Air Transport in the 21Air Transport in the 21stst Century Century

Strong evidence to show that our global Strong evidence to show that our global system is dependent upon air travelsystem is dependent upon air travel

Civil aviation began in 1920s with earlier Civil aviation began in 1920s with earlier precursor in Germany pre-WW Iprecursor in Germany pre-WW I

High costs restricted widespread use of air High costs restricted widespread use of air traveltravel

But since 1960s declining costs have made But since 1960s declining costs have made recreational air travel commonplacerecreational air travel commonplace

Air freight increasingly importantAir freight increasingly important What are the defining characteristics of What are the defining characteristics of

contemporary air transport?contemporary air transport?

Technology Driven IndustryTechnology Driven Industry

Through a cascade of innovations, Through a cascade of innovations, technology has dramatically altered the technology has dramatically altered the size, range, speed and safety of aircraftsize, range, speed and safety of aircraft

Boeing 777 – advanced technology and Boeing 777 – advanced technology and extended range, smaller crewextended range, smaller crew

Airbus 380- 555 passengers, range of Airbus 380- 555 passengers, range of 9,200 miles and 30% larger payload 9,200 miles and 30% larger payload than the Boeing 747-400 and operating than the Boeing 747-400 and operating costs 15-30 % lower costs 15-30 % lower

The Dominance of Boeing and AirbusThe Dominance of Boeing and Airbus

These two firms account for virtually all sales of These two firms account for virtually all sales of aircraft with >100 seatsaircraft with >100 seats

Aircraft manufacturing is a huge global Aircraft manufacturing is a huge global production networkproduction network

B777 uses 3 million partsB777 uses 3 million parts Japanese (fuselage), Italian (wing flaps), Canada Japanese (fuselage), Italian (wing flaps), Canada

(landing gears) and others are involved(landing gears) and others are involved Highly competitive business with huge lobbying Highly competitive business with huge lobbying

efforts requiredefforts required Does Airbus have an unfair advantage? Does Airbus have an unfair advantage?

Technology DynamicsTechnology Dynamics

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

Boeing 7E7 www.newairplane.comBoeing 7E7 www.newairplane.com New environmentally New environmentally

sensitive aircraft 2007sensitive aircraft 2007 15-20% less fuel than 15-20% less fuel than

conventional wide conventional wide bodiesbodies

200-250 passengers200-250 passengers 7,500-8,000 nautical 7,500-8,000 nautical

miles (Seattle-Moscow, miles (Seattle-Moscow, Sydney- Dallas, Paris- Sydney- Dallas, Paris- Honolulu, Shanghai- Honolulu, Shanghai- Johannesburg)Johannesburg)

Mach .85 (85% of Mach .85 (85% of Speed of Sound)Speed of Sound)

Rise of the Airline IndustryRise of the Airline Industry

Prior to 2001, five decades of uninterrupted Prior to 2001, five decades of uninterrupted growth: strong passenger and cargo growthgrowth: strong passenger and cargo growth

Air fares have declined to make air travel Air fares have declined to make air travel more accessible to larger numbers of peoplemore accessible to larger numbers of people

Postwar safe and secure setting- Postwar safe and secure setting- pax pax AmericanaAmericana

Broad geographic scale of economic activityBroad geographic scale of economic activity Liberalization and greater freedom to set Liberalization and greater freedom to set

fares and open up new routesfares and open up new routes

Deregulation of the U.S. Airline Deregulation of the U.S. Airline IndustryIndustry

Prior to 1978 airlines were subject to Prior to 1978 airlines were subject to regulation by Civil Aeronautics Boardregulation by Civil Aeronautics Board

Regulated level and structure of fares, Regulated level and structure of fares, entry of new carriers in general and in entry of new carriers in general and in specific linksspecific links

In 40 years of regulation no new entry In 40 years of regulation no new entry occurred in scheduled servicesoccurred in scheduled services

Why regulation?Why regulation?

Reasons for RegulationReasons for Regulation

Felt necessary to insure future economic Felt necessary to insure future economic growthgrowth

Depression era produced a suspicion of Depression era produced a suspicion of free markets and potential havocfree markets and potential havoc

Feeling that excessive competition would Feeling that excessive competition would produce instability in the infant industryproduce instability in the infant industry

Protect profitability of individual carriers Protect profitability of individual carriers and constrain growth of larger carriersand constrain growth of larger carriers

Winds of Change: DeregulationWinds of Change: Deregulation By late 1970s restrictive policies of CAB came By late 1970s restrictive policies of CAB came

under attackunder attack Proponents of less government influence argued Proponents of less government influence argued

that lack of competitive threat dampened that lack of competitive threat dampened incentives for efficient airline operationsincentives for efficient airline operations

Restrictions on price competition forced airlines Restrictions on price competition forced airlines to pursue non-price strategies such as: schedule to pursue non-price strategies such as: schedule frequency, non-stop services, in-flight amenitiesfrequency, non-stop services, in-flight amenities

Result was that airlines charged excessive fares Result was that airlines charged excessive fares and offered inefficient levels of service.and offered inefficient levels of service.

Paid too little attention to controlling labor and Paid too little attention to controlling labor and other costs- no competitive pressures to deliverother costs- no competitive pressures to deliver

Airline Deregulation Act 1978Airline Deregulation Act 1978

Gradual decontrol took place and CAB was Gradual decontrol took place and CAB was phased out by 1985phased out by 1985

Initial consequences: downward pressure on Initial consequences: downward pressure on fares and ‘price wars’fares and ‘price wars’

Load factors (level of occupancy) increased Load factors (level of occupancy) increased Route rationalization –see next slideRoute rationalization –see next slide New aggressive entry- 25 new carriers New aggressive entry- 25 new carriers

between 1978 and 1982between 1978 and 1982 Continued increase in employmentContinued increase in employment

Route RationalizationRoute Rationalization Basically how can and have carriers Basically how can and have carriers

changed their routing to enhance changed their routing to enhance competitive position?competitive position?

Increase average length of haul- add Increase average length of haul- add longer routes and delete shorter oneslonger routes and delete shorter ones

Minimize cost of serving market and fare Minimize cost of serving market and fare by flying larger aircraft at high load by flying larger aircraft at high load factors-use of wide bodiesfactors-use of wide bodies

Route diversification: reduce seasonality, Route diversification: reduce seasonality, improve traffic mix: tourism, elderly, improve traffic mix: tourism, elderly, business, educationbusiness, education

Improve fleet utilityImprove fleet utility

Hub and Spoke NetworksHub and Spoke Networks

Changes in Route StructureChanges 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.

Changes in Route StructureChanges 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.

Changes in Route StructureChanges 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

Advantages of Hub and SpokeAdvantages of Hub and Spoke By combining passengers with different origins By combining passengers with different origins

and destinations, average passengers per flight and destinations, average passengers per flight will increasewill increase

Traffic feed permits more frequent service or Traffic feed permits more frequent service or service with larger aircraftservice with larger aircraft

Either service strategy allows carrier to realize Either service strategy allows carrier to realize density economiesdensity economies

For example double # of flights w/o increasing For example double # of flights w/o increasing ground crewground crew

Larger aircraft more economical in fuel use and Larger aircraft more economical in fuel use and labor costslabor costs

Density economies allow larger carriers to Density economies allow larger carriers to offset input costs advantages of new entrantsoffset input costs advantages of new entrants

Changing Winds Again : 1990sChanging Winds Again : 1990s

Airlines order new, efficient and expensive Airlines order new, efficient and expensive aircraft anticipating increased air travelaircraft anticipating increased air travel

Higher jet fuel pricesHigher jet fuel prices Depressed economy reduces demandDepressed economy reduces demand Gulf War frightens tourist trafficGulf War frightens tourist traffic Inefficiencies of hub and spoke raisedInefficiencies of hub and spoke raised Both United and American turn over short Both United and American turn over short

unprofitable routes to low cost or commuter unprofitable routes to low cost or commuter airlinesairlines

Demise of Eastern and Pan Am- Continental Demise of Eastern and Pan Am- Continental and TWA bankruptcyand TWA bankruptcy

Low fare entrants: SouthwestLow fare entrants: Southwest September 11 further impacts carriers September 11 further impacts carriers

Crisis in the AirlinesCrisis in the Airlines Global airline industry suffered worst Global airline industry suffered worst

year ever in 2001- losing US$11.6 year ever in 2001- losing US$11.6 billionbillion

Sabena and Swissair collapsedSabena and Swissair collapsed United Airlines and US Air announced United Airlines and US Air announced

bankruptcy-both are still under bankruptcy-both are still under Chapter 11 currentlyChapter 11 currently

Huge number of aircraft were idledHuge number of aircraft were idled What is the cause(s) of this state? What is the cause(s) of this state?

Causes of Airline CrisisCauses of Airline Crisis Airline industry has never really been Airline industry has never really been

profitable- why?profitable- why? Ordering of aircraft years in advance tends Ordering of aircraft years in advance tends

to foster boom-bust cycleto foster boom-bust cycle Pervasive involvement of state has diverted Pervasive involvement of state has diverted

industry’s emphasis on profit makingindustry’s emphasis on profit making Romance of air travel draws overinvestmentRomance of air travel draws overinvestment Economists argue that this is an Economists argue that this is an “empty “empty

core” industrycore” industry meaning a tendency towards meaning a tendency towards unprofitabilityunprofitability

Structure of Airline CostsStructure of Airline Costs Fixed/Overhead- carrier’s capital Fixed/Overhead- carrier’s capital

especially aircraft especially aircraft 17 %17 % Operating-Direct-dependent on type of Operating-Direct-dependent on type of

aircraft: flight crew, fuel, maintenance, aircraft: flight crew, fuel, maintenance, depreciation, landing fees, leasing depreciation, landing fees, leasing 60 %60 %

Operating-Indirect- passenger related: Operating-Indirect- passenger related: passenger services, ticketing, station passenger services, ticketing, station and ground costs, administrative and ground costs, administrative 23%23%

Labor CostsLabor Costs

Labor costs represent significant Labor costs represent significant proportion of total operating costsproportion of total operating costs

1998 North America: USAir 40%; Delta 1998 North America: USAir 40%; Delta 39%; United 38%39%; United 38%

1998 Europe: Air France 34%; BA 1998 Europe: Air France 34%; BA 28%; KLM 28%28%; KLM 28%

1998 Asia: Korean 17%; Thai 17%; SIA 1998 Asia: Korean 17%; Thai 17%; SIA 17%; JAL 15%17%; JAL 15%

Strategies for Reducing Labor Strategies for Reducing Labor CostsCosts

Private European carriers set crisis measures Private European carriers set crisis measures to reduce coststo reduce costs

State owned carriers reduced costs as part of State owned carriers reduced costs as part of restructuring to qualify for EC aidrestructuring to qualify for EC aid

Renegotiate terms and conditions of Renegotiate terms and conditions of employment and cut staff numbersemployment and cut staff numbers

Set up low cost subsidiaries with lower wage Set up low cost subsidiaries with lower wage scales-outsourcing loss making routes to low scales-outsourcing loss making routes to low cost carrierscost carriers

Stock options for employees- UA offered Stock options for employees- UA offered shares to unions and 3 of 12 seats on Board in shares to unions and 3 of 12 seats on Board in exchange for pay cuts exchange for pay cuts

The Plight of US AirwaysThe Plight of US Airways In early days of deregulation, USAir one of In early days of deregulation, USAir one of

most profitable—monopoly in Northeastmost profitable—monopoly in Northeast Wave of consolidation- USAir purchased Pacific Wave of consolidation- USAir purchased Pacific

Southwest and Piedmont --# 6 rankSouthwest and Piedmont --# 6 rank Both had lower cost structures but USAir Both had lower cost structures but USAir

rejected thisrejected this 1990s scaled back and plugged plug on 1990s scaled back and plugged plug on

western routes but did not scale down crew western routes but did not scale down crew bases, reservations centers, and training bases, reservations centers, and training facilitiesfacilities

Lead in east with hubs at Pittsburgh, Lead in east with hubs at Pittsburgh, Philadelphia and Charlotte—captive travelers Philadelphia and Charlotte—captive travelers

CEO Wolf returns airline to profitability: Airbus CEO Wolf returns airline to profitability: Airbus fleet, European destinations, closed facilities fleet, European destinations, closed facilities

US Airways Plight cont’dUS Airways Plight cont’d Convinced pilots’ union to let airline buy Convinced pilots’ union to let airline buy

regional jetsregional jets Made labor concessions in exchange and to Made labor concessions in exchange and to

stave off strikesstave off strikes Endured by charging high fares to business Endured by charging high fares to business

customers but undermined by Internetcustomers but undermined by Internet In 2000 acquired by United for $4.3 bil and In 2000 acquired by United for $4.3 bil and

assumption of $7.3 bil debtassumption of $7.3 bil debt Sept 11 hurt by slowdown and entered Sept 11 hurt by slowdown and entered

bankruptcy--$900 mil loan guaranteed from bankruptcy--$900 mil loan guaranteed from Federal government allows it to emergeFederal government allows it to emerge

Southwest forced competition at Philadelphia Southwest forced competition at Philadelphia hub-back to bankruptcyhub-back to bankruptcy

The Regional Jet PhenomenonThe Regional Jet Phenomenon Additional impact of Additional impact of

deregulation was growth deregulation was growth of feeder airlinesof feeder airlines

Growth of RJs- 50 and 70 Growth of RJs- 50 and 70 seat aircraftseat aircraft

Range and speed of Range and speed of larger jets larger jets

Cost less to purchase Cost less to purchase $23 mil vs $52 mil A320$23 mil vs $52 mil A320

Burn less fuelBurn less fuel Crews paid lessCrews paid less Allows airlines to cope Allows airlines to cope

with fluctuating demandwith fluctuating demand

No Frills AirlinesNo Frills Airlines

Financial viability of airlines is uncertainFinancial viability of airlines is uncertain One response is to create low-cost, no-One response is to create low-cost, no-

frills operationsfrills operations Lower fares, select destinations, no food, Lower fares, select destinations, no food,

e-tickets, first come seat assignments, e-tickets, first come seat assignments, strict baggage allowancestrict baggage allowance

One type of aircraft: B737 or A320One type of aircraft: B737 or A320 Such carriers now account for 20% of Such carriers now account for 20% of

seats nationwideseats nationwide

No Frills PrototypeNo Frills Prototype

Southwest Airlines begun over 30 years Southwest Airlines begun over 30 years ago by Herb Kelleherago by Herb Kelleher

44thth largest airline in U.S., 64 mil largest airline in U.S., 64 mil passengers annually to over 60 citiespassengers annually to over 60 cities

355 aircraft less than 9 years old355 aircraft less than 9 years old Based upon sound management Based upon sound management

principlesprinciples Operates in largely short haul, low Operates in largely short haul, low

margin markets and eschews hub and margin markets and eschews hub and spoke to better use aircraft and spoke to better use aircraft and personnel in quick turnaroundpersonnel in quick turnaround

Southwest AirlinesSouthwest Airlines

jetBlue AirwaysjetBlue Airways

Air Tran AirlinesAir Tran Airlines

Where the Future Touches Down:Where the Future Touches Down:Airports in a Globalizing WorldAirports in a Globalizing World

Huge increases in air traffic have Huge increases in air traffic have concentrated in a handful of airportsconcentrated in a handful of airports

Hubs paramount feature of the industryHubs paramount feature of the industry Major hubs whether for passenger or Major hubs whether for passenger or

cargo articulate relations between cargo articulate relations between regional economies and broader global regional economies and broader global economyeconomy

Thus governments at all levels have Thus governments at all levels have invested heavily in new airports and invested heavily in new airports and upgradesupgrades

Major Passenger and Cargo AirportsMajor Passenger and Cargo Airports2002 Passengers (mil) and (metric 2002 Passengers (mil) and (metric

tons)tons) (1) Atlanta 76.9 (2) Chicago (66.5) (3) (1) Atlanta 76.9 (2) Chicago (66.5) (3)

London Heathrow (63.3) (4) Tokyo (61.1) London Heathrow (63.3) (4) Tokyo (61.1) (5) LAX (56.2) (6) DFW (52.8) (7) FKT (5) LAX (56.2) (6) DFW (52.8) (7) FKT (48)(48)

(1) (1) MemphisMemphis (3390) (2) Hong Kong (3390) (2) Hong Kong (2516) (3) Anchorage (2027) (4) Tokyo (2516) (3) Anchorage (2027) (4) Tokyo Narita (2000) (5) LAX (1758) (6) Seoul Narita (2000) (5) LAX (1758) (6) Seoul (1705) (7) Singapore (1660) (8) FKT (1705) (7) Singapore (1660) (8) FKT (1631) (9) Miami (1624) (10) NY-JFK (1631) (9) Miami (1624) (10) NY-JFK (1574) (11) (1574) (11) LouisvilleLouisville (1523) (1523)

Atlanta Hartsfield IAAtlanta Hartsfield IAhttp://www.aci-na.org/docs/US_Econ_Impact.pdfhttp://www.aci-na.org/docs/US_Econ_Impact.pdf

75 million passengers 75 million passengers annuallyannually

45K direct jobs,3.5K 45K direct jobs,3.5K air freight, 2.1 ground air freight, 2.1 ground transporttransport

Total payroll $1.9 bilTotal payroll $1.9 bil Indirect impact of $3.8 Indirect impact of $3.8

bil on local-regional bil on local-regional economyeconomy

$17.3 bil total annual $17.3 bil total annual regional impactregional impact

Ultra-Global Hubs: Singapore’s ChangiUltra-Global Hubs: Singapore’s ChangiAirportAirport

Opened in July 1981Opened in July 1981 2002 Passengers 29 mil2002 Passengers 29 mil 2002 Cargo 1,660,000 2002 Cargo 1,660,000

metric tonsmetric tons In 2006 Terminal 3 In 2006 Terminal 3

additions will add 20 mil additions will add 20 mil passenger capacity passenger capacity bringing total to 64 milbringing total to 64 mil

Free Skytrain service Free Skytrain service between the terminalsbetween the terminals

Mini edge city shoppingMini edge city shopping

Malaysia’s Super Multi Media CorridorMalaysia’s Super Multi Media Corridor

Kuala Lumpur InternationalKuala Lumpur InternationalAirport www.klia.com.myAirport www.klia.com.my

Opened in 1998Opened in 1998 Express rail link 27 Express rail link 27

minutes from minutes from downtown KLdowntown KL

Part of the Super Part of the Super Multi Media Multi Media Corridor Corridor technology drivetechnology drive

Destination itselfDestination itself Competing with Competing with

ChangiChangi

Schiphol Airport, AmsterdamSchiphol Airport, Amsterdam

9th largest in world9th largest in world 40,736,009 passengers 40,736,009 passengers

in 2001 and a 3 % AGRin 2001 and a 3 % AGR 1,288,624 metric tons in 1,288,624 metric tons in

2001 and a 4.4 % AGR2001 and a 4.4 % AGR Gateway to a nation Gateway to a nation

with strong travel with strong travel industryindustry

http://www.schiphol.nlhttp://www.schiphol.nl

Bluegrass Non-Stop DestinationsBluegrass Non-Stop Destinations

Y2000- 4 non-stopsY2000- 4 non-stops Y2005-12 non-stopsY2005-12 non-stops New York, Newark, Philadelphia, New York, Newark, Philadelphia, PittsburghPittsburgh, ,

Washington, DCWashington, DC Atlanta, Charlotte, Orlando, Atlanta, Charlotte, Orlando, DallasDallas, ,

Houston, Memphis, St LouisHouston, Memphis, St Louis Chicago ORD and Midway, Cincinnati, Chicago ORD and Midway, Cincinnati,

Detroit, ClevelandDetroit, Cleveland To be added in Y05-07-Denver and To be added in Y05-07-Denver and

MinneapolisMinneapolis 4-5 percent increases in traffic per annum4-5 percent increases in traffic per annum

Direct Flight Connections 2004

Controversies and ExternalitiesControversies and Externalities

Noise and conflicting land uses are the Noise and conflicting land uses are the major problemsmajor problems

Noise pollution severely limited the utility Noise pollution severely limited the utility of the Concorde because it could not of the Concorde because it could not attain supersonic speed over landattain supersonic speed over land

Airports occupy relatively little land area—Airports occupy relatively little land area—O’Hare occupies only 9 sq mi- but O’Hare occupies only 9 sq mi- but proximity to cities is criticalproximity to cities is critical

New runways and runway extensions are New runways and runway extensions are controversial topicscontroversial topics

O’Hare Airport ExpansionO’Hare Airport Expansionhttp://www.flychicago.com/ohare/about/about.shtmhttp://www.flychicago.com/ohare/about/about.shtm

FAA approves $15 billion FAA approves $15 billion expansion to nation’s most expansion to nation’s most delay prone airportdelay prone airport

8 Year plan calls for 6 8 Year plan calls for 6 parallel and two diagonal parallel and two diagonal runwaysrunways

440 acres expansion 440 acres expansion requires city purchase and requires city purchase and raze 550 homes, relocate raze 550 homes, relocate 200 businesses and a 200 businesses and a cemetery dating to 1800scemetery dating to 1800s

Claim to save $12 billion Claim to save $12 billion over two decades by over two decades by reducing passenger and reducing passenger and aircraft delaysaircraft delays