According to the Carney (2006) transportation refers to the activity of (or the system used in) moving people or things from one place to another (p.1531). By moving people or things from place to place, transportation is a service delivery industry with an essential economic role to facilitate the meeting of remote demand for a good or service. In a business, raw materials have to be taken to the manufacturer and the finished product has to be distributed amongst its consumers this positions transportation at the center of trade and industrialization. Trade and industrialization are important to the growth of an economy and therefore governments that are serious with development will move to ensure that a country has an efficient transportation system put in place. Public transport is funded and operated by the government whereas private transport is funded and run by an individual(s) or firms known as carriers. One important mode of transportation is air transportation (Columbia Encyclopedia, 2009). Aircraft are the vehicles used in this mode of transportation.
A history of air carriers as given by Coyle et al attributes the use of airplanes for mail transport as the starting point of the airline industry (2006, p.158). From mail transport, air transportation moved to passenger, transport where the industry has all through established its dominance especially when it comes to transporting passengers over long distances in very short periods. Through the years the airline industry has offered freight transportation on specific commodities – that are termed as emergency shipments – even though it has faced a great deal of competition from surface carriers (Trani, 2005). From the first aircraft built by the Wright brothers in 1903 to the now sophisticated aircraft of today, the airline industry has made major technological advancements even though the rate of advancements has slowed down over the recent years.
An industry overview by Coyle et al describes the airline industry as labor-intensive (p.158). The overview goes on to state that, in as much as the airline industry is dependent on passenger revenue it is the preferred mode of transportation when it comes to high-value, perishable, or emergency freight (p.158). The following paragraphs discuss the impact that air carriers have had on the transportation industry and where necessary make comparisons with other modes of transport.
Air carriers can be broadly categorized into private and for-hire carriers (Coyle et al, 2006, p.158). Firms that fall in the private carrier category distinctively transport either company personnel or emergency freight (Coyle et al, 2006, p.158). A closer observation into these firms leaves us to conclude that most of them prefer transporting company personnel to emergency freight making exceptions when it is most feasible.
A glance at for-hire carriers shows that firms that fall in this category offer different types of services. The services offered by for-hire carriers can be classified into all-cargo, air taxi, commuter, charter, and international services (Coyle et al, 2006, P.159). All-cargo carriers such as FedEx and UPS airlines are primarily concerned with the transportation of cargo. Commuter carriers on the other hand step in to provide air services to low-density routes – routes that have a low demand for air service – that are usually abandoned by certified air carriers. Such low-density routes are characterized by small communities that have reduced or no air service at all and larger communities that enjoy increased and scheduled air services (Coyle et al, 2006, p.159). The commuter carriers enter into a working relationship with the certified carriers that ensure that communities affected by the abandonment continue to receive air services. The operations of commuter carriers in cases of long-distance travel at some point involve the transfer of passengers and/or re-handling of freight. Charter carriers and air taxis have no schedule or designated routes and the services they offer can be termed as supplementary to the other carriers (Coyle et al, 2006, p.159). They are commonly hired on a contract basis to transport people or freight between contract specified origins and destinations. In the US, international carriers are those that service the US as a continent, the US and other foreign countries, or the US and its territories (US Centennial of Flight Commission).
For-hire carriers in the US are also classified according to their annual operating revenues (Coyle et al, 2006, p.158). In this classification, the carriers can fall into one of three classes, which include majors, nationals, and regional. Major carriers such as American and Delta record $1 billion annual operating revenue. National carriers such as JetBlue and Frontier airlines record annual operating revenue of $100 million to $1 billion. Regional carriers like Air Midwest or PSA record annual operating revenue of less than $100 million.
Coyle et al describe air transport as a more time-sensitive mode of transport where long distances of travel are involved (p.162). Airlines face limited competition from motor and rail carriers in transiting high-valued manufactured goods and passengers. Intramodal competition between air carriers in the US is very high following the 1978 deregulation in the industry that encouraged new entrants into the market and existing carriers to expand their services (Coyle et al, 2006, p.162). Another contributing condition that encourages high intramodal competition among air carriers is excess capacity, which occurs when an airline has too many flights and seat miles on a single route (Coyle et al, 2006, p.162). When an excess capacity situation occurs, airlines move to reduce prices and fares and thus attract more customers to mitigate the negative effects it will have (Coyle et al, 2006, p.162). However, such actions are not beneficial to all because they may plunge other carriers into financial debt or even have them operating at a loss and thus financially undermining those (Coyle et al, 2006, p.162).
A spectrum of service competition in the airline industry reveals competition in the different forms of service offered, the most pronounced of these forms being in the frequency and timing of flights in a given route. Any given airline wants to ensure that there are planes available in a given route at the time of day when passengers are most likely to travel e.g. between 7.00 am and 10.00 am and /or between 4.00 pm and 6.00 pm in the case of departures. Another area where there is service competition is in the provision of passenger amenities in a flight (Coyle et al, 2006, p.163). In order for an airline to gain a competitive edge over other carriers, it has in addition to offering on-time arrival services and friendly employees stand out in offering the best passenger amenities such as gourmet meals and on-board movies. The competition also exists in the area of offering no-frills service (Coyle et al, 2006, p.163). An airline offering a no-frills service like Southwest Airlines works with low labor costs. In order to bring down labor costs it works to reduce its personnel through offering limited snacks and drinks in flights or it allows passengers to carry their own food and only restricts itself to providing one class of service in a given flight.
Cargo competition from surface carriers remains intense although air carriers have published competitive rates – (these rates are higher than those of surface carriers are). Another contributing factor to intense cargo competition is the excess capacity (Coyle et al, 2006, p.163). In an effort to eliminate working with excess capacity, most carriers turn to air cargo business further increasing competition.
According to Coyle et al, air transportation has established its dominance in the for-hire long-distance passenger market (2006, 164). Evidence to support these can be obtained from statistics in the year 2002 that show that 68.6% of the total operating revenues in the air carrier industry were from passenger service. The legacy was accrued from slightly over 600 million passenger enplanements. Still, in the same year, the revenue from freight transportation was about twelve and a half percent of the total operating revenue. Most of the freight that is delivered by air transportation is considered emergency shipments. Emergency shipments have an emergency value attached to them, this value rises if the shipment is not delivered on time and this rise is a bad indication for business. By undertaking to transport emergency shipments by air, it means that the transportation costs are almost completely outweighed by the emergency value. Emergency shipments include; mail, clothing, communication products, horticultural produce such as flowers, expensive automobiles, jewelry, and photographic equipment.
According to Coyle et al, the undisputed advantage of air transportation is speed, that is, the time taken to move from one terminal to another is low for air transportation than any other mode of transportation (2006, p.165). A shopper who chooses to employ the services of an air carrier to transport freight is at most times attracted by the speed and reliability that comes with air transport. In addition to these advantages, the reduced level of inventory and the reduced cost of carrying inventory are benefits that may further attract the shipper (p.165).
As pointed out, air transportation dominates the long-distance passenger travel market. The average length of haul in the year 2002 for air transportation of passengers was 852 miles. Even though air transportation is impossible in adverse snow or fog conditions, air carriers generally employ the services of sophisticated navigational equipment in most weather conditions to offer reliable services (Coyle et al, 2006, p.166 – 167). Variations in transit time – (time taken by an aircraft to reach its destination) – do exist but they are small and at times negligible (Coyle et al, 2006, p.167). According to Coyle et al departure time can be defined as the time an aircraft closes its doors whereas arrival time can be defined as the time the wheels of an aircraft touch the surface of the runway.
A major demerit of air carriers is poor accessibility which prolongs the time and cost of the service provided. Different aircraft models vary in passenger and freight carrying capacity, speed, fuel consumption, and operating cost per mile (Coyle et al, 2006, p.167). The figure below shows the different aircraft models and their distinct features.
Very basic to the operations of an air carrier is the air carrier terminal or airport, this is because it is at the airport that the carrier offers passenger, cargo, and aircraft services. The services include passenger loading and offloading, luggage handling, cargo shipment refueling, aircraft maintenance, etc. Governments have their role cut out in promoting and maintaining the growth and development of air transport. In order for the air transport industry to flourish, there have to be adequate airport facilities and so it is up to the government to release funds that go into the construction of these facilities (Coyle et al, 2006, p.167). The government in return imposes various taxes on both carriers and passengers such as aircraft registration and fuel taxes paid by carriers and airline ticket taxes paid by passengers. Other payments are paid by carriers’ rent, landing fees, and for the space allocated to them.
According to Coyle et al, a cost structure considering the level of fixed costs and the level of variable costs would indicate that variable costs are higher than fixed costs (p.169). The low level of fixed costs is a resultant effect of government investment and the operation of airports and airways. Souring competition in the industry has prompted carriers to cut operating costs in order to operate efficiently. More specifically, it has turned to reduce labor costs as the industry is categorized as one of the most labor-intensive industries.
In order to understand the effect of increasing fuel prices on the airline industry, let us first consider the consumption of fuel per hour by four of the most commonly used aircraft.
Table1. Showing the various aircraft models and their respective fuel consumption per hour
Using the price of fuel for the year 2002, which had, rose to $ 0.77, let us work out the fuel cost per hour.
Table 2. Showing the various aircraft models, their respective fuel consumption per hour and fuel cost per hour at a fuel price of $ 0.77
Clearly, from the above table one can tell that the airline industry is hard pressed financially by fuel prices and escalations in price of the commodity do not help but only create more problems to the already financially strained carriers (Coyle et al., 2006, p.170). Owing to this fact, most airlines have opted and invested on more fuel-efficient aircrafts to counter the effects of the fuel price increases. It has been noticed that, even though the price of fuel moved from $ 0.62 to $ 0.77 from January to December 2002, fuel consumption on the hand reduced from 2001 to 2002. This drop in fuel consumption resulted in fuel savings of up to over two billion dollars.
A Survey in 2002 estimates that 601000 people were employed by the airline industry with each earning an annual average compensation of $ 74,831.To run an airline successfully a variety of skills are required. You need pilots, copilots, and engineers to operate the plane. You need to have flight attendants to attend to the various needs of passengers on board a plane. Mechanics and ground crew personnel are also required to do maintenance works and servicing to the plane. Moreover, in order to tie together the different localities an airplane will be flying through, you need to have communication personnel. Finally, to carry out the various logistics as appertains to air travel you need office personnel and management. These imply that the airline industry is indeed labor intensive and thus justifying the trend in the airline industry of reducing or cutting on labor costs (Coyle et al, 2006, p.170). In 2002, labor costs were projected to take 65% of total operating costs.
In the airline industry, most large carriers are more suited to operate on an economy of scale basis (Coyle et al, 2006, p.171). Consider first that the closer a plane gets to full capacity the lower the seat mile costs. Secondly, a carrier cannot inventory an unused seat even if another plane in the carrier’s fleet is overbooked. Finally, consider the investment that goes in integrated communication network to carry out successfully operations such as passenger reservations. These considerations serve as strong indications of large-scale operations and as evidence of existence of an economy of scale environment for large air carriers. In the US, you would most likely find large carriers operating in between cities like New York and Los Angeles.
An economy of density occurs when a carrier’s operation is characterized by full capacity in both forward and backward haul movement (Coyle et al., 2006, p.172). An economy of scale approach to the airline industry by new comers is considered as a right strategy of entering the business (Coyle et al., 2006, p.172). Airlines that operate on an economy of density basis will abandon low demand routes because such routes are economically unviable to them.
According to Coyle et al airline passenger pricing varies according to the level of competition that exists in the industry, the time and day of return and departure, the service level and advance ticket purchase (p.173). On the other hand, the price a carrier sets on transporting freight depends on weight and volume in cubic dimensions of the freight (Coyle et al, 2006, p.173). The over dimensional charge concept in air freight pricing is at times considered to be exaggerative because it suggests high prices for goods like inflated beach balls because they take up more space.
Two measures of operating efficiency commonly used in the airline industry include the operating ratio given by:
- Operating Ratio = (Operating Expenses / Operating Income) * 100
- As well as the load factor given by
- Load Factor = (Number of passengers / Total number of seats) * 100 (Coyle et al, 2006, p.173-174).
Coyle et al goes on to explain that the operating ratio measures the portion of operating income that goes into operating expenses whereas the load factor measures the percentage of a plane’s capacity that is utilized (Coyle et al, 2006, p.173 – 174). A route that gives a low load factor implies that the demand in that route for air carrier services is low and the economic advice to the carrier is smaller aircrafts would be appropriate for that route (O’Connor, 1995). An operating ratio tending to 100 or of 100 or greater than 100 would indicate poor business and the operator would counter this by either increasing operating revenue or decreasing operating expenditure.
Owing to high publicity on matters regarding air travel safety the public has become much more aware of the safety problems that face the airline industry. The publicity is justifiable when you consider the number of people that can be affected by a single incident say a plane crash. Recently governments have moved to tighten airport security; the move however has led to delays in airports. In addition, this is justifiable when you consider incidents like the terrorist attack on the Twin Towers in New York in September 11, 2001, which saw four planes hijacked, and in its wake lots of lives were lost and thousands injured. However, air travel stands out as the safest mode of travel (Coyle et al, p.174).
In the airline industry, travel times are measured in hours, which are an indication of a very quick or fast-paced mode of transportation (Coyle et al, 2006, p.175). In order to stick to this repute carriers turn to advancements in technology to find better ways of offering improved and faster services. The advancements in technology can be in equipment or in information processing. An example of technological advancements in the area of information processing would be the Air Cargo Fast Flow Program that is an automated information-processing program. The program developed by the port of New York and New Jersey makes available a paperless system that ensures very fast custom processing of freight cargo. Another additional benefit of the program is that it offers a better way of tracking shipments and provides better communication between carriers who are working together.
References
Carney, F. (2006). Macmillan English dictionary for advanced learners. Oxford: Macmillan.
Columbia Encyclopedia. (2009). Aviation. New York: Columbia University Press
Coyle, J., Bardi, E. & Novack, R. (2006). Transportation. (6TH ed.). 2006. USA: Thomson learning.
O’Connor, W. (1995). An introduction to Airline Economics. Westport: Praeger Publishers.
Trani, A. (2005). History of air Transportation. Web.
US Centennial of Flight Commission. (n.d.) A history of commercial air freight. Web.