Chapter 5
Air Carriers
BRIEF HISTORY
In 1908 the development of air transportation began with the U.S. Post Office examining the feasibility of providing air mail service. Although airplanes were used in World War I, the use of air planes for mail transport can be considered the beginning of the modern airline industry. Passenger transportation services developed as a by-product of the mail business and began to flourish in selected markets. Since that time, airplanes have become faster, bigger, and relatively more fuel-efficient. Although the level and degree of technological improvement have slowed in the airline industry, there is still opportunity for further innovation.
Airline travel is a common form of transportation for long-distance passenger and freight travel and the only reasonable alternative when time is of the essence. The tremendous speed of the airplane, coupled with more competitive pricing, has led to the growth of air transportation, particularly in the movement of passengers.
INDUSTRY OVERVIEW AND SIGNIFICANCE
The airline industry is very dependent on passenger revenues to maintain its financial viability. However, to characterize airlines simply as movers of people presents too simplistic a view of their role in our transportation system. The air lines are a unique and important group of carriers that meet some particular needs in our society. Although their share of the freight movement on a ton-kilometre basis is small, the type of traffic that they carry (high-value, perishable, or emergency) makes them an important part of our total transportation system. Emphasis upon total logistics cost in a quick-response lead-time environment will continue to contribute to their growth in freight movements.
TYPES OF CARRIERS
Private Carriers
Air carriers can be segmented into for-hire carriers and private carriers. A private air carrier is a firm that transports company personnel or freight in planes to support its primary business. Private air transportation is predominantly used to transport company personnel, although emergency freight is sometimes carried on private airplanes as well. Rarely, however, is a private air carrier established to routinely carry freight.
For-Hire Carriers
The for-hire carriers are no longer regulated on an economic basis by the federal government and cannot be easily categorized into specific types because carriers provide many types of services. For our purposes, the for-hire carriers will be discussed according to type of service offered (air taxi, commuter, charter, and international) and annual revenue (nationals, and regionals).
A classification frequently used by U.S. air carriers is one based on annual operating revenues. The categories used to classify air carriers in terms of revenue are as follows:
Majors annual revenues of more than $1 billion
Nationals — annual revenues of S100 million to $1 billion
Regionals — annual revenues of less than $100 million
U.S. major carriers provide service between major population areas within the United States such as New York, Chicago, and Los Angeles. The routes served by these carriers are usually high- density corridors, and the carriers use high-capacity planes
U.S. national carriers operate between less-populated areas and major population centers. These carriers operate scheduled service over relatively short routes with smaller planes.
Regional carriers have operations similar to the nationals. The carriers operate within a particular region of the country, such as New England or the Midwest, and connect less-populated areas with larger population centers
The all-cargo carrier, as the name implies, primarily transports cargo. The transportation of air cargo was deregulated in 1977, permitting the all-cargo carriers to freely set rates, enter and exit markets, and use any size aircraft dictated by the market. Examples of all-cargo carriers include FedEx and UPS Airlines.
The commuter air carrier is technically a regional carrier. The commuter publishes timetables on specific routes that connect less-populated routes with major cities. As certified carriers abandon routes, usually low-density routes, the commuter enters into a working relationship with the certified carrier to continue service to the community. The commuter then connects small communities that have reduced or no air service with larger communities that have better scheduled service. The commuter’s schedule is closely aligned with connecting flight schedules at a larger airport.
The charter carriers, also known as air taxis, use small to medium size aircraft to transport people or freight. The supplemental carrier has no time schedule or designated route. The carrier charters the entire plane to transport a group of people or cargo between specified origins and destinations. Many travel tour groups use charter carriers. The rates charged and schedules followed are negotiated in the contract.
MARKET STRUCTURE
Number of Carriers
Private air transportation has been estimated to include approximately 60,000 company-owned planes, with over 500 U.S. corporations operating private air fleets. In addition, thousands of planes are used for personal, recreational, and instructional purposes.
COMPETITION
Intermodal
Due to their unique service, air carriers face limited competition from other modes for both passengers and freight. Air carriers have an advantage in providing time-sensitive, long-distance movement of people or freight. Airlines compete to some extent with motor carriers for the movement of higher-valued manufactured goods; they face competition from automobiles for the movement of passengers and, to a limited extent, from trains and buses. For short distances (under 800 km), the access time and terminal time offsets the speed of the airline for the line-haul.
Intramodal
Competition in rates and service among the air carriers is very intense, even though the number of carriers is small.
Carriers may also have excess capacity (too many flights and seat miles on a route) and attempt to attract passengers by selectively lowering fares to fill the empty seats.
New entrants to the airline market initially cause overcapacity to exist on many routes. To counter this and add passengers to their aircraft, carriers reduce prices and fare wars begin. This causes financially weaker carriers to exit the market. This is especially true of carriers with high operating costs (many times due to high-cost union labour contracts), high cost of debt, or high levels of fixed costs. (Many of these maintain high fixed investments in hub-and-spoke terminal operations.) The remaining carriers begin to enjoy economies of density (discussed later in this chapter), and the cost per passenger kilometre will decrease and margins will increase, even in the existence of relatively low fares. So, even with the discounted prices in today’s airline market, many carriers have been able to remain profitable.
Service Competition
Competition in airline service takes many forms, but the primary service competition is the frequency and timing of flights on a route. Carriers attempt to provide flights at the time of day when passengers want to fly. Flight departures are most frequent in the early morning (7:00 am. to 10:00 p.m.) and late afternoon (4:00 p.m. to 6:00 p.m.).
In addition to the frequency and timing of flights, air carriers attempt to differentiate their service through the advertising of passenger amenities. Carriers promote such things as on-time arrival and friendly employees to convince travellers that it has the desired quality of service. Gourmet meals and on-board movies are some of the amenities that a carrier uses to entice passengers to use and reuse its service.
A postderegulation development in service competition was no-frills service (Budget airlines). The no-frills air carrier (for example, Southwest Airlines) charges fares that are lower than that of a full-service air carrier. However, passengers receive limited snacks and drinks (coffee, tea, or soft drinks). Another hall mark of such carriers is that they only provide one class of service. Also, the passengers provide their own magazines or other reading materials. Overall, there are fewer airline employees involved in no-frills services operations, which contribute to lower costs. The “no-frills” carriers have had a significant impact on fares where their service is available.
Cargo Competition
For cargo service, competition has become intense. As a result of the complete deregulation of air cargo in 1977, air carriers have published competitive rates, but these rates are still higher than those available via surface carriers. Freight schedules have been published that emphasize low transit times between given points. To overcome accessibility problems, some carriers provide door-to-door service through contacts with motor carriers. Major airline freight companies (e.g., FedEx, UPS Airlines, and DHL) have their own fleets of surface delivery vehicles to perform the ground portion of this door-to-door service.
OPERATING AND SERVICE CHARACTERISTICS
General
Air transportation dominates the for-hire, long-distance passenger transportation market.
The majority of freight using air service is high-value and/or emergency shipments. The high cost of air transportation is usually prohibitive for shipping low-value routine commodities unless there is an emergency.
For emergency shipments, the cost of air transportation is often inconsequential compared to the cost of delaying the goods. For example, an urgently needed part of an assembly line might have a $20 value, but if the air-freighted part arrives on time to prevent the assembly line from stopping, the “opportunity” value of the part might become hundreds of thousands of dollars. Thus, the $20 part might have an emergency value of $200,000, and the air freight cost is a small portion of this emergency value.
Examples of commodities that move via air carriers include mail, clothing, communication products and parts, photography equipment, mushrooms, fresh flowers, industrial machines, high-priced livestock, racehorses, expensive automobiles, and jewellery. Normally basic raw materials such as coal, lumber, iron ore, or steel are not moved by air carriage. The high value of these products provides a cost-savings trade-off, usually but not always from inventory, that offsets the higher cost of air service. The old adage “Time is money” is quite appropriate here.
Speed of Service
Undoubtedly, the major service advantage of air transportation is speed. The terminal- to-terminal time for a given trip is lower via air transportation than via any of the other modes. Commercial jets are capable of routinely flying at speeds of 800 to 960 kilometres per hour, thus making a New York to California trip, approximately 4,800 kilometres, a mere 6-hour journey.
This advantage of high terminal-to-terminal speed has been dampened somewhat by reduced frequency of flights and congestion at airports.
Air carriers have been concentrating their service on the high-density routes like New York to Chicago, for example. In addition, most carriers have adopted the hub-and-spoke terminal approach, in which most flights go through a hub terminal; Atlanta (Delta) and Chicago (United) are examples. These two factors have aggravated the air traffic congestion and ground congestion at major airports and have increased total transit time while decreasing its reliability. Also, some carriers have been unable to expand because of limited “slots” at major airports. At hub airports, these slots are controlled by the dominant carrier, making it difficult for new carriers to offer service at that hub.
The shippers who use air carriers to transport freight are primarily interested in the speed and reliability of the service and the resultant benefits, such as reduced inventory levels and inventory carrying costs. Acceptable or improved service levels can be achieved by using air carriers to deliver orders in short time periods. Stock-outs can be controlled, reduced, or eliminated by responding to shortages via air carriers.
Length of Haul and Capacity
For passenger travel, air carriers dominate the long-distance moves. The capacity of airplanes is dependent on its type. A wide-body, four-engine jet has a seating capacity of about 370 people and an all-cargo carrying capacity of 16.6 tons. Table 5.3 provides capacity and operating statistics for some of the more commonly used aircraft in both domestic and international markets.
Normally, small shipments that are time-sensitive are moved by air carriers.
In addition to small shipment sizes, the packaging required for freight shipped by air transportation is usually less than other modes. It is not uncommon in air transportation to find a palletized shipment that is shrink-wrapped instead of banded. The relatively smooth ride through the air and the automated ground-handling systems contribute to lower damage and thus reduce packaging needs.
One gallon = 3.785 litres
One mile = 1.61 kilometres
Accessibility and Dependability
Except in adverse conditions such as fog or snow, air carriers are capable of providing reliable service. The carriers might not always be on time to the exact minute, but the variations in transit time are small. Sophisticated navigational instrumentation permits operation during most weather conditions. On-time departures and arrivals are within 15 minutes of scheduled times.
Poor accessibility is one disadvantage of air carriers. Passengers and freight must be transported to an airport for air service to be rendered. This accessibility problem is reduced when smaller planes and helicopters are used to transport freight to and from airports, and most passengers use automobiles. Limited accessibility adds time and cost to the air service provided. Even with the accessibility problem, air transportation remains a fast method of movement and the only logical mode when distance is great and time is restricted. The cost of this fast freight service is high, about three times greater than motor carrier and 10 times greater than rail. Nevertheless, the high speed and cost make air carriage a premium mode of transportation.
EQUIPMENT
Types of Vehicles
As previously mentioned, there are several different sizes of airplanes in use, from small commuter planes to huge, wide-body, four-engine planes used by the nationals
Table 5.3 compares some of the major aircraft types in terms of seats, cargo payload, speed, fuel consumption, and operating cost per hour. Airlines have many options to select from when purchasing equipment.
Terminals
The air carriers’ terminals (airports) are financed by a government entity. The carriers pay for the use of the airport through landing fees, rent and lease payments for space, taxes on fuel, and aircraft registration taxes. In addition, users pay a tax on airline tickets and air freight charges. Terminal charges are becoming increasingly more commonplace for passenger traffic.
The growth and development of air transportation is dependent upon adequate air port facilities. Therefore, to ensure the viability of air transportation, the government has the responsibility of financially contributing to the construction of airport facilities. The various state and local governments assume the responsibility for operating and maintaining the airports.
At the airport, the carriers perform passenger, cargo, and aircraft servicing. Passengers are ticketed, loaded, and unloaded, and their luggage is collected and dispersed. Cargo is routed to specific planes for shipment to the destination airport or to delivery vehicles. Aircraft servicing includes refuelling; loading of passengers, cargo, luggage, and supplies (food); and maintenance. Major aircraft maintenance is done at specific airports.