The Evolution of the Us Airline Industry: Theory, Strategy and Policy (Studies in Industrial Organization)

295 Pages·2005·4.46 MB·English

by  Eldad Ben-Yosef

The Evolution of the US Airline Industry
Studies in Industrial Organization
Volume 25
Series Editors:
H.W. de Jong,University of Amsterdam;Nijenrode,
theNetherlands School of Business, Breukelen, the Netherlands
W.G.Shepherd,Dept.of Economics, University of
Massachusetts at Amherst, USA
The titles published in this series are listed at the end of this volume.
The Evolution of the US
Airline Industry
Theory, Strategy and Policy
by
Eldad Ben-Yosef
A C.I.P.Catalogue record for this book is available from the Library of Congress.
ISBN 0-387-24213-9 (HB)
ISBN 0-387-24242-2 (e-book)
Published by Springer,
P.O.Box 17, 3300 AADordrecht, The Netherlands.
Printed on acid-free paper
All Rights Reserved
© 2005 Springer
No part of this work may be reproduced, stored in a retrieval system, or transmitted
in any form or by any means, electronic, mechanical, photocopying, microfilming, recording
or otherwise, without written permission from the Publisher, with the exception
of any material supplied specifically for the purpose of being entered
and executed on a computer system, for exclusive use by the purchaser of the work.
Printed in the Netherlands.
V
CONTENTS
Foreword ix
Introduction 1
Overview 9
PART 1: ECONOMIC DEREGULATION 21
Deregulation 23
Aircraft 65
Destructive Competition 103
PART 2: NOISE AND SAFETY REGULATION 127
Social Regulation 129
Noise Regulation 137
Safety Regulation 169
PART 3: COMPETITION 211
Yield Management 213
What Next? 239
On Theory and Policy Implications 261
Epilogue 283
References 289
Index 293
vi
List of Figures
Figure 1. SimmmpleHuubNetwork................................................................................ 43
Figure 2. A Two-StarrNetttwork................................................................................ 47
Figure 3. End-to-EndVertical Integration............................................................... 49
Figure 4.US AirlinesFuel PriceIndeeex.................................................................... 72
Figure 5. NewAircraftOrders................................................................................. 79
Figure 6.ProfittMargins.......................................................................................... 87
Figure 7. Stage II Aircraft—Ratioby Airline—Year-Endd1989.............................. 88
Figure 8. Rate of Changein Aircraft Acquisition Cost........................................... 89
Figure 9. NewAircraftDeliveries 1985 –1993....................................................... 96
Figure 10. World AirlinesNet Profits1985–1995.................................................... 96
Figure 11. USAirlines AircraftCost Index 1986-1988.......................................... 100
Figure 12. New AircraftOrdersand Deliveries 1960-1998.................................... 124
Figure 13. PrimaryCauses of MajorAccidentsWorld Fleet 1980-1989............... 190
Figure14.Fatal Accidents By Tyyype World Fleet1988 -1995................................ 191
Figure 15. Accident/100,000 Departures 1990-1998.............................................. 196
Figure 16. Annual Profits 1990-2002..................................................................... 233
Figure17.Domestic and SystemmNetProfitMargins (Quarterly) 1996-2003........ 234
Figure18. RealYield (cents) 1990–2001............................................................... 234
Figure 19. CommmpositeCost Index1990-2001......................................................... 235
Figure 20.CostAllocation 2003............................................................................. 251
Figure21. LaaborrCostIndex................................................................................... 252
Figure 22. IncreaseinLaaborrCostperAvailableSeatMile, 1998-2001................. 252
Figure23. Laaborr Cost perrAvailableSeat-Mile(cents) 2001................................. 254
List of Tables
Table1.Operating Data 1st Versus 2nd Generation Aircraft............................................ 73
Table2.AircrafttMarkettValueand Rental Rates............................................................ 74
Table3. Selected Aircraft Operating Costs 1994............................................................. 99
Table4.Selectedd AirlinesOperating Costs..................................................................... 99
Table5.US Carrrriers: Fatalities,SeriouslyInjured Passengers and Hull Loss 1982-1999... 177
Table6. TransportationnFatalities................................................................................ 178
Table7. Accident Causes - a Simple Typology............................................................. 183
vii
In memory of
Asher Ben-Yosef, myfather
and
Amos Ginor, my mentor
Aviation Pioneers
ix
FOREWORD
For over three decades the airline industry has continued to maintain a high profile
in the public mind and in public policy interest. This high profile is probably not
surprising. There does seem to be something inherently newsworthy about airplanes
and the people and companies that fly them.
The industry was one of the first major industries in the United States to undergo
deregulation, in 1978. It thereby transitioned from a closely regulated sector (the former
Civil Aeronautics Board tightly controlled everyttthing from prices to routes to entry) to
one that is largely market oriented. The incumbent carriers transformed themselves
from the point-to-point operators that the CAB had required to the hub-and-spokes
structures that took better advantage of their network characteristics. Further, they
transformed their pricing from the quite simple structures that the CAB had required to
the highly differentiated/segmented pricing structures (“yield management”) that
reached an apogee in the late 1990s. Some caaarriers, like American, Delta, and United,
were better at this transition; others, like Pan American, TWA, and Eastern, were not.
What the incumbent carriers did not do, however, was deal with their costly wage
and work rules structures, which were an enduring legacy of their regulatory period.
This legacy, when combined with the high-fare end of the yield-management pricing
structure, has made them vulnerable to entry by new carriers with lower cost structures.
This vulnerability—compounded byy high variability in fuel prices—has yielded large
x
and widespread losses since 2001, immersion in bankruptcy proceedings for some
carriers, and work forces that (understandably) have been slow to yield the gains of the
regulated era and are unhappy in having to do so. The public policy concerns continue.
Eldad Ben-Yosef has written an intriguing book about the modern airline
industry. He offers a unique perspective, being able to combine the expertise of a
trained economist with the experience of someone who has been involved in the
business of the industry for over 20 years. Though some readers may not agree with
some points, his positions are definitely well-reasoned and worthy of serious
consideration or debate. Readers will surely find the journey through this book to be
interesting and worthwhile.
Lawrence J. White
Stern School of Business, New York University
November 2004