Air Transportation, 7th Edition

8/9/2019 Air Transportation, 7th Edition

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Air Transportation

John G. Wensveen

A Management Perspective

Seventh Edition


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AIR TRANS PORTATION


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I would like to dedicate this book to my sister, Kirsty. I hope it makes for pleasant reading onyour new journey to good health

To my wonderful parents, John and Sandi. Thank-you for always supporting me.I would never have been where I am today without you.

To my girlfriend, Kerri. You make me smile and stretch for the stars. Anything is possible!

Bryanneyou will never be forgoen my lile one.


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Air TransportationA Management Perspective

Seventh Edition

JOHN G. WENSVEEN, PhDPresident and CEO, Airline Visions, LLC

www.airlinevisions.com


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John G. Wensveen 2011

All rights reserved. No part of this publication may be reproduced, stored in a retrieval systemor transmied in any form or by any means, electronic, mechanical, photocopying, recording orotherwise without the prior permission of the publisher.

John G. Wensveen has asserted his moral right under the Copyright, Designs and Patents Act, 1988,to be identied as the author of this work.

Published byAshgate Publishing Limited Ashgate Publishing CompanyWey Court East Suite 420Union Road 101 Cherry StreetFarnham Burlington, VT 05401-4405Surrey GU9 7PT USAEngland

www.ashgate.com

British Library Cataloguing in Publication DataWensveen, J. G.

Air transportation : a management perspective. 7th ed.1. AirlinesManagement. 2. Aeronautics, Commercial.I. Title II. Wells, Alexander T.387.7068-dc22

Library of Congress Control Number:2011935389

ISBN: 978-1-4094-3062-9 (hbk)ISBN: 978-1-4094-3063-6 (pbk)ISBN: 978-1-4094-3064-3 (ebk)

Printed and bound in Great Britain by the

MPG Books Group, UK.


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Contents

List of Figures ixList of Tables xi

About the Author xvForeword by Jack J. Pelton xviiForeword by Michael Magnusson xixPreface xxiAcknowledgments xxxi

PART ON EAN INTRODUCTION TO AIR TRANSPORTATION

1 The Airline Industry: Trends, Challenges and Strategies 3Introduction 4Stages of Development Impacting the Airline Industry 4Past, Present and Future Trends 5Regional Analysis 7The Industry: Challenges and Strategies 10The New Breed of Airlines 12Failing and Achieving Success 13

2 Aviation: An Overview 17Introduction 18The Aerospace Industry 18The Air Transportation Industry 35

3 Historical Perspective 43Introduction 45The Formative Period: 19181938 45The Growth Years: 19381958 53

MaturityJets Arrive: 19581978 55Economic Developments Prior to Deregulation 57Federal Legislation and the Airlines 60Postderegulation Evolution 74General Aviation 81
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4 Air Transportation: Regulators and Associations 93Introduction 94The Department of Transportation 95The Federal Aviation Administration 101The Transportation Security Administration 109The National Transportation Safety Board 109Major Aviation Associations 114

5 The General Aviation Industry 125Introduction 126General Aviation Statistics 126The General Aviation Support Industry 141The Available MarketThe Users 151

PART TWOSTRUCTURE AND ECONOMICS OF THE AIRLINES

6 The Airline Industry 161Introduction 162Structure of the Airline Industry 162Major and National Carriers 165Regional Carriers 168

Airline Statistics 174Airline Certication 174Step-by-Step U.S. Certication Breakdown 177Data Collection by the DOT 178Industry Agreements 179Trac and Financial Highlights: 19602005 182

7 Economic Characteristics of the Airlines 191Introduction 192The Airlines as Oligopolists 193Other Unique Economic Characteristics 202The Signicance of Airline Passenger Load Factors 207

PART THRE EMANAGERIAL ASPECTS OF AIRLINES

8 Airline Management and Organization 217Introduction 218

Management 218The New Corporate Structure 222Functions of Management 226Organization 229


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The Organizational Chart 232Sta Departments 234Line Departments 239

9 Forecasting Methods 259Introduction 260The Purpose of Forecasting 260Forecasting Methods 262

10 Airline Passenger Marketing 273Introduction 274Development of the Marketing Concept 275The Marketing Mix 276The Consumer-Oriented Marketing Concept 285

Marketing Strategies Since Deregulation 290

11 Airline Pricing, Demand, and Output Determination 299Introduction 301The Trend in Domestic Passenger Airfares 301Pricing and Demand 304No-Frills Airfare and Survey Warfare 312Types of Passenger Fares 313The Pricing Process 314

Airline Costs 320Pricing and Output Determination 325

12 Air Cargo 335Introduction 337Historical Overview 337Air Cargo Today 341The Future 344The Market for Air Freight 345Types of Air Freight Rates 347Special Air Freight Services 349Factors Aecting Air Freight Rates 353

13 Principles of Airline Scheduling 359Introduction 360The Mission of Scheduling 360Equipment Maintenance 362Flight Operations and Crew Scheduling 365Ground Operations and Facility Limitations 367

Schedule Planning and Coordination 369Equipment Assignment and Types of Schedules 380Hub-and-Spoke Scheduling 382Data Limitations in Airline Scheduling 385


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14 Fleet Planning: The Aircraft Selection Process 389Introduction 390Factors in Fleet Planning 390Design and DevelopmentThe Manufacturers Viewpoint 397The Fleet-Planning Process 403The Decision to Upgrade or Replace 409Appendix: Fleet Planning at American Airlines 412

15 Airline Labor Relations 415Introduction 416The Railway Labor Act and The Airlines 417Historical Overview of Airline Union Activity 422Labor Relations Since Deregulation 428Human Resources in the 21st Century 438

16 Airline Financing 443Introduction 444Sources of Funds 444Sources and Uses of Funds by the U.S. Scheduled Airlines 453Cash Management and Financial Planning 466

PART FOUR

THE INTERNATIONAL SCENE17 International Aviation 475

Introduction 476The Question of Sovereignty in Airspace 476International Air Law 479The Formation of IATA 486The Bermuda Agreement of 1946 487Three Decades Later: From Bermuda to Deregulation 488The Pursuit of Open Skies 492Globalization 497Future Challenges 500New Airline Business Models 501

Appendix: Career Planning in Aviation 509Introduction 510Choosing and Geing Your First Job in Aviation 510Cover Leers and the Rsum 516The Interview 518

Glossary 531Index 561


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List of Figures

3-1 The rst contract air mail routes 48

4-1 Organization of the U.S. Department of Transportation 964-2 Organization of the Federal Aviation Administration 1024-3 Organization of the National Transportation Safety Board 110

6-1 The structure of the airline industry2010 167

7-1 Partial Boeing 757 routing pattern (two days), summer 200X 2097-2 Daily seats and passengers, one MiamiNew York schedule 210

8-1 Typical airline pyramid of authority 220

8-2 Typical new organizational structure for new-entrant andlow-cost carriers 225

8-3 Management by objectives 2268-4 The administrations in a major air carriers organization 2338-5 A typical major air carriers nance and property administration 2358-6 A typical major air carriers information services administration 2368-7 A typical major air carriers personnel administration 2378-8 A typical major air carriers medical and legal administrations 2388-9 A typical major air carriers corporate communications

administration 2388-10 A typical major air carriers economic planning administration 2388-11 A typical major air carriers flight-operations administration 2408-12 A typical major air carriers engineering and maintenance

administration 2448-13 A typical major air carriers marketing and services administration 2518-14 A typical major air carriers regional sales and services department 2528-15 An air carriers food service department 253

9-1 Hypothetical correlation between GNP and number of activegeneral aviation aircraft 264

9-2 Time-related changes in a dependent variable 2669-3 Composite time-series trend line used for forecasting purposes,

after smoothing has been accomplished 268

10-1 Market segmentation 287


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11-1 An individual air carriers demand for air transportationper month between two cities 305

11-2 Effect of changes in demand 30611-3 Elastic demand 30911-4 Basic rule of elastic demand 309

11-5 Inelastic demand 31011-6 Basic rule of inelastic demand 31111-7 Common fare 31311-8 Total revenue and RPMs for an individual airline over a

particular period of time 32711-9 Yield expressed in fare per 1,000 RPMs for an individual airline

over a particular period of time 32711-10 Total costs and ASMs for an individual airline over a short

period of time 329

11-11 Total revenue and total costs for an individual airline over ashort period of time 331

12-1 General commodity rates vary by weight of the shipment 34712-2 Containers provided by airlines. 35012-3 Containers offered by shippers 35112-4 Assembly service charge by total shipment weight over a

24-hour period 352

13-1 Conceptual framework for the schedule developmentprocess 361

13-2 Maintenance facilities 36413-3 Boeing 757 routing pattern 36513-4 Station plotting for the hypothetical All-American Airport 36813-5 Trafc flow 37113-6 Schedules are sensitive to departure time 37213-7 Schedules are sensitive to changes 37313-8 Schedule salability varies with direction 37313-9 Schedule salability varies with the airport 374

13-10 Time zone effect on schedules 37513-11 Local-station activity chart for airplane cleaners 37613-12 Staggered arrivals and departures of afternoon jet service

avoid costly duplication of ground crews and groundequipment 376

13-13 Chain reaction effect 37713-14 Cross-connection (hub-and-spoke) service 38113-15 Multiplier effect of hub connections 383

14-1 Major characteristics of competing commercial jetliners 400

17-1 The nine freedoms of the air 484


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List of Tables

1-1 Regional Regulatory Trends 81-2 Financial Issues and Challenges Impacting Air Transportation 111-3 Challenges Impacting Global Air Transportation 111-4 Strategies for Global Aviation 12

2-1 Aerospace Industry Sales by Product Group, 19902011 222-2 Aerospace Industry Sales by Customer, 19872010 232-3 Civil Aircraft Shipments, 19972011 282-4 U.S. Civil Aviation Economic Impact Study Detail2006 38

3-1 Growth of Certicated Domestic Routes 583-2 Average Yield per Revenue Passenger Mile 59

3-3 U.S. Schedule Airlines Operating Revenues and Prots, Before andAfter Interest Expense 60

3-4 Top U.S. Airports for Regional Flights, July 2009 78

5-1 Active U.S. General Aviation Aircraft,19602009 1275-2 GAMA General Aviation Aircraft Shipments by Type of Aircraft,

19622010 1295-3 Number of General Aviation and Air Taxi Aircraft by Type and

Primary Use, 2008 134

5-4 U.S. Civil and Joint-Use Airports, Heliports, Stolports, andSeaplane Bases by Type of Ownership, 2008 1405-5 Worldwide Piston Engine Airplane Shipments by Manufacturer,

19982010 1445-6 Worldwide Business Jet Shipments by Manufacturer (19982010) 1465-7 Active U.S. Pilots and Non-Pilot Certicates Held, 1999 155

6-1 U.S. Airline Passenger Trafc for the Top 12 Air Carriers, 1978 1666-2 U.S. Airline Passenger Trafc for the Top 12 Air Carriers, 2004 1666-3 Industry Traffic Statistics 19932008 1706-4a S ummary of Aircraft in Regional Airline Use2004 1736-4b Summary of All-Cargo Aircraft in Regional Airline Use2004 1736-5 Selected Trafc and Financial Statistics for the Certicated Air

Carriers, 19652009 180


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7-1 Top 25 U.S. Airlines2009 1997-2 Revenue Passenger Load Factor for U.S. Scheduled Airlines,

19702009 208

11-1 Average Air Passenger Fares for Domestic Airlines, 19262008 302

11-2 An Individual Air Carriers Demand for Air Transportation perMonth Between Two Cities 304

11-3 Demand and Revenue Schedule for an Airline over a ParticularPeriod of Time 326

11-4 Total Fixed-Overhead Costs, Total Variable Costs, andTotal Costs for an Airline over a Particular Period of Time 328

11-5 Systemwide Passenger Load Factor for an Airline over aParticular Period of Time 329

11-6 Prot-Maximizing Output for an Airline over a Particular

Period of Time 330

12-1 Freight and Express Ton-Miles and Revenues for U.S. AirCarrier Scheduled Services, 19752009 342

13-1 Maintenance System for a Jet Aircraft 363

14-1 Operating Fleet of Selected U.S. Airlines, 2009 39814-2 A Carriers Current Inventory of 737s 403

15-1 Airline Employment, 2009 41615-2 Duration of Airline Strikes Between the Fall of 1958 and 1970 42615-3 Increase in U.S. Scheduled Airline Wages and Fringe Benets

Compared to Consumer Prices (Index 1970 = 100) 42715-4 Fringe Benets as a Percentage of Wages for Selected Workers,

U.S. Scheduled Airlines, 19701979 427

16-1 Net Prot (or Loss) and Rate of Return on Investment for the U.S. Scheduled Airlines, 19602004 445

16-2 Assets Portion of the Balance Sheet for the U.S. ScheduledAirlines, as of December 31, 2004 454

16-3 Liabilities Portion of the Balance Sheet for U.S. ScheduledAirlines, as of December 31, 2004 455

16-4 Sources and Uses of Funds for the U.S. Scheduled Airlines asEvidenced by Changes in the Industry Balance Sheets 458

16-5 Actual Depreciation and Amortization for the U.S. ScheduledAirline Industry, 19602004 460

A-1 Aviation and Aerospace Industries Listed in the World AviationDirectory 512A-2 Selected Flight-Related Job Titles with the Airlines 520A-3 Selected Maintenance-Related Job Titles with the Airlines 522A-4 Selected Management- and Non-Management-Related Job

Titles with the Airlines 523A-5 Selected Flight-Related Job Titles in General Aviation 524


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A-6 Selected Job Titles in Airport Administration 526A-7 Selected Job Titles with the Federal Aviation Administration 526A-8 Selected Job Titles in Manufacturing 528


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About the Author

Dr. John Wensveen is President and CEO of Airline Visions, LLC, an advisory and futurist

rm specializing in the development of business models for air carrier operations with aparticular focus on airline start-ups.

He has been dubbed the idea factory by many of his colleagues and has the abilityto identify trends and focus on fast results. Dr. Wensveen is a leading expert on businessand strategic plan development, marketing and branding, diversication strategies,partnership development, due diligence and M&A. Consulting projects include businessplan development for low-cost carrier (LCC) start-ups, formulation of strategic growthrecommendations, managing of clients growth mission and operational objectives,providing vision and leadership to carry out mission, and building of relationships. Dr.

Wensveens consulting practice also includes expert witness testimony and advisoryservices to the television and lm industries.Prior to this role, he was the Dean, School of Aviation at Dowling College in New

York. In addition, he was an Executive Consultant at InterVISTAS-ga2 in Washington,DC where he was responsible for developing international partnership agreements forair carriers worldwide. He was also a founding member and Vice President at MAXjetAirways, the rst start-up US flag carrier to obtain FAA certication to operate on thetrans-Atlantic since the events of 9/11. From 1999 to 2004, Dr. Wensveen was a Professorof Airline Management and Operations with the School of Business at Embry-RiddleAeronautical University in Daytona Beach, Florida. In the early 1990s, he was employedwith Canada 3000 Airlines holding supervisory positions in flight operations and later,passenger services.

Dr. Wensveen is an active member of a number of professional organizations and isa frequent speaker at international aviation events. In addition, he holds visiting andadjunct professor status with universities in the USA, Canada, Europe and Caribbean.

Dr. Wensveen publishes frequently in major aviation publications and is an aviationanalyst for the media often seen on major television networks and quoted in majornewspapers and magazines around the world. In addition to Air Transportation: AManagement Perspective, he is also author of Wheels Up: Airline Business Plan Development.

From 1996 to 1999, Dr. Wensveen hosted a number of leading radio shows in the UnitedKingdom and was awarded Best Male Presenter in 1997 at the BBC Radio One Awards.

Dr. Wensveen, born and raised in Vancouver, Canada earned a Ph.D. in InternationalAir Transport Management with a focus on Business, Strategy and Marketing from theUniversity of Wales Cardi (United Kingdom) and a B.A. in Geography and TransportationPlanning from the University of Victoria (Canada). He is also an active pilot.


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Foreword

Aviation passionately lives within me and drives mepersonally, professionally,

emotionally.This passion was shaped by growing up with parents who were pilots, spending hours

in the right seat of my familys Cessna 140A. I was also influenced by growing up inSouthern California in the 1950s and 1960s, surrounded by the likes of Douglas, Lockheedand Rockwell.

Not only is flying and restoring antique aircraft a lifelong hobby, Ive spent more thanthree decades working in engineering and product development at Boeing (formerlyDouglas Aircraft), Fairchild Dornier and Cessna Aircraft Company.

To me, aviation isby farthe greatest, most exciting industry in the world today,

and Im certain this era will be looked at historically as one of aviations most formative.Every segment of our industry is dealing with vital regulatory issuessecurity, safety,the environment, to name a fewand were at a critical stage with the much-neededmodernization of the air trac control system.

Taking a comprehensive look at past and present trends, as youll nd in JohnWensveensAir Transportation: A Management Perspective, will help us understand how toprotect our industry and allow it to grow to meet the worlds transportation needs.

I marvel at what our industry has accomplished in just 100 years of powered flight,and I can only dream of what we might achieve in the next 100. Air travel is now anessential form of transportation for individuals and businesses everywhere, opening newopportunities and oering tremendous freedoms. It is, in fact, one of the key engines thatpropels our progress as a society.

Beyond touching every geographic corner of the world, aviation influences everyaspect of our livesour economy, culture, quality of life and our future.

Jack J. PeltonChairman, President and CEO (retired)

Cessna Aircraft Company


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Foreword

Just like the author Dr. John Wensveen, my interest in Commercial aviation also beganat an early stage traveling and watching aircraft come and go. After briefly considering

a pilot career as a teenager, I became an aeronautical engineer. But, I soon gravitatedtowards marketing of commercial aircraft, which I have spent most of my professionallife doing.

During my almost 30 years in commercial aviation, I have had the good fortune to workwith a wide variety of airlines around the globe, small and large. Although many of theirchallenges may be local, the major decisions they face are similar.

Running an airline has never been easy. Its an unforgiving industry that can losevast sums of money very quickly. Many factors can impact the boom line and some are

beyond the control of the management (oil prices, political events, natural disasters etc).

Thus, it becomes even more important to make the right decisions on the issues that youcan influence (aircraft, pricing, network, labor-relations, etc). One bad decision can bringdown the airline, There are several examples of this. This book reviews all these factorsvery well and provides an overall view that is so important for a student of commercialaviation. I can only wish it would have been available 35 years ago when I begun studyingaviation and all its complexities and challenges.

As a nal word to students of aviation, many of you will be part of the future aviationindustry. All I can say is its a fascinating and exciting business to be in and I do not thinkthat will change. You will not regret embarking on a career in aviation.

Michael MagnussonPresident & CEO

Saab Aircraft Leasing


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Preface

It was only four years ago since the sixth edition of this book was published, and the

global aviation industry has experienced numerous changes that, in many cases, were notpredicted. The seventh edition ofAir Transportation: A Management Perspectivecovers thereasoning behind such changes and aempts to forecast the future to a certain degree interms of how air transportation will evolve.

On September 11, 2001, the aviation industry started a new era in history as a resultof the terrible terrorist aacks against the United States. The Iraqi crisis, Severe AcuteRespiratory Syndrome (SARS), record fuel and oil prices, massive nancial losses, loomingthreats of terrorism, and political instability have contributed to continued restructuringof the industry. General aviation, including business aviation, and commercial aviation

have been impacted as have manufacturers and all other participants in aviation. At thetime of the last printing, the industry was in a period of survive, adapt and recover. Today,the industry is in a period of rethink resulting in organizations becoming more ecientas a result of recent turbulent times. Airlines continue to fail as will always be the case

but there are a lot of positive success stories at the same time. Aircraft manufacturers likeAirbus and Boeing have experienced positive growth with the design of new and ecientaircraft while regional jet manufacturers have experienced, in some cases, negative resultsdue to the changing nature of route network development and airline restructuringprograms. Such manufacturers are being faced with the challenge of determining whatthe next stage in aircraft technology is.

A previous edition of this book stated 2005 would be the year in which the global airtransportation industry would be back at normal levels. For the most part, this is true.Some regions of the world were somewhat isolated from the events of 9/11 and morerecent events and air carriers of dierent types and sizes are excelling. In other regions ofthe world, there are distinctive growth paerns ranging from slow to fast. In 2011, loadfactors are back up to regular levels and yet airlines continue to struggle as a result ofannually increasing operational costs.

The global air transportation industry changes on a daily basis and it is importantto understand this change must be examined on a regional basis more so than a global

basis. As dened by the International Civil Aviation Organization (ICAO), the worldconsists of North America, Latin America and Caribbean, Europe, Asia-Pacic, Africa andthe Middle East. Building on a tested framework of subject areas, this book incorporatesthe trends, challenges and strategies impacting all regions of the world creating a modernrevision suitable for academic and industry use for some time to come. The challenge of anauthor writing a new edition of a well established book, is to produce something readers


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are already familiar with but are introduced to new information above and beyond thepredecessor.

The seventh edition remains introductory in nature providing the reader with a solidfoundation of the air transportation industry and a greater appreciation of the majormanagement functions within an airline. Various references are provided at the end ofeach chapter encouraging the reader to explore and keep abreast of current periodicalsand web sites. The reader should grasp enough knowledge to reason accurately andobjectively about problems facing the industry and the development of a lasting interestin the air transportation industry. The basic concepts and problems facing the industry ina straightforward and logical fashion are presented throughout each chapter.

C H A N G E S I N T H E S E V E N T H E D I T I O N

Completely updated to reflect the challenges facing airlines in the 21st century, this textprovides comprehensive, sophisticated coverage of both classic and current practices inair transportation management. The reader is guided through the ins and outs of the airtransportation industry as well as through the details of management functions withinairlines. This edition places greater emphasis on the global airline industry, with suchtopics as airline passenger marketing, labor relations, nancing, and heightened securityprecautions integrated throughout the text. Tables, gures, statistics, key terms, reviewquestions, and glossary terms have been added and updated.

T E A C H I N G A N D L E A R N I N G A I D S

The substantive content of a textbook is only part of what makes it usable in the classroom;for the book to be eective, its content must be taught by instructors and learned bystudents. To facilitate the process, this edition continues to pay particular aention toteaching and learning aids, such as the following:

1. Chapter outlines.Each chapter opens with an outline of the major topics to be covered.

2. Chapter checklists.After the outline, each chapter includes a checklist of objectives thatstudents should be able to accomplish on completing the chapter.

3. Relevancy.Most of the examples, applications, and extensions of the basic material aredrawn from and apply to the air transportation environment of the 1990s.

4. Staying power.The text is designed to have staying power over the years. It emphasizesthe underlying principles, practices, and policies that will not change appreciablyover time. It is recognized that instructors will supplement the material with current,

topical applications and events.

5. Figures and tables.Important points in each chapter are illustrated with strong visualmaterials.


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6. Logical organization and frequent headings. Air transportation can easily becomeoverwhelming in its multitude of topics, concepts, practices, and examples. Thematerial covered here has been put in a systematic framework so that students knowwhere they have been, where they are, and where they are going in the text. Frequentheadings and subheadings aid organization and readability.

7. Key terms.Each chapter concludes with a list of key terms used in the text.

8. Review questions. Review questions at the end of each chapter address importantpoints.

9.Appendix and suggested readings.One chapter includes an appendix that is of practicalinterest and that reinforces the material covered. A list of suggested readings isincluded in each chapter for students who wish to pursue the material in greater

depth.

10. Career appendix. This edition once again includes an appendix on jobs in the airtransportation eld and ways to get them.

11. Glossary of air transportation terms. All key terms appearing at the end of eachchapter, as well as many other terms used in the text and others of signicance in airtransportation, are included in the glossary.

12. Complete index. The book includes a complete index to help students nd neededinformation.

I N T E N D E D A U D I E N C E

Because the aspirations of most students of air transportation (and, for that maer, mostcareer paths) lead to the airline segment of the air transportation industry, the major focusof this text is on the management functions and organization of airlines. However, thesignicance and contribution of general aviation is not overlooked.

This book is intended for three somewhat dierent audiences with similar interests:students enrolled in a course such as Air Transportation or Airline Management;students in transportation and trafc management programs who wish to gain moreinsight into the air transportation industry because most of their classes concentrateon surface transportation modes; and individuals who work for an airline and want togain a beer understanding of managerial aspects. Too often, an airline employee, as aspecialist, sees only a limited part of the overall operation and has lile, if any, knowledgeof such important subjects as marketing, pricing, scheduling, and fleet planning. Evenindividuals within marketingreservations, for examplehave lile appreciation of

their companys growth strategies and market segmentation. These employees are simplytoo busy fullling the functions of the particular job description.


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O R G A N I Z AT I O N O F T H E T E X T

The following is an outline ofAir Transportation: A Management Perspective, seventh edition.

Part One An Introduction to Air Transporta tion

Chapter 1 The Airline Industry: Trends, Challenges and Strategies. Chapter1 provides the reader with a solid overview of the dierent stages ofdevelopment impacting the airline industry alongside past, presentand future trends. In addition, the main challenges and strategies arepresented leading into a discussion on the new breed of airlines.

Chapter 2 Aviation: An Overview. Chapter 2 introduces students to thecharacteristics, scope, and economic signicance of the aerospaceindustry and its major segmentsthe government market and the

commercial market for air transport and general aviation aircraft. Theair transportation industry is clearly dened, and its contribution to theeconomy is discussed in depth.

Chapter 3 Historical Perspective. This chapter provides a historical sketch of U.S.airlines and general aviation, including the federal legislation that hasaected their growth and development. The Airline Deregulation Act of1978 and the circumstances leading up to it are thoroughly explored. Thepostderegulation era from 1978 to the early 2000s is discussed, includingchanges in the structure of the industry and new airliners entering the

market (low-cost carriers, virtual carriers, and mega-carriers).Chapter 4 Air Transportation: Regulators and Associations. This chapterdiscusses the roles played by the four primary federal agencies thatinterface with both segments of the air transportation industry:the Department of Transportation (DOT), the Federal AviationAdministration, the Transportation Security Administration, and theNational Transportation Safety Board. The ofces at the Departmentof Transportation responsible for carrying out the remaining functionsof the former Civil Aeronautics Board are thoroughly explored. Thepurpose and major functions of the prominent aviation trade associationsare also described.

Chapter 5 The General Aviation Industry. This chapter concludes Part One byreviewing the general aviation industry, including its statistics and adescription of widely diverse segments according to their primary usecategories. Other topics include the role of general aviation airports, FAAservices to general aviation, and the general aviation support industry,which, like a three-legged stool, is made up of the manufacturers, thexed-base operators, and the users of general aviation aircraft.

Part Two Structure and Economics of the Airlines

Chapter 6 The Airline Industry. This chapter reviews the current structureof the U.S. airline industry and its composite nancial andtrafc statistics. A complete discussion of the postderegulationexpansion, consolidation, and concentration of the industry is


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included. The growing role of regional carriers and new typesof airlines is thoroughly discussed. This chapter also includes asection on airline certication, including types of and requirements forcertication and ofces within the DOT responsible for this importantfunction. The current trend of intra-industry agreements, such as codesharing and other cooperative eorts, are described in detail.

Chapter 7 Economic Characteristics of the Airlines. This chapter deals withthe economic characteristics of oligopolies in general and the uniquecharacteristics of airlines in particular. Aention is also given to theeconomic forces in the postderegulation period that have led to such mega-carriers as American, United, Continental, and Delta. The signicance ofairline passenger load factors is thoroughly explored. This chapter alsodiscusses how the industry has changed since the events of 9/11 andcurrent global events.

Part Three Managerial Aspects of Airlines

Chapter 8 Airline Management and Organization. The opening chapter of PartThree introduces students to the principles and practices of airlinemanagement and organization. The dierent levels of managementwithin an airline are explored, along with the functions of managementplanning, organizing, stafng, directing, and controlling. This isfollowed by a comprehensive review of organization planning and

a description of a typical major air carriers organizational structure,including the purpose and function of various administrations anddepartments. Departmentalization and the need for new divisionswithin the organization, such as safety and security and training, areintroduced.

Chapter 9 Forecasting Methods. Forecasting is extremely important in themanagement of airlines. All planning involving personnel and equipmentneeds is based on forecasts of future trafc and nancial expectations. Forthis reason, this chapter naturally precedes all of the chapters relatingto the other managerial aspects of airlines. The purpose of this chapteris to expose students to the primary forecasting methods used by rmsengaged in air transportation.

Chapter 10 Airline Passenger Marketing. This chapter begins with a discussionof how the marketing of air transportation has changed over the years.The marketing mix (product, price, promotion, and place) is analyzed indepth, and the consumer-oriented marketing concept of the late 1990sand early 2000s is discussed. Various current airline marketing strategiesare then explored, including such intensive approaches as gaining deepermarket penetration, increasing product development, and developing

new target markets. Direct marketing, computerized reservation systems(CRSs), travel agents, frequent-flier programs, business-class service, codesharing, hub-and-spoke service, and advertising and sales promotion areall highlighted.

Chapter 11 Airline Pricing, Demand, and Output Determination. This chapterfocuses on pricing, certainly one of the most volatile of the four Ps


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following the introduction of jets. The nal portion of this chapter dealswith funding sources in the 2000s and the important subjects of cashmanagement and nancial planning.

Part Four The International Scene

Chapter 17 International Aviation. The nal chapter rounds out the textcoverage of air transportation by adding the dimension of internationalaviation. Air transportation plays a signicant role in the movementof passengers and cargo between countries, and this chapter discusseshow the various international conferences and conventions haveshaped worldwide aviation. The last section of the chapter covers theinternational aviation market following the passage of the International

Air Transportation Competition Act of 1979. The subjects of globalizationand international airline and airport alliances are thoroughly explored.

Appendix Career Planning in Aviation. This appendix provides a structuredapproach to the all-important subject of career planning. Students aretaken through the steps of choosing and geing their rst job in aviation,identifying sources of career information, developing rsums, andpreparing for an interview. Included are numerous job descriptions fromall segments of the aviation industry.

A N O T E T O I N S T R U C T O R S

Anyone who has taught courses in air transportation has surely recognized the paucityof texts on the subject. The few books that are available either are too broad in scope,resulting in a shallow overview of most topics, or examine a particular segment of theindustry or phase of management in depth but with very lile breadth. I have aemptedto take a balanced approach, recognizing that most instructors will have their own ideasregarding the importance of the subject maer under discussion and will supplementthe text with their own materials accordingly. Statistics appearing in tables and chartshave been drawn from easily accessed sources, such as Aerospace Facts and Figures, FAAStatistical Handbook,and ATA annual reports, so that they can be readily updated by usersof the text.

This book is designed to carry its fair share of the burden of instruction. Students usingthis text should not rely on you for detailed, repetitive explanations. Less class time isrequired to generate functional understanding of the subject, so more time is availablefor class discussion and the application of the material to current issues. In researchingthis book, I acquired a wealth of materials, most of them free, from numerous sources,including the DOT, FAA, NTSB, ICAO, ATA, RAA, and World Aviation Directory.The air

carriers are a rich source of material that can be used to supplement your course: writeto the particular department about which you are seeking information. The GAMA, AIA,ATA, and individual aircraft manufacturers can also supply a host of materials.

Another source that I have found helpful in our courses is the Harvard Business SchoolCase Services, Harvard Business School, Boston, Mass. 02163. Some of the air transportationcases will be appropriate for your courses, and the students will enjoy them.


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A I R T R A N S P O R T A T I O Nx x v i i i

Suggested Outlines for a One-Semester Course

Courses in air transportation vary in content and emphasis, and so will the uses of thisbook. Some courses may cover the material from beginning to end; others will focus oncertain sections and omit the rest. Parts One and Two oer a broad-based introductionto air transportation and should be suitable for most users. Airline management coursesmight focus on Parts Three and Four.

These recommendations are flexible. Other combinations are possible.

Chapter Topic Introductory Air

Transportation

Course

Airline

Management

course

Aviation

Administration

1. The Airline Industry: Trends, Challenges and Strategies

2. Aviation: An Overview

3. Historical Perspective

4. Air Transportation: Regulators and Associations

5. The General Aviation Industry

6. The Airline Industry

7. Economic Characteristics of the Airlines

8. Airline Management and Organization

9. Forecasting Methods

10. Airline Passenger Marketing 11. Airline Pricing, Demand, and Output Determination

12. Air Cargo

13. Principles of Airline Scheduling

14. Fleet Planning: The Aircraft Selection Process

15. Airline Labor Relations

16. Airline Financing

17. International Aviation

A. Career Planning in Aviation


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P R E F A C E x x i x

A N O T E T O S T U D E N T S

I hear and I forgetI see and I rememberI do and I understand

Confucius

The most eective and interesting way to learn any subject is by doing it. No professoror textbook could ever teach you all about air transportation; all they can do is help youto learn it. Much of the learning process is up to you. This text has been designed to beeasy to understand. Usually, as you read the text, you wont have to struggle to get themeaning of a concept or principle. But understanding is one thing; learning somethingwell and applying it to current events is something else.

Before starting a chapter, review the chapter outline and checklist. Take notes andhighlight the major points as you proceed with your reading. After reading the chapter, see

if you can accomplish the objectives listed in the chapter checklist. The review questionsat the end of each chapter are also designed to bring out the most important points madein the chapter.

Become familiar with aviation trade journals and magazines. You will be surprised tosee how many articles there are relating to the material discussed in class. This literaturewill not only enhance your own knowledge of the subject maer but also enrich yourclassroom experience as you discuss the material with classmates.

This is probably one of the most exciting periods in the brief history of our airtransportation industry. With the passage of the Airline Deregulation Act of 1978, and

the emergence of liberalization and open skies we have witnessed the emergence of acompletely new structure for air transportation services in the United States and aroundthe world. The industry stands poised for a new surge of growth. Many new career pathswill surface in the next several years for those of you who have prepared for them. Goodluck!


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Acknowledgments

My passion for aviation began at the age of three when I had to evacuate a large jet aircraft

with an engine re. I was dressed in a pilots uniform proudly displaying my wings. Liledid I know the events of that day would change the course of my life and fly me downa path to a lifelong career in aviation. As a small child, my dream was to learn to fly andafter a few hours holding the stick and a few years of maturity, I realized my real passionwas aviation business.

I owe many thanks to the pioneers of aviation and the entrepreneurs of today thatcontinuously amaze me with new developments. There are few industries in existencewhere one can go to sleep at night and wake up the next morning faced with challengesthat did not exist the day prior. The excitement created by the daily stresses of this

business keep me going and striving toward the design of the ultimate airline. Is thiseven possible?Many thanks are owed to industry sources who provided a great deal of material that

was extremely helpful in puing together this textbook. Thank you to the Department ofTransportation, Federal Aviation Administration, Transportation Security Administration,National Transportation Safety Board, Air Transport Association, National BusinessAviation Association, Aircraft Owners and Pilots Association, International Civil AviationOrganization, and the International Air Transport Association. Additional thanks to AirbusIndustrie, The Boeing Company, Raytheon Corporation, Cessna Aircraft Company, andthe New Piper Aircraft Corporation.

Thank you to Jack Pelton, former Chairman, President, and CEO at Cessna AircraftCompany. A special thank you to a good friend and colleague, Robert Stangarone, VicePresident of Communications, Cessna Aircraft Company. Also, thank you to Dr. RyanLeick, Utah Valley University, Dr. Rhe Yates, Sarah Morris, and Leah Heel, JacksonvilleUniversity, for assisting with data collection.

A textbook of this nature cannot come together without the assistance of a team. Thankyou to Dr. Alexander Wells for believing in me and allowing me to carry on the legacy, toAshgate Publishing especially Guy Loft and Kevin Selmes.

Finally, I would like to show my appreciation and love for my parents, John Sr. and

Sandi, my sister, Kristy, as well as my lile girl, Bryanne. You will never be forgoen.Also, a very special thank you to Kerri for making all dreams seem possible.

John Wensveen


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PART ONE

An Introduction toAir Transportation


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1The Airline Industry: Trends,Challenges and Strategies

IntroductionStages of Development Impacting the Airline IndustryPast, Present and Future TrendsThe Industry: Challenges and StrategiesThe New Breed of Airlines

Chater Checklist Yu Shuld Be Able T:

Dene the four stages of development impacting theairline industry

Discuss the main trends impacting the global airlineindustry including regional challenges

Describe and discuss the main critical nancial issuesand challenges associated with air transportation

Understand the main strategies for global aviation in

order to achieve success Discuss the dierent types of air carriers evolving andthe main factors behind success and failure


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I N T R O D U C T I O N

In previous editions of this book, Chapter 1 provided an overview of the air transportationand aerospace industries. Given the volume of change constantly occurring in the aviationindustry, it is important for the reader to have a full understanding of the global airlineindustry before proceeding with the other chapters in the book. Having knowledge at themacro level will assist the reader in beer understanding the other chapters presented.This chapter provides a background on the current global industry including a regionalanalysis, discusses current and future evolvement of the industry in terms of trends,discusses challenges and strategies impacting the industry, discusses the new breed ofairlines, and discusses why airlines fail and what can be done to achieve success. Chapter1 presents an overall framework to supplement the other chapters in the book. As aresult, some information presented in this chapter will be repeated in other chapters anddiscussed in greater detail.

S T A G E S O F D E V E L O P M E N T I M P A C T I N G T H EA I R L I N E I N D U S T R Y

Historically, the United States aviation industry has been the centre of focus for discussionsrelated to history, change, challenges and strategies. One of the main reasons for thisis because the US has traditionally been at the forefront of evolvement in the aviation

industry and that is the one major reason why the bulk of reference material on the marketis heavily concentrated on the US airline industry. However, as the rest of the worldexperiences increased change in political environments, dierent regions of the globe arebecoming more important in terms of change resulting in decreased emphasis on the USindustry. Although some experts disagree, there are four stages of development impactingthe airline industry in terms of maturity. Some regions of the world have skipped a stepor two resulting in both positive and negative results for the industry. With that said,the logical stages of development include: regulation, liberalization, deregulation and insome cases, re-regulation. The rst three stages of development are discussed in greaterdetail throughout the book.

Stage I: Regulation

At one point in time, the bulk of the global airline industry was heavily regulated meaninggovernments had strict control of the industry in terms of air fares, routes and marketentry of new airlines. The main factors resulting from a regulated environment include,but are not limited to, the following: strict ownership control of airlines, limited to nocompetition on selected routes, limited markets served, limited city-pair frequency, high

air fares for passengers, government bail-outs for air carriers in distress, and incentive toachieve airline protability.

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Stage II : Liberalization

In a liberalized environment, there is less government control of the industry comparedto a regulated environment. Although liberalization generally brings positive results tothe industry, one large barrier to implementation is that the global airline industry cannotimplement seamlessly or simultaneously. However, the industry does recognize the needto implement where appropriate and as of mid-2011, the industry appears to be movingforward in a positive direction with increased bilateral negotiations between countries. Asper the International Air Transport Association (IATA) liberalization allows for expansioninto new markets, diversication into new products, specialization in niche products, andmarket exit for air carriers not able to succeed in specic competitive markets.

Stage III: Deregulation

In a fully deregulated environment, government controls like entry and price restrictionsfor air carriers are removed allowing airlines to serve any given route and freely competewith other carriers. In many ways, deregulation is the opposite of regulation. Generallyspeaking, air fares are substantially decreased, safety is improved, and service qualityincreases (i.e., route frequency, total number of miles flown, on-time performance, frillsand amenities). In the case of the United States, selected small and medium sized airportshave not felt the true benets of deregulation because of the limited amount of competitionin each market.

Stage IV: Re-regulation

In 2007, the United States airline industry entered formal discussions regarding thepossibility of re-regulating the industry as a result of merger discussions betweenAmerican Airlines and Northwest Airlines and United Airlines and Continental Airlines.

In a re-regulated environment, the government would have a role in pricing and restrictairlines from selling air fare below actual cost. Re-regulation would also result in changesto the Railway Labor Act as discussed in later chapters of the book where unions wouldnot be permied to strike resulting in binding arbitration. Suggested changes also includerestricting airlines to utilizing larger aircraft on certain city-pairs resulting in decreasedfrequency. Also, the air trac control system would be updated to increase eciency of thenational air transport system and decrease delays at hub airport facilities throughout thecountry. As the airline industry restructures, it appears there will be increased expansion,increased consolidation, and increased concentration.

PA S T , P R E S E N T A N D F U T U R E T R E N D S

The Global Airl ine Industry

Since the terrorist aacks on the United States on September 11, 2001, the global airlineindustry has experienced four phases of evolvement including: survive, adapt, recover

C H A P T E R 1 T H E A I R L I N E I N D U S T R Y 5


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and rethink. The rethink phase is an on-going process forcing air carriers worldwide toconstantly enhance business models to achieve protability while maintaining a safe andecient operation. In the new operating environment, airlines are no longer dened asairlines but as businesses where only the est survive. If the boom line is not met, theair carrier disappears and is often replaced by a new competitor or an existing competitorexpands its operation.

Scenarios

In the past decade, the global airline industry has faced a long list of negative scenariosresulting in high barriers for successful operations. Some of these scenarios include: 2003outbreak of Severe Acute Respiratory Syndrome (SARS), the on-going Iraq War, the on-going Afghan War, and the 2008 nancial crisis. In the year 2011 onwards, airlines will be

forced to prepare for additional scenarios whether they occur or not. Preparation includesdeveloping a flexible business plan allowing the airline to adapt to most any environment.Historically, well-established airlines have not done a great job adapting to fluctuatingenvironments because of their dependency on legacy based systems. New air carriers,particularly those known as low-cost carriers have been able to withstand changes inthe global environment because their business models incorporate flexibility. With thatsaid, not all such airlines have been able to survive. Moving forward, airlines must preparefor globalization, changes in the international political landscape, distribution of naturalresources (oil, gas, water), internal conflicts (shifts in power), unintended consequences

and unintended consequences of good intentions, public and international perception,war, terrorism, and continued nancial issues.

The Top 5 Frustrations in Aviation

The airline industry is perhaps the most high prole industry in the world but it is alsoconsidered one of the most neglected in terms of investment. With that said, the airlineindustry faces numerous frustrations and the list is lengthy. For the purpose of discussion,the author highlights what are considered to be the top ve frustrations impactingaviation today (in random order). These include: fuel and oil; pollution control; personnelcutbacks; global economic woes; and recurring safety lapses. Additional areas of debateinclude: costs associated with Air Navigation Service Providers (ANSP); governmentinterference; the environment and ecient infrastructure; security and taxation. Suchtopics are discussed in greater detail throughout the book.

The Top 3 Costs for Airlines and Typical Airline OperatingExpenses

The top three costs for most airlines, in any order, are: fuel, labor and maintenance. In theUnited States, fuel was 40 percent of airline operating costs in the year 2010 as per IATA.Actual costs associated with airline operations vary region by region, country by country,and company by company. In the US, the Air Transport Association (ATA) produces a



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Passenger Airline Cost Index on a quarterly basis. The author recommends the readerconsult the ATA web site to get a beer understanding of costs associated with operatingan airline. The index takes into account the following costs: fuel; labor; aircraft rents andownership; non-aircraft rents and ownership; professional services; food and beverage;landing fees; maintenance material; aircraft insurance; non-aircraft insurance; passengercommissions; communication; advertising and promotion; utilities and oce supplies;transport-related; and other operating.

The Aviation and Aerospace Almanac lists typical operating expenses as: ticketing,sales, promotion; general administrative; fuel and oil; station expenses; passengerservices; maintenance and overhaul; flight crew; depreciation and amortization; landingand associated airport charges; enroute facility charges; and other operating costs. Forspecic percentage breakdowns of costs, the reader is encouraged to review ICAO AirTransport Reporting Form EF-1.

R E g I o N A L A N A LY S I S

Airlines are important to the global economy because they link regional economies withthe rest of the world. When the economy is doing well, airlines tend to prot but whenthe economy is not doing well, airlines tend to lose prot often being the rst and hardesthit industry in turbulent times.

In order to beer understand the aviation industry, it is important to have a globalunderstanding of how the industry functions as well as a regional understanding. Just

because one region is successful, it does not mean another region is following similarpaerns. However, the eects of a region do have positive and negative impacts on otherregions causing what is called the domino eect or a chain reaction.

At the end of 2009, the aviation industry continued to suer from a global economiccrisis and the implications of such will never be fully known. According to IATA, airlinesworldwide lost a combined $11 billion USD in 2009 due to rising fuel costs and reducedearnings on fares and cargo. Despite indications of certain economies returning to positiveenvironments, the positive impact on air carriers world-wide has been slow to grow. Asa result, airlines have been shrinking capacity to accommodate reduced bookings for rstand business class travel. Typically, when the economy suers, the volume of businesstravel is reduced or eliminated by many corporations negatively impacting high-end fares.IATA forecasted yields (average fare per mile) decreased 12 percent in 2009 compared tothe original forecast of 7 percent. Revenue for 2009 decreased 15 percent compared to 2008to a gure of $455 billion USD. Oil prices continued to rise adding a total of $9 billion USDin costs for the airline industry in 2009. European carriers lost an estimated $3.8 billionUSD in 2009 due to reduced travel on long-haul markets while North American carrierslost an estimated $2.6 billion USD. Asia-Pacic carriers lost an estimated $3.6 billion USDwhile Latin American carriers for the most part broke even. In 2009, Middle Eastern andAfrican-based airlines lost an estimated $500 million USD each. Unfortunately, the global

airline industry will continue to face many nancial challenges but it is expected revenuewill return to 2008 levels in 2012 assuming the global economy bounces back and fuelprices do not make a drastic leap upwards. Should the airline industry continue on anegative path and rising costs oset increasing demand, global airline prots could in2011 be half what they were in 2010 according to IATA. In year 2011, rising fuel and oilcosts continue to be an issue as a result of instability in the Middle East with a particular



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focus on Libya. For every $1/barrel increase in oil, it costs the airlines $1.6 billion on aglobal basis.

Table 1-1 highlights current regional regulatory trends. Depending on what directionregional and global economies take, such regulatory trends may change to adapt to thechanging environment. It is expected the volume of airline consolidation will increase tocompensate for increased operating costs and increased competition in specic markets.

TABLE 1-1 Regional Regulatory Trends

Region Regulation Liberalization Deregulation Privatization

North America No No Yes Privatization

Latin America No No Yes Privatization

Europe No Yes No PrivatizationAsia-Pacic No Yes Yes Privatization

Middle East No Yes No Limited

Africa No Some No Cautious

North America

In terms of regulatory trends for North America, Canada has experienced the privatization

of airlines, airports, Air Trac Control (ATC), and the rise of the low-cost airline. The UnitedStates has experienced the rise of the low-cost carrier, government control of airports, thedevelopment of secondary airports, major airline debt, bankruptcies, mergers, stagnantdomestic passenger growth, and increased international growth. US domestic routes havebeen hit hard in recent years. Mexico has experienced government control of the industryand bankruptcies in addition to the emergence of the low-cost airline.

Although most US airlines utilize a hub-and-spoke strategy as dened later in thisbook, some airlines are now implementing de-hubbing or de-peaking strategies to spreadflights more evenly throughout the day allowing airlines to use their resources in a moreecient manner. Such a strategy also allows for a reduction in energy which ultimatelyreduces airport congestion. Aircraft fleets are becoming more simplied as airlines realizethe high costs of operating mixed fleets. Automation initiatives are being implemented toimprove customer service and enhance productivity. Airlines are changing distributionmethods with a huge reliance on the Internet for ticket sales and there is a shift in in-flightservices to more economical oerings.

Europe (European Union)

In terms of regulatory trends for Europe, the Third Package was implemented in 1997creating a fully liberalized environment. Airlines have privatized and the region hasexperienced the growth of low-cost airlines and the growth of alliances including airlinesand airports. Competition between dierent modes of transportation has impacted theairline industry especially the use of high-speed rail. The theme for the future of theEuropean Union (EU) is leadership in air transport regulation. National pride continues



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to be an issue for the industry and many challenges will continue to be faced as the EUexpands its geographic boundaries.

Asia-Pacific

In terms of regulatory trends for Asia-Pacic, the region has experienced managedliberalization and change has been slow compared to North America and Europe. Theregion has felt the positive rewards of strong growth since late 2001 especially in Chinaand India. Interestingly, the busiest international route in the world is Hong KongTaipei.

The region is somewhat unique in the sense that there is no regional organizationproviding many opportunities as well as challenges. Megacarriers and small internationalcarriers co-exist and there are limited interline agreements despite having the largestshare of the world economy. There has been increased growth in the development of

airline alliances and the region faces increased airport and airspace congestion as wellas competition. There is a dire need for advanced navigational equipment to improveeciency and enhance safety measures.

Middle East

In terms of regulatory trends for the Middle East, the region has experienced fairly stagnantgrowth in recent years due to the great divide between rich and poor. The passenger

market is limited forcing airlines to bank on repeat travel by passengers. Airlines areimpacting low-cost strategies and safety and security continue to be issues requiringaddressing.

Africa

In terms of regulatory trends for Africa, airlines do not really contribute much to theeconomy due to the low propensity to fly variable. Standards are low compared to otherregions of the world particularly when looking at safety and the environment. North Africaappears to be growing at a higher rate compared to other parts of the region estimated at46 percent per year for the period 20002010. There has been increased stability in theregion which will hopefully increase the propensity to fly variable over the next decade.

Africa operates an older aircraft fleet mainly due to the low standards issue and lackof capital. The average aircraft age in Africa is 20 years and there continues to be largeutilization of what are referred to as Stage I and II aircraft (i.e., Boeing 727). Such aircraft areinecient to operate, noisy, and damaging to the environment. It is estimated that up to1,000 new aircraft will be required over the next decade to replace antiquated technology.

Since 1992, the region has experienced airline integration, restructuring, and

commercialization. Gradually, flag carriers have become more self-reliant and there hasbeen increased privatization and less government control in the industry. There is a strongneed for training especially at the management levels to cope with global trends. In addition,there is the need for autonomy in civil aviation authorities and improved and additionalinfrastructure. Airlines need to learn to work together as partners rather than compete andit is expected as the industry matures, low-cost carriers will enter certain markets.



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Latin America/Caribbean

In terms of regulatory trends for Latin America/Caribbean, there is a shift from regulationtoward liberalization. The region has experienced increased passenger growth andcompetition as well as increased alliances. Airlines are developing corporate strategy anda competitive strategy to cope with competition. There is a strong need for training at themanagement levels as well as a need for research and development. Brand culture is veryimportant in the region and there has been an increased focus on safety in recent years.

Throughout the region, airlines are thinking as a business and not necessarily as an airlinein the traditional sense. Cost savings initiatives are being implemented and governmentshave learned the economic benets of successful air carrier operations. There is a strongdebate about the regional airport system and whether airport privatization has failed or not.

Safety performance continues to be an issue in Latin America/Caribbean with an annualaverage of 14 percent of the industrys total incidents. This percentage is high considering

the region makes up approximately 5 percent of the worlds total trac.There has been an increased emphasis on improving environmental performance with

investments in new technologies, ecient use of infrastructure, more eective use ofaircraft operations, and discussions on emissions trading.

T H E I N D U S T R Y : C H A L L E N g E S A N D S T R A T E g I E S

Forces Impacting the Airline Environment and Infrastructure Issues

There are a number of forces impacting the airline environment including internal andexternal. The main forces include physical, economic, political and/or legal, socio/cultural,demographic, and technological. Airline management must be aware of all the factorsthat arise or could arise as applied to each force. The airline has the ability to controlcertain aspects of the forces but cannot control other aspects. For example, the airlinecan prepare strategies to combat competition but cannot fully insulate itself from thethreat of competition like new entrant carriers (i.e., deregulated/liberalized environment;freedom of entry/exit; aircraft availability) or new substitutes (i.e., telecommunications,video conferencing). The airline does not have control over the power of the customer orthe power of market intermediaries.

It has been said that aviation is the highest prole industry in existence but also themost neglected in terms of infrastructure investment. There has been an on-going debateabout where such investment is needed and although there is often a strong consensusaddressing specic areas, there is frequently strong resistance. For example, in the U.S.,ATC technology is antiquated and most agree it should be updated. However, there is thepossibility that other countries will be able to tap into U.S. technology and take advantageof it without paying for it.

Capacity in the sky and on the ground is an important topic in the global aviationindustry. If there is no additional investment into capacity infrastructure, and demand isgreater than capacity, there will be increased congestion and delays resulting in increasedcosts and lost of economic benets. Investment into infrastructure development will resultin an ecient air transportation system with economic benets being realized. The abovewill be discussed in greater detail throughout the book.

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Critical Financial Issues and Challenges

As previously stated, the global airline industry will continue to face critical nancialissues and challenges. Table 1-2 outlines some of the major factors corporations mustaddress in order to succeed.

TABLE 1-2 Financial Issues and Challenges Impacting Air Transportation

Cost controls World economy

Access to capital markets Irrational pricing and predatory action by major carriers

Insurance Over-capacity

Foreign currency exposure Cash flow and ability to self-finance

Fleet replacement and price of new aircraft Debt/equity ratios

Industry losses and inconsistent protability Taxation

Cost of funds and low yieldon surplus funds

Ownership issues

Productivity and labor reform

Global Aviation Challenges in the 21st Century

The global aviation industry will face a long list of challenges in the 21st century due to the

new operating environment resulting from the tragic terrorist aacks on the U.S. in 2001and changing political environments. Table 1-3 outlines some of the major challenges thatare discussed throughout the book. The reader will gain a beer understanding of mosttopics plus additional ones in upcoming chapters.

TABLE 1-3 Challenges Impacting Global Air Transportation

Bankruptcy and shut downs Generic vs. Airline business plan

Flexible strategic plan Treat as a business

Regulation, liberalization, deregulation Rising costs (fuel, oil, labor, maintenance, security)New generation airlines vs. legacies Restructuring and alliances

Excessive capacity Competition from other modes of transportationand technology

Customer (target, loyalty) Organizational design

Internal challenges Overall strategy

Duplication of work structures Functional and departmental barriers

Sta relations and new types of employees Legacy system dependencies

Lack of compromise Air carrier ownership and controlSustainability of air carriers and safeguards Physical and environmental constraints

Air transport and the global trade mechanism Consumer protection and passenger rights

Impact of technology (aircraft, e-commerce,Internet, Computer Reservation Systems, GlobalDistribution Systems) on liberalization process

Future approaches to regulatory reform

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Global Aviation Strategies in the 21st Century

The global aviation industry is learning to adapt to the multiple changing environmentsin which it operates. The incorporation of flexible strategies are becoming more importantthan ever before leading to the development and implementation of new business modelswith various types of businesses under the umbrella of air transportation. Table 1-4outlines some of the global aviation strategies the industry must address. The reader willgain a beer perspective on some of these topics as they are presented throughout the

book.

TABLE 1-4 Strategies for Global Aviation

Understand the reality ofchange and become flexible

Revitalize strategy

Development of new types ofair carrier business models

Focus on the customer and ask what they want

Eliminate duplicationof work structures

Organizational accountability

Turn staff relationsinto strengths

Update airline systems

Build partnerships (alliances,interactive marketing)

Act decisively

Diversify the business(core and non-core)

Create new ways to reduce future costs and spending of capital

Increase efficiency Reduce dependence on local, national, and international economies

Airlines must take controlof business issues

Work in partnership with other organizations

T H E N E W B R E E D O F A I R L I N E S

Since the terrorist aacks on the U.S. on September 11, 2001, the global industry has gonethrough multiple phases of development including survive, adapt, recover, and rethink.The laer phase is an on-going phase that will never end forcing air carriers to constantlyrethink business strategies. The main advantage of having to rethink regularly is that itforces management at the leadership level to strengthen the core business for long-termsurvival and success. As airlines rethink their business models and new entrants emergebased on new business platforms, new breeds of airlines will emerge and succeed aswell as emerge and fail. The ultimate business model will probably never be developedbecause of the impossibility of being able to predict the future of the industry and all thefactors that influence its growth. Although a frustrating scenario, excitement is added tothe industry with the challenge of becoming the best.

There are dierent categories of air carriers to be discussed in an upcoming chapterranging from the true legacy airline to the regional/commuter to the low-cost airline to thespecialized airlines including the network specialist, the product specialist, and the pricespecialist. Before discussing any of the above in great detail, the reader should know thatthe term, low-cost airline, has been a major buzz word in the industry over the past decadeand there is the belief that low-cost means an ecient operation with cheap air fares.



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Discombobulated Syndrome: What the heck does low-cost mean?

Low-cost airline is a frequently misused and misinterpreted word even by industry experts.For the purpose of debate, there is no such thing as a low-cost airline but the reader candecide if that is true or not by consulting the chapters in the book. It is important to have abasic understanding of the above issue prior to moving forward with the readings so thatthere are no misconceptions about terminology used in the content. The industry tends touse numerous denitions for low-cost operations and the author wants to alert the readerof such because often multiple denitions mean the same thing. For example, a low-costairline might refer to the following: low cost carrier (LCC); low-cost/no frills carrier (LCC/NF); low-fare/high value carrier (LFHV); less frills carrier; value carrier; budget carrier;or new generation carrier. The author refers to the above as discombobulated syndrome.

In upcoming chapters, the new breed of air carriers, discussions on the new airline/airport system, and newly developing trends in airline alliances will be introduced to the

reader.

FA I L I N G A N D A C H I E V I N G S U C C E S S

Historically, airlines have failed and airlines have achieved success in all regions of theworld. As already mentioned, no business model is perfect and there is always room forimprovement. Many lessons will be learned throughout the chapters in this book and thereader will recognize common traits leading to failure.

Failures in Airl ine Business Planning

Some of the common failures in airline business planning will now be highlighted andlater discussed in upcoming chapters.

Undercapitalization is a common basis for failure. Existing airlines rarely have enoughcapital to keep up with high operational costs and start-up airlines rarely have enoughcapital to either launch the company or remain in business. Access to funding has becomeincreasingly dicult and will most likely become more dicult until the global economy

becomes more dened.Overexpansion is another common trait associated with failure. There is a often a

common belief that bigger is beer and sometimes, leadership feels it is beer to havelarger access to a market over a competitor rather than operate a successful and ecientoperation. In certain cases, when an airline grows to a certain size, often measured bythe amount of annual revenue, the airline has no choice but to continue growing due tovarious factors including size of infrastructure.

Lack of flexibility is a major negative factor impacting airlines world-wide. The businessplatforms of legacy carriers are often based on old regulatory environments designed to

operate in a specic type of environment that no longer exists. Unfortunately, because thelegacy carrier is often too established, it has diculty adjusting to changing environments.However, newer carriers have a major advantage over legacy carriers because businessplatforms are developed incorporating flexible strategic parameters allowing the airlineto adapt to multiple changing environments as necessary.



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Wrong money and wrong leadership are negative contributors when an airlineseeks to be successful. Wrong money is invested by parties that do not understand thenature of the operation and as a result of having an active voice in the decision makingprocess, ultimately lead to the demise of an organization. Wrong leadership includeshaving the wrong person in the wrong job and in some cases, having the right person inthe wrong job. Airlines, no maer how big or small, should make sure only right money isinvested into the organization and the right people should be placed in the right positions.

Unable to obtain sustainable, competitive advantage is a large factor contributing tofailures in business planning. This is one of the reasons why some air carriers believe inthe bigger is beer philosophy. Market dominance is often more important than achievingprotability but as access to capital is decreased and government bail-out packagesdecrease, airlines will be forced to restructure strategies if they wish to remain afloat.

Finally, a failure to demonstrate revenue growth and protability is a major failure inairline business planning. This is dicult to achieve but it must be done. Failure to identify

market need is a common mistake made in the development of the airline business plan.It must be superior to any potential competitors business plan and should be able to gainthe aention of investors.

Achieving Success

The reader will quickly learn of the many failures associated with dierent types ofbusinesses in the air transportation industry. There is a large focus on air carrier operations

as this book concentrates on this but it also introduces the reader to other aspects of airtransportation including general aviation, air cargo, and aerospace. In terms of discussinghow to achieve success in the industry, airlines are the primary focus. The reader should

be aware, that dierent success strategies apply to dierent aspects of air transportationdepending on the specic focus. However, as success relates to airlines, success can beachieved by following, but not limited to, some basic factors including: developmentof a solid airline business plan (not a generic business plan); incorporate flexibility;diversify business structures; recruit and hire the right leadership; implement steady andmoderate growth strategies; implement eective cost cuing strategies; practice aircraftfleet commonality; seek reasonable capital requirements; ensure that available tonne-mileremains congruent with demand (route/network realignment/optimization); shift capacityto take advantage of routes and markets where depressed currency will signicantly increasevalue-for-money opportunities; improve balance sheets and credit ratings (prudent capitalplanning); develop strategies to counter continuing pressure on yields; carefully evaluatenew partnerships and alliances; respond to consumer needs rather than dictate; create anenvironment that enhances labor/management relationships with cooperation; engage ineective lobbying eorts to influence critical government policies, laws, regulations, andtaxes; eliminate ineciencies; increase productivity to the greatest extent possible; andhave a long-term vision rather than concentrating on today.

K E Y T E R M S

Air Navigation Service Providers (ANSP)DeregulationDe-hubbing



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LiberalizationLow-cost carrier (LCC)Railway Labor ActRegulationRe-regulationSevere Acute Respiratory Syndrome (SARS)

R E V I E W Q U E S T I O N S

1. List the four stages of development impacting the airline industry and briefly describehow each has impacted the future direction of the industry.

2. What are the top ve frustrations in aviation today? Describe each. What are additionalareas of debate?

3. What are the top three costs for an airline typically? In addition, list other typicalairline operating expenses. What is the name of the index that produces such costs?How often is the index published?

4. What are the six aviation regions of the world? Describe the regulatory trendsassociated with each region.

5. What are the main forces impacting the airline environment? What are the main

infrastructure issues?

6. What are the main failures in airline business planning? Describe each in detail.

W E B S I T E S

www.airlines.orgwww.iata.orgwww.icao.intwww.lowcostairlinesworld.com

S U G G E S T E D R E A D I N G S

Heppenheimer, T.A., Turbulent Skies: The History of Commercial Aviation. Hoboken, NJ: Wiley

Publishing, 1998.

Icon Group International.Airline: Websters Timeline History, 18332007. San Diego, CA: Icon Group

International, Inc., 2009.

Miller, Frederic P., Agnes F. Vandome, and John McBrewster. Low-cost Carrier: No Frills, Discounts and

Allowances, Budget, Airline, United States, Europe, List of Low-cost Airlines, Ancillary Revenue.

Beau Bassin, Mauritius: Alphascript Publishing, 2009.



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2Aviation: An Overview

IntroductionThe Aerospace IndustryThe Air Transportation Industry

Chater Checklist Yu Shuld Be Able T:

Dene aerospace industryand describe its basiccharacteristics and economic magnitude

Discuss some of the problems faced by thegovernment market

Describe the current economic outlook for the threesegments included in the civil aviation market

Identify and briefly describe the factors aectingcommercial transport sales

Dene related aerospace products and services Dene air transportation industryand distinguishbetween certicated air carriers and general aviation

Describe the impact of the air transportation industryon the economy Describe how air transportation contributes to the

ecient conducting of business and aects personaland pleasure travel paerns


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I N T R O D U C T I O N

In a short span of 100 years, we have gone from making a few test flights to orbitingcelestial bodies, from sliding along sand dunes to spanning oceans, from performing featsof isolated daring to depending on aviation in our everyday lives. Speeds have increaseda thousandfold, as have altitude and range capability. No longer is the sky the limit.Ahead lie risks and rewards as vast as space itself. We have the promise of new airlinersthat fly with greater fuel efciency, of huge air freighters that move the nations goods,of an expanding general aviation fleet, and of the peaceful uses of space for explorationand research.

T H E A E R o S p A C E I N D U S T R Y

The aerospace industry includes those rms engaged in research, development, andmanufacture of all of the following: aerospace systems, including manned and unmannedaircraft; missiles, space-launch vehicles, and spacecraft; propulsion, guidance, and controlunits for all of the foregoing; and a variety of airborne and ground-based equipment essentialto the testing, operation, and maintenance of flight vehicles. Virtually all of the major rmsin the aerospace industry are members of the Aerospace Industries Association (AIA)orthe General Aviation Manufacturers Association (GAMA).Founded in 1919 and based inWashington, D.C., the AIA is a trade association representing the nations manufacturersof commercial, military, and business aircraft, helicopters, aircraft engines, missiles,

spacecraft, and related components and equipment. GAMA, also based in Washington,D.C., is the trade association that represents the interests of manufacturers of light aircraftand component parts.

As the 21st century began, approximately two-thirds of the aerospace industrysoutput was bought by the federal government. During the past two decades, this gurehas ranged as high as 74 percent. At the same time, the aerospace industry is the worldslargest producer of civil aircraft and equipment. Roughly 6 out of every 10 transportsoperating with the worlds civil airlines are of U.S. manufacture, and in addition, theindustry turns out several thousand civil helicopters and general aviation planes yearly.

These facts underline the unique status of the aerospace industry. Its role asprincipal developer and producer of defense, space, and other government-required systems in large measure dictates the industrys size, structure, and productline. Because it operates under federal government procurement policies and practices,the industry is subject to controls markedly dierent from those of the commercialmarketplace. But the aerospace industry is also a commercial entity, and it must competein the civil market for economic and human resources with other industries less feered

by government constraints. Its dual nature as government and commercial supplier makesthe aerospace industry particularly important to the national interest. Its technologicalcapabilities influence national security, foreign policy, the space program, and other

national goals. Also, the efcacy of the national air transportation system depends toconsiderable degree on the quality and performance of equipment produced for theairlines and the airways operators.



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Naturally, such an industry is vital to the U.S. economy, especially in the followingareas:

1. Trade balance. The excellence of U.S. aerospace products has created strong demandabroad, with the result that the industry consistently records a large international

trade surplus.2. Employment. Despite several years of decline in number of workers, the aerospace

industry remains one of the nations largest manufacturing employers.

3. Research and development. The industry conducts moreresearch and development (R& D)than any other i

Documents

Air Transportation, 7th Edition