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Air Transport in the 21st Century


Low fare entrants: Southwest. September 11 further impacts carriers. Crisis in the Airlines ... Southwest Airlines begun over 30 years ago by Herb Kelleher ... – PowerPoint PPT presentation

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Title: Air Transport in the 21st Century

Air Transport in the 21st Century
  • Strong evidence to show that our global system is
    dependent upon air travel
  • Civil aviation began in 1920s with earlier
    precursor in Germany pre-WW I
  • High costs restricted widespread use of air
  • But since 1960s declining costs have made
    recreational air travel commonplace
  • Air freight increasingly important
  • What are the defining characteristics of
    contemporary air transport?

Technology Driven Industry
  • Through a cascade of innovations, technology has
    dramatically altered the size, range, speed and
    safety of aircraft
  • Boeing 777 advanced technology and extended
    range, smaller crew
  • Airbus 380- 555 passengers, range of 9,200 miles
    and 30 larger payload than the Boeing 747-400
    and operating costs 15-30 lower

The Dominance of Boeing and Airbus
  • These two firms account for virtually all sales
    of aircraft with 100 seats
  • Aircraft manufacturing is a huge global
    production network
  • B777 uses 3 million parts
  • Japanese (fuselage), Italian (wing flaps), Canada
    (landing gears) and others are involved
  • Highly competitive business with huge lobbying
    efforts required
  • Does Airbus have an unfair advantage?

Technology Dynamics
  • Concorde became the travel mode for the
  • Mach 2 at 58,500 feet
  • But extremely expensive and noisy
  • Plus plagued by safety doubts
  • Retired in October, 2003

Boeing 7E7
  • New environmentally sensitive aircraft 2007
  • 15-20 less fuel than conventional wide bodies
  • 200-250 passengers
  • 7,500-8,000 nautical miles (Seattle-Moscow,
    Sydney- Dallas, Paris- Honolulu, Shanghai-
  • Mach .85 (85 of Speed of Sound)

Rise of the Airline Industry
  • Prior to 2001, five decades of uninterrupted
    growth strong passenger and cargo growth
  • Air fares have declined to make air travel more
    accessible to larger numbers of people
  • Postwar safe and secure setting- pax Americana
  • Broad geographic scale of economic activity
  • Liberalization and greater freedom to set fares
    and open up new routes

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Deregulation of the U.S. Airline Industry
  • Prior to 1978 airlines were subject to regulation
    by Civil Aeronautics Board
  • Regulated level and structure of fares, entry of
    new carriers in general and in specific links
  • In 40 years of regulation no new entry occurred
    in scheduled services
  • Why regulation?

Reasons for Regulation
  • Felt necessary to insure future economic growth
  • Depression era produced a suspicion of free
    markets and potential havoc
  • Feeling that excessive competition would produce
    instability in the infant industry
  • Protect profitability of individual carriers and
    constrain growth of larger carriers

Winds of Change Deregulation
  • By late 1970s restrictive policies of CAB came
    under attack
  • Proponents of less government influence argued
    that lack of competitive threat dampened
    incentives for efficient airline operations
  • Restrictions on price competition forced airlines
    to pursue non-price strategies such as schedule
    frequency, non-stop services, in-flight amenities
  • Result was that airlines charged excessive fares
    and offered inefficient levels of service.
  • Paid too little attention to controlling labor
    and other costs- no competitive pressures to

Airline Deregulation Act 1978
  • Gradual decontrol took place and CAB was phased
    out by 1985
  • Initial consequences downward pressure on fares
    and price wars
  • Load factors (level of occupancy) increased
  • Route rationalization see next slide
  • New aggressive entry- 25 new carriers between
    1978 and 1982
  • Continued increase in employment

Route Rationalization
  • Basically how can and have carriers changed their
    routing to enhance competitive position?
  • Increase average length of haul- add longer
    routes and delete shorter ones
  • Minimize cost of serving market and fare by
    flying larger aircraft at high load factors-use
    of wide bodies
  • Route diversification reduce seasonality,
    improve traffic mix tourism, elderly, business,
  • Improve fleet utility

Hub and Spoke Networks
Changes in Route Structure
  • Prior to deregulation services were taking place
    on a point-to-point basis.
  • Two airline companies (red and blue) are
    servicing a network of major cities.
  • Some direct connections exist, but mainly at the
    expense of the frequency of services and high
    costs (if not subsidized).
  • Also, many cities are serviced by the two
    airlines and connections are inconvenient.

Changes in Route Structure
  • With deregulation, hub-and-spoke networks emerge
  • Consequence is each airline assumes dominance
    over a hub (red airline over the orange hub and
    blue airline over the light blue hub) and
    services are modified so the two hubs are
    connected to several spokes.
  • Both airlines tend to compete for flights between
    their hubs and may do so for specific spokes, if
    demand warrants it.
  • However, as network matures, it becomes
    increasingly difficult to compete at hubs as well
    as at spokes, mainly because of economies of

Changes in Route Structure
  • As an airline assumes dominance of a hub, it
    reaches oligopolistic (if not monopolistic)
    control and may increase airfares for specific
  • The advantage of such a system for airlines is
    the achievement of a regional market dominance
    and higher plane loads, while passengers benefit
    from better connectivity
  • But there are delays for connections and need to
    change planes more frequently

Advantages of Hub and Spoke
  • By combining passengers with different origins
    and destinations, average passengers per flight
    will increase
  • Traffic feed permits more frequent service or
    service with larger aircraft
  • Either service strategy allows carrier to realize
    density economies
  • For example double of flights w/o increasing
    ground crew
  • Larger aircraft more economical in fuel use and
    labor costs
  • Density economies allow larger carriers to offset
    input costs advantages of new entrants

Changing Winds Again 1990s
  • Airlines order new, efficient and expensive
    aircraft anticipating increased air travel
  • Higher jet fuel prices
  • Depressed economy reduces demand
  • Gulf War frightens tourist traffic
  • Inefficiencies of hub and spoke raised
  • Both United and American turn over short
    unprofitable routes to low cost or commuter
  • Demise of Eastern and Pan Am- Continental and
    TWA bankruptcy
  • Low fare entrants Southwest
  • September 11 further impacts carriers

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Crisis in the Airlines
  • Global airline industry suffered worst year ever
    in 2001- losing US11.6 billion
  • Sabena and Swissair collapsed
  • United Airlines and US Air announced
    bankruptcy-both are still under Chapter 11
  • Huge number of aircraft were idled
  • What is the cause(s) of this state?

Causes of Airline Crisis
  • Airline industry has never really been
    profitable- why?
  • Ordering of aircraft years in advance tends to
    foster boom-bust cycle
  • Pervasive involvement of state has diverted
    industrys emphasis on profit making
  • Romance of air travel draws overinvestment
  • Economists argue that this is an empty core
    industry meaning a tendency towards

Structure of Airline Costs
  • Fixed/Overhead- carriers capital especially
    aircraft 17
  • Operating-Direct-dependent on type of aircraft
    flight crew, fuel, maintenance, depreciation,
    landing fees, leasing 60
  • Operating-Indirect- passenger related passenger
    services, ticketing, station and ground costs,
    administrative 23

Labor Costs
  • Labor costs represent significant proportion of
    total operating costs
  • 1998 North America USAir 40 Delta 39 United
  • 1998 Europe Air France 34 BA 28 KLM 28
  • 1998 Asia Korean 17 Thai 17 SIA 17 JAL 15

Strategies for Reducing Labor Costs
  • Private European carriers set crisis measures to
    reduce costs
  • State owned carriers reduced costs as part of
    restructuring to qualify for EC aid
  • Renegotiate terms and conditions of employment
    and cut staff numbers
  • Set up low cost subsidiaries with lower wage
    scales-outsourcing loss making routes to low cost
  • Stock options for employees- UA offered shares to
    unions and 3 of 12 seats on Board in exchange for
    pay cuts

The Plight of US Airways
  • In early days of deregulation, USAir one of most
    profitablemonopoly in Northeast
  • Wave of consolidation- USAir purchased Pacific
    Southwest and Piedmont -- 6 rank
  • Both had lower cost structures but USAir rejected
  • 1990s scaled back and plugged plug on western
    routes but did not scale down crew bases,
    reservations centers, and training facilities
  • Lead in east with hubs at Pittsburgh,
    Philadelphia and Charlottecaptive travelers
  • CEO Wolf returns airline to profitability Airbus
    fleet, European destinations, closed facilities

US Airways Plight contd
  • Convinced pilots union to let airline buy
    regional jets
  • Made labor concessions in exchange and to stave
    off strikes
  • Endured by charging high fares to business
    customers but undermined by Internet
  • In 2000 acquired by United for 4.3 bil and
    assumption of 7.3 bil debt
  • Sept 11 hurt by slowdown and entered
    bankruptcy--900 mil loan guaranteed from Federal
    government allows it to emerge
  • Southwest forced competition at Philadelphia
    hub-back to bankruptcy

The Regional Jet Phenomenon
  • Additional impact of deregulation was growth of
    feeder airlines
  • Growth of RJs- 50 and 70 seat aircraft
  • Range and speed of larger jets
  • Cost less to purchase 23 mil vs 52 mil A320
  • Burn less fuel
  • Crews paid less
  • Allows airlines to cope with fluctuating demand

No Frills Airlines
  • Financial viability of airlines is uncertain
  • One response is to create low-cost, no-frills
  • Lower fares, select destinations, no food,
    e-tickets, first come seat assignments, strict
    baggage allowance
  • One type of aircraft B737 or A320
  • Such carriers now account for 20 of seats

No Frills Prototype
  • Southwest Airlines begun over 30 years ago by
    Herb Kelleher
  • 4th largest airline in U.S., 64 mil passengers
    annually to over 60 cities
  • 355 aircraft less than 9 years old
  • Based upon sound management principles
  • Operates in largely short haul, low margin
    markets and eschews hub and spoke to better use
    aircraft and personnel in quick turnaround

Southwest Airlines
jetBlue Airways
Air Tran Airlines
Where the Future Touches Down Airports in a
Globalizing World
  • Huge increases in air traffic have concentrated
    in a handful of airports
  • Hubs paramount feature of the industry
  • Major hubs whether for passenger or cargo
    articulate relations between regional economies
    and broader global economy
  • Thus governments at all levels have invested
    heavily in new airports and upgrades

Major Passenger and Cargo Airports 2002
Passengers (mil) and (metric tons)
  • (1) Atlanta 76.9 (2) Chicago (66.5) (3) London
    Heathrow (63.3) (4) Tokyo (61.1) (5) LAX (56.2)
    (6) DFW (52.8) (7) FKT (48)
  • (1) Memphis (3390) (2) Hong Kong (2516) (3)
    Anchorage (2027) (4) Tokyo Narita (2000) (5) LAX
    (1758) (6) Seoul (1705) (7) Singapore (1660) (8)
    FKT (1631) (9) Miami (1624) (10) NY-JFK (1574)
    (11) Louisville (1523)

Atlanta Hartsfield IA http//
  • 75 million passengers annually
  • 45K direct jobs,3.5K air freight, 2.1 ground
  • Total payroll 1.9 bil
  • Indirect impact of 3.8 bil on local-regional
  • 17.3 bil total annual regional impact

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Ultra-Global Hubs Singapores Changi Airport
  • Opened in July 1981
  • 2002 Passengers 29 mil
  • 2002 Cargo 1,660,000 metric tons
  • In 2006 Terminal 3 additions will add 20 mil
    passenger capacity bringing total to 64 mil
  • Free Skytrain service between the terminals
  • Mini edge city shopping

Malaysias Super Multi Media Corridor
Kuala Lumpur International Airport
  • Opened in 1998
  • Express rail link 27 minutes from downtown KL
  • Part of the Super Multi Media Corridor technology
  • Destination itself
  • Competing with Changi

Schiphol Airport, Amsterdam
  • 9th largest in world
  • 40,736,009 passengers in 2001 and a 3 AGR
  • 1,288,624 metric tons in 2001 and a 4.4 AGR
  • Gateway to a nation with strong travel industry
  • http//

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Bluegrass Non-Stop Destinations
  • Y2000- 4 non-stops Y2005-12 non-stops
  • New York, Newark, Philadelphia, Pittsburgh,
    Washington, DC
  • Atlanta, Charlotte, Orlando, Dallas, Houston,
    Memphis, St Louis
  • Chicago ORD and Midway, Cincinnati, Detroit,
  • To be added in Y05-07-Denver and Minneapolis
  • 4-5 percent increases in traffic per annum

Direct Flight Connections 2004
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Controversies and Externalities
  • Noise and conflicting land uses are the major
  • Noise pollution severely limited the utility of
    the Concorde because it could not attain
    supersonic speed over land
  • Airports occupy relatively little land
    areaOHare occupies only 9 sq mi- but proximity
    to cities is critical
  • New runways and runway extensions are
    controversial topics

OHare Airport Expansion http//
  • FAA approves 15 billion expansion to nations
    most delay prone airport
  • 8 Year plan calls for 6 parallel and two diagonal
  • 440 acres expansion requires city purchase and
    raze 550 homes, relocate 200 businesses and a
    cemetery dating to 1800s
  • Claim to save 12 billion over two decades by
    reducing passenger and aircraft delays