Airline

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An airline is a company that provides air transport services for traveling passengers and freight. Airlines lease or own their aircraft with which to supply these services and may form partnerships or alliances with other airlines for mutual benefit. Generally, airline companies are recognized with an air operating certificate or license issued by a governmental aviation body.

Airlines vary from those with a single aircraft carrying mail or cargo, through full-service international airlines operating hundreds of aircraft. Airline services can be categorized as being intercontinental, intra-continental, domestic, regional, or international, and may be operated as scheduled services or charters.

History

The first airlines

LZ Graf Zeppelin over Berlin for DELAG, the world's first airline (est. in 1909)

American aviation pioneers, such as Rufus Porter and Frederick Marriott, attempted to start airlines using airships in the mid-19th century, focusing on the New York–California route. Those attempts floundered due to such mishaps as the airships catching fire and the aircraft being ripped apart by spectators.

DELAG, Deutsche Luftschiffahrts-Aktiengesellschaft was the world's first airline.1 It was founded on November 16, 1909 with government assistance, and operated airships manufactured by The Zeppelin Corporation. Its headquarters were in Frankfurt. The four oldest non-dirigible airlines that still exist are Netherlands' KLM, Colombia's Avianca, Australia's Qantas, and the Czech Republic's Czech Airlines. KLM first flew in May 1920, while Qantas (which stands for Queensland and Northern Territory Aerial Services Limited) was founded in Queensland, Australia, in late 1920.

European airline industry

Beginnings

The Handley Page W.8b was used by Handley Page Transport, an early British airline established in 1919.

The earliest fixed wing airline was the Aircraft Transport and Travel, formed by George Holt Thomas in 1916. Using a fleet of former military Airco DH.4A biplanes that had been modified to carry two passengers in the fuselage, it operated relief flights between Folkestone and Ghent. On 15 July 1919, the company flew a proving flight across the English Channel, despite a lack of support from the British government. Flown by Lt. H Shaw in an Airco DH.9 between RAF Hendon and Paris - Le Bourget Airport, the flight took 2 hours and 30 minutes at £21 per passenger.

On 25 August 1919, the company used DH.16s to pioneer a regular service from Hounslow Heath Aerodrome to Le Bourget, the first regular international service in the world. The airline soon gained a reputation for reliability, despite problems with bad weather and began to attract European competition. In November 1919, it won the first British civil airmail contract. Six Royal Air Force Airco DH.9A aircraft were lent to the company, to operate the airmail service between Hawkinge and Cologne. In 1920, they were returned to the Royal Air Force.2

Other British competitors were quick to follow - Handley Page Transport was established in 1919 and used the company's converted wartime Type O/400 bombers with a capacity for 19 passengers, to run a London-Paris passenger service.

A 1919 advertisement for the Dutch airline KLM.

The first French airlines were also established and began to offer competition for the same route. The Société Générale des Transports Aériens was created in late 1919, by the Farman brothers and the Farman F.60 Goliath plane flew scheduled services from Toussus-le-Noble to Kenley, near Croydon. Another early French airline was the Compagnie des Messageries Aériennes, established in 1919 by Louis-Charles Breguet, offering a mail and freight service between Le Bourget Airport, Paris and Lesquin Airport, Lille.3

The Dutch airline KLM made its first flight in 1920, and is the oldest continuously operating airline in the world. Established by aviator Albert Plesman,4 it was immediately awarded a "Royal" predicate from Queen Wilhelmina5 Its first flight was from Croydon Airport, London to Amsterdam, using a leased Aircraft Transport and Travel DH-16, and carrying two British journalists and a number of newspapers. In 1921 KLM started scheduled services.

In Finland, the charter establishing Aero O/Y (now Finnair) was signed in the city of Helsinki on September 12, 1923. Junkers F.13 D-335 became the first aircraft of the company, when Aero took delivery of it on March 14, 1924. The first flight was between Helsinki and Tallinn, capital of Estonia, and it took place on March 20, 1924, one week later.

In the Soviet Union, the Chief Administration of the Civil Air Fleet was established in 1921. One of its first acts was to help found Deutsch-Russische Luftverkehrs A.G. (Deruluft), a German-Russian joint venture to provide air transport from Russia to the West. Domestic air service began around the same time, when Dobrolyot started operations on 15 July 1923 between Moscow and Nizhni Novgorod. Since 1932 all operations had been carried under the name Aeroflot.

Early European airlines tended to favour comfort - the passenger cabins were often spacious with luxury interiors - over speed and efficiency. The relatively basic navigational capabilities of pilots at the time also meant that delays due to the weather, especially during the winter in the south of England, were commonplace.

Rationalization

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

By the early 1920s, small airlines were struggling to compete, and there was a movement towards increased rationalization and consolidation. In 1924, Imperial Airways was formed from the merger of Instone Air Line Company, British Marine Air Navigation, Daimler Airway and Handley Page Transport Co Ltd., to allow British airlines to compete with stiff competition from French and German airlines that were enjoying heavy government subsidies. The airline was a pioneer in surveying and opening up air routes across the world to service far-flung parts of the British Empire and to enhance trade and integration.6

The first new airliner ordered by Imperial Airways, was the Handley Page W8f City of Washington, delivered on 3 November 1924.7 In the first year of operation the company carried 11,395 passengers and 212,380 letters. In April 1925, the film The Lost World became the first film to be screened for passengers on a scheduled airliner flight when it was shown on the London-Paris route.

Two French airlines also merged to form Air Union on 1 January 1923. This later merged with four other French airlines to become Air France, the country's flagship carrier to this day, on 7 October 1933.

Germany's Deutsche Luft Hansa was created in 1926 by merger of two airlines, one of them Junkers Luftverkehr. Luft Hansa, due to the Junkers heritage and unlike most other airlines at the time, became a major investor in airlines outside of Europe, providing capital to Varig and Avianca. German airliners built by Junkers, Dornier, and Fokker were among the most advanced in the world at the time.

Global expansion

In 1926, Alan Cobham surveyed a flight route from the UK to Cape Town, South Africa, following this up with another proving flight to Melbourne, Australia. Other routes to British India and the Far East were also charted and demonstrated at this time. Regular services to Cairo and Basra began in 1927 and was extended to Karachi in 1929. The London-Australia service was inaugurated in 1932 with the Handley Page HP 42 airliners. Further services were opened up to Calcutta, Rangoon, Singapore, Brisbane and Hong Kong passengers departed London on 14 March 1936 following the establishment of a branch from Penang to Hong Kong.

April 1935 map showing Imperial Airways' routes to Australia and South Africa.

Imperial's aircraft were small, most seating fewer than twenty passengers, and catered for the rich - only about 50,000 passengers used Imperial Airways in the 1930s. Most passengers on intercontinental routes or on services within and between British colonies were men doing colonial administration, business or research.8

Like Imperial Airways, Air France and KLM's early growth depended heavily on the needs to service links with far-flung colonial possessions (North Africa and Indochina for the French and the East Indies for the Dutch). France began 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, Aéropostale went bankrupt, was nationalized and merged into Air France.

Although Germany lacked colonies, it also began expanding its services globally. In 1931, the airship Graf Zeppelin began offering regular scheduled passenger service between Germany and South America, usually every two weeks, which continued until 1937.9 In 1936, the airship Hindenburg entered passenger service and successfully crossed the Atlantic 36 times before crashing at Lakehurst, New Jersey on May 6, 1937.10

By the end of the 1930s Aeroflot had become the world's largest airline, employing more than 4,000 pilots and 60,000 other service personnel and operating around 3,000 aircraft (of which 75% were considered obsolete by its own standards). During the Soviet era Aeroflot was synonymous with Russian civil aviation, as it was the only air carrier. It became the first airline in the world to operate sustained regular jet services on 15 September 1956 with the Tupolev Tu-104.

EU airline deregulation

Deregulation of the European Union airspace in the early 1990s has had substantial effect on structure of the industry there. The shift towards 'budget' airlines on shorter routes has been significant. Airlines such as EasyJet and Ryanair have often grown at the expense of the traditional national airlines.

There has also been a trend for these national airlines themselves to be privatized such as has occurred for Aer Lingus and British Airways. Other national airlines, including Italy's Alitalia, have suffered - particularly with the rapid increase of oil prices in early 2008.

U.S. airline industry

Early development

TWA Douglas DC-3 in 1940. The DC-3, often regarded as one of the most influential aircraft in the history of commercial aviation, revolutionized the aviation industry.11

Tony Jannus conducted the United States' first scheduled commercial airline flight on 1 January 1914 for the St. Petersburg-Tampa Airboat Line.12 The 23-minute flight traveled between St. Petersburg, Florida and Tampa, Florida, passing some 50 feet (15 m) above Tampa Bay in Jannus' Benoist XIV wood and muslin biplane flying boat. His passenger was a former mayor of St. Petersburg, who paid $400 for the privilege of sitting on a wooden bench in the open cockpit. The Airboat line operated for about four months, carrying more than 1,200 passengers who paid $5 each.13 Chalk's International Airlines began service between Miami and Bimini in the Bahamas in February 1919. Based in Ft. Lauderdale, Chalk's claimed to be the oldest continuously operating airline in the United States until its closure in 2008.14

Following World War I, the United States found itself swamped with aviators. Many decided to take their war-surplus aircraft on barnstorming campaigns, performing aerobatic 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 Jenny15 aircraft that had been procured by the United States Army Air Service. Private operators were the first to fly the mail but due to numerous accidents the US Army was tasked with mail delivery.citation needed During the course of the Army's involvement they proved to be too unreliable and lost their air mail duties.citation needed By the mid-1920s, the Postal Service had developed its own air mail network, based on a transcontinental backbone between New York City and San Francisco.citation needed To supplant this service, they offered twelve contracts for spur routes to independent bidders. Some of the carriers that won these routes would, through time and mergers, evolve into Pan Am, Delta Air Lines, Braniff Airways, American Airlines, United Airlines (originally a division of Boeing), Trans World Airlines, Northwest Airlines, and Eastern Air Lines.

Service during the early 1920s was sporadic: most airlines at the time were focused on carrying bags of mail. In 1925, however, the Ford Motor Company bought out the Stout Aircraft Company and began construction of the all-metal Ford Trimotor, which became the first successful American airliner. With a 12-passenger capacity, the Trimotor made passenger service potentially profitable. Air service was seen as a supplement 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 and Northwest Airways (which began flights to Canada in the 1920s) were the only U.S. airlines to go international before the 1940s.

With the introduction of the Boeing 247 and Douglas DC-3 in the 1930s, the U.S. airline industry was generally profitable, even during the Great Depression. This trend continued until the beginning of World War II.

Development since 1945

In October 1945, the American Export Airlines became the first airline to offer regular commercial flights between North America and Europe.16 Shown here is Am Ex Boeing 377 Stratocruiser in 1949.

As governments met to set the standards and scope for an emergent civil air industry toward the end of the war, the U.S. took a position of maximum operating freedom; U.S. airline companies were not as hard-hit as European and the few Asian ones had been. This preference for "open skies" operating regimes continues, with limitations, to this day.citation needed

World War II, like World War I, brought new life to the airline industry. Many airlines in the Allied countries were flush from lease contracts to the military, and foresaw a future explosive demand for civil air transport, for both passengers and cargo. They were eager to invest in the newly emerging 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. Most offered increased efficiency from both added speed and greater payload.

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 Eastern bloc had Tupolev Tu-104 and Tupolev Tu-124 in the fleets of state-owned carriers such as Czechoslovak ČSA, Soviet Aeroflot and East-German 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. Concorde first flew in 1969 and operated through 2003. In 1972, Airbus began producing Europe's most commercially successful line of airliners to date. The added efficiencies for these aircraft were often not in speed, but in passenger capacity, payload, and range. Airbus also features modern electronic cockpits that were common across their aircraft to enable pilots to fly multiple models with minimal cross-training.

US airline deregulation

Pan Am Boeing 747 Clipper Neptune's Car in 1985. The deregulation of the American airline industry increased the financial troubles of the iconic airline which ultimately filed for bankruptcy in December 1991.17

1970 U.S. airline industry deregulation lowered federally controlled barriers for new airlines just as a downturn in the nation's economy occurred. New start-ups entered during the downturn, during which time they found aircraft and funding, contracted hangar and maintenance services, trained new employees, and recruited laid off staff from other airlines.

Major airlines dominated their routes through aggressive pricing and additional capacity offerings, often swamping new start-ups. In the place of high barriers to entry imposed by regulation, the major airlines implemented an equally high barrier called loss leader pricing.18 In this strategy an already established and dominant airline stomps out its competition by lowering airfares on specific routes, below the cost of operating on it, choking out any chance a start-up airline may have. The industry side effect is an overall drop in revenue and service quality.19 Since deregulation in 1978 the average domestic ticket price has dropped by 40%.20 So has airline employee pay. By incurring massive losses, the airlines of the USA now rely upon a scourge of cyclical Chapter 11 bankruptcy proceedings to continue doing business.21 America West Airlines (which has since merged with US Airways) remained a significant survivor from this new entrant era, as dozens, even hundreds, have gone under.

In many ways, the biggest winner in the deregulated environment was the air passenger. Although not exclusively attributable to deregulation, indeed the U.S. witnessed an explosive growth in demand for air travel. Many millions who had never or rarely flown before became regular fliers, even joining frequent flyer loyalty programs and receiving free flights and other benefits from their flying. New services and higher frequencies meant that business fliers could fly to another city, do business, and return the same day, from almost any point in the country. Air travel's advantages put intercity bus lines under pressure, and most have withered away.

By the 1980s, almost half of the total flying in the world took place in the U.S., and today the domestic industry operates over 10,000 daily departures nationwide.

Toward the end of the century, a new style of low cost airline emerged, offering a no-frills product at a lower price. Southwest Airlines, JetBlue, AirTran Airways, Skybus Airlines and other low-cost carriers began to represent a serious challenge to the so-called "legacy airlines", as did their low-cost counterparts in many other countries. Their commercial viability represented a serious competitive threat to the legacy carriers. However, of these, ATA and Skybus have since ceased operations.

Increasingly since 1978, US airlines have been reincorporated and spun off by newly created and internally led manangement companies, and thus becoming nothing more than operating units and subsidiaries with limited financially decisive control. Among some of these holding companies and parent companies which are relatively well known, are the UAL Corporation, along with the AMR Corporation, among a long list of airline holding companies sometime recognized world wide. Less recognized are the private equity firms which often seize managerial, financial, and board of directors control of distressed airline companies by temporarily investing large sums of capital in air carriers, to rescheme an airlines assets into a profitable organization or liquidating an air carrier of their profitable and worthwhile routes and business operations.

Thus the last 50 years of the airline industry have varied from reasonably profitable, to devastatingly depressed. As the first major market to deregulate the industry in 1978, U.S. airlines have experienced more turbulence than almost any other country or region. In fact, no U.S. legacy carrier survived bankruptcy-free. Amongst the outspoken critics of deregulation, former CEO of American Airlines, Robert Crandall has publicly stated:

"Chapter 11 bankruptcy protection filing shows airline industry deregulation was a mistake.22"

The airline industry bailout

Congress passed the Air Transportation Safety and System Stabilization Act (P.L. 107-42) in response to a severe liquidity crisis facing the already-troubled airline industry in the aftermath of the September 11th terrorist attacks. Congress sought to provide cash infusions to carriers for both the cost of the four-day federal shutdown of the airlines and the incremental losses incurred through December 31, 2001 as a result of the terrorist attacks. This resulted in the first government bailout of the 21st century.23 Between 2000 and 2005 US airlines lost $30 billion with wage cuts of over $15 billion and 100,000 employees laid off.24

In recognition of the essential national economic role of a healthy aviation system, Congress authorized partial compensation of up to $5 billion in cash subject to review by the Department of Transportation and up to $10 billion in loan guarantees subject to review by a newly created Air Transportation Stabilization Board (ATSB). The applications to DOT for reimbursements were subjected to rigorous multi-year reviews not only by DOT program personnel but also by the Government Accountability Office25 and the DOT Inspector General.2627

Ultimately, the federal government provided $4.6 billion in one-time, subject-to-income-tax cash payments to 427 U.S. air carriers, with no provision for repayment, essentially a gift from the taxpayers. (Passenger carriers operating scheduled service received approximately $4 billion, subject to tax.)28 In addition, the ATSB approved loan guarantees to six airlines totaling approximately $1.6 billion. Data from the US Treasury Department show that the government recouped the $1.6 billion and a profit of $339 million from the fees, interest and purchase of discounted airline stock associated with loan guarantees.29

Asian airline industry

Although Philippine Airlines (PAL) was officially founded on February 26, 1941, its license to operate as an airliner was derived from merged Philippine Aerial Taxi Company (PATCO) established by mining magnate Emmanuel N. Bachrach on December 3, 1930, making it Asia's oldest scheduled carrier still in operation.30 Commercial air service commenced three weeks later from Manila to Baguio, making it Asia's first airline route. Bachrach's death in 1937 paved the way for its eventual merger with Philippine Airlines in March 1941 and made it Asia's oldest airline. It is also the oldest airline in Asia still operating under its current name.31 Bachrach's majority share in PATCO was bought by beer magnate Andres R. Soriano in 1939 upon the advice of General Douglas McArthur and later merged with newly formed Philippine Airlines with PAL as the surviving entity. Soriano has controlling interest in both airlines before the merger. PAL restarted service on March 15, 1941 with a single Beech Model 18 NPC-54 aircraft, which started its daily services between Manila (from Nielson Field) and Baguio, later to expand with larger aircraft such as the DC-3 and Vickers Viscount.

India was also one of the first countries to embrace civil aviation.32 One of the first West Asian airline companies was Air India, which had its beginning as Tata Airlines in 1932, a division of Tata Sons Ltd. (now Tata Group). The airline was founded by India's leading industrialist, JRD Tata. On October 15, 1932, J. R. D. Tata himself flew a single engined De Havilland Puss Moth carrying air mail (postal mail of Imperial Airways) from Karachi to Bombay via Ahmedabad. The aircraft continued to Madras via Bellary piloted by Royal Air Force pilot Nevill Vintcent. Tata Airlines was also one of the world's first major airlines which began its operations without any support from the Government.33

With the outbreak of World War II, the airline presence in Asia came to a relative halt, with many new flag carriers donating their aircraft for military aid and other uses. Following the end of the war in 1945, regular commercial service was restored in India and Tata Airlines became a public limited company on July 29, 1946 under the name Air India. After the independence of India, 49% of the airline was acquired by the Government of India. In return, the airline was granted status to operate international services from India as the designated flag carrier under the name Air India International.

On July 31, 1946, a chartered Philippine Airlines (PAL) DC-4 ferried 40 American servicemen to Oakland, California from Nielson Airport in Makati City with stops in Guam, Wake Island, Johnston Atoll and Honolulu, Hawaii, making PAL the first Asian airline to cross the Pacific Ocean. A regular service between Manila and San Francisco was started in December. It was during this year that the airline was designated as the flag carrier of Philippines.

During the era of decolonization, newly born Asian countries started to embrace air transport. Among the first Asian carriers during the era were Cathay Pacific of Hong Kong (founded in September 1946 ), Orient Airways (later Pakistan International Airlines; founded in October 1946), Malayan Airways Limited in 1947 (later Singapore and Malaysia Airlines), El Al in Israel in 1948, Garuda Indonesia in 1948, Japan Airlines in 1951, Thai Airways International in 1960, and Korean National Airlines in 1947.

Latin American airline industry

TAM Airlines is the largest airline in Latin America in terms of number of annual passengers flown.34

Among the first countries to have regular airlines in Latin America were Bolivia with Lloyd Aéreo Boliviano, Cuba with Cubana de Aviación, Colombia with Avianca, Argentina with Aerolineas Argentinas, Chile with LAN Chile (today LAN Airlines), Brazil with Varig, Dominican Republic with Dominicana de Aviación, Mexico with Mexicana de Aviación, Trinidad and Tobago with BWIA West Indies Airways (today Caribbean Airlines), Venezuela with Aeropostal, and TACA based in El Salvador and representing several airlines of Central America (Costa Rica, Guatemala, Honduras and Nicaragua). All the previous airlines started regular operations well before World War II.

The air travel market has evolved rapidly over recent years in Latin America. Some industry estimates indicate that over 2,000 new aircraft will begin service over the next five years in this region.citation needed

These airlines serve domestic flights within their countries, as well as connections within Latin America and also overseas flights to North America, Europe, Australia, and Asia.

Only three airlines: LAN, OceanAir and TAM Airlines have international subsidiaries and cover a large number of destinations within the Americas as well as major hubs in other continents. LAN with Chile as the central operation along with Peru, Ecuador, Colombia and Argentina and some operations in the Dominican Republic. The recently formed AviancaTACA group has control of Avianca Brazil, VIP Ecuador and a strategic alliance with AeroGal. And TAM with its Mercosur base in Asuncion, Paraguay. As of 2010, talks of uniting LAN and TAM have strongly developed to create a joint airline named LATAM.

Regulatory considerations

National

Many countries have national airlines that the government owns and operates. Fully private airlines are subject to a great deal of government regulation for economic, political, and safety concerns. For instance, governments often intervene to halt airline labor actions 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, India, the United Kingdom, 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.

Cyprus Airways national airline of Cyprus

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.citation needed 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 profitability 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

Singapore Airlines Airbus A380 lands at Changi Airport. Singapore Airlines was the first international airline to operate the A380, the world's largest passenger airliner.35

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 airports 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 airports 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. These agreements 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

Juan Trippe, the founder of Pan American World Airways, surveying his globe. The collapse of Pan Am, an airline often credited for shaping the international airline industry, in December 1991 highlighted the financial complexities faced by major airline companies.

Historically, air travel has survived largely through state support, whether in the form of equity or subsidies. The airline industry as a whole has made a cumulative loss during its 100-year history, once the costs include subsidies for aircraft development and airport construction.3637

One argument is that positive externalities, such as higher growth due to global mobility, outweigh the microeconomic losses and justify continuing government intervention. A historically high level of government intervention in the airline industry can be seen as part of a wider political consensus on strategic forms of transport, such as highways and railways, both of which receive public funding in most parts of the world. Profitability is likely to improve in the future as privatization continues and more competitive low-cost carriers proliferate.citation needed

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

Top airline groups by revenue

for 2010, source : Airline Business August 2011, Flightglobal Data Research

Group Revenue ($B) operating result ($B) net result ($B)
Lufthansa Group 36.1 1.76 1.49
United Continental Holdings 36.0 1.82 0.85
Delta Air Lines 31.8 2.22 0.59
Air France-KLM Group 31.3 0.16 0.81
FedEx Express 26.5 1.23 0.80
AMR Corporation 22.2 0.31 -0.41
International Airlines Group (British Airways/Iberia) 19.5 0.30 0.13
Japan Airlines Corporation 16.0 2.22
All Nippon Airways Group 16.0 0.80 0.27
The Emirates Group 14.8 1.48 1.46

Ticket revenue

Airlines assign prices to their services in an attempt to maximize profitability. The pricing of airline tickets has become increasingly complicated over the years and is now largely determined by computerized yield management systems.

Because of the complications in scheduling flights and maintaining profitability, airlines have many loopholes that can be used by the knowledgeable traveler. Many of these airfare secrets are becoming more and more known to the general public, so airlines are forced to make constant adjustments.

Most airlines use differentiated pricing, a form of price discrimination, to sell air services at varying prices simultaneously to different segments. Factors influencing the price include the days remaining until departure, the booked load factor, the forecast of total demand by price point, competitive pricing in force, and variations by day of week of departure and by time of day. Carriers often accomplish this by dividing each cabin of the aircraft (first, business and economy) into a number of travel classes for pricing purposes.

A complicating factor is that of origin-destination control ("O&D control"). Someone purchasing a ticket from Melbourne to Sydney (as an example) for A$200 is competing with someone else who wants to fly Melbourne to Los Angeles through Sydney on the same flight, and who is willing to pay A$1400. Should the airline prefer the $1400 passenger, or the $200 passenger plus a possible Sydney-Los Angeles passenger willing to pay $1300? Airlines have to make hundreds of thousands of similar pricing decisions daily.

Lufthansa is the flag carrier airline of Germany.

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. Through computers, new airfares can be published quickly and efficiently to the airlines' sales channels. For this purpose the airlines use the Airline Tariff Publishing Company (ATPCO), who distribute latest fares for more than 500 airlines to Computer Reservation Systems across the world.

The extent of these pricing phenomena is strongest in "legacy" carriers. In contrast, low fare carriers usually offer preannounced and simplified price structure, and sometimes quote prices for each leg of a trip separately.

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, stimulative pricing for low demand flights coupled with overbooking on high demand flights can help reduce this figure. This is especially crucial during tough economic times as airlines undertake massive cuts to ticket prices to retain demand.38

Operating costs

An Airbus A340-600 of Virgin Atlantic Airways. In October 2008, Virgin Atlantic offered to combine its operations with BMI in an effort to reduce operating costs.39

Full-service airlines have a high level of fixed and operating costs to establish and maintain air services: labor, fuel, airplanes, engines, spares and parts, IT services and networks, airport equipment, airport handling services, sales distribution, catering, training, aviation insurance and other costs. Thus all but a small percentage of the income from ticket sales is paid out to a wide variety of external providers or internal cost centers.

Moreover, the industry is structured so that airlines often act as tax collectors. Airline fuel is untaxed because of a series of treaties existing between countries. Ticket prices include a number of fees, taxes and surcharges beyond the control of airlines. Airlines are also responsible for enforcing government regulations. If airlines carry passengers without proper documentation on an international flight, they are responsible for returning them back to the original country.

Analysis of the 1992–1996 period shows that every player in the air transport chain is far more profitable than the airlines, who collect and pass through fees and revenues to them from ticket sales. While airlines as a whole earned 6% return on capital employed (2-3.5% less than the cost of capital), airports earned 10%, catering companies 10-13%, handling companies 11-14%, aircraft lessors 15%, aircraft manufacturers 16%, and global distribution companies more than 30%. (Source: Spinetta, 2000, quoted in Doganis, 2002)

The widespread entrance of a new breed of low cost airlines beginning at the turn of the century has accelerated the demand that full service carriers control costs. Many of these low cost companies emulate Southwest Airlines in various respects, and like Southwest, they can eke out a consistent profit throughout all phases of the business cycle.citation needed

As a result, a shakeout of airlines is occurring in the U.S. and elsewhere. American Airlines, United Airlines, Continental Airlines (twice), US Airways (twice), Delta Air Lines, and Northwest Airlines have all declared Chapter 11 bankruptcy. Somewho? argue that it would be far better for the industry as a whole if a wave of actual closures were to reduce the number of "undead" airlines competing with healthy airlines while being artificially protected from creditors via bankruptcy law. On the other hand, somewho? have pointed out that the reduction in capacity would be short lived given that there would be large quantities of relatively new aircraft that bankruptcies would want to get rid of and would re-enter the market either as increased fleets for the survivors or the basis of cheap planes for new startups.

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.

Assets and financing

The 'Golden Lounge' of Malaysia Airlines at Kuala Lumpur International Airport (KLIA). The airline has ownership of special slots at KLIA giving it a competitive edge over other airlines operating at the airport.

Airline financing is quite complex, since airlines are highly leveraged operations. Not only must they purchase (or lease) new airliner bodies and engines regularly, they must make major long-term fleet decisions with the goal of meeting the demands of their markets while producing a fleet that is relatively economical to operate and maintain. Compare Southwest Airlines and their reliance on a single airplane type (the Boeing 737 and derivatives), with the now defunct Eastern Air Lines which operated 17 different aircraft types, each with varying pilot, engine, maintenance, and support needs.

A second financial issue is that of hedging oil and fuel purchases, which are usually second only to labor in its relative cost to the company. However, with the current high fuel prices it has become the largest cost to an airline. Legacy airlines, compared with new entrants, have been hit harder by rising fuel prices partly due to the running of older, less fuel efficient aircraft.24 While hedging instruments can be expensive, they can easily pay for themselves many times over in periods of increasing fuel costs, such as in the 2000–2005 period.

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 tradable asset for many airlines. Clearly take-off slots at popular times of the day can be critical in attracting the more profitable business traveler 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. For example, Reagan National Airport attracts profitable routes due partly to its congestion, leaving less-profitable routes to Baltimore-Washington International Airport and Dulles International Airport.

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. For example, LaGuardia Airport is the preferred airport for most of Manhattan due to its proximity, while long-distance routes must use John F. Kennedy International Airport's longer runways.

Airline partnerships

A Japan Airlines Boeing 777-300 with special Oneworld livery. Oneworld is the third largest airline alliance after Star Alliance and SkyTeam.

Codesharing 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' (JAL) codesharing partnership with Aeroflot in the 1960s on TokyoMoscow flights; 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. Another example was the AustrianSabena partnership on the ViennaBrusselsNew York/JFK route during the late '60s, using a Sabena Boeing 707 with Austrian livery.

Since airline reservation requests are often made by city-pair (such as "show me flights from Chicago to Düsseldorf"), an airline that can codeshare with another airline for a variety of routes might be able to be listed as indeed offering a Chicago–Düsseldorf flight. The passenger is advised however, that airline no. 1 operates the flight from say Chicago to Amsterdam, and airline no. 2 operates the continuing flight (on a different airplane, sometimes from another terminal) to Düsseldorf. Thus the primary rationale for code sharing is to expand one's service offerings in city-pair terms to increase sales.

A more recent development is the airline alliance, which became prevalent in late 1990s. These alliances can act as virtual mergers to get around government restrictions. Alliances of airlines such as 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. One of the first airlines to start an alliance with another airline was KLM, who partnered with Northwest Airlines. Both airlines later entered the SkyTeam alliance after the fusion of KLM and Air France in 2004.

Often the companies combine IT operations, or purchase fuel and aircraft as a bloc to achieve higher bargaining power. However, the alliances have been most successful at purchasing invisible supplies and services, such as fuel. Airlines usually prefer to purchase items visible to their passengers to differentiate themselves from local competitors. If an airline's main domestic competitor flies Boeing airliners, then the airline may prefer to use Airbus aircraft regardless of what the rest of the alliance chooses.

Fuel hedging

Average jet fuel prices per gallon for major United States airlines.

Southwest is credited with maintaining strong business profits between 1999 and the early 2000s due to its fuel hedging policy. Looking at the annual reports, many other airlines are replicating Southwest's hedging policy to control their fuel costs.

Average fuel cost per gallon 2005 2006 2007 2008 2009
Southwest Airlines $1.13 $1.64 $1.80 $2.44 $2.12
JetBlue Airways $1.70 $2.08 $2.18 $3.08 $2.08
American Airlines $2.8 $2.12 $3.03 $2.07
Delta Air Lines $1.89 $2.12 $2.23 $3.16 $2.15
United Airlines $2.11 $2.18 $3.54 $1.75

Environmental impacts

MODIS tracking of contrails generated by air traffic over the southeastern United States on January 29, 2004.

Aircraft engines emit noise pollution, gases and particulate emissions, and contribute to global dimming.40

Growth of the industry in recent years raised a number of ecological questions.

Domestic air transport grew in China at 15.5 percent annually from 2001 to 2006. The rate of air travel globally increased at 3.7 percent per year over the same time. In the EU greenhouse gas emissions from aviation increased by 87% between 1990 and 2006.41 However it must be compared with the flights increase, only in UK, between 1990 and 2006 terminal passengers increased from 100 000 thousands to 250 000 thousands.,42 according to AEA reports every year, 750 million passengers travel by European airlines, which also share 40% of merchandise value in and out of Europe.43 Without even pressure from "green activists", targeting lower ticket prices, generally, airlines do what is possible to cut the fuel consumption (and gas emissions connected therewith). Further, according to some reports, it can be concluded that the last piston-powered aircraft were as fuel-efficient as the average jet in 2005.44

Despite continuing efficiency improvements from the major aircraft manufacturers, the expanding demand for global air travel has resulted in growing greenhouse gas (GHG) emissions. Currently, the aviation sector, including US domestic and global international travel, make approximately 1.6 percent of global anthropogenic GHG emissions per annum. North America accounts for nearly 40 percent of the world's GHG emissions from aviation fuel use.45

CO2 emissions from the jet fuel burned per passenger on an average 3,200 kilometers (2,000 mi) airline flight is about 353 kilograms (776 pounds).46 Loss of natural habitat potential associated with the jet fuel burned per passenger on a 3,200 kilometers (2,000 mi) airline flight is estimated to be 250 square meters (2700 square feet).verification needed47

In the context of purported climate change and peak oil, there is a debate about possible taxation of air travel and the inclusion of aviation in an emissions trading scheme, with a view to ensuring that the total external costs of aviation are taken into account.48

The airline industry is responsible for about 11 percent of greenhouse gases emitted by the U.S. transportation sector. Boeing estimates that biofuels could reduce flight-related greenhouse-gas emissions by 60 to 80 percent. The solution would be blending algae fuels with existing jet fuel:49

There are Electric aircraft projects, where some of them are fully operational planes as of 2013.

Call signs

Each operator of a scheduled or charter flight uses an 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. For example, British Airways uses a Speedbird call-sign, named after the logo of its predecessor, BOAC, while SkyEurope used Relax.

Airline personnel

The various types of airline personnel include: Flight operations personnel including flight safety personnel.

Airlines follow a corporate structure where each broad area of operations (such as maintenance, flight operations(including flight safety), 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 employ lawyers to deal with regulatory procedures and other administrative tasks.citation needed

Industry trends

Map of scheduled airline traffic in 2009

The pattern of ownership has been privatized in the recent years, that is, the ownership has gradually changed from governments to private and individual sectors or organizations. This occurs as regulators permit greater freedom and non-government ownership, in steps that are usually decades apart. This pattern is not seen for all airlines in all regions.citation needed

The overall trend of demand has been consistently increasing. In the 1950s and 1960s, annual growth rates of 15% or more were common. Annual growth of 5-6% persisted through the 1980s and 1990scitation needed. Growth rates are not consistent in all regions, but countries with a de-regulated airline industry have more competition and greater pricing freedom. This results in lower fares and sometimes dramatic spurts in traffic growth. The U.S., Australia, Canada, Japan, Brazil, India and other markets exhibit this trend. The industry has been observed to be cyclical in its financial performance. Four or five years of poor earnings precede five or six years of improvement. But profitability even in the good years is generally low, in the range of 2-3% net profit after interest and tax. In times of profit, airlines lease new generations of airplanes and upgrade services in response to higher demand. Since 1980, the industry has not earned back the cost of capital during the best of times. Conversely, in bad times losses can be dramatically worse. Warren Buffett once said that despite all the money that has been invested in all airlines, the net profit is less than zero. He believes it is one of the hardest businesses to manage.52

As in many mature industries, consolidation is a trend. Airline groupings may consist of limited bilateral partnerships, long-term, multi-faceted alliances between carriers, equity arrangements, mergers, or takeovers. Since governments often restrict ownership and merger between companies in different countries, most consolidation takes place within a country. In the U.S., over 200 airlines have merged, been taken over, or gone out of business since deregulation in 1978. Many international airline managers are lobbying their governments to permit greater consolidation to achieve higher economy and efficiency.

See also

Airline related lists

Notes and references

  1. ^ "DELAG: The World's First Airline". Airships.net. Retrieved 2010-08-22. 
  2. ^ The Putnam Aeronautical Review edited by John Motum, p170 Volume one 1990 Naval Institute Press
  3. ^ "World Aviation in 1919 - Part 1". Royal Air Force Museum. Retrieved 28 February 2011. 
  4. ^ "Koninklijke Luchtvaart Maatschappij, N.V. History". International Directory of Company Histories 28. 1999. Retrieved 30 July 2013. 
  5. ^ "History". KLM Corporate. KLM. Retrieved 30 July 2013. 
  6. ^ "Appointment of Government Directors" Flight 1923
  7. ^ http://www.century-of-flight.net/Aviation%20history/coming%20of%20age/imperial%20airways.htm
  8. ^ Pirie, G.H. Incidental tourism: British imperial air travel in the 1930s. Journal of Tourism History, 1 (2009) 49-66.
  9. ^ "LZ-127 Graf Zeppelin". Airships.net. Retrieved 2010-08-22. 
  10. ^ "Hindenburg". Airships.net. 2009-06-10. Archived from the original on 5 October 2010. Retrieved 2010-08-22. 
  11. ^ "The DC-3 Genesis of The Legend". Dc3history.org. Archived from the original on 27 September 2010. Retrieved 2010-08-22. 
  12. ^ "Tony Jannus, an enduring legacy of aviation". Tony Jannus Distinguished Aviation Society. tonyjannusaward.com. Retrieved 2010-12-02. 
  13. ^ Carey, Susan, First airline offered no frills, many thrills, Wall Street Journal, December 31, 2013, p. B4
  14. ^ "Chalks Airlines Loses Flight License". airportbusiness.com. Retrieved 2010-12-02. 
  15. ^ Amick, George. "How The Airmail Got Off The Ground." American History 33.3 (1998): 48. Academic Search Premier. Web. 3 Nov. 2011.
  16. ^ "Air Transportation: The Beginnings of Commercial Transatlantic Service". centennialofflight.net. Retrieved 2010-08-22. 
  17. ^ "Air Transportation: The Airline Bankruptcies of the 1980s". centennialofflight.net. Retrieved 2010-08-22. 
  18. ^ name="Andrew R. Thomas">"Mr. Soft Landing: Airline Industry Strategy, Service, and Safety". Apress. 2007. 
  19. ^ "American Society of Quality (ASQ)". 
  20. ^ "Massachusetts Institute of Technology". 
  21. ^ "Business Week". 
  22. ^ "Robert Cranall former CEO AA, CNBC". 
  23. ^ http://ostpxweb.ost.dot.gov/aviation/Data/stabilizationact.pdf
  24. ^ a b Bamber, G.J., Gittell, J.H., Kochan, T.A. & von Nordenflytch, A. (2009). "chapter 5". Up in the Air: How Airlines Can Improve Performance by Engaging their Employees. Cornell University Press, Ithaca. 
  25. ^ http://www.gao.gov/new.items/d04725r.pdf
  26. ^ [1]dead link
  27. ^ [2]dead link
  28. ^ "U". Dot.gov. Retrieved 2010-08-22. 
  29. ^ "U.S. Treasury - Air Transportation Stabilization Board". Treas.gov. 2001-09-22. Archived from the original on July 9, 2008. Retrieved 2010-08-22. 
  30. ^ "Above the Pacific, by William Joseph Horvat, 1966, ISBN 978-0-8168-0000-1". Hawaii.gov. Retrieved 2010-08-22. 
  31. ^ Jane, Jane's airlines & airliners By Jeremy Flack, First Edition, 2003, ISBN 978-0-00-715174-5
  32. ^ An Introduction To Travel And Tourism By Pran Nath Seth, Sushma Seth Bhat. Books.google.com. 2005. ISBN 978-81-207-2482-2. Retrieved 2010-08-22. 
  33. ^ International Environmental Law By Bhatt. Books.google.com. 2007-01-01. ISBN 978-81-313-0125-8. Retrieved 2010-08-22. 
  34. ^ "Top 10 Airlines in Latin America By Arlene Fleming". Airtravel.about.com. 2010-06-10. Retrieved 2010-08-22. 
  35. ^ Singapore Airlines - News Releases
  36. ^ Wings of Desire, Guardian, Thursday February 23, 2006
  37. ^ Airlines and the canine features of unprofitable industries, Financial Times, September 27, 2005
  38. ^ "Recession ‘prompts surge in cheap flights’ - Cheapflights.co.uk". News.cheapflights.co.uk. 2009-05-13. Retrieved 2010-08-22. 
  39. ^ Robertson, David (October 29, 2008). "Virgin proposes tieup with BMI and Lufthansa". The Times (London). Retrieved April 23, 2010. 
  40. ^ Travis, David J.; Carleton, Andrew M.; Lauritsen, Ryan G (2002). "Contrails reduce daily temperature range" (PDF). Nature 418 (6898): 601. doi:10.1038/418601a. PMID 12167846. 
  41. ^ "Climate change: Commission proposes bringing air transport into EU Emissions Trading Scheme" (Press release). EU press release. 2006-12-20. Archived from the original on 12 January 2008. Retrieved 2008-01-02. 
  42. ^ http://www.parliament.uk/briefing-papers/SN03760.pdf
  43. ^ http://www.aea.be/about/airtransportineurope/index.html
  44. ^ http://www.transportenvironment.org/sites/default/files//docs/Publications/2005pubs/2005-12_nlr_aviation_fuel_efficiency.pdf
  45. ^ David McCollum, Gregory Gould, and David Greene. Greenhouse Gas Emissions from Aviation and Marine Transportation: Mitigation Potential and Policies, 2009.
  46. ^ "carbon-footprint-calculator". TerraPass.com. Retrieved Feb 19, 2008. 
  47. ^ "environmental impact of airline flights". ecofx.org. Retrieved Feb 19, 2008. 
  48. ^ Including Aviation into the EU ETS: Impact on EU allowance prices ICF Consulting for DEFRA February 2006
  49. ^ "A Promising Oil Alternative: Algae Energy". The Washington Post. January 6, 2008. Retrieved April 23, 2010. 
  50. ^ By Ángel González (2007-08-30). "Boeing/aerospace | To go green in jet fuel, Boeing looks at algae | Seattle Times Newspaper". Seattletimes.nwsource.com. Retrieved 2010-08-22. 
  51. ^ http://www.globalloadcontrol.com
  52. ^ "Buffett’s spot-on advice". Money Sense. Retrieved 2008-10-20. 

Bibliography

  1. "A history of the world's airlines", R.E.G. Davies, Oxford U.P, 1964
  2. "The airline encyclopedia, 1909–2000.” Myron J. Smith, Scarecrow Press, 2002
  3. "Flying Off Course: The Economics of International Airlines," 3rd edition. Rigas Doganis, Routledge, New York, 2002.
  4. "The Airline Business in the 21st Century." Rigas Doganis, Routledge, New York, 2001.

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