1. Management of
Transportation
Seventh Edition
Coyle, Novack, Gibson &
Bardi
© 2011 Cengage Learning
Chapter 7
The Airline
Industry
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Introduction
• Rail: dominant mode from 1850s to WW II
– Superior in both price and service quality to
road transport for most of this period
– Superior in service quality to water transport
• Development facilitated by standardization
of track gauge and rolling stock
• Pivotal role in U.S. economic development
– Great expansion in track mileage, post-1870s
– Financed by private capital
– Too much track mileage relative to demand

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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 Carriers
Private 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)

5. Types of Carriers
For-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 Structure
Number 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

7. Market Structure
Number of Carriers
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8. Market Structure
Number of Carriers
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Competition
Intermodal 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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Competition
Service 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 Characteristics
General
• 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 Characteristics
Speed 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 Characteristics
Length 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

14. Operating and Service Characteristics
Accessibility 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

16. Equipment and Facilities
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17. Taxes and Fees
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18. Taxes and Fees (continued)
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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

20. Cost Structure
Fixed vs. Variable Cost Components
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Cost Structure, cont’d
Fuel 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 Structure
Equipment, 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)
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

23. Cost Structure
Equipment, 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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Rates
Pricing
• 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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Rates
Operating 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 costPlane 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

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Current Issues
Safety 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

27. Current Issues
Safety and Security
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28. Current Issues
Safety and Security
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29. Current Issues
Technology
• 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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