Domestic Rates after Deregulation

The deregulation of domestic rates has resulted in an expanding use of discount fares. This was especially marked in the 1980s. The proportion of discount traffic to total passenger miles in the domestic services of the major airlines rose from 57 percent in 1980 to 91 percent by 1987, and has remained close to 90 percent thereafter, with the average discount in the 60 to 65 percent range off the full fares.4 These figures seem especially remarkable in light of the fact that the discount fare...

Changes in Certification Procedures

The first change in long-standing entry procedure and policy was with respect to domestic cargo, in the cargo regulatory reform law of November 9, 1977, designated as P.L. 95-163. (This law was given no formal name by Congress, and only certain parts of it deal with regulatory reform. We will refer to it simply as the cargo regulatory reform law.) Under this law any airline that had conducted scheduled freighter service anywhere between January 1, 1977, and November 9, 1977, was entitled for...

Polling the Passengers and Prospective Passengers

This method consists simply of quizzing passengers or prospective passengers, either by personal interview or by printed questionnaires. Often an airline will simply leave a copy of a questionnaire on each passenger seat on certain flights and compile data from those that are turned in. The disadvantages of this procedure are obvious There is no way to compel passengers to fill out the questionnaire, nor to know whether those who turn in completed forms are a typical sample of all passengers,...

Mergers And Acquisitions

The merger or consolidation of two or more airlines into one company involves the concepts of both entry and exit. It is an action that may have important consequences for the entire airline industry and the public, and it can generate much controversy. When two airlines merge, each route system is added to the other so that a single enlarged system is formed. To the extent that both airlines may have been competing in some markets prior to the merger, there will obviously be a reduction in the...

Huband Spoke Systems

Since deregulation, the major airlines have increasingly emphasized the development of so-called hub-and-spoke systems, which one authority has defined as follows A hub and spoke system consists of a set of spoke routes flying to and from minor markets into major hub cities. The major airline which creates the hub and spoke system flies some of these spokes itself. Commuter, local, or smaller airlines whom the major airline has co-opted into the system fly other spokes. A set of much longer and...

Notes

Brenner, The Significance of Airline Passenger Load Factors, in Airline Economics, ed. George W. James Lexington, Mass. D.C. Heath, 1982 , pp. 51-52. 2. John R. Meyer and Clinton V. Oster, Jr., Deregulation and the Future of Intercity Passenger Travel Cambridge, Mass. The MIT Press, 1987 , p. 79. 3. Donald Garvett and Laurence Michaels, Price Parrying A Direction for Quick, Decisive, and Profit-Maximizing Pricing, in Handbook of Airline Marketing, ed. Gail F. Butler and Martin R....

Total Demand versus Market Shares

Some of the factors we have been discussing tend to attract people to air travel, others merely to attract to a particular airline some people who were going to fly anyway. The total demand for airline service was certainly affected by the quantum jump in speed and comfort when the airlines went from piston to jet fleets. And the general level of personal income also affects total demand for air service. But service amenities are another matter very few people will decide to fly to a point...

The SCurve Controversy

Many airline officials will contend that passengers in a market are attracted to an airline in a proportion greater than that airline's capacity bears to the total capacity of all the airlines in that market. For example, if there are two airlines in the market and one has 60 percent of the capacity, prospective passengers will tend to think first of this dominant carrier when they decide to reserve space on a flight. Also they will be most likely to find the most desirable departure time and...

Books

Air Transport Association of America. Air Cargo from A to Z. Washington, D.C. Air Transport Association of America, undated. Bailey, Elizabeth E., David R. Graham, and Daniel P. Kaplan. Deregulating the Airlines. Cambridge, Mass. The MIT Press, 1985. Biederman, Paul. The U.S. Airline Industry End of an Era. New York Praeger, 1982. Brancker, J. W. S. IATA and What It Does. Leiden A. W. Sijthoff, 1977. Butler, Gail F., and Martin R. Keller, eds. Handbook ofAirline Finance. Washington, D.C....

Questions

Discuss the total cost concept justification for using a more expensive mode of transportation. Include each element in physical distribution. Describe the just-in-time concept. What special responsibility does it place on the transportation system Why is it unlikely that we will see a new uncompromised freighter aircraft designed and produced in the near future Why might the lighter-than-air airship be a good cargo carrier What are its limitations as a cargo carrier Give examples of...

Some Demand Characteristics

There are certain characteristics of the demand for airline service that, while not unique to airlines, are at least unusual. Air transportation is what economists sometimes call an intermediate good and the demand for it a derived demand , in the sense that most people use air transportation as a means to achieve some other purpose. Very few passengers fly merely for the sake of flying. Consequently, when trying to estimate passenger demand, it is necessary to go into all the various reasons...

Regional aircraft

In Chapter 3 we noted that the regional and commuter air carriers have developed largely into adjuncts of the major passenger carriers, either owned or closely linked with those majors, and moving traffic between their hubs and relatively small traffic points, usually over short hauls. We have also noted that these services have been conducted largely with turboprop aircraft of foreign manufacture. In the mid-1990s, however, some foreign manufacturers began to bring on the market pure jet,...

Frequent Flyer Programs

In 1981 the airlines began instituting frequent flyer programs, under which a passenger is awarded points in the form of coupons or certificates for every flight taken on one airline, the number of points being based on the flight distance and sometimes on the type of ticket purchased. For example, in 1988 American Airlines was awarding a mileage-based number of points for coach tickets, whether or not at discount fares, 120 percent of that number for a business-class ticket, 150 percent for a...

Selected References

How the major airlines have adjusted route strategies to compete in a deregulated environment both with new entrants and with one another is discussed in John R. Meyer and Clinton V. Oster Jr., Deregulation and the Future of Intercity Passenger Travel Cambridge, Mass. The MIT Press, 1987 , pp. 55-72 the potential danger of concentration is discussed in the same book, pp. 207-14. The development of hub-and-spoke networks is described in Steven Morrison and Clifford Winston, The Economic Effects...

Restrictions on Fifth Freedom

There are limitations on entry other than those relative to frequency and capacity. One of these is a restriction on carrying Fifth Freedom traffic. To understand this problem, it is first essential to master a classification of international traffic that originated back at the time of the Chicago Conference on International Civil Aviation in 1944 and remains in current usage today. Under this classification, traffic is broken down into five categories called freedoms, defined as follows First...

Frequency and Capacity Restrictions

We said that we would examine any major limitation on the degree of entry, and in the international sphere there is such a major limitation. We refer to restrictions on frequency and capacity. The word frequency means, of course, the number of scheduled flights, measured usually by the week. The word capacity means the total number of seats made available during a particular period, again usually a week. It will be obvious that the two terms overlap, but they are not identical. If an airline...

Economies of Scale Scope and Density

Economists make a distinction among economies of scale, economies of scope, and economies of density. An airline that expands its total operations may realize economies of scale, but whether any major airline is likely to realize economies by simply getting bigger is a matter of much controversy. However, an airline adding a route branching out from its existing network may well realize economies of scope that is, savings because, for example, its airport facilities and personnel are already in...

Aircraft Selection

The management of an airline approaching a decision on aircraft purchase must consider many factors. First, there is the price of the aircraft, which may be a matter for negotiation with the manufacturer, especially if there is to be a single commitment to purchase a substantial number of planes. Credit costs must be reckoned aircraft financing usually involves extension of credit by a major bank, life insurance company, or other large financial institution, but sometimes by the aircraft...

The Production Function And Factor Costs

In elementary economics we talk about factors of production and break them down into land, labor, capital, and managerial entrepreneurship. We also consider how these factors are brought together in certain proportions to create a particular output. An industrialized country may put a lot of capital and a little labor together to produce an article. A country with low-wage labor and not much capital will use a lot of labor and little machinery to produce the same article. Similarly, in the...

Preface

This book is an introduction to the economics of the airline service of the United States, both domestic and international, for the reader whose need is for a relatively simple, yet college-level, text. It is intended as a textbook for one-semester courses of the type becoming common in U.S. colleges today and bearing such titles as Aviation Administration, Air Transportation, or Economics of Air Transportation. Since the appearance of the fifth edition in 1995, there has been a continuation of...

Multiple Designation

Multiple designation is a term used in international air transportation to mean that one country designates more than one of its airlines to fly a particular international route. U.S. policy, at least up until the second Bermuda Agreement, has been to insist that bilateral agreements permit multiple designation without any numerical ceiling on the number of airlines on any route. Bilateral agreements have used the expression an airline or airlines designated by the Government of , although many...