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Airline

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An airline is an organization providing aviation services to passengers and/or cargo. It owns or leases airliners with which to supply these services and may form partnerships or alliances with other airlines for reasons of mutual benefit.

Industry overview

The scale and scope of airline companies ranges from those with a single airplane carrying mail or cargo, through full-service international airlines operating many hundreds of airplanes in various types. Airline services can be categorized as being intercontinental, intracontinental, regional or domestic and may be operated as scheduled services or charters.

These variations in the types of airline companies, their operating scope, and the routes they serve, makes analysis of the airline industry somewhat complex. Nevertheless, some patterns have emerged in the last 50 years of experience:

  • The general pattern of ownership has gone from government owned or supported to independent, for-profit public companies. This occurs as regulators permit greater freedom, in steps that are usually decades apart. This pattern has not been completed for all airlines in all regions.
  • The demand for air travel services is derived demand. That is, it depends on other things: business needs for cargo shipments, business passenger demand, leisure passenger demand, all influenced by macroeconomic activity in the markets under study. These patterns are highly seasonal, and often day-of-week, time-of-day, and even directionally variable.
  • The industry is cyclical. Four or five years of poor performance are followed by five or six years of gradually improving good performance. But profitability in the good years is generally low, in the range of 2-3% net profit after interest and tax. It is in this time that airlines begin paying for new generations of airplanes and other service upgrades they ordered to respond to the increased demand. Since 1980, the industry as a whole has not even earned back the cost of capital during the best of times. Conversely, in bad times losses can be dramatically worse.
  • Notwithstanding these demand patterns, the overall trend of demand has been consistently increasing! In the 1950's and 1960's, annual growth rates of 15% or more were common. Annual growth of 5-6% persisted through the 1980's and 1990's. Growth rates are not consistent in all regions, but certainly areas where deregulation provided more competition and greater pricing freedom resulted in lower fares and sometimes dramatic spurts in traffic growth. The U.S., Australia, Japan, Brazil, Mexico, and other markets exhibited this trend.
  • As in many mature industries, consolidation is a trend, as airlines form new business combinations, ranging from loose, limited bilateral partnerships to long-term, multi-faceted alliances of groups of companies, to equity arrangements between companies, to actual mergers or takeovers. Since governments often restrict ownership and merger between companies in different countries, we see most consolidation taking place within a country. In the U.S., over 200 airlines have been merged, taken over, or simply gone out of business since deregulation began in 1978. Many international airline managers are actively lobbying their governments to permit greater consolidation, in order to achieve higher economies of scale and greater efficiencies.

Early development of airlines in the U.S.

Following World War I, the United States found itself swamped with aviators. Many decided to take their war-surplus aircraft on barnstorming campaigns, performing acrobatic maneuvers to woo crowds. In 1918, the United States Postal Service won the financial backing of Congress to begin experimenting with air mail service, initially using Curtiss Jenny aircraft that had been procured by the United States Army for reconaissance missions on the Western Front. The Army was the first to fly these missions, but quickly lost the contract when they proved to be too unreliable. By the mid-1920s, the Postal Service had developed its own air mail network, based on a transcontinental backbone between New York, New York and San Francisco, California. To supplant this service, they offered twelve contracts for spur routes to independent bidders: the carriers that won these routes would, through time and mergers, evolve into Braniff Airlines, American Airlines, United Airlines (originally a division of Boeing), Trans World Airlines, Northwest Airlines, and Eastern Airlines, to name a few.

Passenger service during the early 1920s was sporadic at best: most airlines at the time were focused on carrying bags of mail. In 1925, however, Ford Motor Company bought out the Stout Aircraft Company and began construction of the all-metal Ford Trimotor, the first successful American airliner. With a 12-passenger capacity, it made passenger service potentially profitable. Air service became parallel to rail service in the American transportation network.

At the same time, Juan Trippe began a crusade to create an air network that would link America to the world, and he achieved this goal through his airline, Pan American World Airways, with a fleet of flying boats that linked Los Angeles to Shanghai and Boston to London. Pan Am was the only U.S. airline to go international before the 1940s, and quickly became a symbol of the potential of the American airline industry.

With the introduction of the Boeing 247 and Douglas DC-3 in the 1930s, the U.S. airline industry continued to build up profitability, despite the Great Depression. This trend continued until the beginning of World War II.

Early development of airlines in Europe

The Imperial Airways Empire Terminal, Victoria, London. Trains ran from here to flying boats in Southampton, and to Croydon Airport

The first countries in Europe to embrace air transport were France and Germany. France begain an air mail service to Morocco in 1919 that was bought out in 1927, renamed Aéropostale, and injected with capital to become a major international carrier. In 1933, Aeropostale went bankrupt, was nationalized, and became Air France.

The German airline industry began with Lufthansa in 1926, which, unlike other airlines at the time, became a major investor in airlines in the developing world, founding Varig and Avianca. German airliners built by Junkers, Dornier, and Fokker were the most advanced in the world at the time. The peak of German air travel came in the mid-1930s, when Nazi propaganda ministers approved the start of commercial zeppelin service: the big airships were a symbol of industrial might, but the fact that they used flammable hydrogen gas raised safety concerns that culminated with the Hindenburg disaster of 1937.

United Kingdom's flag carrier during this period was Imperial Airways, which became BOAC (British Overseas Airlines Co.) in 1939. Imperial Airways used huge Handley-Page biplanes for routes between London, the Middle East, and India: images of Imperial aircraft in the middle of the Rub'al Khali, being maintained by Bedouins, are among the most famous pictures from the heyday of the British Empire.

Development of airlines post-1945

World War II, like World War I, brought new life to the airline industry. Many airlines in the Allied countries had become rich by leasing their airplanes to the military, and were eager to spend this money on the new flagships of air travel such as the Boeing Stratocruiser, Lockheed Constellation, and Douglas DC-6. Most of these new aircraft were based on American bombers such as the B-29, which had spearheaded research into new technologies such as pressurization.

File:Pan Am 707.jpg
Pan Am Boeing 707

In the 1950s, the De Havilland Comet, Boeing 707, Douglas DC-8, and Sud Aviation Caravelle became the first flagships of the Jet Age in the West, while the Soviet Union bloc countered with the Tupolev Tu-104 and Tupolev Tu-124 in the fleets of state-owned carriers such as Aeroflot and Interflug. The Vickers Viscount and Lockheed L-188 Electra inaugurated turboprop transport.

The next big boost for the airlines would come in the 1970s, when the Boeing 747, McDonnell Douglas DC-10, and Lockheed L-1011 inaugurated widebody ("jumbo jet") service, which is still the standard in international travel. The Tupolev Tu-144 and its Western counterpart, Concorde, made supersonic travel a reality. In 1972, Airbus began producing Europe's most commercially successful line of airliners to date.

Starting in the late 1970s, hit by the oil crisis and airline deregulation, many airlines across the world entered financial difficulties. New low-cost carriers, such as Laker Airways and Southwest Airlines, emerged as competitors to older "legacy" carriers. Pan Am, Eastern, and many other large airlines disappeared by the 1990s. Although the ensuing decade brought record profits to airlines, particularly in the United States, the September 11, 2001 terrorist attacks greatly stifled this boom.

Regulatory considerations

Government regulation

Many countries have national airlines that are owned and operated by the government. Even fully privatized airlines are subject to a great deal of government regulation for economic, political, and safety concerns. Airline labor actions, for instance, are often halted by government intervention in order to protect the free flow of people, communications, and goods between different regions without compromising safety.

The United States, Australia, and to a lesser extent Brazil, Mexico, the European Union, and Japan have "deregulated" their airlines. In the past, these governments dictated airfares, route networks, and other operational requirements for each airline. Since deregulation, airlines have been largely free to negotiate their own operating arrangements with different airports, enter and exit routes easily, and to levy airfares and supply flights according to market demand.

The entry barriers for new airlines are lower in a deregulated market, and so the U.S. has seen hundreds of airlines start up (sometimes for only a brief operating period). This has produced far greater competition than before deregulation in most markets, and average fares tend to drop 20% or more, spurring new sources of demand. The added competition, together with pricing freedom, means that new entrants often take market share with highly reduced rates that, to a limited degree, full service airlines must match. This is a major constraint on profitabilty for established carriers, which tend to have a higher cost base.

As a result, profitability in a deregulated market is uneven for most airlines. These forces have caused some major airlines to go out of business, in addition to most of the poorly established new entrants.

International regulation

File:Singapore.b747.london.750pix.jpg
Singapore Airlines Boeing 747

Groups such as the International Civil Aviation Organization establish worldwide standards for safety and other vital concerns. Most international air traffic is regulated by bilateral agreements between countries, which designate specific carriers to operate on specific routes. The model of such an agreement was the Bermuda Agreement between the US and UK following World War II, which designated ports to be used for transatlantic flights and gave each government the authority to nominate carriers to operate routes.

Bilateral agreements are based on the "freedoms of the air," a group of generalized traffic rights ranging from the freedom to overfly a country to the freedom to provide domestic flights within a country (a very rarely granted right known as cabotage). Most agreements permit airlines to fly from their home country to designated ports in the other country: some also extend the freedom to provide continuing service to a third country, or to another destination in the other country while carrying passengers from overseas.

In the 1990s, "open skies" agreements became more common, which take many of these regulatory powers from state governments and open up international routes to further competition. Open skies agreements have met some criticism, particularly within the European Union, whose airlines would be at a comparative disadvantage with the United States' because of cabotage restrictions.

Economic considerations

Although many countries continue to operate state-owned or parastatal airlines, most large airlines today are privately-owned and are therefore governed by microeconomic principles in order to maximize shareholder profit.

Ticket sales

Most private airlines practice price discrimination by selling seats at different prices based on the terms of the ticket. Tickets purchased in advance are usually much cheaper than tickets purchased on the day of travel, even though they provide the same service to the bearer. The advent of advanced computerized reservations systems in the late 1970s, most notably Sabre, allowed airlines to easily perform cost-benefit analyses on different pricing structures, leading to almost perfect price discrimination in some cases (that is, filling each seat on an aircraft at the highest price that can be charged without driving the consumer elsewhere). The intense nature of airfare pricing has led to the term "fare war" to describe efforts by airlines to undercut other airlines on competitive routes.

Computers also allow airlines to predict, with some accuracy, how many passengers will actually fly after making a reservation to fly. This allows airlines to overbook their flights enough to fill the aircraft while accounting for "no-shows," but not enough (in most cases) to force paying passengers off the aircraft for lack of seats.

Airport operations

Where an airline has established an engineering base at an airport then there may be considerable economic advantages in using that same airport as a preferred focus (or "hub") for its scheduled flights.

In view of the congestion apparent at many international airports, the ownership of slots at certain airports (the right to take-off or land an aircraft at a particular time of day or night) has become a significant tradeable asset in the portfolios of many airlines. Clearly take-off slots at popular times of the day can be critical in attracting the more profitable business traveller to a given airline's flight and in establishing a competitive advantage against a competing airline. If a particular city has two or more airports, market forces will tend to attract the less profitable routes, or those on which competition is weakest, to the less congested airport, where slots are likely to be more available and therefore cheaper. Other factors, such as surface transport facilities and onward connections, will also affect the relative appeal of different airports and some long distance flights may need to operate from the one with the longest runway.

Business-to-business relations

Code sharing is the most common type of airline partnership; it involves one airline selling tickets for another airline's flights under its own airline code. An early example of this was Japan Airlines' code sharing partnership with Aeroflot in the 1960s on flights from Tokyo to Moscow: Aeroflot operated the flights using Aeroflot aircraft, but JAL sold tickets for the flights as if they were JAL flights. This practice allows airlines to expand their operations, at least on paper, into parts of the world where they cannot afford to establish bases or purchase aircraft.

Since airline reservation requests are often made by city-pair (such as "show me flights from Chicago to Dusseldorf"), an airline who is able to code share with another airline for a variety of routes might be able to be listed as indeed offering a Chicago-Dusseldorf flight. The passenger is advised however, that Airline 1 operates the flight from say Chicago to Amsterdam, and Airline 2 operates the continuing flight (on a different airplane, sometimes from another terminal) to Dusseldorf. Thus the primary rationale for code sharing is to expand one's service offerings in city-pair terms so as to increase sales.

Virtually all international airlines practice code sharing.

A more recent development is the airline alliance, which became prevalent in the 1990s. Groups of airlines such as the Star Alliance, oneworld, and SkyTeam coordinate their passenger service programs (such as lounges and frequent flyer programs), offer special interline tickets, and often engage in extensive codesharing (sometimes systemwide). These are increasingly integrated business combinations-- sometimes including cross-equity arrangements-- in which products, service standards, schedules, and airport facilities are standardized and combined for higher efficiency. Often the companies combine IT operations, buy fuel, or purchase airplanes as a bloc in order to achieve higher bargaining power.

Customs and conventions

Each operator of a scheduled or charter flight uses a distinct airline call sign when communicating with airports or air traffic control centres. Most of these call-signs are derived from the airline's trade name, but for reasons of history, marketing, or the need to reduce ambiguity in spoken English (so that pilots do not mistakenly make navigational decisions based on instructions issued to a different aircraft), some airlines and air forces use call-signs less obviously connected with their trading name.

Airline personnel

The various types of airline personnel include:

Most airlines follow a corporate structure where each broad area of operations (such as maintenance, flight operations, and passenger service) is supervised by a vice president. Larger airlines often appoint vice presidents to oversee each of the airline's hubs as well. Airlines also tend to employ considerable numbers of lawyers to deal with regulatory procedures and other administrative tasks.

See also

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