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Factors that cause effects on the airline industry

Page 34 Share Suggested Citation: The National Academies Press. First, the events of September 11, 2001, led to a drop-off in flying, and the imposition of new security procedures have affected the costs of providing air service and lengthened passenger travel times.

These factors caused billions of dollars in losses to U. The industry responded by reducing capacity, retiring inefficient aircraft types, and raising revenue through the imposition of new and expanded ancillary fees.

These responses allowed the industry to return to profitability in the past few years. However, the changes in the industry have not had a uniform effect on all airports. Airports serving smaller communities have been particularly affected by the changes, resulting in reduced service levels, less airline competition, and poorer service quality.

  1. Smaller communities have had very limited ability to respond to major trends affecting the aviation industry in recent years, including economic recessions and the price of jet fuel. Accessed Sep 26, 2011.
  2. This paper is presented in six parts.
  3. In this work, we used the structure proposed by this method to perform the determination of the weights, without using, however, the fundamental scale of Saaty Vieira, 2006 , which assigns a priority value of one element over another. In this markets for which fixed costs are high changes in production volume do not modify significantly the overall cost of the company.
  4. Furthermore, the proposal is to establish a hierarchy of these factors according to their importance. Literature Review of Airline Industry Trends 29 suffered a substantial decline in flights.

Officials at airports serving smaller communities need to understand how the recent history and performance of the U. Smaller communities have had very limited ability to respond to major trends affecting the aviation industry in recent years, including economic recessions and the price of jet fuel. Although some smaller communities have tried to reduce the risk of losing air service by providing incentives or subsidies for air service, these efforts have involved much uncertainty.

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In some cases, carriers exited markets when incentives or subsidies ended. Although smaller communities may try to reduce risk, there will still be uncertainty because of factors outside the Literature Review of Airline Industry Trends 16 Effects of Airline Industry Changes on Small- and Non-Hub Airports control of the community.

A review of the recent history of the U. Aviation Industry The recent history and performance of the U. The main external shocks to the U. The aviation industry responded to these external shocks by reducing capacity, consolidating, retiring inefficient air- craft types, and developing new sources of revenue. In 2012, the U. Exhibit 2-1 shows the trend line and actual amount of per capita disposable income for the United States from 2000 to 2011. This reduction in purchasing power reduced the demand for leisure air travel; the slowdown in the economy also reduced business travel demand.

On the cost side, the price of jet fuel rose dramatically between 2004 and 2008, then temporarily crashed, and returned to historically high levels by 2011. These increases have been a major source Source: Exhibit 2-2 shows the average monthly spot price per barrel of jet fuel from January 2000 to December 2013.

  • ACQI connectivity scores were com- puted for 462 U;
  • Although the percentage of delayed arrivals was also higher at rural com- munities than at larger communities, the difference was not as substantial.

The report also found this was accompanied by a decline in overall domestic seat capacity offered by commercial carriers. Though not shown in the exhibits above, the recent sharp decline in oil prices in the second half of 2014 has clearly benefitted the major air carriers, but there is not yet any indication that they plan to increase capacity as a result.

Bureau of Transportation Statistics recent months are preliminary and subject to restatement ; Energy Information Administration Exhibit 2-2. During the fuel cost increase, airlines responded by reducing use of fuel-intensive aircraft and by increasing fares to pass fuel costs on to passengers, both of which are supply-side effects.

Airlines passed some of the increase in fuel costs on to passengers through fare increases, fuel surcharges, and unbundling of services by introducing ancillary fees for services e.

The financial strain on airlines resulted in the bankruptcies of 49 U. Most bankruptcies did not result in a carrier ceasing operations, because the U. Bankruptcy Code allows companies to reorga- nize under Chapter 11. Exhibit 2-4 shows U. Chapter 7 liquidation or Chapter 11 reorganization.

In some cases, bankruptcy reorganizations made it easier for carriers to merge with one another. A series of airline mergers during the 2000s resulted in substantial consolidation of seat capacity as Exhibit 2-3. Airlines for America A4A data, U. Bankruptcies and Services Cessations Exhibit 2-4. Exhibit 2-6 shows the change in the number of flights at five airline hubs that experienced particularly drastic service decreases in recent years. The influence of the price of fuel and the reduced demand for air travel due to the economic slowdown and airline consolidation can be seen in the dra- matic decline in the number of domestic flights operated by U.

  1. In this markets for which fixed costs are high changes in production volume do not modify significantly the overall cost of the company. Questionnaires also presented an space that could be used to additional comments.
  2. The last category of costs determinants is the one in which the manager has high or total control.
  3. Exhibit 2-9 shows the percent change in scheduled flights by flight distance from June 2007 to June 2012. Some items that can be part of this category are marketing, product planning, financial policies and business strategy.
  4. Leakage occurs for several reasons including proximity to a legacy-carrier network hub with more direct flight options , proximity to an airport with LCCs often with lower fares , or due to a fragmented catchment area where competition is high Martin et al. Exhibit 2-6 shows the change in the number of flights at five airline hubs that experienced particularly drastic service decreases in recent years.

Seat shares of top U. Louis American 9,503 7,127 -25.

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Federal Aviation Administration Exhibit 2-6. The decline in flights in recent years was not uniform across all U. Exhibit 2-8 shows the change in scheduled flights by carrier between June 2007 and June 2012.

  • This is usually effective, since the authorities are supposed to have interest in setting up the region, as this may induce economic growth and social location Carrilho, 2009;
  • Smaller airports experienced greater declines in ACQI connectivity scores 15;
  • Some items that can be part of this category are marketing, product planning, financial policies and business strategy.

Much of the decline in flights by network carriers occurred in the short-haul sector. Exhibit 2-9 shows the percent change in scheduled flights by flight distance from June 2007 to June 2012. The change in flights by length of haul can be explained by passenger demand elasticity, relying on the well-established observations that short-haul air travel is more price elastic than long-haul air travel, domestic air travel is more price elastic than international air travel, and leisure travel is more price elastic than business travel.

Higher price elasticity indicates that consumers are more sensitive to changes in price. In response to these factors, a recent study suggests that airlines made strategic Source: Federal Aviation Administration Exhibit 2-8. Factors that cause effects on the airline industry Review of Airline Industry Trends 21 decisions to reduce service in markets that were more price elastic and to maintain or increase service in markets that were more price inelastic Morrison, Bonnefoy, and Hansman 2010.

Despite the substantial reduction in the number of flights since 2007, the number of available seat miles has been largely unchanged.

Airlines targeted short-haul flights and flights with smaller aircraft for most of the flight reductions, which means that the overall number of available seats was not impacted as significantly as the overall number of flights. Exhibit 2-10 shows domes- tic capacity by carrier type network airline or low-cost airline from 2007 to 2012. When adjusted for stage length and seat size, smaller aircraft such as regional jets are gener- ally more fuel intensive than larger aircraft, so airlines reduced the miles flown of fuel-inefficient smaller aircraft while increasing the miles flown of fuel-efficient larger aircraft Morrison, Bonnefoy, and Hansman, 2010.

Federal Aviation Administration Exhibit 2-9. Despite the recent decrease in use of small regional jets, network carriers increased their reli- ance on regional carriers in the past decade.

The Effects of 9/11 on the Airline Industry

Federal Aviation Administration Exhibit 2-11. Literature Review of Airline Industry Trends 23 By reducing capacity, carriers were able to increase load factors on flights. Exhibit 2-13 shows RASM by carrier type network airline or low-cost airline from 2007 to 2012.

Exhibit 2-14 shows average fares by flight length from 2000 to 2011. Carriers increased fares most sharply in short-haul markets that experienced the greatest capacity reduction. Unit revenues, or revenue factors that cause effects on the airline industry available seat mile, are calculated as operating revenues excluding transport revenues divided by total available seat miles.

Bureau of Transportation Statistics Exhibit 2-14. Factors that cause effects on the airline industry revenue collected by U. In addition to increasing passenger fares, airlines increased revenue by adopting ancillary fees to recapture some revenue lost because of reduced demand for air travel and to offset increased fuel costs.

The recent growth in ancillary fees results from new fees and expanded existing fees for services that were previously included in base airfares to generate additional ancillary rev- enue. Examples of services include checked baggage, reservation changes and cancellations, seat selection, food, and other miscellaneous items.

Exhibit 2-15 shows the amount of baggage fees, reservation and cancellation fees, and mis- cellaneous revenue collected by scheduled U. The same overall pattern of profit and loss is evident if looking at net income which includes the effects of non-operating revenues and expenses, taxes, and interest rather than operating income.

Exhibit 2-16 shows overall operating income of U. Since 2009, industry consolidation, capacity reduction, fare increases, and increased ancillary revenue have resulted in improved financial performance.

Literature Review of Airline Industry Trends 25 airlines broke even in 2009 and generated operating profits in 2010 and 2011, in sharp contrast to the operating losses in 2001 through 2005 and 2008. The improved financial performance of U. But in addition, the U. In recent years, airline service quality has improved markedly as measured by the percent- age of on-time and completed flights. Part of this improvement likely resulted from the recent trend of Source: Bureau of Transportation Statistics Exhibit 2-16.

Federal Aviation Administration Exhibit 2-17. Airlines often look to reduce service at airports serving smaller communities first because the opportunity for profit at these airports is smaller because the population base of potential travelers is smaller. In addition, if a small community is within a reasonable driving distance of a larger airport, residents may choose to drive to the larger airport that has better service options further reducing the demand for air service at the airport serving the smaller community GAO 2003a.

The overall number of available seats was lower in 2013 than in 2001 for each hub group, although the decline was much greater at medium-hub airports than at other hub groups. Airport hub groups are deter- mined annually by FAA based on the number of enplanements.

Thus, part of the medium-hub Source: OAG, October data, 2001-2013; includes domestic service only. Exhibit 2-19 provides snapshots of the U. The number of large- and medium-hub airports decreased while the number of small-hub airports increased. This reflects the reclassification of some of the larger airports as small-hub airports because of fewer enplaned passengers at the larger airports.

The increasing consolidation of passenger service at larger airports is evident when examin- ing the share of seats and number of airports in each airport group. The 67 large- and medium- hub airports in 2001 accounted for 87. Although the total share of seats in 2013 was essentially identical 88.

The number of overall flights in 2013 was lower than in 2001 for each of the airport hub groups, although the decline at large-hub airports was less substantial than at airports in the small-hub groups.

Changes in the share of seats and number of airports by airport hub group from 2001 to 2013.

  • The same overall pattern of profit and loss is evident if looking at net income which includes the effects of non-operating revenues and expenses, taxes, and interest rather than operating income;
  • Literature Review of Airline Industry Trends 33 communities.

Network carriers traditionally provided service to smaller airports to feed hub operations at larger airports. LCCs typically only serve larger airports with point-to-point service.

The low fares offered by LCCs often induce residents of smaller communities to drive to larger air- ports, which reduces the demand for air service at smaller communities.

Services on Demand

Airlines reduced service, sometimes dramatically, at some under-performing hubs as a result of industry consolidation and bankruptcies. Small- and non-hub airports were significantly affected by these changes in the airline hub structure. Exhibit 2-21 shows the change in flights from small- and non-hub airports to airline hub airports.