A Profile of the Global Airline Industry

Kent N. Gourdin

• Publisher: Business Expert Press
• Year: 2015
• Print ISBN: 9781606495544
• eBook ISBN: 9781606495551
• Topic: Betriebswirtschaft
• Subtopic: Transportwesen

The airline industry is one of the most fascinating in the world, with roots going back to the earliest years of the 20th century. Not long after the Wright brothers flew successfully for the first time in 1903, interest in aviation for military and commercial purposes began. In the late teens, the U.S. government began offering potentially lucrative airmail contracts to start-up air carriers, who competed vigorously for them often with disastrous results. Despite the rocky start, the carriers persevered and, by the 1930s, were beginning to look like the companies we see today. This book will provide the reader insight into the nature of the airlines and why companies promulgate the strategies they do. First, the history of commercial air services will be examined, with an initial focus on the United States. After this background, airline operations around the world will be compared and the different types of carriers that comprise the industry will be discussed. Next, the reader will learn about important uncontrollable outside forces (fuel costs, terrorism, economic conditions, etc.) that can have dramatic and potentially devastating impacts on an airline. Finally, in the face of expected increases in the demand for the global movement of passengers and cargo, future opportunities and challenges facing the airline industry will be presented.

Chapter 1

Introduction

Background

The airline industry is one of the most fascinating in the world, with roots going back to the earliest years of the 20th century. Not long after the Wright brothers flew successfully for the first time in 1903, interest in aviation for military and commercial purposes began. Following World War I, the U.S. government began offering potentially lucrative airmail contracts to start-up air carriers, who competed vigorously for them often with disastrous results. Given the crude aircraft, lack of navigation and weather forecasting services, and poor pilot training, crashes became the rule rather than the exception. Despite the rocky start, the carriers persevered and by the 1930s were beginning to look like the companies we see today. In fact, competition in the United States became so severe that the government created the Civil Aeronautics Board (CAB) in 1938 to regulate the business of domestic air travel. The industry worldwide got a tremendous boost after World War II, with the availability of inexpensive military surplus aircraft and a plethora of airfields that could easily be converted to civilian use.

Commercial aviation, both in the United States and abroad, continued to grow during the 1950s, 1960s, and 1970s. By the mid-1970s, Congress decided that economic regulation was no longer necessary and began the process of deregulation by freeing the all-cargo carriers from most CAB oversight in 1977. In 1978, for better or worse, the passenger airlines were deregulated as well.

Deregulation transformed the U.S. airline industry forever. New carriers entered the marketplace, while old ones failed. As the demand for international travel increased, airlines in other countries began to grow as they found ways to successfully compete against what had been an industry largely dominated by U.S. firms. Competition forced managers to adopt cost control measures that seriously degraded service, while more recently rising fuel prices have made profitability even more elusive. Indeed, the carriers well regarded by passengers today are not based in Los Angeles or New York, but rather in Dubai, Singapore, or Germany.

In order to provide insight into the nature of the airlines and why companies promulgate the strategies they do, the history of commercial air services will be examined, with an initial focus on the United States. After this background, airline operations around the world will be compared and the different types of carriers that comprise the industry will be discussed. Next, the reader will learn about important uncontrollable outside forces (fuel costs, terrorism, economic conditions, etc.) that can have dramatic and potentially devastating impacts on an airline. A discussion of economic regulation and deregulation will follow, to help the reader understand the impact of both legislative actions on the carriers operating today. Finally, in the face of expected increases in the demand for the global movement of passengers and cargo, future opportunities and challenges facing the airline industry will be presented.

The Early Years: 1918 to 1938

Commercial aviation in America began in 1918 with the transport of airmail, first by the U.S. Army Air Service and then by the U.S. Post Office, which carried the mail for nine years using its own pilots and airplanes. To say that flying at that time was fraught with danger is an understatement. Thirty-one of the first 40 airmail pilots hired by the government died in crashes.1 There were no airways, navigational aids, or emergency landing fields; no federal agencies that dealt with civilian flying and no federal laws to regulate it; no standards for aircraft maintenance; and no mechanism for licensing pilots.2

Similar developments were occurring in Europe. For many months after the war, normal rail travel in Europe remained problematic and irregular because of the shortage of passenger equipment and the destruction of tracks and bridges. In addition, chaotic political conditions in Central and Eastern Europe often disrupted schedules. The situation opened many possibilities for launching airline routes. Although few airfields existed, aircraft of the postwar era could and did use relatively short sod runways for years, meaning that locating suitable airports near most cities was not the formidable engineering challenge that emerged in subsequent decades. Another factor that emerged as a driver of airline development in Europe was the ongoing need to tie far-flung empires to their respective mother countries. Great Britain, France, and the Netherlands all had colonies around the world; while in the nascent Union of Soviet Socialist Republics (USSR), air transport emerged as an indispensable medium for rapid transportation and a visible means of knitting together sprawling, divergent regions.3 In fact, the oldest continuously operating airline in the world is the Dutch carrier KLM, which was founded in 1919.4

A significant difference between the United States and the rest of the world was that the former relied on the private sector to develop its airlines while virtually every other nation created and operated its own national carrier(s), a fact that continues to impact global commercial aviation to this day.

One factor that quickly became apparent in the United States was that the demand for military aircraft alone could not sustain aircraft manufacturing, which prior to 1917 was virtually nonexistent.5 After the war, the government was buying fewer planes while commercial flying was virtually nonexistent.6 As a result, there was no civilian market for planes. The government’s decision to sell its surplus aircraft to civilians at cheap rates made an impossible situation even worse. The availability of inexpensive planes did lure many people into the air transport business, but those enterprises proved too precarious either to provide reliable transport service or to serve as a market for planes. For example, in the United States, there were 88 airline operators in 1921 and 129 in 1923, yet the latter figure included only 17 of the original 88. While some companies managed to eke out a thin existence with a plane or two, as late as 1924 the nation still did not have a single regularly scheduled air transport line.7

Structure Emerges

The event that brought order to the chaos was the passage of the Air Commerce Act of 1926. Championed by then-Secretary of Commerce Herbert Hoover, the act’s impact was enormous. During the period from 1922 to 1926, the nation added only 369 miles of regular air service operated by private enterprise and 3,000 miles of airmail lines run by the post office that did not carry passengers or express. By 1929, there were 25,000 miles of government-improved airways of which 14,000 were lighted with beacons; 1,000 airports built and 1,200 in progress; 6,400 licensed planes making 25,000,000 miles in regular flights annually; and a manufacturing output of 7,500 planes a year.8 In fact, the act paved the way for the formation of three of today’s four largest U.S. airlines: Delta, which started as a crop-dusting operation in 1924 and carried its first domestic passengers in 1929; United Airlines which began in 1931; and American in 1930. Of course, there were many others as well (Northwest, 1926; Pan American, 1927; Eastern, 1927; Trans World Airlines [TWA], 1930; Braniff, 1931; Continental, 1934; National, 1934), although these have all failed or been assimilated by other carriers.9 Perhaps the greatest impact of the act was to establish a model of private industry and public promotion working together to establish a strong U.S. airline industry responsive to the needs of the nation.

Naturally, all these new airlines were trying to compete with each other during one of the worst depressions ever to occur in the United States. Recall that there was no government oversight of the industry, so managers were free to make whatever business decisions they thought best, with little regard for the stability of the industry. Congress had established a precedent of imposing economic regulation on the railroad, pipeline, and trucking industries engaged in interstate commerce because they viewed such a move as being in the public interest. The airlines were brought under that regulatory umbrella in 1938. While the topic of economic regulation will be covered in a later chapter, the CAB was created to stabilize the fledgling airline industry by controlling prices and limiting competition. One goal at the time was to encourage the spread of commercial air services across the nation. Of course, the airlines only wanted to serve routes that they knew would be profitable, so the agency utilized the award of operating authorities (i.e., permission) to ensure the public need for air services would be met. Essentially, carriers were forced to serve both money-making and money-losing routes, with the earnings from the former offsetting the losses of the latter so that overall the carrier made a profit. By limiting the number of certificates awarded to serve profitable or high-demand routes and increasing those for unprofitable or low-demand ones, the CAB limited competition on the former and increased it on the latter. The impact on fares was predictable: higher prices where competition was restricted and lower where it was forced.

Expansion Abroad

Global expansion on any meaningful level was constrained by the lack of suitable aircraft and infrastructure. Pan American established itself as an international carrier with a short-lived passenger service from Key West to Havana in 1927. The carrier proved so adept at winning federal airmail contracts that services throughout the Caribbean quickly followed.10 However, crossing the Atlantic and the Pacific Oceans proved much more challenging. The Atlantic routes had to be via intermediate points, either by the northern countries, or via island hopping points in the Central Atlantic. The problem thus became one of territorial sovereignty. Great Britain, for example, through its Commonwealth connection to Canada stood in the way of the initial segment of the Great Circle route eastwards from New York. The British were not anxious to allow the Americans to start a service before they were ready themselves. Similarly, France had secured exclusive landing rights to the Azores, the vital halfway point in the middle of the Atlantic, by an agreement with Portugal, which controlled the islands. Denmark still extended its political domain to the Faröe Islands, Iceland, and Greenland, and thus controlled the northern perimeter.11

There were actually fewer operational and political problems growing across the Pacific. Initial efforts focused on securing a Great Circle route from New York to Tokyo via Canada, Alaska, and the Soviet Union, but the Soviets refused to allow U.S. carriers to transit its airspace because America continued to withhold diplomatic recognition. All interest then shifted to the Central Pacific. The weather was better, but more importantly, the United States controlled vital territories like Hawaii, Midway and Wake Islands, Guam, and the Philippines, which meant that trans-Pacific air services could be stitched together without asking for permission from any foreign government. One big problem remained, aside from the challenge of developing an aircraft capable of profitably flying between San Francisco and Honolulu: the lack of infrastructure between Hawaii and Manila. Pan American faced the challenge head-on and built these resources itself. It leased a ship, organized supplies and equipment, and dispatched it with 44 airline technicians and 74 construction staff. The cargo included enough material to construct two complete villages and five air bases (including hotel accommodations for passengers and crew), the most important of which were at Midway and Wake Islands, tiny specks of U.S. territory in the middle of the Pacific where two flying boat bases were blasted out of the coral. All this work was completed in mid-1935, with scheduled airmail service starting in November of that year and passenger service a year later.12 A few statistics on the first flight from San Francisco to Manila: one-way fare was $799, the equivalent of $13,895 in 2014; total flight time was 59 hours, 48 minutes (21 hours from San Francisco to Honolulu alone); total elapsed time was seven days.13

World War II and the Postwar Years: 1939 to 1958

Unfortunately, as the 1930s wore on, the threat of war in both Europe and the Pacific became more acute, slowing further developments in the industry. Pan American started transatlantic services in 1939, only to curtail them a few months later. By the time the United States actually entered the conflict in December of 1941, international commercial flights had virtually ceased as did casual air travel within the United States. The Army’s Air Transport Command was formed in 1942 to coordinate the transport of aircraft, cargo, and personnel throughout the country and around the world. The Air Transport Command contracted with airlines to fly wherever they were needed. Pa...

Table of contents

• Cover
• Title
• Copyright
• Abstract
• Content
• Acknowledgments
• Chapter 1: Introduction
• Chapter 2: The Global Airline Industry
• Chapter 3: Industry Organization
• Chapter 4: External Forces Affecting Air Carrier Operations
• Chapter 5: Government Involvement in Airline Operations
• Chapter 6: Opportunities and Challenges for the Industry
• Notes
• References
• Index
• Adpage
• Backcover