Airline

Management
AVM 373
PROFESSOR GREG SCHWAB

US AIRWAYS

NEW EMPLOYEE
ORIENTATION

Chapter 1 Objectives

All civil flying performed by the certified

air carriers and general aviation
Does not include military but military activity is
tracked by the FAA

Air Transportation includes:

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
High
High
High

Performance
Reliability
Technology
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 McDonaldDouglas have offset large R&D
expenses by benefiting from large
military contracts

Government required to ask for bidders

Request for Proposals

Detailed Specifications

Government Contracts

Air Transportation includes:

all transportation by certified air carriers and
general aviation aircraft

Transformation of Industry during the

1950s due to:
production of jet powered military aircraft

Late 1960s
fabrication of equipment to meet the nations
goals in space exploration

Industry Characteristics

More R & D (technology)

Greater product complexity
More personnel per unit produced
Higher skill level
Longer program development time
The need for new facilities

Changes compounded need

for:

1991: almost 65% of industry bought by

federal government
Exports of aerospace represent 10% of
total US exports
Aviation exports exceed aviation imports

Manufacturing Output

Trade balance
Employment

consistently employees ~1,000,000 people

R&D
Impact on other industries
Travel infrastructure

travel related industries

Industry vital to US in:

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

General Aviation

High aircraft prices

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

Reasons for downward GA trend

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

What is General 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

Business 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

Airline Aviation

Chapter 2 Objectives

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

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

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

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 terms
Members 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 lowdensity 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 1940s, aircraft
companies began to focus on producing
aircraft for business transportation

Air Carrier Aircraft Development

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

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)

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

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

Chapter 3 Objectives

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

FAA Operating Certificates

Aircraft
1. 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

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)

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 doesnt have to occur

FAA Enforcement

Operations
ATC System
NAVAIDS
Airports
Aeronautical Center
Technical Center
NASA Report
FAA honors NASA Reports that are properly
filed
but there are limitations

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 wont 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 doesnt 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 cant 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-1980s
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

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

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

Chapter 4 Objectives

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

GA Support Industry

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 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-1980s
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

GA Usage

Commercial and Industrial Flying

aerial application
aerial observation
other work use
commuter air carrier
air taxi

Agricultural

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 1970s: long slow decline in aircraft
shipments
President Johnsons Great Society social
programs
4 Planes introduced in 1960s: Cessna 172, Piper
Cherokee, Beech King Air 90, and Lear 23
More planes sold in the 1970s than before or since
Airport Development Act of 1970
Many smaller companies purchased by larger
companies in the 1980s.

Economic Factors affecting GA

Aircraft

1970s 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

Chapter 5 Objectives

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 100300 miles
Certified commuters are referred to as
medium or large regional

The Airline Industry:

Regional/Commuter

Formerly air taxi operators

Classified as small regionals (noncertificated
carriers)
Operate over short distances between 100300 miles
Regional Airline Association was formally the
Commuter Airline Association
more descriptive of service offered

NTSB Major Accident

Investigation

Aviation accidents have been on a flat line

since mid-1980s
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 1980s
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

Section 401 Certificates

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 418 Certificates

All-Cargo Certificates
No passengers

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

Travel Agencies

Chapter 16 Objectives

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 (1960s)

No discrimination based on nationality

Every aircraft must be registered to a
state

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

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

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

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

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

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 1970s

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

The Airlines as Oligopolists

Capital Requirements
Certificate of Public Convenience and
Necessity
Requires large numbers of technicallyskilled personnel

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

The Airlines as Oligopolists

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 nonprice 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 (ACs)

Federal Aviation Regulations (FARs)
Airworthiness Directives (ADs)
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

organizations 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 Nonrevenue)
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 (ASMs)
will increase at a decreasing rate

Chapter 11 Air Cargo

Review Chapter Objectives

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

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

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

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: 1980s
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

Review Chapter Objectives

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 1990s have been used
to reduce debt incurred during the 1990s

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