Airline Operations and Management

Airline Operations and Management Airline Operations and Management: A Management Textbook is a survey of the airline industry, mostly from a managerial perspective. It integrates and applies the fundamentals of several management disciplines, particularly economics, operations, marketing and finance, in developing the overview of the industry. The focus is on tactical, rather than strategic, management that is specialized or unique to the airline industry. The primary audiences for this textbook are both senior and graduate students of airline management, but it should also be useful to entry and junior level airline managers and professionals seeking to expand their knowledge of the industry beyond their own functional area. Gerald N. Cook is Adjunct Professor in the College of Business at Embry-Riddle Aeronautical University. He obtained his Bachelor of Science in professional pilot technology and Master of Science in Management from Purdue University and Doctor of Business Administration from Nova Southeastern University. He enjoyed a long airline career as a pilot and in various flight operations management positions at several airlines. Dr. Cook is retired from Spirit Airlines. Bruce G. Billig is Adjunct Assistant Professor in the College of Aeronautics at Embry- Riddle Aeronautical University. He holds a Bachelor of Science in electrical engineer- ing from the U.S. Air Force Academy and a Master of Aeronautical Science degree from Embry-Riddle. He retired from the Air Force as a Command Pilot in 1997 and is currently a captain at Southwest Airlines. This page intentionally left blank Airline Operations and Management A Management Textbook Gerald N. Cook and Bruce G. Billig First published 2017 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2017 Gerald N. Cook and Bruce G. Billig The right of Gerald N. Cook and Bruce G. Billig to be identified as authors of this work has been asserted by them in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Names: Cook, Gerald N., author. | Billig, Bruce G., author. Title: Airline operations and management: a management textbook / Gerald N. Cook and Bruce G. Billig. Description: Abingdon, Oxon; New York, NY: Routledge, 2017. | Includes bibliographical references and index. Identifiers: LCCN 2016038017 | ISBN 9781138237520 (hardback) | ISBN 9781138237537 (pbk.) | ISBN 9781315299594 (ebook) Subjects: LCSH: Airlines–Management. Classification: LCC HE9780 .C59 2017 | DDC 387.7068–dc23 LC record available at https://lccn.loc.gov/2016038017 ISBN: 978-1-138-23752-0 (hbk) ISBN: 978-1-138-23753-7 (pbk) ISBN: 978-1-315-29959-4 (ebk) Typeset in Galliard by Deanta Global Publishing Services, Chennai, India To our wives for encouragement, perseverance, research, and initial editing. This page intentionally left blank Contents List of Figures xiv List of Tables xviii Introduction: Goal of Airline Management and Operations 1 Introduction 1 1 Historical Perspective 3 1.1 Transportation and Commerce 3 1.2 First Airlines 4 1.3 Early Regulation 5 1.4 History of British Airways 6 1.5 U.S. Airmail 6 1.6 Economic Regulation 12 1.7 Civil Aeronautics Board Economic Regulation 1938 to 1978 13 1.8 Advances in Aircraft Technology 14 1.9 Post-War Airline Growth 16 1.10 The Jet Age 18 1.11 U.S. Deregulation 21 1.12 The Airline Deregulation Act of 1978 24 1.13 Post-Deregulation Evolution 24 1.14 U.S. Deregulation Results 25 1.15 CAB in Retrospect 26 1.16 Deregulation in Europe 28 1.17 Deregulation in China 29 1.18 Airline Industry Today 30 1.19 Summary 32 References 32 Review Questions 33 viii Contents 2 Supply and Demand for Air Transportation 36 2.1 Size, Scope, and Economic Importance 36 2.2 Factors Driving Global Air Transportation Growth 38 2.2.1 Globalization 38 2.2.2 Demographics 39 2.2.3 Liberalization 41 2.2.4 Factors of Production 42 2.3 Air Cargo 43 2.4 Forecasting Air Travel Demand 44 2.4.1 Macro-Forecasting 44 2.4.2 Route-Level Micro-Forecasting 46 2.4.3 Passenger Segmentation 47 2.4.4 Variation in Demand 48 2.5 Demand Curve 50 2.6 Need for Forecasts 54 2.7 New Route Example 54 2.8 Summary 58 Notes 58 References 59 Review Questions 59 3 Route Structure 61 3.1 History 61 3.2 Generic Route Structures 62 3.3 Point-to-Point 62 3.3.1 Fast, Cheap, and Independent 63 3.3.2 Limited to Large Markets 63 3.3.3 Example: Ryanair 63 3.4 Linear 64 3.5 Hub-and-Spoke 65 3.5.1 Operation 66 3.5.2 Advantages 67 3.5.3 Disadvantages 71 3.5.4 Bottom Line 73 3.5.5 Examples of H&S Route Systems 74 3.6 Hub-and-Spoke Variations 76 3.6.1 Hybrid Route Systems 76 3.6.2 Multiple Hubs 78 3.6.3 Directional Hub 79 3.6.4 Rolling Hub 82 3.6.5 Tailored Complexes 84 3.6.6 Legal, Financial, and Capacity Restrictions 84 Contents ix 3.7 Hub Airport Requisites 85 3.7.1 Competing H&S Systems 86 3.7.2 Hub Failures 86 3.8 Evolving Route Systems 88 3.8.1 Southwest Airlines Route System 88 3.8.2 Delta’s LaGuardia Hub 90 3.9 Summary 90 Note 92 References 92 Review Questions 93 4 Product Offering 95 4.1 Strategic Choices 95 4.1.1 The Marketing Concept 95 4.1.2 Generic Strategies 97 4.1.3 Industry Evaluation: Porter’s Five Forces 98 4.2 Comprehensive Network Carriers 102 4.2.1 Differentiation 103 4.2.2 Delta Air Lines 105 4.3 Regional Airlines 105 4.3.1 Fleet 107 4.3.2 Regional Airlines Worldwide 110 4.3.3 Upheaval 110 4.4 Low-Cost Carriers 112 4.4.1 Business Model 113 4.4.2 Ancillary Revenues 113 4.4.3 LCC Examples 115 4.4.4 Long-Haul LCCs 116 4.4.5 LCC within Comprehensive Network Carriers 117 4.5 Hybrid Airlines 118 4.5.1 Alaska, JetBlue Airways, and Air Berlin 119 4.6 Focus Carriers and Tailored Products 120 4.6.1 All Inclusive Charter Airlines 121 4.6.2 All-Business-Class Service 121 4.6.3 Tailored Products 122 4.7 Cargo Airlines 123 4.7.1 Combination Carriers 124 4.7.2 Integrated Carriers 124 4.7.3 All-Cargo Airlines 124 4.8 Summary 125 Notes 127 References 127 Review Questions 129 x Contents 5 Flight Schedule Development and Control 130 5.1 Airline Planning Process 130 5.2 Strategic Planning 131 5.2.1 Long-Range Plan/Fleet Selection 131 5.2.2 Product Planning 132 5.3 Flight Schedule Development 133 5.3.1 Objectives 135 5.3.2 Fleet Assignment 138 5.3.3 Trade-offs 138 5.3.4 Optimization 139 5.3.5 The Passenger Service System 140 5.4 Asset Assignment 140 5.4.1 Aircraft Assignment 141 5.4.2 Aircraft Flow Chart 143 5.4.3 Crew Pairings and Bid Lines 143 5.5 Tactical Management 147 5.5.1 Airline Operations Control Center 147 5.5.2 Flight Schedule Disruptions 150 5.5.3 Managing Irregular Operations 150 5.5.4 Irregular Operations Examples 152 5.5.5 Dynamic Scheduling 154 5.6 Continuous Improvement 155 5.6.1 Goals 155 5.6.2 Measurement 156 5.6.3 Performance Diagnosis 158 5.6.4 Corrective Action 161 5.7 Summary 161 References 161 Review Questions 162 6 Economics and Finance 164 6.1 Profit History 164 6.1.1 Cyclical World Airline Profits 164 6.1.2 Net Profit Margin 165 6.1.3 Profits by World Region 166 6.1.4 Return on Invested Capital 168 6.2 Earning Profits 169 6.3 Revenue Generation 172 6.3.1 Yield History 172 6.3.2 Fare History 173 Contents xi 6.3.3 Revenue Passenger Miles 174 6.3.4 Ancillary Revenue 177 6.4 Cost Structure 182 6.4.1 Labor 183 6.4.2 Fuel 186 6.4.3 Ownership and Rental Expenses 189 6.4.4 Taxes 191 6.5 Legacy Carrier Restructuring 194 6.6 Fleet Selection 196 6.6.1 Range and Payload 197 6.6.2 Aircraft Operating Costs 198 6.7 Fleet Financing 202 6.7.1 Internal Financing 202 6.7.2 Debt Financing 203 6.7.3 Leasing 204 6.7.4 Financing Portfolio 206 6.8 Economics of Scale, Scope, and Density 206 6.8.1 Scale 206 6.8.2 Density 207 6.8.3 Scope 207 6.9 Summary 207 Note 208 References 208 Review Questions 211 7 Pricing and Revenue Management 212 7.1 Regulated Prices 212 7.2 Objective of Revenue Management 213 7.3 Revenue Management Components 214 7.3.1 Overbooking 215 7.3.2 Overselling 216 7.4 Pricing 219 7.5 Revenue Management Product Characteristics 220 7.5.1 Seat Allocation 221 7.5.2 Price Discrimination 224 7.5.3 Market Segmentation 225 7.5.4 Estimating Demand 227 7.5.5 Fare Buckets and Fare Nesting 232 7.5.6 Expected Booking Updating 234 7.5.7 Selling-Up 236 7.5.8 Revenue Enhancement with Revenue Management 236 xii Contents 7.6 Network Allocation 237 7.6.1 Hidden City Ticketing 240 7.7 Revenue Management in Air Freight 241 7.8 The Future of Revenue Management 242 7.9 Summary 242 Notes 243 References 243 Review Questions 245 8 Distribution 246 8.1 Airline Distribution History 247 8.1.1 The OAG 248 8.1.2 Payment 249 8.1.3 Ticketing 250 8.1.4 The Growth of Travel Agencies 251 8.1.5 The Reservisor 252 8.1.6 The Magnetronic Reservisor 254 8.1.7 Reserwriter 256 8.1.8 SABER 256 8.1.9 Travel Agents Get Involved 258 8.2 The Birth of the Global Distribution System 260 8.2.1 CRS Favoritism 262 8.2.2 GDS Regulation 263 8.3

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