2.2 Operational Characteristics
2.2.1 Structural Features
The International Air Transport Association (IATA) was, founded in 1945, repre- sents the interests of the airlines and operates a clearing house for inter-airline debts arising from inter-airline traffic.7 Figure 2.3 displays the key trends of airline passenger growth of recent decades.
2.2 Operational Characteristics
Spirit, United (merged with Continental), UPS, and Virgin.8Except for the parcel- delivery companies, these (Group III) majors generate more than 90 % of aggre- gated revenues from passenger traffic and less than 10 % from cargo carriage, with approximately 75 % of the flights being between domestic destinations.
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Fig. 2.3 (a) Passengers enplaned (in millions), (b) number of passengers and flights (in millions), (c) passenger-miles (in billions), (d) available seat-miles (in billions), (e) load factor (%), (f) yield (constant 2001 dollars and current dollars), and (g) average number of passengers per departing flight and average miles per departure, to 2014
8American acquired TWA in 2001.
All of the majors are required to hold two certificates issued by the federal government. The Department of Transportation (DOT) under Section 401 of the Federal Aviation Act issues the first, a fitness certificate. It establishes that the carrier has the financial and management wherewithal in place to provide scheduled service with large aircraft, those with 61 or more seats and a payload of more than 18,000 lb. The second, an operating certificate, is issued by the FAA under Section 121 of the Federal Aviation Regulations and specifies for aircraft with ten or more seats numerous requirements including those pertaining to the training of flight crews and to aircraft maintenance programs.
Nationals and Regionals National carriers (in DOT Group II) are defined as scheduled airlines generating annual revenues between $100 million and $1 billion, but they may sometimes provide long-haul and even international service. Like the majors, nationals operate mostly medium- and large-size jets and are thus subject to the same certification requirements as the majors. As of 2013, the Group IIs included Allegiant, Evergreen International, ExpressJet, Horizon, Mesa, and Polar Air Cargo.
Regionals account for the majority of flights in the US and had until recently been among the fastest growing companies. As the name implies, these carriers (RJs, in brief) for the most part provide service to only one region of the country and generate revenues of under $100 million (Group I). The largest regionals, with revenues of more than $20 million, must also comply with FAA and DOT certifi- cation requirements, although smaller, so-called commuter airlines are only required to file certain annual reports according to DOT’s Section 298 regulations.
These small carriers are exempt from Section 401 fitness certificate requirements because their aircraft have fewer than 30 seats. Among the largest regionals are major-carrier affiliates that operate on fixed departure fees per flight.9The major carriers set RJ schedules and establish fares but also absorb operational risks related to costs of fuel and revenue targets of their contract carrier affiliates.
Charters, Taxis, and Fractional-Ownership Carriers Nonscheduled airline opera- tors, known as charter airlines, are more frequently found serving the European than the US tourism markets (see Chap.7). Such airlines organize their operations by chartering aircraft equipment, often on a temporary basis, for the purpose of flying to specific tourist locations in season. However, Section 401 certification regula-
9After 1995, all scheduled carriers operating aircraft with ten or more seats were required to comply with FAA Part 121 certification procedures. Among the largest contract carriers have been Atlantic Coast (now Independence Air), Skywest, ExpressJet, and Pinnacle. Both Atlantic Coast and Skywest had either been or are still partnered, respectively, with United and Delta, and ExpressJet with United/Continental. Carey (2009) notes that relationships between the regionals and their partners are sometimes strained. According to federal aviation rules and legal precedent, commuter airlines are considered to be distinct legal entities even though their planes usually bear the logo of the mainline carriers. See Mouawad (2012d) and McCartney (2013c). On industry vertical integration, see Forbes and Lederman (2009).
2.2 Operational Characteristics 57
tions for any aircraft operating within the United States are largely the same as for the major scheduled carriers.
Development of new technologies (including, for example, complex planning algorithms) has also enabled charter air taxi-like companies to begin providing services on shorter routes. These online services allow passengers to instantly obtain prices on flight plans of their own design.10And fractional-jet ownership programs, comparable in structure to vacation time-share plans used by the hotel industry, divert high-paying business customers from the major commercial airlines by offering the convenience and speed that major carriers are no longer able to provide. Such plans account for around 15 % of all US business-aviation flights.11 Labor Relations Labor accounts for a significant part of an airline’s total operating costs, typically ranging from at least 20 % to sometimes as high as 40 %. Discount airlines such as JetBlue and Southwest—in all accounting for around 20 % of domestic US air-carrier capacity as of the early 2000s—have enjoyed competitive advantages in that their labor cost percentages have tended to be near the lower end of the range as compared to the upper end of the range at legacy carriers. The actual percentage is influenced by a variety of factors that include average length of routes, average hours of flight per plane per day (e.g., around 9 h for Southwest and perhaps
10See Fallows (2005), who describes brief history and discusses SATSair and DayJet. See also Meckler and Johnson (2006), about light business jets and Sharkey (2008). Krupnick (2015) writes about start-ups such as Magellan Jets, which offers a subscription whereby passengers buy blocks of flight times and are then matched to planes via an iPhone app. Another start-up is BlackJet, which matches passengers with empty seats on nearby private aircraft.
11A typical 5-year contract with NetJets (Executive Jet Inc.) and smaller competitors (e.g., Flight Operations, Inc.) involves the sale of one-sixteenth ownership share of a plane to a buyer who gets 50 h of flight per year after paying further specified monthly and hourly operating fees.
Fractional-jet ownership programs, pioneered by Executive Jet in the mid-1980s, are described more fully in Carey (2002b), who notes that the cost of a one-sixteenth share of a small Citation Excel, twin-engine, seven-seat jet requires an upfront investment of $620,000, a monthly fee of nearly $8000, and an hourly flight fee of almost $1700 for a plane that sells new for about $9.8 million. Comparably, a one-fourth share of a Gulfstream V, which can carry 13 passengers, has an upfront fee of $10.1 million, a monthly fee of $56,516, and an hourly fee of $3118 for 200 h per year. One of the significant advantages of such jets is that they can land at 5000 US airports rather than only the 500 or so available to larger commercial carriers. A major challenge in running the business is that an estimated 25 % or more of the average time a plane spends in the air it is empty, en route to passenger pickups. As noted in Fabrikant (2008), the annual estimated corporate operating cost in 2008 for a plane like the Gulfstream G550 was around $1.3 million, including
$500,000 for property tax and $400,000 for pilots and stewards. Typical operating costs are more than $2000 an hour in the air. Another experimental concept, discussed in the November 2012 issue ofInc. involves Surf Air, a company that allows unlimited monthly flights to regional airports for a fee of $1110 a month. See also Witz (2013b) and Zipkin (2015a).
As of 2002, Executive Jet Inc., owned by Warren Buffett’s Berkshire Hathaway, Inc. had held around 50 % share of market. See also Carey (2002a), Johnson (2005), Johnson and Corkery (2006), and Palmer (2004) in which growth of air charter through companies such as Blue Star Jet, small air taxis (Pogo), and Jet Cards (that operate like a prepaid phone card) are discussed. Airport congestion concerns related to such taxis is discussed in McCartney (2006c). See also Sharkey (2007);BusinessWeekJanuary 29, 2007; Burger (2011) and Kesmodel (2012).
6 h for United and Delta); union and government agreements; and corporate history.
Given that operating margins are already narrow to begin with, it has always been important to contain labor costs, as even small savings in this area may often translate into the difference between profit and loss.
As a consequence, the industry has had a long history of labor strife, with work slowdowns or strikes being not all that uncommon (and with strikes occasionally averted in airline and railroad disputes through presidential intervention under the Railway Labor Act of 1926). This history of labor dissent, expressed in frequent union/management clashes, has extended across the board from pilots (e.g., the Airline Pilot’s Association, ALPA) to machinists (e.g., the International Associa- tion of Machinists and Aerospace Workers, IAM) and to flight attendants (e.g., the Association of Flight Attendants, AFA).12 In attempts to relieve tensions and to combine the interests of labor and management, several airlines have—through union governance and in lieu of larger pay raises—sometimes given their workers equity stakes in the companies.13To date, however, experiences with such arrange- ments have not proven viable over the long term. Whether or not they are, though, does not change the fact that labor unions are significant participants within the airline industry’s operating structure.