Air Transport in the 21st Century

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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 travel 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: 

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: 

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: 

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

Boeing 7E7 www.newairplane.com: 

Boeing 7E7 www.newairplane.com 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- Johannesburg) Mach .85 (85% of Speed of Sound)

Rise of the Airline Industry: 

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

Deregulation of the U.S. Airline Industry: 

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: 

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: 

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 deliver

Airline Deregulation Act 1978: 

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: 

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, education Improve fleet utility

Hub and Spoke Networks: 

Hub and Spoke Networks

Changes in Route Structure: 

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: 

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 agglomeration.

Changes in Route Structure: 

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 segments. 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: 

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: 

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 airlines Demise of Eastern and Pan Am- Continental and TWA bankruptcy Low fare entrants: Southwest September 11 further impacts carriers

Crisis in the Airlines: 

Crisis in the Airlines Global airline industry suffered worst year ever in 2001- losing US$11.6 billion Sabena and Swissair collapsed United Airlines and US Air announced bankruptcy-both are still under Chapter 11 currently Huge number of aircraft were idled What is the cause(s) of this state?

Causes of Airline Crisis: 

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 industry’s emphasis on profit making Romance of air travel draws overinvestment Economists argue that this is an “empty core” industry meaning a tendency towards unprofitability

Structure of Airline Costs: 

Structure of Airline Costs Fixed/Overhead- carrier’s 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 Labor costs represent significant proportion of total operating costs 1998 North America: USAir 40%; Delta 39%; United 38% 1998 Europe: Air France 34%; BA 28%; KLM 28% 1998 Asia: Korean 17%; Thai 17%; SIA 17%; JAL 15%

Strategies for Reducing Labor Costs: 

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 carriers 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: 

The Plight of US Airways In early days of deregulation, USAir one of most profitable—monopoly in Northeast Wave of consolidation- USAir purchased Pacific Southwest and Piedmont --# 6 rank Both had lower cost structures but USAir rejected this 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 Charlotte—captive travelers CEO Wolf returns airline to profitability: Airbus fleet, European destinations, closed facilities

US Airways Plight cont’d: 

US Airways Plight cont’d 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: 

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: 

No Frills Airlines Financial viability of airlines is uncertain One response is to create low-cost, no-frills operations 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 nationwide

No Frills Prototype: 

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: 

Southwest Airlines

jetBlue Airways: 

jetBlue Airways

Air Tran Airlines: 

Air Tran Airlines

Where the Future Touches Down: Airports in a Globalizing World: 

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): 

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://www.aci-na.org/docs/US_Econ_Impact.pdf : 

Atlanta Hartsfield IA http://www.aci-na.org/docs/US_Econ_Impact.pdf 75 million passengers annually 45K direct jobs,3.5K air freight, 2.1 ground transport Total payroll $1.9 bil Indirect impact of $3.8 bil on local-regional economy $17.3 bil total annual regional impact

Ultra-Global Hubs: Singapore’s Changi Airport: 

Ultra-Global Hubs: Singapore’s 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

Malaysia’s Super Multi Media Corridor: 

Malaysia’s Super Multi Media Corridor

Kuala Lumpur International Airport www.klia.com.my: 

Kuala Lumpur International Airport www.klia.com.my Opened in 1998 Express rail link 27 minutes from downtown KL Part of the Super Multi Media Corridor technology drive Destination itself Competing with Changi

Schiphol Airport, Amsterdam: 

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://www.schiphol.nl

Bluegrass Non-Stop Destinations: 

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, Cleveland To be added in Y05-07-Denver and Minneapolis 4-5 percent increases in traffic per annum

Slide43: 

Direct Flight Connections 2004

Controversies and Externalities: 

Controversies and Externalities Noise and conflicting land uses are the major problems Noise pollution severely limited the utility of the Concorde because it could not attain supersonic speed over land Airports occupy relatively little land area—O’Hare occupies only 9 sq mi- but proximity to cities is critical New runways and runway extensions are controversial topics

O’Hare Airport Expansion http://www.flychicago.com/ohare/about/about.shtm: 

O’Hare Airport Expansion http://www.flychicago.com/ohare/about/about.shtm FAA approves $15 billion expansion to nation’s most delay prone airport 8 Year plan calls for 6 parallel and two diagonal runways 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