Airline Management AVM 373 PROFESSOR GREG SCHWAB.

Airline Management

AVM 373

PROFESSOR GREG SCHWAB

US AIRWAYS

NEW EMPLOYEE

ORIENTATION

COURSE INTRODUCTION

OVERVIEW COURSE REQUIREMENTS

– HOW TO GET AN “A”

Chapter 1 Objectives

Air Transportation includes:

All civil flying performed by the certified air carriers and general aviation– Does not include military but military activity

is tracked by the FAA

Interstate Air Transportation:

The carriage of persons or property for compensation or hire

Aerospace Industry

Research and Development Aerospace Systems Defense Spacecraft Propulsion, Guidance, Control Units Airborne and Ground Based Equipment

– Testing, Operations, and Maintenance

Principle Product Lines

Aircraft Missiles Space Systems Engines Parts and Equipment

Product Lines Characterized by:

High Performance High Reliability High Technology High Unit Value

Industry activity is:

Dominated by the DOD and NASA

The principle customer is the DOD (is this changing?)

The principle commercial product is the airline transport

Prior to WWII

There were over two dozen companies designing and building commercial airliners

Today the mayor players are down to two

– Boeing (72%)

– Airbus (28%) Historically, Boeing and McDonald-Douglas

have offset large R&D expenses by benefiting from large military contracts

Government Contracts

Government required to ask for “bidders” Request for Proposals

– Detailed Specifications

Industry Characteristics

Air Transportation includes:– all transportation by certified air carriers and general

aviation aircraft

Transformation of Industry during the 1950’s due to:– production of jet powered military aircraft

Late 1960’s– fabrication of equipment to meet the nations goals in

space exploration

Changes compounded need for:

More R & D (technology) Greater product complexity More personnel per unit produced Higher skill level Longer program development time The need for new facilities

Manufacturing Output

1991: almost 65% of industry bought by federal government

Exports of aerospace represent 10% of total US exports

Aviation exports exceed aviation imports

Industry vital to US in:

Trade balance Employment

– consistently employees ~1,000,000 people

R & D Impact on other industries Travel infrastructure

– travel related industries

General Aviation

After record shipments in 1978, GA has experienced a 13 year downward trend in sales from 17,817 in 1978 to 1,104 in 1996

Historically, the GA industry has closely paralleled that of the nations economy (GNP)

– In other words, things have to be pretty good for people to buy their own plane.

– More recently, GA sales have not responded to the current economic recovery

Reasons for downward GA trend

High aircraft prices High interest rates High operating expenses High product liability costs Changing lifestyles Tax laws Foreign competition

What is General Aviation

All civil aviation except that which is carried out by the certified airlines

GA accounts for over 80% of operations at towered airports

GA accumulates over 80% of total hours flown by GA and air carriers combined

What is General Aviation

GA utilizes all of the nations 17,581 airports

Air carriers serve about 800 of these 75% of the air carrier traffic is concentrated

at 30 of the 800 airports

Business Aviation

Business use of light aircraft remains strong Why?

– Fuel-efficient– Can fly to GA airports– Most often can fly direct to destination– Efficient use of time– Decentralization of business– Concentrated airline service

Airline Aviation

Fewer than 5% of US airports have airline service

Majority of flights serve only 30 major centers Expected growth in commuter-regional airline

service to cities with low passenger volumes Large carriers will concentrate on high density

markets

Airline Aviation

By 1960, 1/3 of adult Americans had flown commercially

By 1981, 2/3 By 1995, 80%

Fare prices remain a bargain compared to price increases of other products and services over the past 40 years

Air Mail Service

The first regular airmail route in the US was established in May 1918 between New York City and Washington DC

218 miles in length Discontinued in May 1921

Why Regulate Aviation?

Stabilize the industry Improve air safety Reduce cash subsidy by US government

Congress Rights

Regulate interstate and foreign commerce Regulate the postal service Make treaties with foreign nations Provide for the national defense

The Air Mail ACT of 1925 (Kelly ACT) Authorized the postmaster general to enter

into contracts with private persons or companies for the transportation of mail by air

Air Commerce ACT of 1926

Duty of the Secretary of Commerce to encourage air commerce by establishing civil airways and navigational facilities to aid aerial navigation and commerce

Got the federal government into the aviation business as a regulator for the air carriers

Created by the Kelly Act


Promote the development and stability of commercial aviation in order to attract adequate capital into the business and provide the fledgling industry with the assistance and legal basis necessary for its growth


Established regulations for:– Licensing of Pilots– Licensing of Mechanics– Aircraft Inspection– Operation of aircraft– Marking of licensed and unlicensed aircraft– Airways

Lead to Bureau of Air Commerce

Air Mail ACT of 1930

Passed to enhance growth, efficiency, stability – reckless competition was rampant

Provided Postmaster General with unlimited control over airmail route system

Postmaster General could extend or consolidate routes in public interest

Spoils Conference

Air Mail ACT of 1934

Authorized one year contracts subject to review prior to renewal

Signed into law by President Roosevelt Interstate Commerce Commission

– regulated rates and service equipment

The Civil Aeronautics ACT of 1938 Substituted a single Federal Statute

replacing general and airmail statutes that had up until this time provided direction for aviation

Created an overall administrative body– 5 member Civil Aeronautics Board – 3 Member Air Safety Board– An overall administrator

The Civil Aeronautics ACT of 1938 Members appointed by the President for 6

year overlapping terms Members not permitted financial interest in

aviation Members appointed by the President for 6

year overlapping termsMembers not permitted financial interest in aviation

Civil Aeronautics Authority

Congressional mandate to CAA to provide:

Encourage and develop the air transportation system

Regulate to a high degree of safety Promote adequate, economical, and efficient

system Encourage development of civil aeronautics

Civil Aeronautics Authority

Exercised quasi-judicial and legislative functions covering economic and safety regulations

Balance of personnel, property and unexpended funds transferred from Bureau of Air Commerce and Interstate Commerce Commission

Civil Aeronautic Board

CAA Reorganized into the CAB

CAB became the Civil Aeronautics Administration (CAA)

CAA became Federal Aviation Agency (FAA)

FAA became the Federal Aviation Administration (FAA)

CAB: Road to Deregulation

1977, President Carter appoints Chairman, Alfred Kahn

Strong proponent of deregulation Began processing and approving application

for airlines Better if airlines promised lower fares Renewals were based upon delivery of

promises

CAB: Road to Deregulation

Strong opposition from unions and financial institutions

Deregulated air cargo in 1977– initial success pushed CAB into support

Airline Deregulation ACT of 1978 Mirrored other transportation deregulation Acts

– highway, Waterway Domestic Air Transportation System Overriding theme was competition Airline restrictions slowly removed Essential Air Service

– Small community air service program CAB sunset provision transferred duties to DOT in 1985

Deregulation Issues

Prior to deregulation-problems existed:

– system suffered from overcapacity– barriers to entry and exit from the industry– lengthy regulatory process

Deregulation Issues

Major changes under deregulation:

Phasing out of the CAB by 1985 Easing of restrictions into markets

– entry-exit CAB losing authority over fares by 1983 Reduced reporting requirements for air carriers Federal preemption of any state economic regulation of air

transportation

Airline Deregulation

Proponents Argued:

Commuters would best serve low-density markets

Market place would best serve American interests

Airline Deregulation

Opponents Argued:

Regulation has served the public interest as well as air carrier interest

Deregulation would destabilize the air carrier market

Air Carrier Aircraft Development

After wartime production of aircraft ended in the late 1940’s, aircraft companies began to focus on producing aircraft for business transportation

Good example: The Douglas DC-3 Became the first aircraft to give airlines

three vital ingredients necessary to reach financial break-even point– speed– safety– economy



DeHavilland Comet

– first commercial aircraft (worldwide)

– numerous crashes caused early cancellation

Boeing 707

– Military R & D effort

– Boeing risked own funds for R & D

– Technology transfer to civilian market

– First U.S. jet to enter scheduled service (Pan Am)


Boeing 727– first tested 1963– fielded 1964– hugely successful airframe

Boeing 737– Most popular air carrier jet in service today– 3,000+ flying worldwide

Aviation Aircraft Pioneers

William Lear– gambler, inventor, promoter– developed lear jet

Walter Beech– Beech Aircraft Corporation– Beech King Air

• most successful turbo-prop aircraft flown by commuters and corporations

Aviation Aircraft Pioneers

Clyde Cessna– founded Cessna Corporation– C-172 became most popular aircraft for

business and pleasure market

Department of Transportation (www.dot.gov) Cabinet level office first requested as far back as 1870 DOT created in 1966

– Alan Boyd first Secretary of Transportation President Johnson credited with authorship of DOT

– Advocated creation of DOT and NTSB

– Focused on need for system-wide coordination, safety, and reorganization of transportation activities and planning

– He rallied support for supersonic planes, aircraft noise control, and high speed rail

Department of Transportation

Primary Objectives– stimulating technological advances– provide general leadership– coordination of transportation services

Secretary of Transportation– appointed by the President– reports to congress

Major Functions (see text)

Federal Aviation Administration

Primary Objective:– Promotion of aviation safety while ensuring the

efficient use of the nations navigable airspace– www.faa.gov

Federal Aviation Administration

Traces roots back to the Air Commerce Act of 1926

How does the FAA do its’ job?– issues/enforces safety rules and regulations– certifies airmen, aircraft, aircraft components,

air agencies, airports– Manages/operates national airspace system

FAA Offices-Points of Contact

National Headquarters-Washington D.C. Regional Offices Flight Standards District Office (FSDO) Air Traffic Control

– Flight Service Station– Control Towers– Air Route Traffic Control Center (ARTCC)

FAA Operating Certificates

Airmen– Pilots– Mechanics– Controllers– Dispatchers– Parachute Riggers

Air Carrier Operating– Part 121/135


Aircraft1. Type: Prototype aircraft (experimental),

aircraft, engine, propeller, or appliance

2. Production: after test complete (factory may begin production of a specific type of aircraft)

3. Airworthiness: unique to each airframe produced


Air Navigation

– FAA inspects, classify, and rate facilities such as lights, navigation facilities (VOR,VORTAC,NDB,RADAR)

Air Agency

– Flight Schools, ATC Schools, Aircraft Dispatcher Schools, Mechanic Schools

Airport Operating

– Airports serving air carriers. Ensures a minimum level of safety

– Part 139 (either full or limited certificate)

Airport Certification Examples

FAA ensures airports meet standards established in FAA Advisory Circulars:

Environmental Compliance Fuel Storage De-Icier Fire Fighting Bird Hazards Snow Removal

FAA Enforcement

Investigation– all civil accidents– probable cause reserved for NTSB– safety concerns– accident doesn’t have to occur

Operations

– ATC System

– NAVAIDS

– Airports

– Aeronautical Center

– Technical Center NASA Report

– FAA honors NASA Report’s that are properly filed

– but there are limitations

FAA Enforcement

FAA Funding

Airport and Airway Development Act of 1970– allocated funds for airport construction projects– later became the Planning Grant Program

(1980)– birth of Airport Improvement Program (AIP)

FAA AIP Funding

Incorporates local/State/Regional plans Master/Strategic Plans 10 percent sales tax supported (*changing)

– Local share 5%– State share 5%– Federal share 90%

Cost refunded to sponsors (State/Local)

Other FAA Initiatives

Microwave Landing System (MLS) Global Positioning System (GPS) Continuous ATC System modernization

– STARS, ASDE, ADS, ADS-B

Aeromedical and Human Factors R & D (Atlantic City,NJ)

NTSB

National Transportation and Safety Board Appointed by President

– with advise and consent of Senate Five members

– 5 year overlapping terms

– chairman and one co-chairman Independent of DOT

– DOT must respond within 90 days of NTSB Recommendation

Offices throughout US and Alaska

Transportation Act of 1974

NTSB established as entirely independent agency– Broad powers to investigate transportation

accidents

Most recommendations directed at FAA– airlines must state “why” they won’t comply

with recommendations within 90 days

NTSB Requirements of 1974 Transportation Act Conduct special studies on safety problems Evaluate effectiveness of government

agencies involved in transportation safety Evaluate safeguards used for transportation

of hazardous materials Review appeals from airmen and merchant

seaman whose certificates have been suspended or revoked

NTSB Scope and Responsibilities Investigate civilian accidents in:

– aviation– selected highway accidents– fatal pipeline accidents or substantial damage– all passenger train accidents or fatal railroad– major waterway and any involving public

vessel

NTSB Concerns

Intention of flight by pilot– flight doesn’t have to occur– pilots may be violated based on intent

Damage to aircraft

NTSB- When you need help

Notification Process– www.ntsb.gov– Flight Standards District Office– Air Traffic Control Facility

When and Why you call:– problem with flight controls– crewmember can’t perform duties, i.e. drunk– in-flight fire– overdue aircraft

NASA Report

Your “get-out-of jail-free-card” Only can use once in a 5 year period Must file within 10 days of a violation Some restrictions

NTSB Major Accident Investigation Go-Team Activates- on 24 hour alert Accident Team Members:

– 1 of 5 board members– air traffic controller– experts trained in:– witness investigation– aircraft operations– aircraft maintenance– human factors– meteorologists– hazardous materials

NTSB Major Accident Investigation Aviation accidents have been on a flat line

since mid-1980’s Recently, the number of persons killed in

aviation accidents in the U.S. and its territories dropped from – 1,093 in 1996 (380 air carrier) ValueJet and TWA

800– 976 in 1997 (8 air carrier) (source NTSB 1998

report )

NTSB Major Accident Investigation Year 2000 Statistics:

– Part 121 Carriers 49 Accidents : 92 deaths (AK Flt 261, Embry DC-8)

• Accident per 100,000 Departures = 0.440

– Charter Carriers 5 Accidents : (no deaths)• Accidents per 100,000 Departures = 1.131

– Part 135 Operators 80 Accidents : 5 deaths• Accidents per 100,000 Departures= 3.23

– General Aviation: 1835 Accidents: 341 deaths• Accidents per 100,000 Departures= 6.49

NTSB Investigation Steps

Go-Team at site– 7-10 days for typical accident

Laboratory– review black box– review air traffic control tapes

Safety Recommendation– boards end product– vital to safety prevention

Public Hearing– near crash site

Final Report

International Civil Aviation Organization (ICAO) www.icao.org Composed of 185 countries (+/-)

– called the “Assembly”

33 countries make up the “council” Meet once every three years

– additional meetings as required

ICAO Facts

Purpose and Principal Aim:– Develop principals and techniques to foster

planning and development of international air navigation to ensure safe and orderly growth

ICAO Facts

Other Aims:

– prevent economic waste caused by unreasonable competition

– avoid discrimination between contracting states

– encourage development of airways, airports, and navigation facilities for international civil aviation

Normally adopts FAA and NTSB guidelines Headquartered in Montreal, Quebec, Canada

ICAO Issues

FAA interface:– some consider ICAO a puppet of the FAA– much like United Nations considered an arm of

the United States government

FAA interfaces with DOD, NTSB, ICAO

Major Aviation Associations

Air Transport Association (ATA)– schedules airline service organizations– goals achieved through a system of councils

Regional Airline Association– airlines that deals with short, local, feeder

routes– formally Commuter Airline Association


Aerospace Industries Association (AIA)– trade group representing aviation R & D interests

National Business Aviation Association (NBAA)• represents over 3000 aviation corporations

(www.nbaa.org) Aircraft Owners and Pilots Association (AOPA)

– represents over 250,000 members who fly and own aircraft (www.aopa.org)

Aeronautical Radio Inc (ARNIC), (www.arinc.com)– company owned by the airlines and provide communication

services


American Association of Airport Executives (www.airportnet.org)

– represents airport officials and students of airport management

Air Traffic Control Association (ATCA) (www.atca.org)

– represents those interested in advancement of air traffic control

National Air Traffic Control Association (NATCA) (www.natca.org)

– union that represents the FAA air traffic controllers

The General Aviation Industry

Accepted definition of General Aviation– All civil aviation except that carried by the

commercial airlines

Aircraft termed “utility” to distinguish it from larger aircraft

GA Airport Support

Air Traffic Control

– Flight Service Station provides primary support Active aircraft means:

– aircraft must have current registration and flown during the past year

17,581 airports nationwide

– public and private

– public-use private airports of concern to FAA

• why? vulnerability to sale Private pilot certificates have increased but slowly 600+ Control Towers

GA Support Industry

Manufactures– shipments have steadily declined but some turnaround

may be seen in the future– product liability issues have been resolved

Corporate Aviation– Executive Use

• Specific title used by FAA to describe use not for compensation or hire

– greatest number of GA aircraft show business as primary use

Fixed Base Operators provide numerous services

– line services

– aircraft storage

– aircraft maintenance

– sales and service (largest sales = Cessna)

– Flight instruction

• does not include proficiency flights

– Commercial Services

• Part 135 Passenger and Cargo Services Profit margins vary

GA Support Industry

GA Statistics

90% of all civil air fleet is GA No reporting requirements 181,341 active aircraft GA aircraft (1995)

– on a steady decline

GA operations represent 75% of traffic at control tower locations

Approximately 254,002 active GA pilots– 622,261 total U.S. pilots

NTSB Accident Investigation

Aviation accidents have been on a flat line since mid-1980’s

Recently, the number of persons killed in general aviation accidents in the U.S. and its territories dropped from – 631 in 1996– 646 in 1997– 341 in 2000 (source NTSB 2001 report )

GA Usage

Business– over 2/3 of fortune 500 companies operate

business aircraft• many variations

Personal flying– personal transportation by air is not

economically regulated

Instructional flying

Commercial and Industrial Flying– aerial application– aerial observation– other work use– commuter air carrier – air taxi

Agricultural

GA Usage

Major Factors Affecting sales of Aircraft Product liability claims Luxury taxes Subsidization of research, development,

production and financing

Economic Factors affecting GA Aircraft Prior to 1978: changes to GA equaled changes in the

economy Late 1970’s: long slow decline in aircraft shipments President Johnson’s “Great Society” social programs 4 Planes introduced in 1960’s: Cessna 172, Piper

Cherokee, Beech King Air 90, and Lear 23 More planes sold in the 1970’s than before or since Airport Development Act of 1970 Many smaller companies purchased by larger companies

in the 1980’s.

Economic Factors affecting GA Aircraft 1970’s focused on product liability

– $50 per aircraft in 1962– $2,111 per aircraft in 1972– $70,000 per aircraft in 1985

Companies self-insured to offset risk Airline Deregulation

– slowed business aviation initially

The Airline Industry

A industry may be defined as a number of firms that produce similar products and services and therefore are in competition with one another

In the airline industry, United Airlines is the largest and earned $16+ billion in revenues 1997

The Airline Industry

Industry Structure– Major– Nationals– Regionals

Certified carriers employ over 500,000 employees

Nearly 5,000 multi-engine aircraft in use by U.S. carriers

The Use of Aviation in the United States Social Political

The Social Use of Aviation in the United States Transportation is civilization Aviation is an applied technology

– One jetliner contains:• 4.5 million parts• 100 miles of wiring• 2,000 pieces of tubing• 75,000 engine drawings• 12,000 pages of Technical Orders

U.S. Airfares are the lowest in the world

The Political Use of Aviation in the United States National Defense

– CRAF

Aviation allows position of world leadership

Defense relies upon airpower and diplomacy rather than physical barriers

Air Power is Peace Power

The Political Considerations of Selecting a Site Legislative and Regulatory actions

– Fuel Tax– Landing Fees– Property Taxes

The Airline Industry: Majors

Annual gross revenues over one billion dollars annually

Major Airlines serving airports:– American, Delta, Northwest,TWA, United,

Continental, Southwest, Alaska, UPS,FedEx, DHL Airways, American West, US Airways

Carry 80% of industry traffic B-737 most widely used aircraft

The Airline Industry: Nationals

Sales between $100 million-$1 Billion Airlines:

– Numerous airlines (32) including: AirTran, World

Includes Supplemental air carriers, (i.e., ATA)

The Airline Industry: Regional/Commuter Regionalized service Propeller driven (70%Turbo-prop, 25% piston)

– This is changing rapidly, moving toward business class jets

Small, medium, and large regional Since deregulation, regionals have declined in numbers Code-Sharing with Nationals and Majors

The Airline Industry: Regional/Commuter Large regional control 3/4 of regional traffic 9 out of 10 airports receiving scheduled air service are

served by a Regional Primarily operate aircraft seating less than 60 passengers Operate over short distances between 100-300 miles Certified commuters are referred to as medium or large

regional

Formerly air taxi operators Classified as small regionals (noncertificated carriers) Operate over short distances between 100-300 miles Regional Airline Association was formally the Commuter

Airline Association

– more descriptive of service offered

The Airline Industry: Regional/Commuter

NTSB Major Accident Investigation Aviation accidents have been on a flat line since mid-

1980’s Recently, the number of persons killed in air carrier

accidents in the U.S. and its territories dropped from – 92 in 2000 (AK Flt 262, Embry Worldwide)– 5 Commuter in 2000– 71 Air Taxi in 2000

Non-US Registered air carrier deaths were 236 (mainly from Korean Air 747 craash in Guam in August 1997)– (source NTSB 1998 report )

Deregulation affect on Airline Industry All modes of transportation deregulated

– highway, rail, water, air Increased competition Safety improved after deregulation, then leveled off Economy experienced its worst recession in two decades

during first three years of deregulation of the 1980’s Number of Regionals have decreased

– expect to grow at in the next 10 years

Airline Economic Considerations

Load factors Airframe Fuel Flow Population Competition

Air Carrier Route Selection Determinates Economic considerations: Business Pleasure Mail Cargo Seasonal operations

Geography Considerations

Terrain Weather Navigational status Airport ATC Regulation

Section 401 Certificates

Air Carrier Certificates- Three Types– Primary of determination of fitness– Determination of public convenience and

necessity• carriers providing foreign service

– Continuing fitness review

Airlines must pass fitness test:– carrier site– financial resources– flight equipment– strategy for operations– past performance to legal requirements

Recurrent evaluations Insurance certificate covering operations



All-Cargo Certificates No passengers


Commuter Air Carriers Must submit insurance certificates Also subject to Section 401 Continuing

fitness requirements Prior to beginning operations commuter

must have registration on file

» ?

Travel Agencies

International Aviation

Sovereignty International Air Law Deregulation Growth

Air Transportation involves:

Building airports Navigational aids Weather reporting systems

International systems standardized include: Air Traffic Control Aircraft Design Personnel licensing Airports

International Air Law

Looked closely at establishing universal international jurisprudence– i.e. World Court

Sovereignty in Airspace

Should airspace above a nation be considered within the sovereignty of each nation?

Or like the high seas, be considered international?

Opposing Theories

Air is Free– states have no authority over it

Air is Not Free– states have air sovereignty over their soil

Paris Convention-1919

Allied and associated nations met:– International Commission on Air Navigation

Enacted International Air Navigation Code– Referred to as Paris Convention of 1919

Paris Convention- Outcomes

Full and absolute sovereignty of each state over the air above its territories, and waters– states could not impose jurisdiction over the air

above• Consider Captain Gary Powers flight (1960’s)

No discrimination based on nationality Every aircraft must be registered to a state


Special treatment for military, naval, and state aircraft Right to transit without landing Right to use public airports Mutual identity

– cover damage done to another state Establish a permanent International Aeronautical

Commission Rights remain during time of war


To ensure safe navigation Each aircraft will have a certificate of

airworthiness and license for wireless equipment

Pilots will be licensed Right of Way rules to prevent collisions Rules for ground operations

Havana Convention- 1928

Established special customs procedures for aviation

Reinforced 1919 convention agenda

Warsaw Convention- 1929

Provided unification of rules relating to international transportation by air addressing:

Passenger Merchandise

Warsaw Convention- Outcomes

Convention provided that an air carrier is liable for damage sustained by:

Death or injury to passengers Destruction, loss, or damage to baggage or

goods Loss resulting from delay in the transportation

of passengers, baggage, or merchandise

Warsaw Convention- Outcomes

Set Standards for the following:

Passenger tickets Cargo waybills Air travel documentation

Chicago Conference- 1944

Foster development of international Civil Aviation

Based on theory of opportunity and sound and economical operation

Nation may provide reasonable search of aircraft Transit aircraft will be provided fuel and oil

except from local duties (charges) Standard form of air transport agreement


Standardized many rules/procedures– communication systems– airports– air traffic rules– licensing– airworthiness and registration– weather information exchange– logbooks– maps/charts– customs– accident investigation


ICAO born Expenses divided between nations

– U.S. pay larger share (80%)

Disputes may be settled by Permanent Court of International Justice– or special arbitration tribunal

Power to suspend airline from international operations

Two/Five Freedoms

Privilege of flying across its territory without landing

Privilege of landing for non-traffic purposes Privilege of deplaning passengers, mail, and cargo Privilege of picking up passengers, mail, and

cargo Privilege of picking up/dropping off passengers,

mail, or cargo destined for 3rd country

International Air Transport Association (IATA) www.iata.org To provide a means for collaboration among air

transport enterprises engaged directly or indirectly in international air transport service

Foster air commerce and study the problems connected with air service

Cooperates with ICAO Provides a forum to determine fares and route

structures

Post 1970’s

International fares complicated and abused

U.S. Policy on International Aviation Carter Policy

– U.S. conduct in international aviation– Established to provide U.S. negotiators with

guidelines on objectives

Goal: give consumer the most competitive service available

U.S. Policy on International Aviation Expand opportunities

– exploit technology to enhance international travel

– 34% of international traffic crosses the North Atlantic routes

President Carter policy to encourage competition Largest percentage increase between 1977 and 1986 was

between the U.S. and South Korea (business buildup)

International Concentration

Inevitable Individual airlines do not possess global reach Force Multiplier

– power of the hub

– computer reservation system

– equipment usage (supplies, purchases) Cabotage

– foreign operators carrying passengers between two domestic points in another country

International Air Transportation Act of 1979 Counter-part to Airline Deregulation Act of

1978 Implements U.S. policy in international

aviation Few restrictions to airlines Ensure equality for American air carriers Only problem: no one cares in international

arena- not enforceable

International Aviation

U.S. market share has lost share in several European countries such as Italy– Southern Europe not receptive to increases in

U.S. services

Air Carrier Globalization

Airlines searching for global partners Advantages:

– large and widespread new route network– dominate operations and marketing at large

hubs– control distribution through computer

reservation systems– ability to exercise price leadership

Air Carrier Globalization

American, Delta, United– equipment – growing international routes– favorable balance sheets

Alliances– KLM + Northwest– SAS + Continental– British Airways + American

Open Skies Treaties

Agreement between U.S. and individual countries

Allows carriers to operate without restriction between any point in either country

Guarantees open entry and unrestricted capacity and frequency on all routes

Principle markets for Open Skies

U.S. - Europe U.S. - South America U.S. - Far East

Operations and reception varies Major trend for the future!

Chapter 6 Economic Characteristics of the Airlines Review Chapter Objectives

Introduction: Oligopoly

Typically characterized by high barriers to entry– Substantial capital investments– Need for technical know-how– Control of patent rights– Few sellers in marketplace

– Airlines typically considered an Oligopoly

Oligopoly Characteristics

Substantial economies of scale– a decrease in a firms long-term average costs as the

size of its operations increases– Typically requires large-scale production to obtain

low units costs

Growth through merger– the purpose of most mergers is to gain a substantial

increase in market share, greater economies of scale, more buying power in the purchase of resources

Oligopoly Characteristics

Mutual dependence– In oligopoly markets, it matters what your

competition does– They must consider reactions

Price rigidity and nonprice competition– oligopoly like to maintain constant prices and

engage in nonprice competition, such as advertising and customer service, to hold, or increase their market share

The Airlines as Oligopolists

High barriers to entry– Access to markets are difficult due to scarce

terminal space– Expenditures for advertising, personnel, and

aircraft operations– If unable to recover startup costs, incoming airline

will fail

Airport Terminal space is a barrier to entry for new or existing


Capital Requirements Certificate of Public Convenience and

Necessity Requires large numbers of technically-

skilled personnel


Other– Existing long-term leases held by other airlines– Preferred relationship between Travel Agencies

and a hub airport by incumbent airlines


Majority-in-Interest Clauses Exclusive Use Agreements Dominated Hubs Noise restrictions

Price Rigidity and Non-price Competition Basic characteristic of oligopolist firm Airlines would rather compete in non-price

competition

Government Financial Assistance

Airport and Airway Improvement Act of 1982 provided federal funding of airways and airport development

Load Factors

Expresses relationship between available seat miles and revenue passenger miles– RPM– ASM

High Technological Turnover

Aircraft Airlines has led all other industries over the

past three decades in capital spending

High Labor and Fuel Expenses

Labor Specialization– Workers must specialize in various production

tasks

Average industry salary $48,331 (1996)

The Competitive Advantage of Schedule Frequency Perceived passenger advantage if offer

more trips – allows last minute changes

Excess Capacity and Low Marginal Costs Re-hubbing

– Develop another airport serving the same city

Can contract out aircraft and services (by-product)– such as selling aircraft simulator time to

another airline

Sensitivity to Economic Fluctuations Airlines must be very sensitive to economic

fluctuations Discretionary travel lags after economic

recovery by 12-18 months Airlines can not get out of fixed costs

Close Government Regulation

Advisory Circulars (AC’s) Federal Aviation Regulations (FAR’s) Airworthiness Directives (AD’s) Operations Specifications Unscheduled directives (i.e. maintenance)

The Significance of Airline Passenger Load Factors Capacity Versus Demand Pricing in relation to load factor

– traffic peaks and valleys

Load factor most vital statistic in airline business

Must manage growth and contraction

Chapter 7 Airline Management and Organization

Review Chapter Objectives

Management

The process of achieving an organization’s goals through the coordinated performance of five specific functions: – Planning– Organizing– Staffing– Directing– Controlling

Management

Levels of Management– Board of Directors

• Chief policy making body– Policy is a broadly stated course of action that employees

follow in making decisions

– Top Management– President– Middle Management– Operating Management

Decision Making

Define the problem Analysis the problem Determine alternative solutions

Functions of Management: Planning MBO- Management by Objective

– Goals should be quantifiable– Follow-up discussions– Appraisal of results

Standardization (company manuals)

Functions of Management:Organizing The division of work among employees and

determination of how much authority each person has.

Grouping of activities, delineating authority and responsibility, and establishing working relationships.

Functions of Management:Staffing Stationing people to work in positions

provided for in the organizational structure Involves:

– selection– training– compensation

Functions of Management: Directing Those variables required to monitor and

carry out objectives

Organization

Organization is a plan to bring together the resources of a firm (capital and labor) to the position of greatest effectiveness, or productivity. The plan consists of the grouping of operations (labor and equipment) to achieve the advantages of specialization and the chain of command.

Principles of Organization Planning Unity of Objectives Span of Control Departmentalization Delegation of Authority Levels of Management Clearly defined duties Flexibility Communication

Line and Staff Responsibilities

The Organizational Chart

Unity of objectives– Every department within an organization

contributing to the accomplishment of the firms overall goals

Staff Departments

Finance and Property Informational Services Personnel Medical Legal Corporate Communications Economic Planning

Line Departments

Those administrations that are directly involved in producing and selling air transportation. They include flight operations, engineering and maintenance, and marketing and services.

Flight Operations

Director of Operations Line Pilots Dispatch Weather

Engineering and Maintenance

Small engineering team focused on planning

Route Scheduling About 1/5 of every revenue dollar

Maintenance Stations

Maintenance Base (Hub)– Best equipped

Major Station– Large numbers of people

Service Station– Fewer numbers of people and equipment

Contract Maintenance

If outsourcing maintenance Property Leases

Marketing and Services

Sales force -through daily contact with customers

Internal– reservations, ticket agents

External– travel agencies

Marketing and Services

Advertising Marketing Research and Development Service Planning Sales Planning Food Service

The Flight- Serving Passengers

Meeting customers Purser (1st Flight Attendant) Image building

Employment

Volume Related Employees– Flight Attendance

– Ticket Agents

– Reservation Agents

These positions budgeted commensurate with their growth or contraction in a particular traffic volume

Employee Stock Ownership Programs (ESOP)

Chapter 8: Forecasting Methods

Review chapter Objectives

The Purpose of Forecasting

Purpose: – Short-term: Generally more accurate than

longer-term forecasts– Long-term:

• Fleet Planning

• Forecast type and volume of activity– Passengers

– cargo

– Parts

Forecasting

Analysis Planning Control

Forecasting Methods

Causal– quantitative variable used to determine demand

Times-Series or Trend Analysis Judgmental Methods

– accepted largely on the basis of the reputation of the forecaster

Forecasting Methods

Smoothing the variations can eliminate irregular variations in forecasts– Seasonal Variations– Irregular Variations

Accuracy of Time Series/Causal Models

Business Cycles

Vary in length for individual businesses Magnitudes from peak to valley varies

considerably Government has not adequate explained the

business cycles

Chapter 9: Airline Passenger Marketing

Marketing

Marketing is that broad area of business activity that directs the flow of services provided by the carrier to the customer in order to satisfy customers’ needs and wants and to achieve company objectives.

The Marketing Mix

Product Price Promotion

– a controllable variable

Place– a controllable variable

Uncontrollable Marketing Variables Cultural and social differences Political and regulatory environment Economic Environment Existing competitive structure Resources and objectives of the company

The Consumer-orientated Marketing Concept Market Segmentation Intensive growth strategies Marketing since deregulation

Market Segmentation

The process by dividing potential customers into customer group in order to identify target markets

Increasing the number of passengers in an existing market

Intensive Growth Strategies

Product development– gain brand loyalty (i.e. special lounges at

airports)

Market penetration Marketing development

Marketing Strategies Since Deregulation Computerized Reservation Systems Frequent-flier Program Business-Class Service Code Sharing Hub-and Spoke Service Advertising and Sales Promotion

Chapter 10:

Airline Pricing, Demand, and Output Determination

Law of Demand states that price and quantity demanded are inversely related

Trends in Domestic Passenger Fares Table 10-1 (page 327) Promotional

– only used when load factors are low

Pricing and Demand

Determinants of Demand Changes in Demand Elasticity of Demand

– Inelastic Demand• short haul market

– Elastic Demand• airline “A” reduces fares betting that total revenue

increases

Determinants of Elasticity

Competition Distance Business versus Pleasure Time

Air Fare Warfare

Greater than 2000 price changes daily 2 million individual fares between city pairs Carriers will only match low-frills fares to

meet competition

Types of Passenger Fares

Time-Specific Fares

– i.e. night flight offered at 20-40% off comparable day fares Common Fares Joint Fares Excursion Fares

– used during seasonally weak periods of traffic

– usually require round-trip purchase

– fare penalties with cancellation Promotional Fares

– Always will have some kind of restriction

The Pricing Process

Airline Tariff Publishing Company (ATPCO)

Pricing Strategies and Objectives Pricing Tactics Pricing Analysis Inventory Management

Pricing Strategies and Objectives

Survival - bankruptcy (chapter 11) Market share Premium quality Within these areas, carriers have a multi-

layered pricing matrix

Pricing Tactics

Fare actions include– Introduction fares– Excursion fare sales– Connection market sales– Business fare sales – mileage– Zone– Value added– One-way versus round-trip fares

Pricing Analysis

Subtract the following:– refunds– dilution– advertising– spill– variable additional passenger costs

Inventory Management (page 346) Manage low-fare seat numbers versus coach

seat or business seats Minimize denied boardings Minimize spill and spin seats

Airline Costs

Direct Operating Costs

– all flying expenses, all maintenance and overhaul costs and all aircraft depreciation expenses

Indirect Operating Costs (costs remain unaffected by type of aircraft flown)

– reservations, sales, promotion costs, station and ground expenses

– passenger service costs, general administration costs Non-operating Costs and Revenues

– all profits and losses arising from owned commuter carrier Variable Costs

– Fuel, meals, landing fees Fixed Costs

– Property insurance, lease equipment payments, flight equipment

Pricing and Output Determination Total Costs-Short Run Load Factors (Revenue versus Non-revenue) Profit Maximization - Short Run Law of Diminishing Returns states that as extra

units of variable resources (labor) are added to a fixed resource (existing fleet) the extra output (ASM’s) will increase at a decreasing rate

Chapter 11 Air Cargo


Historical Overview

Air Freight Air Mail

– first air cargo service

Air Express Overnight Air Express

– FedEx established for small packages

The Arrival of Jumbo Jets Types of Carriers

Air Cargo Today

Trend in growth over the last 25 years made possible by larger and more efficient aircraft

Largest Markets– North Atlantic– US Domestic– Europe-Far East

Air Cargo: The Future

Combination Carriers– carry cargo and passengers

• no more than 5-10% passenger

– example: UPS

The Market for Air Freight

Cannot compete to surpass air carrier revenues due to:– cost– primarily designed to carry passengers– no compelling reason to ship by air


Air shipments attractive EXCEPT when…– the commodity is low value relative to weight

(corn)

When demand is frequent (bread/milk) When distribution problems are:

– low insurance for long transit periods


Air shipments attractive when…– specialty handling not required

Packaging Cargo suggests the use of shipping containers. Why?– reduce pilferage loss– reduce package cost

• producers are charged at a lower rate

Types of Air Freight Rates

General Commodity Rates Specific Commodity Rates (i.e. tires) Exception Rates Joint Rates (shared with another company) Priority Reserved Air Freight Speed Package Service Container Rates

Special Freight Services

Assembly Service Distribution Service Pickup and Delivery Service Other Specialized Services Restricted articles MIGHT be accepted by

one airline and not another – dependent upon air carrier operations

specifications

Factors Affecting Air Freight Rates Costs of the service Volume of traffic Directionality Characteristics of the traffic Value of the service Competition

Chapter 12: Principles of Airline Scheduling Review Chapter Objectives

The Mission of Scheduling

The constant search between adequate service and economic strength for the company

Equipment Maintenance

Minimum out-of-service time– maximum in-service utilization

Allowable Time Personnel and Workload Use of Facilities Line Reserves

– extra available airplanes

Flight Operations and Crew Scheduling Operational factors

– Runway lengths– Aircraft fuel capacity– Weather conditions– Air Traffic Requirements and routings – Crew time limits– Employee agreements

Flight Operations and Crew Scheduling Monthly schedules

– flight “line numbers” based upon seniority

Must consider crew domicile Contract hours

Ground Operations and Facility Limitations Always some limitations Cost must be considered Must avoid ground congestion Station Plotting Chart (figure 12-7) Staffing

Scheduling Planning and Coordination Traffic Flow Schedule Salability Schedule Adjustments Load-Factor Leverage Most important responsibility is to evaluate

varied and conflicting objectives to achieve an optimal balance to support the airline

Equipment Assignment and Types of Schedules Must allow enroute service checks at each

stop Overnight Airframe Checks

– A= Every 125 hours– B= Every 750 hours– C= Every 3000 hours/15 months– D= Every 20,000 hours/6-8 years

Hub-And-Spoke Scheduling

Advantages

– Force multiplier

– lower fares with larger aircraft

– less schedule delay Disadvantages

– congestion delay

– delay increase travel time

– lost baggage

– ATC Stress

– environmental impact

Data Limitations in Airline Scheduling Hard to get accurate data between air

carriers International even worse

Chapter 13: Fleet Planning- The Selection Process Review Chapter Objectives

Factors in Fleet Planning

Pre-deregulation Era Hub-and-Spoke System Fleet Commonality Long-Range Aircraft The Trend toward leasing Noise restrictions

Design and Development-The Manufactures Viewpoint Boeing

– leading aircraft in order by ATA members is the B-737

– Faces stiff competition

• B747-400 designed to counter MD-11

• B-777 counters A-330 Airbus

– european aircraft manufacturing consortium

– timing has always been a key to Airbus successes

– 85% common aircraft parts across production lines

• A-330 /A-340

The Fleet Planning Process

Information Required– Current Resources– Corporate Objectives– Projected Industry Environments– Market Strategy

System Constraints– Runway capacity– Environmental considerations– maintenance constraints

The Fleet Planning Process

Aircraft Evaluation– design characteristics– physical performance– acquisition costs

Tentative Fleet Plan and Financial Evaluation Presentation and Management Approval

The Decision To Upgrade or Replace Fleet commonality

– desired results in large aircraft purchases

Refurbishing aircraft can cost as mush as the original cost

Most difficult part:– guessing operating economics

The Decision To Upgrade or Replace Acquisition costs include:

– ground equipment– maintenance training– flight training– cost to borrow money $$$

Leasing

Industry trend is toward fleet leasing Popular since 1986 Tax Reform Act Lessor retains full title of the assets

Operating Leases

Future

Continued consolidation in airline industry will lead to greater cooperation and interdependence between the larger carriers and manufacturers.

Continued cost cutting by the airlines across all accounts

Chapter 14: Airline Labor Relations The Railway Labor Act and the Airlines

– covers airlines and railroads

National Mediation Board– attempts to help both parties find a common

ground for contract agreement

Generally, airline labor unions are organized on a “craft” basis

Railway Labor Act

Purpose– ensure the right of workers to organize and

bargain effectively– to prevent interruption of service– to assist in prompt settlement of disputes or

grievances arising out of existing contracts– Applies to Railroads and Airlines

The Collective Bargaining Process Step One: Collective Bargaining

– wages are negioated

Step Two: National Mediation Board Step Three: Voluntary Arbitration Step Four: Emergency Board Final Option: Presidential Intervention

National Railway Adjustment Board Juistication over grievance and

interpretations of agreements on pay, working conditions, and rules

Restrictive work rules– increase the number of employees required

Criticism of the Process

Is it Needed?– Delta is not unionized– Too many steps

• results in a long process that is not binding

Historical Overview of Airline Union Activity Pre-jet Age Jet Age

Key to airline success: high fuel costs– 1990 impacted airline considerably costing

airlines $4 billion

Labor Relations Since Deregulation Elimination of the automatic labor-cost

pass-through Labor unrest: 1980’s Consolidation Period: 1986-Present The future collective bargaining strategies Labor costs represents 30% of total

operating expenses

Strike Options

Mutual Aid Pact– provided strike insurance payments– cancelled after deregulation

Future

Hot-Button Issues – Two-tier pay system

• averages down pilot wages

– out-sourcing– low-cost second tier air carriers

Chapter 15: Airline Financing


Sources of Funds

Internal– Earnings– Depreciation– Deferred taxes

External– Equipment Trust Financing– Public Equity Offering– Private debt placement

Finding Financing

Investment Bankers

– Primary function is to serve as consultants in finding credit sources for carriers

Equipment Trust Financing

– Financing aircraft by having a bank or group of banks lend the required money, but, holds title to the aircraft until a series of certificates are paid off

Venture Capital

– Startup carriers need venture capital to get started

– FedEx championed venture capital to begin operations

Finding Financing

Key consideration to gain financing

– debt/equity ratio is prime indicator of long-term borrowing power

• the higher the ratio, the less likely it is for the carrier to borrow money

– Return on Investment (ROI) must be well grounded

• Net profits to assets

– Long-term cash forecasts are needed to appraise proposed capital projects

– Reducing debt must be considered

• profits generated during the 1990’s have been used to reduce debt incurred during the 1990’s

Finding Financing

Short term cash forecasts are needed to:

– Anticipate the need for short-term financing

– Maintain good bank relations

– Provide for a basis for monitoring many items on the balance sheet

Debenture Bonds

– a bond not secured by any specific pledge of property Depreciation

– largest single source of internal funds for a carrier

Leases

Operating– short-term capacity enhancements

Capital– appear as long-term liabilities on balance sheet

Why lease?– Avoids progress payoffs to aircraft

manufactures

Cash Management and Financial Planning Cash Flow Cash Budgeting

Airline Management AVM 373 PROFESSOR GREG SCHWAB.

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