Fluent Essays

YouTube Video Resources: The following video outlines the Dallas Fort-Worth (DFW) Airport strategic plan. In it, DFW explores how it will focus its resources on opportunity and change: https://youtu.be/pARaiPYQ0Dk In this lecture, Dr. Gui Lohmann discusses Strategic Airline and Airport Management as well as Airport Dynamic Strategic Planning: Airport dynamic strategic planning - Topic 2 7504BPS - Dr Gui Lohmann The following video demonstrates the progress that has been made in biofuels: First flight on biofuel AVIA MGMT Week 2 1. International Trade and Foreign Aviation Investment - Current Critical Issues After completing your readings for this week, review other sources to obtain data on historical international aviation events. Respond to the following prompt: Discuss two critical issues you found interesting. Present supporting documentation and analyze the issues for a proposed research topic. Post a question about your issues that you would like your classmates to respond to. Write a minimum of 250 words. You must provide citations and references to support answers. Use at least one outside reference source cited in current APA format. 2. Case Study: Trade Challenges Prepare a 2-3 page case study that summarizes the Small Island Development Trade Challenges. Research additional sources and comment on what you have found regarding the challenges presented. Conclude with your assessment of potential solutions to these challenges facing the aviation industry. Be sure to include additional research and resources to support your case study. The assignment should be written according to the writing style guide and the references should be written in current APA format. Include a title page, header, restatement of the title on the top line above the introductory paragraph, a reference page, and all in-text and reference citations. Your paper will automatically be evaluated through Turnitin.  Resources:  A slide presentation by chief economist Brian Pearce. Information includes air connectivity diagrams, measurement, means to an economic end, and transport investments: https://unctad.org/system/files/non-official-document/cimem7_2014_P8_PEARCE.pdf This paper highlights some of the key challenges in transport and trade logistics facing SIDS and identifies areas of potential action to meet these challenges, and explores potential opportunities: https://unctad.org/system/files/official-document/cimem7d8_en.pdf 3. Forecasting Flaws An Airport Master Plan can be a 5, 10, or even 20-year document developed by an airport. It is a very detailed document. Larger airports can spend several thousand dollars to have a master plan created or updated. Much of this FAA-controlled document is based on forecasting, a methodology the authors of your textbook do not believe works. If forecasting is so flawed, why does it continue to be used by major airports? Consider and debate whether or not airport planners should continue to base master plans on forecasting. Defend your response. 4. Advisory Circular Report Summary The FAA publishes Advisory Circulars (AC) which address the Airport Planning and Design process. Review the following AC which highlights the methodology planners utilize in system planning: https://www.faa.gov/documentLibrary/media/Advisory_Circular/150-5070-7-change1.pdf Summarize the two most important sections of this Circular and how it affects Master Planning. Explain how the FAA Airport System Planning Process differs from the Dynamic Strategic Planning Process. Your report should be a minimum of two pages in length (not including the reference page).  17 CRITICAL ISSUES AND PROSPECTS FOR THE GLOBAL AIRLINE INDUSTRY Peter P. Belobaba, William S. Swelbar, and Amedeo R. Odoni The global airline industry has undergone dramatic changes since airline markets were first deregulated in the United States some 40 years ago. Liberalization has become a global phenomenon, and growing competition has forced airlines around the world to search for ways to operate more efficiently. Throughout this book, which has described many characteristics, processes, and issues related to the global airline industry, it has been made clear that a multitude of stakeholders have been affected by the industrys transformation. However, this transformation is far from complete, and continues as of this writing. Among the industrys many stakeholder groups, the one clear winner has been the air travel consumer, as the real price of air travel is today, on average, significantly lower than it was decades ago, even when ancillary fees are included. While consumers have benefited from increased competition, airlines have not been able to retain with any consistency the financial benefits from the many cost and productivity efficiencies they have developed and implemented. As a result, it can be argued that the clearest losers in this transition to a more competitive global airline industry have been the shareholders of airline companies. However, shareholder fortunes have begun to turn in recent years, as the industry has become increasingly focused on earning at least its cost of capital when for decades it did not. At the same time, there is evidence that the strong linkages between economic growth and the fortunes of the airline industry have weakened. The traditional assumption has been that airline market liberalization leads to new and better air services, which lead to traffic growth, thereby resulting in economic growth, which in turn creates the need for new and better air services. It is no longer clear that these linkages are sufficient to sustain an airline industry that historically falters financially with every new economic cycle and world event. We begin this concluding chapter with a look at the major lessons provided by the evolution of the US airline market and its implications for recent developments in the global industry. The US market was the first to deregulate and remains the largest in the world. In addition, it offers an important case study as the airline industry continues its transformation from a regionally focused to a globally oriented industry. As mentioned in several previous chapters, many of the trends observed in the US airline market have already spread to Europe and Asia. In Section 17.2, we look ahead and discuss some of the critical challenges facing the Belobaba, P., Odoni, A., & Barnhart, C. (Eds.). (2015). The global airline industry. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank) href=http://ebookcentral.proquest.com target=_blank style=cursor: pointer;>http://ebookcentral.proquest.com</a> Created from erau on 2021-08-09 21:54:19. C o p yr ig h t © 2 0 1 5 . Jo h n W ile y & S o n s, I n co rp o ra te d . A ll ri g h ts r e se rv e d . global airline industry at the end of 2014. This industry has fought its way through a variety of macroeconomic challenges in the past, and is about to record its fifth consecutive year of aggregate profitability. With each new challenge, airlines have adapted their operating strategies, reduced costs, found alternative sources of revenue, and responded to new competitive forces in order to survive. Recent increases in both the level and volatility of fuel prices have provided an additional catalyst for airlines to complete the transformation envisioned by the deregulators and liberalizers of the industry decades ago. 17.1 Evolution of US and Global Airline Markets A case can be made that US airlines have lost their leadership position relative to rapidly growing global carriers based in several other regions of the world. Still, since the US airline industry was deregulated in 1978, the US market has repeatedly proven to be a template for the evolution of airline commercial and operating strategies around the world. The US industry has been an incubator for many of the most important airline developments that have now spread to the global industry. The pursuit of mergers and consolidation, the growth of low-cost carriers (LCCs), the deterioration of the linkage between economic growth and industry revenues, and the restructuring of costs and productivity are important trends that have defined the evolution of the US airline industry. More recently, the strategy of “capacity discipline” practiced by US airlines and further consolidation of the US airline industry both have contributed to substantial improvements in profitability. While the US industry was the laggard in profitability for virtually all of the first decade of the 2000s, today it is the most profitable region. Because each of these trends has spread (or could spread) to other world regions, it is important to put in perspective the influence of the US model in shaping the global airline industry. 17.1.1 Evolution of US Airline Markets After the US domestic market was deregulated in 1978, several new entrants and incumbents were forced to file for bankruptcy due to the new competitive pressures on fares and operating costs. By the mid-1980s, the first wave of airline mergers and consolidation was well under way, driven by the need to build regional dominance within US borders. Many of these transactions involved direct competitors merging with one another. This type of merger activity was historically unique to the US market, although other regions of the world have more recently seen significant movement toward consolidation. The low-cost carrier phenomenon started in the United States, but has now spread to virtually every liberalized airline market in the world. When the US industry was deregulated, only two airlines had the characteristics of what would come to be known as the “low-cost carrier model.” Southwest Airlines and Pacific Southwest Airlines (PSA) had already been operating within the borders of Texas and California, Belobaba, P., Odoni, A., & Barnhart, C. (Eds.). (2015). The global airline industry. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank) href=http://ebookcentral.proquest.com target=_blank style=cursor: pointer;>http://ebookcentral.proquest.com</a> Created from erau on 2021-08-09 21:54:19. C o p yr ig h t © 2 0 1 5 . Jo h n W ile y & S o n s, I n co rp o ra te d . A ll ri g h ts r e se rv e d . respectively, exempt from the regulations that applied only to interstate airlines. Each had developed innovative operating strategies that came to be viewed as models of what could be expected as the barriers to entry were removed for all US domestic markets. Although many new entrant airlines emerged after deregulation in the United States, most failed during the 1980s and 1990s. After 2000, the LCC sector of the US industry grew rapidly and captured significant market share as the larger, less efficient, and less nimble legacy carriers cut capacity. Due in part to the rapid growth of LCCs and the inability of legacy carriers to maintain their historical fare premium, the US industry experienced a structural revenue issue that was unprecedented. The relationship between US airline industry domestic passenger revenue and gross domestic product began to diverge in 2000, as shown in Figure 17.1. Historically, annual domestic airline passenger revenues had equaled approximately 0.70\% of GDP. By 2003, US airline passenger revenues dropped to 0.55\% of GDP, translating into a loss of nearly $20 billion in revenue for the US industry as a whole. The relationship deteriorated even further after the financial crisis and recession of 2009. By 2013, US domestic passenger revenues relative to GDP dropped to levels approximately $34 billion per year below their historical average prior to 2000. Figure 17.1 US domestic airline passenger revenues as a percentage of US GDP. (Data source: US DOT, 2014) Between 2002 and 2007, bankruptcy and related restructuring by the US carriers resulted in the elimination of nearly $20 billion in annual operating expenses, representing more than one-quarter of their non-fuel expenses, with the majority of the cuts coming from labor wages and benefits. But another macroeconomic phenomenon began to emerge in 2005. Just as the revenue environment had fundamentally changed early in the decade, the global demand for crude oil and its derivatives caused jet fuel prices to triple in less than 3 years. Belobaba, P., Odoni, A., & Barnhart, C. (Eds.). (2015). The global airline industry. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank) href=http://ebookcentral.proquest.com target=_blank style=cursor: pointer;>http://ebookcentral.proquest.com</a> Created from erau on 2021-08-09 21:54:19. C o p yr ig h t © 2 0 1 5 . Jo h n W ile y & S o n s, I n co rp o ra te d . A ll ri g h ts r e se rv e d . The surge in fuel prices to an unprecedented peak in 2008, followed by the global economic crisis and recession, led to yet another shift in US airline strategy. With all types of carriers facing uncontrollable fuel cost increases, the need to focus on increasing revenues and eliminating unprofitable capacity became both more apparent and justifiable. With the expiration of their fuel hedging strategies, even the largest LCCs were forced to increase average fares. And, a shift away from the pursuit of market share to the more effective management of airline supply and a conservative capacity growth strategy signaled a major change in the business practices of the largest US airlines. The recent profitability of the largest US airlines thus reflects the effects of a number of important industry developments since 2000. The cost and productivity improvements made by US legacy airlines made them more competitive not only with the LCCs they faced in domestic markets but also with international carriers. There is much evidence that the restructuring efforts of US legacy airlines led to substantial cost and productivity convergence with maturing LCC airlines and contributed to a slowing of their growth. Several mergers of large airlines have led to an unexpected recent consolidation of the US industry – Delta merged with Northwest, United with Continental, American with US Airways, and even LCCs Southwest and AirTran combined their forces. This unprecedented consolidation has left over 85\% of US domestic capacity in the hands of four large competitors. It has allowed the merged airlines to rationalize their networks and eliminate redundant operations, and has led to a strategy of “capacity discipline” among the major players. Under this strategy, there has been little or no growth in available capacity in US domestic markets for several years, with no major increases expected in the near future. Constrained capacity growth has allowed all of the largest competitors to simultaneously increase both their load factors and yields (average fares), a difficult to achieve combination that explains much of the recent profit performance of US airlines. As shown in Figure 17.2, after a period in the early 2000s when load factors increased at the expense of declining yields, US domestic load factors increased to over 83\% between 2009 and 2013, a 5-year period in which yields were also increasing. However, because such capacity discipline reflects an unstable equilibrium, there is always an incentive for one competitor to unilaterally expand its capacity in search of greater market share. In the US airline industry, there is thus much speculation on how long the current equilibrium can be sustained. Belobaba, P., Odoni, A., & Barnhart, C. (Eds.). (2015). The global airline industry. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank) href=http://ebookcentral.proquest.com target=_blank style=cursor: pointer;>http://ebookcentral.proquest.com</a> Created from erau on 2021-08-09 21:54:19. C o p yr ig h t © 2 0 1 5 . Jo h n W ile y & S o n s, I n co rp o ra te d . A ll ri g h ts r e se rv e d . Figure 17.2 US domestic airline load factors and yields 2000–2013. (Data source: MIT Airline Data Project, 2014) Fundamental to the evolution and lessons of the US airline industry is the sheer size of its domestic market. Despite the reductions in domestic capacity by the legacy carriers and the outsourcing of domestic flying to smaller regional carriers, US carriers still have networks that are in large part dependent on the hypercompetitive US domestic market. The more mature low-cost carriers like Southwest and JetBlue have seen their costs continue to converge with the network legacy carriers. As a result, the domestic growth opportunities for these carriers are limited. They now are turning their attention to international markets and are yielding in the domestic market to a new group of ultra-low cost carriers (ULCCs) like Spirit, Allegiant, and Frontier. Although the US airline industry was deregulated more than 30 years ago, it is still regulated in many respects. The fact that the industry is so visible and important to the economy provides motivation for legislative and regulatory bodies to continue to be involved in commercial decisions, generally in the name of protecting competition and the consumer. Airline labor relations are governed by the Railway Labor Act, the major provisions of which have remained essentially unchanged since 1934. Infrastructure constraints remain an impediment to operational efficiency, in many cases due to regulatory requirements and the inability of major stakeholders to resolve policy differences. Strategies for improving aviation infrastructure and air traffic management systems require agreement between multiple branches of government as well as labor organizations, local governments, and organizations representing environmental concerns. Despite all of the efforts of US carriers to restructure themselves in recent years, the remnants of 60 years of regulation continue to play a major role in the evolution of the US airline industry. Belobaba, P., Odoni, A., & Barnhart, C. (Eds.). (2015). The global airline industry. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank) href=http://ebookcentral.proquest.com target=_blank style=cursor: pointer;>http://ebookcentral.proquest.com</a> Created from erau on 2021-08-09 21:54:19. C o p yr ig h t © 2 0 1 5 . Jo h n W ile y & S o n s, I n co rp o ra te d . A ll ri g h ts r e se rv e d . 17.1.2 Recent Developments in Global Airline Markets As the global airline industry continues its restructuring, its financial performance has improved notably since the most recent financial crisis in 2008. In 2014, the global industry is projected to post a total net profit of $18 billion, the highest in history (IATA, 2014). However, as shown in Figure 17.3, although airlines in all world regions are expected to improve their profit performance from the preceding years, North America accounts for over half of the global net profit projection. There remain large disparities among world regions in terms of airline profits, reflecting a variety of differences in the progress of restructuring, impacts of low-fare competition, growth of emerging global carriers, and general economic conditions. Figure 17.3 Airline net profits by region 2010–2014. (Data source: IATA, 2014) While the growth of the US airlines stagnated as they focused on restructuring and then shifted to a more conservative capacity growth strategy, airlines in other regions of the world have continued to grow. Carriers in Latin America, Southeast Asia, and the Middle East are growing at aggressive rates and many question whether the explosive growth in these regions can be sustained. Passenger traffic carried by Middle East airlines is growing more than four times faster than traffic carried by North American carriers. Traffic growth in the Asia-Pacific and Latin America regions is growing at fairly aggressive rates as well. Although these regions continue to produce aggregate airline profits, profit margins are decreasing as capacity is growing faster than demand. Some of this capacity deployment by carriers from the emerging regions is strategic. The opportunity to gain access to a bilaterally restricted country can be viewed as an investment for the longer term when the emerging market creates demand attributes more akin to a mature region like Europe and North America. On the other hand, most carriers in Europe and North Asia continue to grow at lower rates, reflecting the relative maturity of their respective regional markets. Whereas Belobaba, P., Odoni, A., & Barnhart, C. (Eds.). (2015). The global airline industry. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank) href=http://ebookcentral.proquest.com target=_blank style=cursor: pointer;>http://ebookcentral.proquest.com</a> Created from erau on 2021-08-09 21:54:19. C o p yr ig h t © 2 0 1 5 . Jo h n W ile y & S o n s, I n co rp o ra te d . A ll ri g h ts r e se rv e d . just a few years ago the Asia region produced the highest profit margins, in 2014 the best performing region is North America. In fact, North America is producing margins nearly twice those of Asia. The most anemic profit performance can be found in Europe where margins are less than 2\% and still reflect a need for significant cost restructuring. China has become a growth opportunity for carriers in all regions and secondary markets in Asia have developed to the point where there is sufficient demand to justify service. Africa is presenting new growth opportunities particularly for the European airlines that can expand based on their historical presence in that region. Similar to the United States, Europe has also seen rapid growth of LCCs in new intra- Europe city pairs. Just as the LCC sector expanded aggressively at the expense of the legacy carriers in the United States, a significant low cost sector continues to grow even more rapidly in Europe. Certain low-cost carriers entered the more mature markets in Europe, while Ryanair expanded to secondary markets surrounding the largest population centers. Europe has many geographic areas left in which LCCs can expand further, such as Eastern Europe and the Mediterranean, whereas the US domestic market is mature and offers few remaining growth opportunities for the further stimulation of air travel demand. To be sure, some low-cost carriers will entertain thoughts of starting transoceanic services that will again challenge the globes legacy carrier incumbency on these routes. Like US airlines, the largest European legacy carriers have built their hubs/gateways into formidable traffic distribution networks to all world regions. Large-scale mergers have defined the largest legacy competitors, as the Lufthansa Group purchased Swiss and Austrian Airlines, and Air France and KLM have effectively merged their networks. The International Airlines Group (IAG) is now the holding company for British Airways and Iberia following their merger in 2011. It is not as if Europe has not had casualties, as the former Belgian flag carrier Sabena and perpetually troubled Greek flag carrier Olympic have ceased to exist. And, questions such as whether secondary carriers like SAS and TAP Air Portugal can survive as stand-alone entities will certainly be asked within the European marketplace. Despite 5 years of aggregate profitability, the profit margins of European legacy airlines remain very low. The largest legacy airlines, like Lufthansa and KLM/Air France, continue to struggle with high costs, low productivity, tense labor relations, and severe difficulty in competing with European LCCs whose growth has not slowed the way it has in North America. The European legacy airlines are also seeing a bigger impact from emerging global carriers that appear to be diverting long-haul international traffic from traditional European connecting hubs to their hubs in the Middle East. Emirates, Etihad, Qatar, and Turkish all have very ambitious expansion plans and strong positions for delivery of new aircraft. Strategically, their growth has already introduced new competitive pressures on carriers based in Europe, Oceania, and Belobaba, P., Odoni, A., & Barnhart, C. (Eds.). (2015). The global airline industry. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank) href=http://ebookcentral.proquest.com target=_blank style=cursor: pointer;>http://ebookcentral.proquest.com</a> Created from erau on 2021-08-09 21:54:19. C o p yr ig h t © 2 0 1 5 . Jo h n W ile y & S o n s, I n co rp o ra te d . A ll ri g h ts r e se rv e d . Asia. The aggressive capacity growth of developing hubs at Dubai, Abu Dhabi, Doha, and Istanbul with their geographically desirable global locations has shifted traffic flows connecting at traditional hubs such as Frankfurt, Paris, and London. These hubs provide new connecting opportunities for traffic flows between North and South America, on one hand, and India, Southeast Asia, Africa, and Australia on the other. The load-consolidating power of hub networks enables these Middle East airlines to provide connecting service not only to large markets such as New York–Delhi but also to smaller secondary markets such as Sao Paolo–Osaka. Furthermore, the geographic location of their growing hubs could facilitate the development of an African commercial aviation market that has until now been generally devoid of meaningful carriers of its own and has remained an extension of European carrier networks. Each of these emerging carriers is employing a different growth strategy in expanding to many of the same global origin–destination (O-D) markets, the vast majority of which involve “sixth freedom” connecting traffic (see Chapter 2). Emirates has been largely growing organically, with the exception of a recent partnership with Qantas in which the Australian carrier shifted its European gateway away from Singapore to Dubai. Etihad, based in Abu Dhabi, has chosen to take minority equity positions in at least eight carriers with the most significant stake being a 49\% investment in Italian flag carrier Alitalia. Qatar, the smallest of the four carriers, has chosen to join the oneworld alliance. And, while each of the three Middle East carriers operates wide- body aircraft largely dependent on connecting flows, Turkish has constructed a more traditional hub utilizing both narrow- and wide-body aircraft targeting its home country, Europe, and North Africa flows across its system. With few exceptions, unstable economies in South America have led to many airline casualties. Iconic names such as Varig and Aerolineas Argentinas were crushed under financial pressures and significant inefficiencies in their operations. Mexicana has been a casualty as well. However, a few airlines have emerged with different attributes that hold promise for the future in this region. LAN Airlines was the result of the consolidation of the former LAN Peru, LAN Argentina, and LAN Ecuador under the umbrella of what was previously LAN Chile. The LAN model of building its network by gaining access to the bilateral rights of failing airlines on the same continent has been very successful. This is an operating model with promise as other regions experience similar difficulties or in countries where sufficient scale and scope are not present to operate an airline under a single flag. The trend toward consolidation has also been evident in Latin America, as LAN merged with Brazils TAM to form LATAM, and TACA merged with Avianca in Colombia. COPA Holdings operates Panama City-based COPA and Colombian-based Aerorepublica. The Brazilian startup airline GOL remains the continents strongest low-cost carrier and has set its visions on developing its brand in the weaker Latin regions of Central America and Mexico. Another Brazil-based low-cost carrier, Azul, Belobaba, P., Odoni, A., & Barnhart, C. (Eds.). (2015). The global airline industry. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank) href=http://ebookcentral.proquest.com target=_blank style=cursor: pointer;>http://ebookcentral.proquest.com</a> Created from erau on 2021-08-09 21:54:19. C o p yr ig h t © 2 0 1 5 . Jo h n W ile y & S o n s, I n co rp o ra te d . A ll ri g h ts r e se rv e d . was formed in 2008 and more recently merged with TRIP, Brazils largest regional carrier. The Asia-Pacific region has seen little merger activity and instead has relied on the formation of lower cost subsidiaries or joint ventures to improve cost-efficiency and profitability. The Asian region will be among the most interesting to watch as it, too, will evolve in the face of global industry transformation. Although the economic importance of this region to the world is unquestioned, airline access to the region remains highly regulated. With the exceptions of India, Korea, Taiwan, and Singapore, along with a number of smaller countries in the region, Asia remains largely a limited- entry aviation space. China remains the market with arguably the greatest potential as the earning power of its populace, and thus the inherent demand for air travel, increases. Japan has historically provided an important gateway, as both US and Japanese carriers developed international connecting hubs for access to Asian destinations. But, can Japan support two airlines in an increasingly competitive environment? The development of new and meaningful competition in Korea already has had some effect on the Japanese carriers. As hubs and gateways continue to grow in Korea, Taiwan, and China, traffic that has been transiting Japan for access to Asia has an option to overfly Japan. Already US airlines are bypassing Tokyos Narita Airport with new long-haul aircraft. US carriers have also pressed the Japanese to allow for more services to the downtown Haneda Airport as they shift strategies on how they serve Japan. These shifts in international traffic flows in Asia are similar to those experienced as the Middle East carriers expand their networks – both developments will redefine the competitive global traffic flows that have been in place for several decades. In Oceania, the New Zealand governments policy has been more liberal than that of its Australian counterpart. Whereas the Australian economy has been strong, its flag carrier Qantas is anything but strong. The carrier struggles with a high-cost structure and is in a hypercompetitive geography with the Middle East carriers. Recently, Qantas and Emirates entered into an agreement whereby the Australian carrier would stop flying to Europe and instead funnel its European traffic through Dubai. As a condition of the deal, Qantas and British Airways were forced to end a long-standing partnership. The Australians have demonstrated some willingness to entertain new and different ownership regimes in recent years. It is Australia that could prove to be the international leader in terms of liberalized aviation policy as it looks for ways to restructure Qantas, a policy that could in turn have a great impact on global airline competition. Finally, the continent of Africa has been home to a few successful carriers as the global industry has grown. But like other regions of the world, this undeveloped region will hold promise for some, as South African Airways is doing well today and Kenya is often mentioned as the next promising African market. It will, however, take more Belobaba, P., Odoni, A., & Barnhart, C. (Eds.). (2015). The global airline industry. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank) href=http://ebookcentral.proquest.com target=_blank style=cursor: pointer;>http://ebookcentral.proquest.com</a> Created from erau on 2021-08-09 21:54:19. C o p yr ig h t © 2 0 1 5 . Jo h n W ile y & S o n s, I n co rp o ra te d . A ll ri g h ts r e se rv e d . developed economies to sustain an airline that can compete effectively with larger global airlines. They will emerge, but until they do, this region will continue to be dependent on its connections to the air transportation system via Europe, the Middle East, and Turkey. … 4. Dynamic Strategic Planning Dynamic strategic planning is the approach recommended for airport development. It recognizes the reality that the airport/aviation industry is highly uncertain; that we do not and cannot know what the future will bring. Airport planners, designers, and managers therefore need to consider many different possibilities. Dynamic strategic planning enables airport professionals to think through these contingencies. It leads to a flexible development strategy that positions airports to minimize risks, take advantage of opportunities as they arise, and thus maximize expected value. Dynamic strategic planning adapts the traditional process of master planning to the current era. Conventional master planning is now inadequate. It became the standard approach over a generation ago, when governments both strongly regulated the airport/airline industry and controlled most of the airlines of the world. In that distant past, things changed slowly: new airlines were infrequent, low-cost airlines were rare, route patterns were stable, and airports operated in a known environment. That was then. Now, the airport/airline industry is constantly changing (Chap. 1). Airport planning needs to keep up with this evolution. Dynamic strategic planning is now appropriate. The forecast is always wrong. Managers and planners must face this fundamental reality in this era of innovation and competition in the airport/airline industry. Airlines unexpectedly form alliances, merge, and change their routes and services; passengers and shippers reorient their patterns. Such variations make forecasts of levels and types of traffic unreliable. Airport professionals must assume that the future reality can easily be different from what seems most likely at present. Dynamic strategic planning leads planners to anticipate the range of possible futures and scenarios of operation—instead of merely a single forecast. It then analyzes how alternative developments would perform under the several scenarios. This information gives decision makers the reasonable basis for selecting the initial developments that lead to the preferred profile of risks and benefits. Dynamic strategic planning positions the airport to maximize its expected future performance by taking advantage of good opportunities and avoiding unnecessary developments. Overall, it builds appropriate flexibility into the design to facilitate smooth, effective transitions to new situations. Doing dynamic strategic planning is like playing chess well. One first thinks ahead many moves. Then one makes an initial move to establish a position that enables a good response to threats and opportunities that might arise. As the situation advances, one rethinks the moves and proceeds as then seems appropriate, based on the reality of what is actually happening rather than ones original speculation of what might happen. The game plan alters move by move, period by period. As applied to airports, this means that one develops facilities with the flexibility to expand or change functions as seems best, adjusting developments period by period according to how the future unfolds. Sections 4.4 and 4.5 show how to plan for uncertainty. 4.1. Planning Concepts The concept of planning needs explanation. It means different things in different contexts, to planning professionals and to airport planners in particular. Specific words and phrases, such as plan, master planning, and strategic planning, have acquired meanings that are not obvious. Persons who have not been intimately involved in these practices or are not aware of local differences may get confused. It is therefore useful to identify the meaning of the several words for planning in the context of airport systems. 4.1.1. Plans Professionals from different contexts do not share a common understanding about what the concept of planning implies. All agree that planning involves the preparation of a response to some possible future events and that a plan is a conceptual roadmap of what one could do. They disagree, however, between two contrasting perspectives: © McGraw-Hill Education. All rights reserved. Any use is subject to the Terms of Use, Privacy Notice and copyright information. https://www.accessengineeringlibrary.com/mhe-lookup/atom-id/6455a16f56ea6bf3 Is a plan a directive blueprint from top authorities that specifies what is to happen? Or, is a plan a collection of local suggestions of what airports might like to do, all of which are debatable or negotiable? In many contexts, planning is a top-down, directive activity. Elite groups, typically government officials, prepare plans for important sectors of the economy, such as airports. They then transmit these plans to subordinates for development. This process prevails not only in autocratic but also in democratic countries. In Japan, for example, the responsible national ministry systematically identified and developed a sequence of major national projects, such as the island airports of Hiroshima, Osaka/Kansai, and Nagoya/Chubu, and of regional airports for each prefecture. In the United States and some other countries, planning is a bottom-up, visionary activity. Local authorities prepare their own plans. This practice is common in countries that have strong regional governments, such as the provinces in Canada, the Länder in Germany, and the states and cities of the United States. In the United States, for example, local airports prepare lists of possible projects according to what they see as best for them, without consulting other airports and often in direct competition with them. Every 2 years the U.S. Federal Aviation Administration (FAA) collects these uncoordinated local plans and presents a revised National Plan of Integrated Airport Systems (NPIAS). This document is far from directive: Because the NPIAS is an aggregation of airport capital projects identified through the local planning process, rather than a spending plan, no attempt is made to prioritize the projects the included development or evaluate whether the benefits of a specific development project would exceed its costs. [Italics added] (U.S. Secretary of Transportation, 2010) Such bottom-up plans are in no sense guides as to what will happen, and certainly do not dictate any specific allocation of money. These wishful local plans are very different from directive national plans. Readers should keep this difference in mind whenever they read or listen to international colleagues. 4.1.2. Master Plans Master plans have a very specific meaning in the context of airport planning. As stated by the International Civil Aviation Organization (ICAO): An airport master plan presents the planners conception of the ultimate development of a specific airport. [Italics added] (ICAO, 1987, pp. 1–2) This definition is widely accepted internationally. ICAO is part of the United Nations, and representatives of the member states developed and agreed to it. A master plan focuses on an architectural/engineering development at a single airport. Note that it involves three essential notions: Ultimate vision, that is, a current view of the possible long-term future, for example 20 years ahead Development, that is, the buildings, runways, and other physical facilities—not operational concepts or management issues Specific airports, not to a regional or national aviation system The master plan is thus tightly constricted compared to national plans that governments have prepared and implemented in India, Japan, and elsewhere. Traditional practice develops airport master plans in a linear process. The ICAO, the International Air Transport Association (IATA, an airline group), and the U.S. FAA provide the most commonly used guidelines (FAA, 2004 and 2005; IATA, 2004; ICAO, 1987). They cover both master plans for individual airports, and integrated airport system planning. These several guidelines are fundamentally the same, although they differ in detail. The key elements of this process are the following: © McGraw-Hill Education. All rights reserved. Any use is subject to the Terms of Use, Privacy Notice and copyright information. Inventorying existing conditions Forecasting future traffic Determining facility requirements Developing several alternatives for comparative analysis Selecting the most acceptable alternative as the master plan This master planning process is fundamentally flawed. It assumes that planners should only consider a single forecast. This is both unrealistic and irresponsible: It is unrealistic in this era of innovation and competition. The future is full of surprises, as experienced airport professionals know well from experience. Sec. 4.3 makes this point in detail. Traffic can develop in many ways. It is irresponsible because, by focusing on the most likely or preferred forecast, it neglects risks. It does not provide appropriate insurance against them. It is as if a business based its planning on the most likely forecast that its facilities would not suffer a fire, and consequently neither provided fire suppression systems nor bought insurance. Master plans rapidly become obsolete. Airport operators frequently have to junk the ultimate, 20-year vision of the master plan after only a few years. Sometimes it is dead on arrival due to its inflexibility. Not too long ago, for example, the board of directors of one of the top airports in the United States voted to accept a master plan that had been 5 years in the making (they had to do this, so that they could legally pay the consultants). Then, as the next item of business, this same board voted a contract for a new planning process, because they already knew the approved master plan was out of date! Despite the deficiencies of these documents, airport operators will continue to have to prepare master plans. This is because the national and international funding agencies expect to see these kinds of plans. In the United States, for example, the general rule is that airports can only get funds from the federal government for projects that are in the NPIAS. Furthermore, projects only get into the NPIAS if they are included in an approved master plan. The challenge for airport planners is to improve the master planning process, so that it can deal realistically and responsibly with the future. In principle, this is not difficult, because it is easy to modify the process from a technical point of view. In practice, old habits die hard, and it may take time for standard processes to evolve. Meanwhile, forward-thinking airport operators should be able to implement better planning procedures, such as dynamic strategic planning. 4.1.3. Strategic Plans In the field of management, strategic planning refers to a disciplined process for analyzing the current situation of a business activity, and identifying the vision of how that entity should position itself regarding its customers and competitors (e.g., Porter 1985; Hax and Majluf, 1996). This process has fallen out of favor (Mintzberg, 1994; Hax, 1997). In large part, this is because corporate strategic planning in practice evolved into large, expensive, and burdensome processes. These efforts were like master planning: they tried to predict various future states and design corporate responses to these predictions. As the forecasts so often turned out to be wrong, the resulting strategic plans became obsolete, just as the airport master plans do. According to a leading proponent of strategic planning in business, The criticism of strategic planning was well deserved. Strategic planning in most companies has not contributed to strategic thinking (Porter, 1987). Yet airport managers and operators need to think strategically. They need to examine the range of future possibilities, position their organizations to respond flexibly to the events that occur, and in fact react appropriately as the future becomes clear. Sections 4.4 and 4.5 describe the suitable dynamic strategic planning in detail. Good strategic thinking for an airport must consider the context of the airport/airline industry. Events far beyond the airport boundaries affect the development and consequently the planning for airports. Decisions made in faraway airline boardrooms can drastically upset airport developments. For example, US Airways decision to consolidate its operations in Philadelphia © McGraw-Hill Education. All rights reserved. Any use is subject to the Terms of Use, Privacy Notice and copyright information. turned Pittsburghs airport into a ghost town. Traffic at this former hub dropped from 19.8 million annual passengers in 2001 to only 8.0 million in 2010. Similarly, when American Airlines bought TWA and closed its hub in St. Louis, traffic there dropped from 30.6 million annual passengers to 12.4 million in just 4 years. Likewise, the decisions by Emirates to expand aggressively, and of Dubai to provide enormous new airport facilities, are causing shifts in traffic flows affecting major European hubs. Airports must look beyond their boundaries when they do their planning. Airport planners need to take a systems view that looks at the larger airport/airline industry. 4.2. Systems Perspective We need to recognize that airports are part of a system of transportation. They do not exist just by or for themselves. We must avoid the planning box that focuses narrowly on single airports. This section considers the concept of airport systems and addresses the operational questions: Who plans the development of airport systems? Who will be planning them in the future? 4.2.1. Airport Systems An airport is part of an airport/airline system. It is not independent. Each is a part of one or more networks connecting other airports. These networks and systems can be either geographic or operational. Geographically, for example, one can think of the following: Regional networks linking smaller airports with a regional or national center, as commuter aircraft feed traffic from all over the Southeast United States into Atlanta, or Argentine airports connect with Buenos Aires Metropolitan multi-airport systems serving a single metropolitan area, as Oakland, San Jose, and San Francisco/International serve the Bay Area, and the de Gaulle and Orly airports serve Paris (see Chap. 5 for detail) National networks linking the major cities of a country, as major airlines do for large countries such as the United States, Germany, and Japan International and intercontinental networks, connecting countries with each other Alternatively, one can think of networks and airport systems defined functionally, by the type of traffic or the carrier: Integrated cargo networks, such as those constituted by major cargo integrators such as UPS or FedEx, which give traffic and meaning to airports such as Louisville, Kentucky, and Los Angeles/Ontario, which otherwise would have little to do with each other Low-cost networks, served by airlines such as Southwest in the United States, Ryanair in Europe, or AirAsia in Southeast Asia, which serve secondary airports such as Boston/Providence and Miami/Fort Lauderdale, or Frankfurt/Hahn and London/Stansted In general, an airport is part of several systems of airports simultaneously. Memphis, Tennessee, for example, is both the major hub for the FedEx system of airports and part of a regional feeder system. London/Stansted is part of both a low-cost system of airports and the London multi-airport system. As a rule, it is not possible to divide airport systems into self-contained subsystems or modules, as a car can be divided into the chassis, the engine block, and the drive train. Airport systems overlap. In practice, they do not have a precise definition in terms of the aviation and air transport network. National governments classify airports in a variety of ways. However, these categories do not necessarily define the systems meaningfully. In the United States the FAA organizes airports by the relative number of passengers: it defines a medium hub as an airport with at least 0.25 percent, but less than 1 percent of the annual passenger boardings in the United States. This definition has little consequence for planning and development. In Japan, the governmental distinguishes between international airports and others, and this label has had great financial significance. Designated international airports have © McGraw-Hill Education. All rights reserved. Any use is subject to the Terms of Use, Privacy Notice and copyright information. https://www.accessengineeringlibrary.com/mhe-lookup/atom-id/46ccf601e4f32b29 received far greater support from the central government than the others. However, a number of Japanese airports that have not been international officially, such Tokyo/Haneda, do in fact cater to international passengers and cargo. Here again, the governmental label does not identify the functional systems. The essential point of discussion is that governmental jurisdictions do not define airport systems. A single jurisdiction may include two or more reasonably distinct and competitive systems. Thus, California and Germany include systems centered, respectively, on Los Angeles and San Francisco, and on Frankfurt, Munich, and Berlin. Conversely, a single system may overlap several jurisdictions. The metropolitan multi-airport system around Boston includes airports in three states (Boston, Massachusetts; Providence, Rhode Island; and Manchester, New Hampshire). Similarly, the feeder system for Amsterdam airport in the Netherlands extends over a large part of Britain, Belgium, and Northern France. The consequence of this observation is that governments rarely can plan airport systems effectively. If the government encompasses several airport systems, it will find it politically difficult to choose among the possibilities, to pick winners among the competitive systems. This explains why the U.S. NPIAS is a nonselective assembly of proposed developments of individual airports. This documents aggregates projects from the bottom up, as indicated in the previous section. On the other hand, if the government controls only part of the airport system, it may not be able to have a decisive impact on it. 4.2.2. Planning Airport Systems In the late twentieth century, many national governments had a substantial effect on their airport systems. They were particularly able to develop regional airports. Typically, the national ministry in charge of transportation or aviation would use its resources to invest in provincial projects. Thus Australia built excellent facilities in the capital cities of each state and territory. Canada invested heavily throughout its provinces and territories, most notably constructing Montreal/Mirabel, then the airport with the largest area of property in the world. Japan endowed each prefecture with a series of remarkable airports, leveling mountains, filling in valleys, and creating airport islands at Hiroshima, Osaka, and Nagoya. Mexico built international airports at coastal resort areas throughout the country, strongly promoting the development of tourism in Cancun, Cabo San Lucas, and similar sites. The United States taxed airline tickets, placed the proceeds in the Airport and Airway Trust Fund, and used this money to improve airside facilities throughout the United States. Directive national planning of airport systems is generally obsolete, however. Most nations have judged that they can no longer afford to subsidize such programs. Indeed, many regional airport projects sponsored by national planning were plainly not economically efficient, however desirable they might have been from a political perspective. Their traffic would never have justified the investments. The development of Montreal/Mirabel airport offers a prime example: built by Transport Canada as a second airport, it never served more than a few million annual passengers. When Aéroports de Montréal took over the citys airports, it concentrated all scheduled traffic at Montreal/Trudeau, effectively closing Mirabel. Such white elephants led to a drive for economic efficiency and reduction of airport subsidies. The result has been the breakup of government-owned national airport groups into local companies and authorities, as in Australia, Canada, and Mexico. Thus, the opportunities for national planning of airport systems are largely gone. Many metropolitan authorities have also developed second airports as part of multi-airport systems. Their general practice has been to use the revenues provided by major international airports to finance these projects. Typically, these secondary facilities took a long time to build up traffic. They were often financially premature and economically inefficient, as Chap. 5 discusses in detail. Thus [1] © McGraw-Hill Education. All rights reserved. Any use is subject to the Terms of Use, Privacy Notice and copyright information. https://www.accessengineeringlibrary.com/mhe-lookup/atom-id/46ccf601e4f32b29 The Aéroports de Paris built Paris/de Gaulle to be the premier facility for France, yet this platform took a generation to overtake Paris/Orly as the busiest airport for the region. The British Airport Authority (as the government agency later replaced by the privatized BAA) built London/Stansted airport, which remained largely underutilized compared to its design for 15 years. The Port Authority of New York and New Jersey built major new facilities at New York/Newark and had a major passenger building built that remained totally unused for over a decade. The FAA built Washington/Dulles and attempted unsuccessfully to build up significant traffic for almost 20 years. Long-term subsidized investments in major facilities are likely to be rare in the privatized environment of the early twenty-first century. Airport authorities or companies that have to raise money in the private sector are replacing governmental bodies that acted as if they could afford to disregard interest payments. The British Airports Authority is now a company, BAA plc. The U.S. government transferred its responsibilities for the Washington airports to the Metropolitan Washington Airports Authority. Privatization limits the opportunities for planning and developing multi-airport systems. Privatization is leading to the end of airport systems planning as it was practiced in the twentieth century outside the United States. The national governmental bodies that could direct airport development are disappearing, and the local and regional airport authorities are increasingly required to justify projects for secondary airports to demanding private investors. What will be the airport systems planning of the future? The inevitable consequence of privatization is that private, local interests prevail. Airport planning in the future is likely to focus increasingly on the development of individual airports. Planning efforts will focus on increasing each airports competitive advantage over other airports. To the extent that a competitive market economy maximizes the public welfare, this is desirable. However, airports do suffer from congestion and create externalities. Basic economics tells us that, under these circumstances, competition is not necessarily in the overall best interests of society, of a nation or a region specifically. Airport planning in the twenty-first century is likely in practice to be narrowly defined around the development of the airport facilities under the control of a single authority or company. The focus will be on the configuration of the airfield; the set of passenger buildings; the supporting people movers, baggage, and communication systems; the complex of cargo and maintenance facilities, and the modes of access. The remainder of this chapter assumes this perspective. Airport companies might eventually evolve into large international operators of major airports. They could in this case develop strategies for developing airports as part of a coherent global system competing with other chains of airport operators. So far, however, international airport companies such as Abertis or GMR manage independent airport operations (Table 1.12). Currently, the large integrated cargo shippers such as UPS and FedEx appear to be closer to planning for their systems of cargo hubs. How this will develop is an open question. Who knows what the future will bring? 4.3. The Forecast Is Always Wrong Experience demonstrates that forecasts about airport traffic are always wrong. Comparisons between what a forecast indicated for a given period and what actually occurred almost invariably show a significant discrepancy. This is especially true when one considers forecasts over 10 to 20 years, that is, over the normal periods for the planning of major airport facilities. The differences between forecast and reality are most apparent when they concern the total level of operations. However, they are equally significant for planning purposes when they concern the composition of the traffic. For example, 10 million passengers at an origin and destination airport require quite different facilities than the same number when half of them are transfers (Chap. 14). As this section illustrates, the accuracy of forecasts of all types is low. The fact that forecasts are unreliable has crucial implications for airport planning. Responsible planners consequently must accept that they do not know what levels or types of traffic will use the facilities they design. They need to anticipate that these facilities will have to serve different loads than the ones they now think are most probable. They therefore need to make sure © McGraw-Hill Education. All rights reserved. Any use is subject to the Terms of Use, Privacy Notice and copyright information. https://www.accessengineeringlibrary.com/mhe-lookup/atom-id/6455a16f56ea6bf3#ch01table12 https://www.accessengineeringlibrary.com/mhe-lookup/atom-id/2948e6ee48d41153 that any design they propose will function well in these different conditions. In practice, they need to check the performance of their designs under different loads and, when they find deficiencies, they need to alter these designs to avoid the potential for future problems. In general terms, the fact that forecasts are unreliable means that designers need to create flexible designs that can adapt easily to the range of future conditions. The unreliability of forecasts has well documented for a long time. Ascher (1978) illustrated the phenomenon through case studies across a variety of issues. Makridakis and colleagues demonstrated the inaccuracy of all kinds of forecasts, even in the short run, through extensive analyses of all the major methods available (Makridakis and Hibon, 1979; Makridakis et al., 1984). de Neufville (1976) presents extensive evidence of the poor performance of forecasting for airport systems. The U.S. Office of Technology Assessment (1982) gave an official account of the unreliability of forecasts of airport activities in the United States. More recently, Friedman (2004) compared the divergence between forecasts and actual results for the FAA Terminal Area Forecasts. This section illustrates this evidence for the benefit of readers who cannot refer to these and other citations. Forecasts are unreliable because it is basically impossible to get good forecasts. All forecasting is based on some extrapolation of past trends into the future. However, past trends are constantly changing for economic, technological, industrial, and political reasons. The financial crisis in Asia in the 1990s, terrorism in 2001, and the worldwide recession after 2008 caused aviation traffic to subside considerably. New aircraft, larger and quieter, enable new routes, lower fares, and more traffic. Airline mergers and alliances change the services and public consumption of air travel. Political changes, such as the collapse of the Soviet Union and the dismantling of the traffic barriers between Russia, China, and the West, vastly reconfigured traffic patterns. The list of reasons why trends do not continue over a reasonable planning period is practically endless. Moreover, as Chap. 19 on forecasting indicates, even to the extent that trends do continue, the mathematical methods for determining them are too subjective to permit analysts to determine definitively what that trend might be. In short, better methods or better analysts will not make forecasts more reliable. In fact, in the increasingly deregulated world of air transport, forecasts are likely to become even more unreliable than they have been. The presentation of the track record for aviation forecasts first covers two substantive contexts: the estimation of costs and the forecasts of overall levels of traffic. It then indicates how longer planning periods and deregulation of aviation further increase the lack of reliability of forecasts. The object is to provide a sense of the large range of uncertainty that should be attached to any aviation forecast—and thus to all planning scenarios. 4.3.1. Cost Estimation Estimates of construction costs for major projects are notoriously inaccurate. Differences between estimated and actual costs of 30 percent are common on standard projects, because of surprises on site, changed orders from the architects or owner, and the whole litany of things that can go wrong. On innovative, high-technology projects, these differences can be much larger, and analysts of project costs have observed …