[Audio] Operating ratio measures the portion of operating revenue that goes to operating expenses. Operating ratio was high around 95 before 2000. in 2017, this ratio was 91.7. When this ratio exceed 100, a loss is incurred. Another widely used measure of operating efficiency is load factor. It measures the percentage of a plane's seats utilization. Airline have raised plane load factor to the low 80 range..

[Audio] A route requires one hour to traverse and has a load factor ratio of 0.65 (demand=0.65*367= 239), the average operating cost per passenger for a 747 aircraft is $ 35.39 ( $ 8,443 per hour divided 367 seats*0.65 load factor). If the demand drops to 80 passenger, the new load factor would be 0.218 ( 80/367), hourly operating cost per passenger would be $ 105.54 ( 8443/80). At this level of demand, the carrier would substitute to a smaller plane such as 727 or DC9. The load factor for DC- 9 would be 0.792 ( 80/101), average operating cost would be $ 25.89 ( $ 2071/80) Equipment substitution might not be possible. Substitution might results in excess capacity..

[Audio] Current Issues Facing the Airline Industry.

[Audio] Safety: safest way for passenger travel; severity of damage if incident happens ( passenger and public). Strict drug-testing policies and alcohol consumption guidelines are in effect for pilots and other aircraft personnel. Security: 9/ 11/2001 gave rise to establishment of the Department of Homeland Security ( DHS, 2002) as well as the Transportation Security Administration ( TSA, 2001). Both agencies are responsible for the safety of passengers while in airports and in-flight. Technology: airlines attract business by providing high-speed transportation, then it constantly needs more sophisticated equipment to facilitate high-speed operation.

[Audio] The airline industry is dominated by revenue from passenger service. Both private (predominantly passenger movement) and for-hire carriers operate as part of the airline industry. Air carriers have an advantage in providing time-sensitive, long-distance movement of people and small shipments of high-value, perishable, and/or emergency freight. Airlines face limited intermodal competition but intense intramodal competition in terms of pricing and service. Airline's cost structure is highly variable in which fuel and labor costs are important elements. Current issues facing the airline industry revolve around safety, security, and the continued need to update technology..