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Figures1.1 Early Airlines. (a) Imperial Airways Route System and (b) HandleyPage H.P. 421.2 (a) Waco JTO Taperwing and (b) Boeing B-40Waco photo courtesy of Embry-Riddle Aeronautical UniversityArchives. B-40 from Wikimedia Commons1.3 Contract Airmail Routes (CAMs), circa 19301.4 The Ford Tri-Motor1.5 Douglas DC-31.6 Large Piston-Powered Aircraft. (a) Douglas DC-6 and(b) Lockheed Super Constellation1.7 (a) Boeing 707 Operated by British Overseas Airways Corporationand (b) a Pan American World Airways Boeing 7471.8 (a) Airbus A300 operated by launch customer Air France and(b) Singapore Airlines flagship A380. A300 photo courtesy ofAirbus. A-380 photo from Wikimedia2.1 World Air Traffic 1974 to 2034. Traffic is measured in trillionsof revenue passenger kilometers (RPK). One RPK represents onepassenger flying one kilometer in air transportation. In the U.S.,the more common statistic is the revenue passenger mile (RPM).Figure courtesy of Airbus, 20152.2 Air Travel and Per Capita Income. Figure courtesy of Airbus, 20152.3 Annual Air Traffic Growth. Figure courtesy of Airbus, 20152.4 Growth in U.S. Scheduled Revenue Passenger Miles2.5 Air Cargo Growth. Figure courtesy of Boeing, 20122.6 Air Travel and GDP. Figure courtesy of Boeing, 20142.7 Airbus A-380. Photo courtesy of Airbus2.8 Demand for Air Travel2.9 The Southwest Effect2.10 New Route Evaluation. June 2016 route map courtesy ofVirgin America2.11 S-Curve3.1 Generic Route Systems79101115171921384041424345465051555662

Figures3.2 Ryanair’s Stockholm Base Routes3.3 Linear Routes in Southwest Airlines’ Network.(b) from MIT/ICAT (used by permission)3.4 Flight Segments Required3.5 Examples of Hub-and-Spoke Systems. Etihad June 2016 routemap courtesy of Etihad Airways3.6 JetBlue Route Systems3.7 Delta Air Lines Multiple Hubs3.8 Directional Hub-and-Spoke Systems3.9 Effect of Rolling Hub at Dallas-Ft Worth3.10 Competing Hub-and-Spoke Systems3.11 Southwest Airlines Chicago Midway Route System4.1 Passenger Criteria in Airline Choice4.2 Evaluating Industry Competition4.3 Airline Product Design. Adapted from Holloway, 20024.4 Air Canada’s fare options. Reproduced with the permissionof Air Canada4.5 Regional Airline Passenger Miles Growth4.6 Embraer 145 and 1954.7 SkyWest Route System as of June, 2016.Courtesy of SkyWest Airlines4.8 Growth of Low-Cost Carriers5.1 Airline Planning Process5.2 Alitalia Timetable5.3 Flight Schedule Objectives5.4 Aircraft Assignment5.5 Aircraft Flow Chart5.6 Flow Chart, Pairings, Bid Lines5.7 Airline Operations Control Center5.8 Irregular Operations5.9 Control Process5.10 Operational Metrics. Panel A—Percentage of flightsarriving on time for the 12 months ended March 2016.Panel B—Passenger complaints per 100,000 enplanementsfor the 3 months ended March 20165.11 Southwest Airlines Operational Performance5.12 Operational Performance Summary6.1 World Airline Net Profits. Profits are adjusted for inflationand measured in 2014 dollars6.2 2015 Pre-Tax Profit Margins Comparison for U.S. Airlines6.3 Airline Earnings Vs. Other Aviation Sectors 1996 through 20046.4 Earnings Before Interest and Tax for 2012, 2013, 2014 and 2015(forecast). Data exclude bankruptcy reorganization and other largenon-cash expenses that substantially impacted US airline 2131134135142144146148153156157159160165166167167

87.97.107.117.127.137.147.157.167.177.18Return on Capital 2000 through 2014World Airline Nominal and Real Yield, 1959–2014World Airline Capacity 1969 to 2014World and U.S. Airline Load Factor from 1960 through 2014Breakeven Load Factors for U.S. Airlines from 1971 to 2015Worldwide Ancillary Revenue Growth from 2007 through 2014Key Ancillary Revenue Components of U.S. Airlines in 2013Ancillary Revenue as a Percent of Total RevenueSpirit Airlines Carry-On Bag RulesU.S. Airline Administrative Cost Percentages for the 1st Quarterof 2015U.S. Airline ASM Versus Full-Time Equivalent EmployeesLabor Productivity in the U.S. as Measured by ASM Per Full TimeEquivalent (FTE) EmployeeHistorical Jet Fuel PricesUnit Operating Costs from 2007 through 2014Percentage of Ticket Prices Going to TaxesFY 2015 Airline Tax CollectionCASM Versus Segment LengthAircraft Fuel Efficiency ImprovementsCheck-In Kiosk Screenshot.No Overbooking RevenueRevenue with OverbookingOverbooking ExamplesDemand Curve Indicating One Unit Sold at Price P1.Total Revenue is P1 U1, Equal to the Shaded AreaDemand Curve Indicating Four Units Sold at Price P4.The Total Revenue for Selling Four Units Is P4 U4 andEqual to the Shaded AreaDemand Curve Showing Four Units Sold, One Unit atEach Price P1, P2, P3 and P4. The Total Revenue isIndicated by the Total of the Four Shaded AreasMarginal CostHistorical Reservation Data from a Specific Flight for the 600 B FareProbability Density Function for 600 B FareSurvivor Function for 600 B FareExpected Marginal Seat Revenue Plot for the 600 B FareExpected Marginal Seat Revenue Plot for the 500 M FareExpected Marginal Seat Revenue Plot for the 300 Q FareExpected Marginal Seat Revenue Plot for the 800 Y FareEMSR plots for Four Fares in a 100-Seat AircraftFare NestingTypical Airline Online Reservations Web 231232233234

FiguresxviiExpected Booking CurveNetwork Allocation ExampleOrigination/Destination Revenue ManagementDemand-Driven Fares, from EmiratesEarly Reservations Center at Pan AmOctober 1954 OAG Cover and Sample PageTicket Blanks.Hand-Written Ticket from 1952Automated TicketAn Early Reservisor TerminalThe Magnetronic Reservisor Desk-Set (left) in Use at a ReservationsOffice and Drum Storage Units (right)8.8 Schematic Diagram Showing Elements in a Typical TeleregisterMagnetronic Reservisor System8.9 Sabre Advertisement.8.10 Typical Sabre GDS Screen Display8.11 U.S. CRS Market Share in 19888.12 Major GDS Pedigree Chart with Current Subsidiaries andJoint Ventures8.13 EDIFACT Screen Presentation8.14 NDC Screen Presentation8.15 Airline Distribution Diagram9.1 Ryanair’s Proposed EU–US Service Under Open Skies9.2 Private versus State-Owned Airlines9.3 Northwest/KLM Alliance9.4 Continuum of Alliance Cooperation9.5 Etihad Airways Equity Alliance10.1 World Airline Profits and Global Gross Domestic 2292295299303306311

28.39.19.2Airline Industry Size and Scope for 2013Factors Causing a Change in DemandA Comparison of Hub-and-Spoke and Point-to-Point SystemsSpirit Airlines Ancillary FeesFading Distinction between CNC and LCCWorld’s Top 25 Airlines2013 Attempted Fare IncreasesFuel Productivity (ASM per gallon) for Selected Airlines for 2010Taxes and Fees for a Hypothetical Domestic Flight fromPeoria, IL, through Chicago O’Hare, to Raleigh-Durham, NCLCC Versus Comprehensive Network Carrier CostsCommercial Aircraft Leasing CompaniesAircraft Financing OptionsRevenue Management ExampleTravel Agency Locations, Sales and Commission Rates1984 GDS Market Shares1988 Market ShareElements of US/Netherlands Open Skies ASAGlobal Airline 7267291300

IntroductionGoal of Airline Management and OperationsThis textbook is a survey of the airline industry from a managerial perspective.The primary audience is senior and graduate students of airline management,but it should also be useful for entry and junior level airline managers needing abroad knowledge of the industry extending beyond their own functional area. Abackground in the various management disciplines typically covered in an undergraduate degree program in business or management is helpful, but not essential.The text applies and integrates the fundamentals of several management disciplines, particularly, economics, operations, marketing, and finance in developingthe overview of the industry. The focus is on tactical, rather than strategic, management that is specialized or unique to the airline industry. Human Resourcemanagement, for example, is not addressed, not because it isn’t crucial to an airline’s success, but because the skills required are not unique to the industry. Themanager with a broad understanding of the industry and its competitive environment is better equipped to work in interdisciplinary assignments and, ultimately,to succeed and progress in an airline career. This is the goal of this text.June 2016IntroductionThe dynamic and rapidly expanding airline industry is essential to the functionof the world economy and for continued economic growth. It’s also an industryoften in turmoil, sometimes as a result of myopic management focus on marketshare but more often due to economic crises beyond the control of airline executives. The first decade of the twenty-first century was especially cruel to the industry as it endured two severe economic recessions, the so-called Great Recessionbeginning in 2008 being the most devastating since the Great Depression ofthe 1930s. As a direct result of falling demand, several airlines failed includingATA, Maxjet, Aloha, Sterling, and Oasis. Others were forced to pare routes andfrequencies and reduce costs in restructuring that continues today. This bookexamines the history, structure, and functions of the airline industry from amanagement perspective with the goal of providing students and junior managers with a broad overview of airline operations and management. Although the

2Introductiontools of several management disciplines are employed, previous study of businessadministration is not required.The text begins with a summary of airline history from the emergence of theearliest passenger airlines immediately following the end of World War I to thepresent. Chapter 1 emphasizes the role of government economic regulation,ownership, and subsidies in the development of the early industry. Rapid technological progress, especially in aircraft speed, reliability, and comfort, increaseddemand and lowered costs to the point that government policy makers, beginning in the United States, freed airlines from regulation of routes and fares leading to an increasingly free market in much of the developed world.Chapter 2 turns to the forces that drive airline demand and supply and therapid growth in airline passenger and cargo transportation which is now mostevident in Asia. Airline product offerings are the subject of the next two chaptersbeginning with an airline’s choice of route structure to connect the destinationsit has chosen to serve. An airline has a range of product amenities it can providewith its core transportation product from the Spartan service characteristic oflow-cost-airlines to a choice of amenities from first class to economy coach provided by most of the world’s largest airlines. The first half of the book ends byexploring the process of developing and managing a flight schedule.Airline economics and finance are addressed in Chapter 6 with a focus on thelargest categories of airline expense and management’s options for cost controlin the face of increasing competition. Fleet renewal, expansion, and financing concludes the chapter. The complex and frequently misunderstood process of airline pricing is the subject of Chapter 7. Sophisticated airline revenue management systems employed by most airlines attempt to maximize revenue by charging different prices to different passenger segments based on willingness andability to pay for air travel.Distribution of airline product information and tickets initially borrowed longestablished practices from the railroad industry. However, faced with rapid passenger growth and product complexity, the first widespread use of computerizedsystems for distribution developed in the airline industry to automate early, laborintensive manual methods to book and track airline passengers. More recentlythe Internet has enabled passengers to easily compare airline products and faresleading to more price competition.The text concludes by considering the early regulation and subsequent liberalization of international air commerce, the concurrent privatization of manystate-owned airlines, and the emergence of the big three global airline alliances.

Chapter 1Historical PerspectiveSeveral scheduled passenger airlines emerged in Europe shortly after the end ofWorld War I in 1918. Economic regulation of routes and prices followed shortlythereafter and prevailed for much of the 20th century. Late in the century, thederegulation of the U.S. airline industry began a trend followed by the EuropeanUnion and then by much of the rest of the world. This history provides a foundation for understanding today’s complex, competitive, and global airline industry. This chapter traces the industry from the era of economic regulation tothe increasingly free market competition allowed in most of the world’s largest markets. After outlining the growth of the early airlines in Europe, the focusshifts to the United States, beginning in 1918 with airmail operated by the U.S.Post Office. Using this early airmail endeavor as our starting point, the chapter traces the fledgling industry through the years of economic regulation underthe Civil Aeronautics Board until economic deregulation in 1978, emphasizing the economic, regulatory, and technical evolution that shaped the industry.This historical perspective then continues with post-deregulation developments,including the emergence of low-cost carriers, bankruptcies, mergers, and buyouts. Airline deregulation next occurred in Europe, and then spread to severalother world regions. To gain a broader perspective on the deregulation processand outcome, the U.S. experience is compared with that of Europe and China,leading to the conclusion that competitive results are remarkably similar. A shortcharacterization of the industry concludes the chapter.1.1 Transportation and CommerceAir transportation is just one element of the world’s transportation infrastructure,which is essential for economic growth and prosperity. Sailing ships have tradedbetween countries for at least two millennia, making those cities and states thatcontrolled trade wealthy. The past riches of Venice, still evident today in magnificent buildings, were based on trade. Today, ever larger and more efficient container ships reduce the cost of ocean shipping, facilitating the huge trade betweenChina, Europe, and the Americas.Rivers were the first and most efficient means for inland transportation ofgoods and people. The construction of canals to improve and supplement natural

4Historical Perspectivewaterways dates back to at least the 6th century bc, when a canal linked theNile River with the Red Sea. Extensive waterway building in China began inthe 3rd century bc. The famous Venetian canals were extensions of the naturalwaterways among the islands on which Venice is built, and date from the founding of the city in the 5th century. Elsewhere in Europe, the Netherlands begancanal construction to foster economic development in the 12th century, withconstruction then spreading across much of Europe. The British canal systemplayed an important role in the Industrial Revolution, beginning in the 18th century. In contrast, economic development in Africa has been stunted by the lackof navigable rivers to facilitate commerce. Waterway construction in the UnitedStates is more recent, with the building of the Erie Canal connecting the HudsonRiver in New York with Lake Erie and the other Great Lakes not completed until1825. The alternatives to waterway transportation at that time, usually by horseand wagon train, were comparatively much more expensive, slower, and limited.Railroads, first introduced in Great Britain in the early 19th century, graduallysupplanted canals, offering higher speed over a much larger geographical area.Transportation systems have often been financed and built by private firms,but market forces are generally insufficient to provide for the vast transportationinfrastructure necessary to foster widespread economic growth. Therefore, governments frequently plan, build or subsidize, and regulate transportation systems.In the United States, for example, the federal government encouraged andsubsidized the development of both water and rail transportation. Railroads wereoften joint ventures of federal and state governments and private firms. The greatwestern expansion of railroads following the Civil War, most notably the completion of the transcontinental railroad in 1869, allowed farm products from theMidwest to reach the heavily populated East Coast cities beginning in the early1870s. Midwest farmers, in turn, were able to readily purchase goods from EastCoast manufacturers, which vastly improved their standard of living. The GreatPlains was transformed from a wasteland to a breadbasket. Transportation enablestrade, which improves the overall standard of living.The federal government remains essential in supporting transportation systems, including highways and roads, waterways, railways, pipelines, airways, andairports. The Army Corps of Engineers still operates the series of locks on theMississippi and Ohio rivers over which Midwest grains are transported for exportworldwide. Likewise, governments have also played a critical role in the development of commercial aviation. The Middle Eastern countries, especially theUnited Arab Emirates and Qatar, have recently invested heavily in airports andstate-owned airlines to promote economic growth and diversity from dependenceon petroleum exports.1.2 First AirlinesEnabled by the rapid wartime advances in aircraft technology and a post-war surplus of aircraft, airlines were founded in the immediate aftermath of World War I in

Historical Perspective51918. While there were a few earlier, short-lived ventures, many current Europeanairlines trace their origins to the immediate post-war era. KLM claims the distinction of being the oldest carrier still in operation, having been founded in 1919.Scheduled flights between London and Amsterdam began in 1920 and continue tothis day (AirFrance/KLM, n.d.). Similarly, the airlines that would later become AirFrance trace their origins to this period. Australia’s Qantas also dates from 1920. Inthe Americas, Colombia’s Avianca is the world’s second oldest airline after KLM.Although Germany lacked the colonial empires of the British, French, and Dutch,it was also home to several early airlines. Today’s Lufthansa is a post-World War IIcreation with some roots dating to 1926. Asia is now the fastest-growing airlinemarket, but its airlines generally trace their origins to the post-World War II era.KLM’s title as the oldest airline in continuous operation notwithstanding, it isBritish A

4.5 Hybrid Airlines 118 4.5.1 Alaska, JetBlue Airways, and Air Berlin 119 4.6 Focus Carriers and Tailored Products 120 4.6.1 All Inclusive Charter Airlines 121 4.6.2 All-Business-Class Service 121 4.6.3 Tailored Products 122 4.7 Cargo Airlines 123 4.7.1 Combination Carriers 124 4.7.2 Integrated Carriers 124 4.7.3 All-Cargo Airlines 124