Evolution of International Aviation

Dawna L. Rhoades

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317138242
• Edition: 3
• Topic: Negocios y empresa
• Subtopic: Industria del transporte

The purpose of this book is twofold. First, it lays out the forces that shaped the international aviation industry and that changed all the rules in the drive for liberalization. Second, it looks at the many interesting and difficult choices ahead that the airline industry in general and the international aviation industry in particular face. These choices include many dichotomies: pulling back from the trend toward liberalization or embracing the liberalization trend, merging in search of profitability or fragmenting the industry in search of economies. These possible futures are explored including the pros and cons of each future from a national, consumer, employer, and employee perspective. As with the previous two editions, Evolution of International Aviation reviews the historical development of the international aviation system. From this foundation it then provides an updated and expanded account of the current state of the aviation and aerospace industry including profitability, consolidation, and merger activity. New to this edition, the book broadens the coverage of the industry segments - airlines, air cargo, and manufacturing - to include the emerging commercial space sector. It also emphasizes the relationship between aviation and the political process, exploring the sustainability of this mode of transportation in a world of climate change, high oil prices, and political instability. Because this book is intended for both the interested amateur and the more serious student, references are provided in the text and at the end of each chapter to allow for further in-depth study. The third edition also adds to each chapter a set of learning objectives and a concluding series of questions for discussion.

Phoenix Rising

DOI: 10.4324/9781315581361-1

Learning Objectives

After reading this chapter, you should have a good understanding of:

• the CRAF program and its relationship to national defense.
• the link between aviation and economic growth.
• how national pride affects attitudes toward the airline industry.
• the cyclical nature of the aviation industry.

Key Terms, Concepts, and People

• CRAF
• Industry lifecycle
• EADS
• Punctuated equilibrium
• “Carry the flag”
• Discontinuous change

Of Phoenixes and Airlines

According to the most famous legend of the phoenix, the phoenix was a bird of brilliant red and gold plumage whose death in a fiery blaze gave rise to a new phoenix. Like the phoenix, the airline industry seems to have established it own cycle of destruction and renewal. From its very inception, the airline industry has been at the mercy of the business cycle, experiencing soaring profits in the upturn and rapidly falling into losses when the market turns down. The so-called new economy that combined technological innovation, globalization, and abundant venture capital began transforming the US and global economy around 1995. This new economy was predicted to end the business cycle or at least smooth it out so that the booms were not so high and the busts so low. Under this new era of prosperity, the U.S. economy grew at about 4.4 percent a year while unemployment dropped to near 4 percent. At the same time, productivity rose at an annual rate of 2.8 percent (Mandel, 2000). In short, growth, productivity, and employment seemed on an unstoppable path upward. The events of 9/11 and the Global Financial Crisis (GFC) have clearly shown us that the death of the business cycle was greatly exaggerated.

In any event, the boom times for airlines have always meant adding capacity through new aircraft acquisitions, opening new routes to unserved destinations, and negotiating bigger labor contracts (or contracts that gave back what was lost in the last downturn). The bust has always been a downward ride into declining profits, falling load factors, and destructive price wars. Unfortunately, even before the events of September 11, the US airline industry was facing the return of its most dreaded foe, the business cycle, and US airlines were expected to post a US$3 billion loss (ATA, 2002). While the rest of the airline world was not yet expecting losses of this magnitude, the US downturn was expected to have an effect on those carriers with a sizable percentage of traffic to North America (Sparaco and Wall, 2001). Post 9/11, the downturn became even steeper as many carriers struggled to avoid bankruptcy, a valiant struggle that failed for many of the major carriers in the US. The US airline industry would not return to profitability until 2006, just in time to watch the 2007 rise in oil prices (ATA, 2007). This was followed by the 2008 GFC and the peak of rising fuel prices (US$147 per barrel). According to the Air Transport Association (ATA), industry losses in 2008 were US$18.2 billion, twice the 2006 high of US$9 billion in profit. As the industry struggled back to profitability after posting a smaller loss of US$2.3 billion loss in 2009 on slumping cargo and passenger traffic, the global economy lost altitude again (Airlines for America, 2013). By comparison, US airline losses in the early 1990s were nearly US$10 billion while the losses for the industry in 2001 alone were US$7 billion (Foss, 2002; Rosen, 1995). In short, the industry continues to set new records for losses.

The airline industry is no stranger to bankruptcy. In the US, the first passenger on a regularly scheduled airline flew from Tampa Bay to St. Petersburg, Florida on January 1, 1914. The airline chalked up another first when it folded four months later after running into financial difficulty (Wells, 1994). In Europe, war and financial crisis in the 1930s and 1940s led to the nationalization of many of the continent’s premier carriers as a means of insuring their survival (Graham, 1995; Sinha, 2001). Back in the US, aviation continued to expand in fits and starts aided by airmail contracts from the US Postal Service (USPS), however, since the deregulation of the US airline industry in 1978, the industry has experienced a financial crisis in the early years of each decade. In the first decade of the twenty-first century, the industry has managed to top even its own records for losses. To those outside the industry, this brief history raises many questions. Why can’t the industry make money? Why does it expect (and often get) special treatment from governments? What, if anything, can be done to stop the cycle? What is the future of the airline industry and the related aviation/aerospace firms around it? These questions are the subject of this book. The first question to tackle is why the industry is considered “special.”

A Special Case

The aviation industry has long been treated as a special case in international business, subject to different rules and held to different standards. In fact, international aviation has been “a serious problem in international relations, affecting the way governments view one another, the way individual citizens view their own and foreign countries, and in a variety of direct and indirect connections the security arrangements by which we live” (Lowenfeld, 1975). There are several reasons for the special status and serious problems associated with international aviation. Originally, the most compelling argument was national defense. Under programs such as the US Civil Reserve Air Fleet (CRAF) plan, civilian fleets could be used during times of military action to ferry troops and supplies. It was, therefore, vital to insure the existence and health of this civilian reserve. In the case of CRAF, the US government gets a reserve fleet for times of emergency without the cost of maintaining it and the airlines get paid a rate that during the first Middle East conflict, Desert Storm, was 1.75 times the seat mile or cargo mile rate (Kane, 1999). National defense has also been cited as the reason for insisting on home country ownership of these airlines and the aerospace manufacturers that supplied their airframes, engines, and other parts. The premise of the argument is the notion that home country nationals would or could be made to cooperate in the defense of their country. As we will see, the connection between civilian and military technology at the manufacturers level has always been close; the innovations in technology first deployed and tested on military aircraft were quickly applied to the commercial fleet. In a number of countries such as the US, funding for research and development for these “military” innovations came from the government and went to firms who also had sizeable civilian operations, a situation that has led foreign competitors to charge “unfair subsidy.”

The second most cited reason for special treatment has been the economic impact of aviation. The Air Transport Action Group estimates that air transport supported 3.5 percent of global gross domestic product (GDP), provided 56.6 million jobs and having a global economic impact of US$2.2 trillion (Air Transport Action Group, 2012). Passenger traffic grew on average 6 percent per year during the decade of the 1980s and early 1990s driven by a number of factors: falling real costs of air travel, increasing economic activity, intensifying international trade, increasing disposable incomes, political stability, relaxation of travel restrictions, expanding ethnic ties, increasing leisure time, tourism promotion, air transport liberalization, and growth in emerging regions and countries. Historically, air traffic has grown at about twice the rate of GDP and during the period 1960–1990 80 percent of traffic growth could be explained by growth in GDP. Beginning in the 1990s, falling real prices (fares) played a greater role in traffic growth. As air travel grows, the direct (value of airline and on-airport activities) and indirect (value of off-airport activities of passengers and shippers) economic impact grows as well. In addition, there is an induced impact from the successive spending of recipients of these direct and indirect benefits. In short, the economic impact of the air transport industry makes its health a major concern of governments, businesses, and passengers around the world and keeps it from being seen as “just another industry.” Unfortunately, this historic link between economic growth (GDP) and air transport has decoupled in the US and appears to be decoupling in the EU as well. It is not yet clear what this change represents. It is possible that the industry in the US and EU has finally reached the stage of maturity that has permanently decoupled this link. It is also possible that consumers have found other ways to spend their discretionary dollars. The phenomena (14 years old in the US) may be temporary or it may be time to acknowledge that there are limits to all phenomenon and nothing including aviation continues upward forever (Michaels, 2013). Still, there is no denying that air transport contributes in many ways to national and global economies.

The third reason for aviation’s special status is the link that exists in the minds of many between aviation and national achievement and pride. International airlines “carry the flag” around the world. This reason should not be underestimated as a driver of individual and government perception. When the bankruptcy and subsequent grounding of the Swissair fleet forced the Swiss football team to fly the Russian carrier Aeroflot to a qualifying match in Moscow, one article reported this event as a “further humiliation for the Swiss flag carrier” (Hall, Grant, Done, and Cameron, 2001). The uproar that occurred in UK over the replacement of the Union Jack on the tail of many British Airways planes by the so-called ethnic tails intended to show British Airways as the airline of the world was motivated by similar nationalistic sentiment (BBC News, 1999). Likewise, the debate in Belgium over the bankruptcy of Sabena and the need for a national carrier to serve the interest of the people of Belgium has more to do with nationalistic pride than airline economics (BBC News, 1999; Sparaco, 2001). Most recently, the Italian efforts to save their national carrier, Alitalia, can be linked to the same national pride that has motivated so many other governments (The Economist, 2013). At the manufacturing level, nations have also mourned the loss of their aviation pioneers. One of the key arguments for the European formation of Airbus was the dominance of manufacturing by US firms. According to Aris (2004), the Airbus project was seen by the French as “Un Grand Projet: one of those brilliant combinations of technological skill and political will that serve to remind the French themselves—and everybody else—just what a great nation they are” (16). To the Germans, Airbus was the chance to rebuild an aerospace industry that had contributed many early innovations in aviation. In short, all things aviation have been linked to national pride in their technological achievement and visionary leadership. In the US, the announcement that the US Air Force had chosen Northrop Grumman and European partner EADS, parent of Airbus, for a refueling tanker deal worth US$35 billion was greeted with anger and calls for political investigation. In the US House of Representatives, Todd Tiahrt, whose district includes facilities of the losing bidder Boeing, has said that the US “should have an American tanker built by an American company with American workers” (Tessler, 2008: 2). In fact, this last example brings together all of the reasons why aviation is a special case—defense, economic impact, and national pride.

Changing Times

Even without the defense, economic, and national pride arguments, aviation/aerospace is not likely to be seen as “just another industry.” It is the stuff of dreams and has fired the imagination of much of the world’s population. Alvin Toffler (1970) noted in his bestselling book Future Shock that in 6000 BC the fastest transportation available to mankind was the camel caravan that averaged 8 miles per hour (mph). By 1600 BC the chariot had raised this speed to approximately 20 mph. The first mail coach in England began operating in 1784 at an average of only 10 miles per hour and the first steam locomotive was capable of a mere 13 mph. In fact, it was not until the invention of an improved steam engine that mankind was able to reach a speed of 100 mph. It took almost 8,000 years to go from the 8 mph camel to the 100 mph train. However, in only 58 years, men in aircraft were exceeding the 400 mph line. Twenty years later that limit doubled. By the 1960s aircraft were approaching speeds of 4000 mph, and space capsules were circling the Earth at 18,000 mph. The newest pioneers are men like Elon Musk of SpaceX and Robert Bigelow of Bigelow Aerospace who are trying to shape the commercial space industry, giving us a private space station to visit and the means to get there.

The history of aviation/aerospace is filled with larger-than-life figures. These men and women were the entrepreneurs of Joseph Schumpeter who took on the thankless job of building and shaping an industry because “there is the dream and the will to found a private kingdom, usually, although not necessarily, also a dynasty … Then there is the will to conquer: the impulse to fight, to prove oneself superior to others, to succeed for the sake, not of the fruits of success, but of success itself … Finally, there is the joy of creating, of getting things done, or simply of exercising one’s energy and imagination” (Schumpter, 1934: 93–94). After all, the Wright brothers started their business career as the owners of a bicycle shop before the dream of aviation led them in a different direction. Their innovation in heavier-than-air flight would start an industry and in many ways illustrate the promises, challenges, and pitfalls of aviation.

Whatever the challenges, there have always been individuals drawn to aviation. The stories of these individuals, the planes they flew, and the companies they founded still fascinate us today. While the level of innovation has slowed for the aviation industry, the manufacturers are continuing to face new challenges in design and performance. One of the greatest of these challenges will be increasing the fuel efficiency and improving the emissions profile of aircraft in a world of increasing oil prices and concerns about climate change. As the demand for air travel increases in developing nations, other challenges are facing the industry. There is a lack of capacity at many of the airports worldwide and crowding of the airspace in many countries demands new systems of traffic management a...