Airline Management AVM 373 PROFESSOR GREG SCHWAB.
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Transcript of Airline Management AVM 373 PROFESSOR GREG SCHWAB.
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Airline Management
AVM 373
PROFESSOR GREG SCHWAB
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US AIRWAYS
NEW EMPLOYEE
ORIENTATION
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COURSE INTRODUCTION
OVERVIEW COURSE REQUIREMENTS
– HOW TO GET AN “A”
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Chapter 1 Objectives
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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
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Interstate Air Transportation:
The carriage of persons or property for compensation or hire
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Aerospace Industry
Research and Development Aerospace Systems Defense Spacecraft Propulsion, Guidance, Control Units Airborne and Ground Based Equipment
– Testing, Operations, and Maintenance
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Principle Product Lines
Aircraft Missiles Space Systems Engines Parts and Equipment
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Product Lines Characterized by:
High Performance High Reliability High Technology High Unit Value
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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
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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
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Government Contracts
Government required to ask for “bidders” Request for Proposals
– Detailed Specifications
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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
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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
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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
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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
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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
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Reasons for downward GA trend
High aircraft prices High interest rates High operating expenses High product liability costs Changing lifestyles Tax laws Foreign competition
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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
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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
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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
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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
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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
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Chapter 2 Objectives
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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
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Why Regulate Aviation?
Stabilize the industry Improve air safety Reduce cash subsidy by US government
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Congress Rights
Regulate interstate and foreign commerce Regulate the postal service Make treaties with foreign nations Provide for the national defense
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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
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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
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Air Commerce ACT of 1926
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
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Air Commerce ACT of 1926
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
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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
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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
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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
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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
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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
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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
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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)
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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
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CAB: Road to Deregulation
Strong opposition from unions and financial institutions
Deregulated air cargo in 1977– initial success pushed CAB into support
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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
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Deregulation Issues
Prior to deregulation-problems existed:
– system suffered from overcapacity– barriers to entry and exit from the industry– lengthy regulatory process
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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
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Airline Deregulation
Proponents Argued:
Commuters would best serve low-density markets
Market place would best serve American interests
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Airline Deregulation
Opponents Argued:
Regulation has served the public interest as well as air carrier interest
Deregulation would destabilize the air carrier market
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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
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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
Air Carrier Aircraft Development
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Air Carrier Aircraft Development
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)
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Air Carrier Aircraft Development
Boeing 727– first tested 1963– fielded 1964– hugely successful airframe
Boeing 737– Most popular air carrier jet in service today– 3,000+ flying worldwide
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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
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Aviation Aircraft Pioneers
Clyde Cessna– founded Cessna Corporation– C-172 became most popular aircraft for
business and pleasure market
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Chapter 3 Objectives
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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
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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)
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Federal Aviation Administration
Primary Objective:– Promotion of aviation safety while ensuring the
efficient use of the nations navigable airspace– www.faa.gov
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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
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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)
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FAA Operating Certificates
Airmen– Pilots– Mechanics– Controllers– Dispatchers– Parachute Riggers
Air Carrier Operating– Part 121/135
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FAA Operating Certificates
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
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FAA Operating Certificates
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)
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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
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FAA Enforcement
Investigation– all civil accidents– probable cause reserved for NTSB– safety concerns– accident doesn’t have to occur
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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
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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)
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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)
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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)
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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
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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
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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
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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
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NTSB Concerns
Intention of flight by pilot– flight doesn’t have to occur– pilots may be violated based on intent
Damage to aircraft
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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
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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
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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
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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 )
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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
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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
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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
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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
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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
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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
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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
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Major Aviation Associations
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
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Major Aviation Associations
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
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Chapter 4 Objectives
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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
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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
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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
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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
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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
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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 )
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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
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Commercial and Industrial Flying– aerial application– aerial observation– other work use– commuter air carrier – air taxi
Agricultural
GA Usage
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Major Factors Affecting sales of Aircraft Product liability claims Luxury taxes Subsidization of research, development,
production and financing
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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.
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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
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Chapter 5 Objectives
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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
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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
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The Use of Aviation in the United States Social Political
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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
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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
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The Political Considerations of Selecting a Site Legislative and Regulatory actions
– Fuel Tax– Landing Fees– Property Taxes
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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
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The Airline Industry: Nationals
Sales between $100 million-$1 Billion Airlines:
– Numerous airlines (32) including: AirTran, World
Includes Supplemental air carriers, (i.e., ATA)
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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
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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
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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
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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 )
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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
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Airline Economic Considerations
Load factors Airframe Fuel Flow Population Competition
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Air Carrier Route Selection Determinates Economic considerations: Business Pleasure Mail Cargo Seasonal operations
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Geography Considerations
Terrain Weather Navigational status Airport ATC Regulation
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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
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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
Section 401 Certificates
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Section 418 Certificates
All-Cargo Certificates No passengers
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Section 419 Certificates
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
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» ?
Travel Agencies
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Chapter 16 Objectives
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International Aviation
Sovereignty International Air Law Deregulation Growth
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Air Transportation involves:
Building airports Navigational aids Weather reporting systems
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International systems standardized include: Air Traffic Control Aircraft Design Personnel licensing Airports
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International Air Law
Looked closely at establishing universal international jurisprudence– i.e. World Court
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Sovereignty in Airspace
Should airspace above a nation be considered within the sovereignty of each nation?
Or like the high seas, be considered international?
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Opposing Theories
Air is Free– states have no authority over it
Air is Not Free– states have air sovereignty over their soil
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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
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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
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Paris Convention- Outcomes
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
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Paris Convention- Outcomes
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
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Havana Convention- 1928
Established special customs procedures for aviation
Reinforced 1919 convention agenda
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Warsaw Convention- 1929
Provided unification of rules relating to international transportation by air addressing:
Passenger Merchandise
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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
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Warsaw Convention- Outcomes
Set Standards for the following:
Passenger tickets Cargo waybills Air travel documentation
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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
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Chicago Conference- 1944
Standardized many rules/procedures– communication systems– airports– air traffic rules– licensing– airworthiness and registration– weather information exchange– logbooks– maps/charts– customs– accident investigation
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Chicago Conference- 1944
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
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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
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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
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Post 1970’s
International fares complicated and abused
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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
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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)
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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
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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
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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
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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
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Air Carrier Globalization
American, Delta, United– equipment – growing international routes– favorable balance sheets
Alliances– KLM + Northwest– SAS + Continental– British Airways + American
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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
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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!
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Chapter 6 Economic Characteristics of the Airlines Review Chapter Objectives
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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
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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
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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
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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
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The Airlines as Oligopolists
Capital Requirements Certificate of Public Convenience and
Necessity Requires large numbers of technically-
skilled personnel
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The Airlines as Oligopolists
Other– Existing long-term leases held by other airlines– Preferred relationship between Travel Agencies
and a hub airport by incumbent airlines
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The Airlines as Oligopolists
Majority-in-Interest Clauses Exclusive Use Agreements Dominated Hubs Noise restrictions
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Price Rigidity and Non-price Competition Basic characteristic of oligopolist firm Airlines would rather compete in non-price
competition
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Government Financial Assistance
Airport and Airway Improvement Act of 1982 provided federal funding of airways and airport development
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Load Factors
Expresses relationship between available seat miles and revenue passenger miles– RPM– ASM
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High Technological Turnover
Aircraft Airlines has led all other industries over the
past three decades in capital spending
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High Labor and Fuel Expenses
Labor Specialization– Workers must specialize in various production
tasks
Average industry salary $48,331 (1996)
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The Competitive Advantage of Schedule Frequency Perceived passenger advantage if offer
more trips – allows last minute changes
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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
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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
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Close Government Regulation
Advisory Circulars (AC’s) Federal Aviation Regulations (FAR’s) Airworthiness Directives (AD’s) Operations Specifications Unscheduled directives (i.e. maintenance)
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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
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Chapter 7 Airline Management and Organization
Review Chapter Objectives
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Management
The process of achieving an organization’s goals through the coordinated performance of five specific functions: – Planning– Organizing– Staffing– Directing– Controlling
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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
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Decision Making
Define the problem Analysis the problem Determine alternative solutions
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Functions of Management: Planning MBO- Management by Objective
– Goals should be quantifiable– Follow-up discussions– Appraisal of results
Standardization (company manuals)
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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.
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Functions of Management:Staffing Stationing people to work in positions
provided for in the organizational structure Involves:
– selection– training– compensation
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Functions of Management: Directing Those variables required to monitor and
carry out objectives
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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.
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Principles of Organization Planning Unity of Objectives Span of Control Departmentalization Delegation of Authority Levels of Management Clearly defined duties Flexibility Communication
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Line and Staff Responsibilities
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The Organizational Chart
Unity of objectives– Every department within an organization
contributing to the accomplishment of the firms overall goals
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Staff Departments
Finance and Property Informational Services Personnel Medical Legal Corporate Communications Economic Planning
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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.
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Flight Operations
Director of Operations Line Pilots Dispatch Weather
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Engineering and Maintenance
Small engineering team focused on planning
Route Scheduling About 1/5 of every revenue dollar
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Maintenance Stations
Maintenance Base (Hub)– Best equipped
Major Station– Large numbers of people
Service Station– Fewer numbers of people and equipment
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Contract Maintenance
If outsourcing maintenance Property Leases
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Marketing and Services
Sales force -through daily contact with customers
Internal– reservations, ticket agents
External– travel agencies
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Marketing and Services
Advertising Marketing Research and Development Service Planning Sales Planning Food Service
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The Flight- Serving Passengers
Meeting customers Purser (1st Flight Attendant) Image building
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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)
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Chapter 8: Forecasting Methods
Review chapter Objectives
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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
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Forecasting
Analysis Planning Control
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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
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Forecasting Methods
Smoothing the variations can eliminate irregular variations in forecasts– Seasonal Variations– Irregular Variations
Accuracy of Time Series/Causal Models
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Business Cycles
Vary in length for individual businesses Magnitudes from peak to valley varies
considerably Government has not adequate explained the
business cycles
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Chapter 9: Airline Passenger Marketing
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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.
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The Marketing Mix
Product Price Promotion
– a controllable variable
Place– a controllable variable
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Uncontrollable Marketing Variables Cultural and social differences Political and regulatory environment Economic Environment Existing competitive structure Resources and objectives of the company
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The Consumer-orientated Marketing Concept Market Segmentation Intensive growth strategies Marketing since deregulation
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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
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Intensive Growth Strategies
Product development– gain brand loyalty (i.e. special lounges at
airports)
Market penetration Marketing development
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Marketing Strategies Since Deregulation Computerized Reservation Systems Frequent-flier Program Business-Class Service Code Sharing Hub-and Spoke Service Advertising and Sales Promotion
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Chapter 10:
Airline Pricing, Demand, and Output Determination
Law of Demand states that price and quantity demanded are inversely related
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Trends in Domestic Passenger Fares Table 10-1 (page 327) Promotional
– only used when load factors are low
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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
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Determinants of Elasticity
Competition Distance Business versus Pleasure Time
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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
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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
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The Pricing Process
Airline Tariff Publishing Company (ATPCO)
Pricing Strategies and Objectives Pricing Tactics Pricing Analysis Inventory Management
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Pricing Strategies and Objectives
Survival - bankruptcy (chapter 11) Market share Premium quality Within these areas, carriers have a multi-
layered pricing matrix
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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
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Pricing Analysis
Subtract the following:– refunds– dilution– advertising– spill– variable additional passenger costs
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Inventory Management (page 346) Manage low-fare seat numbers versus coach
seat or business seats Minimize denied boardings Minimize spill and spin seats
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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
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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
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Chapter 11 Air Cargo
Review Chapter Objectives
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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
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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
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Air Cargo: The Future
Combination Carriers– carry cargo and passengers
• no more than 5-10% passenger
– example: UPS
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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
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The Market for Air Freight
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
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The Market for Air Freight
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
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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
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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
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Factors Affecting Air Freight Rates Costs of the service Volume of traffic Directionality Characteristics of the traffic Value of the service Competition
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Chapter 12: Principles of Airline Scheduling Review Chapter Objectives
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The Mission of Scheduling
The constant search between adequate service and economic strength for the company
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Equipment Maintenance
Minimum out-of-service time– maximum in-service utilization
Allowable Time Personnel and Workload Use of Facilities Line Reserves
– extra available airplanes
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Flight Operations and Crew Scheduling Operational factors
– Runway lengths– Aircraft fuel capacity– Weather conditions– Air Traffic Requirements and routings – Crew time limits– Employee agreements
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Flight Operations and Crew Scheduling Monthly schedules
– flight “line numbers” based upon seniority
Must consider crew domicile Contract hours
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Ground Operations and Facility Limitations Always some limitations Cost must be considered Must avoid ground congestion Station Plotting Chart (figure 12-7) Staffing
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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
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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
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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
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Data Limitations in Airline Scheduling Hard to get accurate data between air
carriers International even worse
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Chapter 13: Fleet Planning- The Selection Process Review Chapter Objectives
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Factors in Fleet Planning
Pre-deregulation Era Hub-and-Spoke System Fleet Commonality Long-Range Aircraft The Trend toward leasing Noise restrictions
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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
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The Fleet Planning Process
Information Required– Current Resources– Corporate Objectives– Projected Industry Environments– Market Strategy
System Constraints– Runway capacity– Environmental considerations– maintenance constraints
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The Fleet Planning Process
Aircraft Evaluation– design characteristics– physical performance– acquisition costs
Tentative Fleet Plan and Financial Evaluation Presentation and Management Approval
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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
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The Decision To Upgrade or Replace Acquisition costs include:
– ground equipment– maintenance training– flight training– cost to borrow money $$$
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Leasing
Industry trend is toward fleet leasing Popular since 1986 Tax Reform Act Lessor retains full title of the assets
Operating Leases
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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
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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
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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
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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
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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
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Criticism of the Process
Is it Needed?– Delta is not unionized– Too many steps
• results in a long process that is not binding
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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
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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
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Strike Options
Mutual Aid Pact– provided strike insurance payments– cancelled after deregulation
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Future
Hot-Button Issues – Two-tier pay system
• averages down pilot wages
– out-sourcing– low-cost second tier air carriers
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Chapter 15: Airline Financing
Review Chapter Objectives
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Sources of Funds
Internal– Earnings– Depreciation– Deferred taxes
External– Equipment Trust Financing– Public Equity Offering– Private debt placement
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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
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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
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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
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Leases
Operating– short-term capacity enhancements
Capital– appear as long-term liabilities on balance sheet
Why lease?– Avoids progress payoffs to aircraft
manufactures
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Cash Management and Financial Planning Cash Flow Cash Budgeting