Theses - Daytona Beach Dissertations and Theses Spring 2001 Air Cargo as a Different Business Unit Juan M. Gomez Embry-Riddle Aeronautical University - Daytona Beach Follow this and additional works at: https://commons.erau.edu/db-theses Part of the Management and Operations Commons Scholarly Commons Citation Gomez, Juan M., "Air Cargo as a Different Business Unit" (2001). Theses - Daytona Beach. 99. https://commons.erau.edu/db-theses/99 This thesis is brought to you for free and open access by Embry-Riddle Aeronautical University – Daytona Beach at ERAU Scholarly Commons. It has been accepted for inclusion in the Theses - Daytona Beach collection by an authorized administrator of ERAU Scholarly Commons. For more information, please contact [email protected]. AIR CARGO AS A DIFFERENT BUSINESS UNIT By Juan M. Gomez A Thesis Submitted to the Business Administration Department in Partial Fulfillment of the Requirements for the Degree of Master of Business Administration in Aviation Embry Riddle Aeronautical University Daytona Beach, Florida Spring 2001 UMI Number: EP31888 INFORMATION TO USERS The quality of this reproduction is dependent upon the quality of the copy submitted. Broken or indistinct print, colored or poor quality illustrations and photographs, print bleed-through, substandard margins, and improper alignment can adversely affect reproduction. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if unauthorized copyright material had to be removed, a note will indicate the deletion. UMI® UMI Microform EP31888 Copyright 2011 by ProQuest LLC All rights reserved. This microform edition is protected against unauthorized copying under Title 17, United States Code. ProQuest LLC 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106-1346 Copyright by Juan Manuel Gomez 2001 All Rights Reserved AIR CARGO AS A DIFFERENT BUSINESS UNIT By Juan M. Gomez This proposal is prepared under the direction of the candidate's thesis committee chair, Dr. Robert McGrath, Department of Business Administration and has been approved be the members of his thesis committee. It was submitted to the Department of Business Administration and was accepted in partial fulfillment of the requirements for the degree of Master of Business Administration in Aviation. THESIS COMMITTEE: Dr. Robert Nf McGrath Chair \j/yJO Dr. Vahindran Rao Member fepartmentyChair, Business Administration in ACKNOWLEDGEMENTS I would like to thank the members of the thesis committee for their guidance, patience and support during the time this thesis was prepared. I would also like to thank particularly Dr. Saad Laraqui for his unconditional assistance, guidance and contributions to make this thesis a reality. Finally I would like to thank God, my parents and my friends who gave me the courage and strength to face this project. IV ABSTRACT Author: Juan M. Gomez Title: Air Cargo as a Different Business Unit Institution: Embry Riddle Aeronautical University Degree: Master of Business Administration in Aviation Year: 2000 By combining cargo and passenger operations under the same business, airlines are facing an operational conflict with respect to the cargo operation, which has always been perceived as a by-product and not as an essential revenue generating activity; This fact leads to poor product quality, weak revenues, and value deterioration. By dedicating time and resources to the cargo operation in a different business unit with a defined strategy, carriers may increase cargo profitability and achieve superior operational results. The purpose of this study is to identify and explain the benefits for passenger airlines to invest in air-cargo operations by defining a clear strategy and creating a separate business unit. Through developing a concept-based decision model the study explains why it makes sense to dedicate time and resources (invest) implementing a strategy for cargo operations. The outcome of this investigation will serve as a decision support tool for those airlines that are evaluating whether or not to invest in developing further their current cargo operations. TABLE OF CONTENTS ABSTRACT vi TABLE OF CONTENTS vii LIST OF FIGURES x LIST OF TABLES xi Chapter 1. INTRODUCTION 1 Statement of the Problem 2 Review of Related Literature 3 Statement of Hypothesis 21 2. ORGANIZATIONAL THEORY 22 2.1 The Value Chain Concept 23 2.2 Value Chain Analysis 25 3. AIR CARGO BUSINESS CHARACTERISTICS 29 3.1 Demand Characteristics 29 3.2 Supply Characteristics 33 4. PASSENGER BUSINESS CHARACTERISTICS 42 4.1 Major Effects of Deregulation 42 4.2 Demand Characteristics 45 4.3 Demand Segmentation 46 4.4 Supply Characteristics 49 4.5 A Strategy for the Passenger Business 49 vi 4.5.1 Cost Leadership 50 4.5.2 Differentiation 52 4.5.3 Focus 53 4.6 Major Scheduled Airlines 54 4.7 Airline Alliances 57 5. CARGO AND PASSENGER OPERATIONS 60 5.1 Advantages 60 5.2 Disadvantages 61 6. AIR CARGO IS A PROMISSING BUSINESS 64 6.1 Factors Influencing Air Cargo 64 6.2 International trade Outlook 68 6.3 Air Cargo Growth Potential 71 7. CHOOSING A STRATEGY FOR AIR CARGO 82 7.1 Three Different Alternatives 82 7.1.1 Differentiation 84 7.1.2 Cost Leadership 87 7.1.3 Leave As-Is 89 8. DECISION TREE FOR EVALUATING A STRATEGY FOR CARGO 90 8.1 First Stage 91 8.2 Second Stage 93 8.3 Third Stage 105 8.4 Fourth Stage 106 8.5 Selected Carriers Performance 110 vii 8.6 Hypothesis Confirmation 113 9. CONCLUSIONS 114 10. REFERENCES 11. APPENDIX A. GLOSSARY Vlll LIST OF FIGURES Figure 1 Three Tools of Value Management 28 Figure 2 Correlation between GDP and RTK's 29 Figure 3 Goods Shipped Preferably by Air 33 Figure 4 Distribution of Airfreight in 1995 34 Figure 5 Distribution of Airfreight in 2015 34 Figure 6 World's Jet Freighter Fleet Forecast 35 Figure 7 Major Traffic Flows between Regions -1998 40 Figure 8 International Schedule Passenger Flows by Region 56 Figure 9 Major airline alliances as of October 2000 58 Figure 10 1998 Scheduled International Passenger / Km Traffic Share of lata Members 59 Figure 11 World GDP by region 1995 - 2000 70 Figure 12 Boeing's forecast for World air cargo over the next 20 years... 71 Figure 13 Share of Processing Trade in Total Merchandise Exports of Selected Countries, 1990-99 74 Figure 14 Regional AirFreight markets - growth forecast 1994 - 2014 78. 78 Figure 15 Cargo flow according to service supplier 85 Figure 16 Importance of shipper service attributes 87 Figure 17 Decision Tree for Strategy Evaluation 90 Figure 18 First Stage 92 IX Figure 19 Second Stage 105 Figure 20 Third Stage 107 Figure 21 Decision Tree 110 X LIST OF TABLES Table 1 Wide Body Freighter Aircraft Fleet by Type 37 Table 2 Top 12 airlines in terms of cargo SFTK's (Total) 38 Table 3 Top 12 airlines in terms of cargo SFTK's (International) 38 Table 4 Top 12 airlines in terms of cargo SFTK's (Domestic) 39 Table 5 Airline Selection Factors 49 Table 6 Available Seat Kilometers in Scheduled Carriers -IATA 1999 55 Table 7 Total Available Seat Kilometers in Scheduled Carriers 55 Table 8 Passenger vs. Cargo Indirect Operating Costs 62 Table 9 Percentage of total sales forecast to be converted over the Internet in regions and selected countries by 2004 67 Table 10 World Merchandise Trade by Region 1997 -1999 69 Table 11 Total Market Region Forecasts 1999-2003 72 Table 12 Average Annual Growth Rate - Region Forecasts 1999-2003 73 Table 13 Total Market Region-Region Forecasts 1999-2003 75 Table 14 Average Annual Growth by Region 76 Table 15 Total Market Region Forecasts 1999-2003 76 Table 16 Regions with higher Growth Rates for Air Cargo than for Passenger Transportation 77 Table 17 Cargo vs. Passenger market growth by region for 2000 Through 2003 77 Table 18 1999 Air cargo growth by market 79 xi Table 19 World Scheduled Airlines Revenues and Expenses 80 Table 20 Percentage Distribution of Total Operating Revenues and Expenses 80 Table 21 Fleet Composition for Selected Airlines 96 Table 22 Stage length (in kilometers) for selected carriers 97 Table 23 Number of departures of selected airlines 98 Table 24 Ratio of International Flights for Selected Airlines 99 Table 25 Available Tonnes Kilometers for Cargo per Departure 101 Table 26 Percentage of International ATK for Cargo for Selected Airlines 102 Table 27 Cargo Load Factor for Selected Carriers 103 Table 28 Aircraft Utilization 103 Table 29 Cost Based on Capacity and Stage Length 104 Table 30 Direct Operating Costs per Cargo ATK 104 Table 31 Major Regions of Cargo Operations for Selected Carriers and their Growth Rate 107 Table 32 Selected Carriers Alliance Group 109 Table 33 Cargo Load Factors of Selected Carriers Compared Ill Table 34 Cargo Revenues per Available Tonne Kilometer 112 Table 35 Cargo Revenue per Cargo Tonne Carried 112 XI1 1. INTRODUCTION Time is money. Today's fast paced environment is changing the way businesses are being done in many industries. Technology and innovation built in today's goods is shortening product life cycles and reducing time to market periods. These circumstances require transportation alternatives able to keep up with such accelerated environment and able to provide efficient logistic management. For several firms, the logistic management is today a decisive value adding activity, which demands reliable and accurate distribution solutions. The benefits in terms of time savings and reliability that air cargo provides are invaluable for certain industries specially for those involved in producing technologic goods or perishables. According to the World Trade Organization 1999 Annual Report, two of the major contributors of international trade during that year were the information technology sector and the automobile industry.