Week 3 - Operations Management
Week 3 AVIA MGMT
The Economy or the Environment?
Aviation is a critical part of our national economy. It provides for the movement of people and goods throughout the world, enabling our economic growth. In the last 35 years, there has been a six-fold increase in the mobility provided by the U.S. air transportation system. At the same time, there has been a 60\% improvement in aircraft fuel efficiency and a 95\% reduction in the number of people impacted by aircraft noise. Despite this progress, and despite aviation’s relatively small environmental impact in the U.S., there is a compelling and urgent need to address the environmental effects of air transportation.
Thirty years ago, the environment was a footnote in most airport master plan documents. Today, it is a major component of every plan. As an airport planner and designer, you need to know why and understand the process.
Discuss the relationship between an airport master plan and the environment. Post a persuasive argument supporting either the economy or the environment when planning an airport. Consider which is more important to an airport planner when creating a Master Plan or Dynamic Strategic Plan. Explain your position.
Wildlife and Airports
Over the past years, many aircraft accidents have been the result of wildlife accidents. Whether it is a bird strike, animals on the runway or taxiway, or other encroachments, the aircraft accident occurs. As a planner, it is most important for you to design or redesign an airport which minimizes wildlife accidents. For this assignment, watch:
Wildlife Services work at Chicago OHare
You will see one obstruction is a dump three miles east of the airport. When you design your runways in Week 8, how will this obstruction affect your runway alignment? What are your concerns with this obstruction? Cite any regulations that will affect your runways. Prepare a minimum of a 2 page paper (not including the reference page) providing a summary of the video and addressing the concerns regarding obstructions.
Exploring International Aviation Business Opportunities
Discussion: Exporting Aviation
Use
https://www.globalair.com/directories/Manufacturers-67.html
to identify an aviation component manufactured near you or identify an aviation product where you now work. Then use
https://legacy.trade.gov/Guide_To_Exporting.pdf
to complete the following three tasks.
1. Identify markets for your company’s products using Chapters 3 and 6.
2. Create an export plan by answering the eleven questions in Chapter 2.
3. Decide how to finance your export transactions using Chapter 15.
Exploring International Business Opportunities
Group Project: Strategic Initiatives for Entry into a Foreign Country
Your group will propose your aviation companys strategic initiatives for entry into a foreign country, which should be persuasive as if proposing a new business opportunity to your companys CEO and/or board of directors. Use Singapore Airlines and write an analysis of the foreign country for opportunities.
6. Aviation Environmental Impacts and Airport-Level
Mitigations
6.1. Introduction
Reducing environmental impacts while also meeting the needs of growing demand is a key challenge for the air transportation
system in the twenty-first century. Remarkable technical progress over the last several decades has made aircraft significantly
quieter, cleaner, and more fuel-efficient. However, continued growth in demand threatens to outpace future technical progress,
while political and public awareness of environmental concerns continues to increase. Many major airport developments have
been significantly delayed (or even cancelled) at great expense because of environmental issues (GAO, 2000) (see Example
6.1). It is therefore critical that airport planners, designers, operators and managers understand and mitigate environmental
impacts from aviation. To address these needs, this chapter provides an overview of the key issues, mitigation opportunities,
and the important environmental review processes that should be complied with during planning, construction, operation, and
modification of airports.
Historically, noise has been the dominant environmental concern (partly because it is directly perceived), but other issues are
becoming increasingly important, such as those shown in Fig. 6.1. Airport operations can have direct impacts on noise, air
quality, water quality, and wildlife. Climate change impacts primarily arise from operations at high altitude (due to the majority
of fuel burn occurring during flight), but airports have an important role to play in promoting mitigations in this area too.
Figure 6.1 Aviation environmental impact areas.
Example 6.1 Airport Development/Environment Interactions
At Boston/Logan, a heated controversy surrounded the construction of Runway 14/32. Some communities around the
airport opposed it because of its perceived environmental impacts, whereas proponents claimed that it would provide
environmental benefits by distributing noise more equitably among the affected communities, facilitating more overwater
approaches to the airport and reducing congestion. The runway opened in 2006, some 30 years after Massport, the
airports operator, had first proposed it.
The possibility of a fifth passenger terminal at London/Heathrow, was first discussed in the early 1980s. Additional
terminal capacity was badly needed but generated fierce opposition. Environmental impact studies, public hearings, and
lawsuits delayed the opening of Terminal 5 until 2008. A third runway to increase the capacity of London/Heathrow has
similarly been proposed for decades, but the support of successive British governments has wavered due to
environmental, societal, and other concerns. To maintain U.K. airport capacity (and hence not lose traffic and associated
economic benefits to other European countries), planners are also exploring other options, such as a new airport in the
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Thames estuary that has its own major environmental challenges.
In Asia, concern about noise impacts, coupled with often difficult terrain and high population densities, has led to the
construction (at enormous cost) of offshore airports on artificial islands at Osaka/Kansai, Nagoya/Chubu, Kitakyushu,
and Hong Kong/Chek Lap Kok (Fig. 6.2). Moreover, much of Tokyo/Haneda is built on reclaimed land in Tokyo Bay. Even
though these offshore airports mitigate some environmental concerns, they create others, such as interfering with the
marine environment.
Figure 6.2 Hong Kong/Chek Lap Kok artificial island airport. (Source: Wylkie Chan, Wikipedia.)
Given their general relevance to most airports, this chapter focuses on noise, air quality, climate change, water quality, and
wildlife impacts, as well as mitigation opportunities relevant to airports. Depending on specific circumstances, airport planners
and operators may also need to consider other areas during formal environmental review processes, such as impacts on
wetlands, coastal resources, or farmland, but these are not explored in detail in this chapter.
Managing environmental impacts from anthropogenic (i.e., generated from human activity) emissions is complex because
issues are experienced at local, regional, national, and international geographic scales and across timescales ranging from
seconds to centuries. In the case of aviation activities, takeoff noise from a single aircraft is experienced for only a short time in
a relatively small area immediately around an airport, while carbon dioxide emissions resulting from fuel burn remain in the
atmosphere for centuries and potentially cause impacts on a global scale. In addition, interactions between aviation
environmental impacts and other system performance metrics (e.g., environmental mitigations may have adverse
consequences on throughput or vice versa) and between environmental impacts themselves (e.g., mitigations that reduce
noise impacts but increase emissions) compound the challenges. The following discussions of each environmental impact
area highlight some of these tradeoffs.
6.2. Aircraft Noise
6.2.1. Background
Noise is any undesirable or unwanted sound. During the early decades of aviation, there were few aircraft movements and
hence limited aviation noise concerns. The first-generation jet aircraft in the 1950s led to a rapid expansion in commercial
aviation and their engines created significant noise. The resulting severe disruption of living patterns in nearby communities
prompted the establishment of formal and informal groups opposing airport expansion, drawing considerable media attention
and, ultimately, government intervention. To allay public concerns in the 1960s, authorities put in place airport-specific noise
limits as traffic grew at major airports such as London/Heathrow and New York/Kennedy. In the 1970s, the U.S. Federal
Aviation Administration (FAA) introduced the first noise certification standards and the International Civil Aviation Organization
(ICAO) promoted similar standards globally (Smith, 1989). Chapter 2 of ICAOs Environmental Protection/Annex 16 to the
Convention on International Civil Aviation (ICAO, 2008a) defined noise standards for aircraft certified before October 6, 1977
(with some exemptions); Chapter 3 for aircraft certified between then and December 31, 2005; and Chapter 4 for aircraft
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certified thereafter. ICAO member states adopt these standards into national legislation, for example U.S. Federal Aviation
Regulation (FAR) Part 36 Stages 2/3/4 correspond to ICAO Chapters 2/3/4. The standards outline noise limits at approach,
sideline and flyover certification points (Fig. 6.3) and cumulative across all three points. All new aircraft must meet these
certification standards in order to gain approval to operate. Sound level is measured in decibels (dB), and each new ICAO
chapter imposes increasingly stringent noise limits, resulting in a 10- to 20-dB cumulative reduction in allowable noise. These
standards have significantly driven down the noise impacts of individual aircraft of a given size over time. For example, the first-
generation Boeing 747-100/200 was introduced in 1970 under Chapter 2 rules, the Boeing 747-400 in 1989 under Chapter 3
rules, and the Boeing 747-8 under Chapter 4 rules. Each successive generation of the aircraft has been required to be
significantly quieter than its predecessors.
Figure 6.3 Aircraft noise certification points (Chapters 3 and 4).
These increasingly stringent certification standards (coupled with the other mitigations to be discussed) have dramatically
decreased the number of people exposed to significant noise levels from airport operations in the last several decades. For
example, from 1975 to 2005 there was a 95 percent reduction in the number of people in the United States living inside 55-dB
DNL contours around airports (a noise metric discussed in detail later) (NRC, 2002). However, as technology enhancements
experience diminishing returns and demand for aviation continues to grow, ICAO projects that the number of people exposed to
55-dB DNL noise will increase globally, from approximately 20 million in 2005 to 25 to 35 million in 2035 (ICAO, 2010a). As a
result, airports will need to continue to address noise impact concerns.
6.2.2. Aircraft Noise Sources
There are two general sources of noise from aircraft: the engines and the airframe, as shown in Fig. 6.4.
Figure 6.4 Primary aircraft noise sources.
Aircraft generate noise whenever there is high-speed or turbulent airflow and/or high-speed mechanical movement and
rotation. Turbofan engine noise [and noise from auxiliary power units (APUs) used to provide power when aircraft are on the
ground] comes from the flow of air through and rapid rotations of the various components of the engine fan and core elements,
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as well as the high-speed gases in the engine exhaust being expelled into the outside air. Turboprop (propeller) engine noise
also includes the turbulent air shed from each blade and the interactions between the blades. Airframe noise is caused by the
flow of air over the surfaces of the aircraft and the turbulent flows created by the structure and cavities introduced by the
deployment of high-lift devices and landing gear. See Smith (1989) for more detailed discussion of aircraft noise sources.
Engine noise tends to dominate on the ground, especially during takeoff when the engines are at very high thrust level, on
landing when using thrust reversers and when taxiing at low speed. By contrast, airframe and engine noises are about equally
important during approach and landing operations when aircraft are at low altitudes in dirty aerodynamic configuration with
high-lift devices and landing gear extended and engines at lower thrust levels than at takeoff. Another source of aircraft noise
is the sonic boom created by aircraft flying at supersonic speeds which can be very disruptive to activities on the ground. This
issue severely limited the market for supersonic commercial aircraft introduced in the 1970s. Only the Aérospatiale-BAC
Concorde found a niche market serving transatlantic routes (overland flights were banned due to the sonic boom concerns)
until its retirement in 2003 on economic grounds.
The increasingly stringent noise certification standards have spurred the development of low-noise technologies for new
aircraft. These have significantly reduced noise impacts, as illustrated in Fig. 6.5. Most reductions in aircraft noise have been
achieved through improvements in engine technology, especially the transition from turbojets to high bypass ratio turbofan
engines. The bypass ratio is the ratio between the amount of air drawn in by the fan that bypasses the engine core relative to
that passing through the core. Large modern turbofan engines have a bypass ratio of around 10:1; that is, ten times more of the
air that is ingested by the fan goes around the engine core than goes through it. This configuration achieves a given thrust level
with minimum size of core and the slower moving bypass air mixes with the high-speed core air, resulting in a significantly
lower exhaust velocity that in turn reduces exhaust noise. Although bypass ratios have generally increased over time for
modern turbofan engines, a limit is being reached which manifests as the plateauing in the noise reduction curve in Fig. 6.5.
Higher bypass ratios require larger fan diameters that increase the weight and drag of the engine and thus increase fuel burn.
This implies a tradeoff between environmental impacts of noise and climate change from fuel burn emissions discussed later
in this chapter.
Figure 6.5 Aircraft source noise reduction.
Meeting future noise targets [such as the European Commissions goal for a 65 percent reduction in perceived aircraft noise
level relative to 2000 levels by 2050 (EC, 2011) and NASAs long-term goal for a cumulative 62 dB reduction below Chapter 4
standards (NSTC, 2010)] will require new noise reduction technologies. Some candidate technologies are illustrated on the right
side of Fig. 6.5. Near-term incremental technology enhancements include engine core and nacelle chevrons (which increase the
mixing of the core and bypass air, reducing engine exhaust noise), and streamlined landing gear fairings (but these also
increase weight and hence have fuel burn impacts). In the medium-term (possibly by 2020), geared turbofans and ultrahigh
bypass ratio (UHBR, also called unducted fan) engines are being promoted for significant fuel savings, but their impact on
noise needs to be carefully monitored. Longer-term (unlikely to be available commercially until at least 2025), more integrated
airframe/engine designs afforded by blended-wing body configurations are being explored. These absorb or heavily shield
engine noise, leading to significantly lower noise impacts on the ground. Their operational usability is an area of ongoing
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research, for example regarding airport infrastructure. It is unlikely that new-generation supersonic aircraft will reenter the
commercial airline fleet in the foreseeable future, although new airframe technologies (such as low boom shaping) are being
developed, which may enable smaller supersonic business jets to become a reality in the near future.
6.2.3. Measuring Aircraft Noise and Its Impacts
Aircraft noise propagates in the form of sound waves that travel through the atmosphere. When these waves reach the human
ear, they create pressure fluctuations that are processed mentally. The wide range of pressures to which the human ear
responds and the nonlinear response to pressure levels have led to the use of a logarithmic scale for quantifying sound levels.
As previously introduced, the unit of measurement used internationally is the decibel (dB): a tenth of a bel, a unit named after
the Scottish innovator Alexander Graham Bell. A sound level of intensity, I measured in dB (L ) is defined as
(6.1)
where I is the sound intensity at the threshold of hearing for the healthy human ear, which by convention equates to 0 dB. The
range of sound levels perceptible to the human lies in a range of roughly 0 to 120 dB: those just above 0 dB are barely
perceptible by the most sensitive ears in a perfectly quiet environment, whereas those above 120 dB lie at the threshold of
causing pain and physical injury to the ear.
Common everyday events mapped to the decibel scale are illustrated in Table 6.1, along with their intensity ratios and
approximate perceived loudness ratios. The formulas for determining perceived loudness are complex and vary significantly
with sound characteristics such as frequency (Smith, 1989). As a rough rule of thumb, the human ear perceives an increase of
10 dB in sound level as approximately twice as loud. Noise events within 2 miles of a major airport when under the flight paths
from aircraft taking off and landing typically fall within the 70- to 110-dB range, depending on aircraft type, exact location, and
atmospheric conditions.
dB
LdB = 10 log10 ( )I
Iref
ref
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Table 6.1 Sound Levels and Typical Noise Events
Sound Level (dB) Relative Intensity (I/I ) Approx. Perceived Loudness Relative to 60 dB Typical Event
0 1 1/64 Threshold of hearing
10 10 1/32 Rustle of leaves
20 100 1/16 Background in recording studio
30 1,000 1/8 Quiet rural nighttime
40 10,000 1/4 Quiet suburban nighttime
50 100,000 1/2 Quiet urban nighttime
60 1 million 1 Normal speech 3 ft away
70 10 million 2 Busy office
80 100 million 4 Urban daytime
90 1,000 million 8 Truck at 100 ft
100 10,000 million 16 Power mower at 3 ft
110 100,000 million 32 Rock band
120 1 million million 64 Threshold of pain
Although the logarithmic scale for measuring the loudness of sound is technically convenient, it causes immense confusion in
informing the public about aircraft noise. When told that measurements at some location show that the noise generated on
takeoff by the average aircraft has been reduced from a typical value of 100 to 90 dB, most people will (not surprisingly)
interpret this statement to mean that aircraft noise has been reduced by 10 percent, when in fact the intensity of the sound has
dropped by 90 percent (i.e., a factor of 10) whereas the human perceives the relative loudness has dropped by approximately 50
percent.
In addition, the decibel measurement of the sound generated by an aircraft movement does not fully characterize its impact on
humans: the frequency or pitch is also important. People may perceive the loudness of two sounds with equal decibel level but
different frequencies as significantly different. Although the healthy human ear can hear sounds in the general frequency range
of 16 to 16,000 hertz (Hz), it is most sensitive to sounds in the range of 2000 to 4000 Hz. Measurements of the loudness of
sound thus typically undergo a further calibration, resulting in an A-weighted adjustment, to better reflect the human response
to noise in the different frequencies. In practical terms, this adjustment adds approximately 2 to 3 dB to sounds in the high-
sensitivity frequency range of 2000 to 4000 Hz and subtracts a few decibels from sounds outside this range. Noise
measurement devices installed around airports are designed to report A-weighted sound levels automatically. To indicate
explicitly that the decibel scale has been adjusted to account for the sensitivity characteristics of the human ear, the A-weighted
decibel units are denoted as dB(A) or dBA.
The most commonly used measures of airport noise can be subdivided into single-event metrics (associated with a single
aircraft movement) and cumulative metrics (measuring noise from many movements over a specified time period). Audible
noise generated by a single aircraft movement lasts for an amount of time T that varies from about 10 seconds to a few
minutes, depending on the location of the listener relative to the aircraft and on the type of movement (approach, departure,
overflight, surface movement, etc.). Analysts and regulators typically use three measures to describe single event noise:
ref
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L (maximum sound level) measures the peak sound level reached during T. It is simply the highest reading, in dBA,
recorded by a noise sensor during T.
SEL (sound exposure level) is a measure of the total noise impact of an event by integrating the noise impacts over time T
which is then normalized to a 1-second duration.
EPNL (effective perceived noise level) is similar to SEL but accounts for the duration and tone of an event (e.g., by assigning
additional weight to certain discrete frequency tones that are particularly irritating to the ear). It is the measurement used for
certification purposes, and its units in this case are termed EPNdB. Because of the complexity of its definition, the
generation of EPNL estimates requires sophisticated computation. As a result, airport environmental studies typically utilize
SEL to measure single-event noise, not EPNL.
Cumulative measures of noise estimate the total noise effect over multiple aircraft movements over a specified time near a
particular location. They are thus more appropriate for representing the general noise environment around an airport. Their
definitions attempt to capture the combined impact of the A-weighted loudness of the total individual noise events. Two
cumulative measures are particularly important:
L (equivalent sound level) is a time-averaged cumulative equivalent sound level whose specific parameters can be adapted
to a given situation. It measures noise exposure by computing the average dBA of noise per unit of time during the specified
period. For example, to compute L for a 2-hour period, the SEL of all the aircraft-generated noise events occurring during
that period would be added on a logarithmic scale and the resulting total would be averaged (i.e., spread equally) over 7200
seconds.
L or DNL (day–night average sound level) is a special case of L for an entire day (86,400 seconds) with a 10-dB increase
for nighttime (10:00 pm–7:00 am) noise to account for its greater impact at these times. Importantly, it is the standard
metric of the FAA for determining the noise impacts of aggregate operations around airports in the United States.
Because cumulative measures represent average noise exposure over time, they may not be able to distinguish between quite
different situations. For example, one noise event generating a painfully loud noise for a short period of time might have the
same average noise over a longer period as many events each generating moderate noise. The L value may be similar for
both cases, but most people would distinguish between them. Public hearings on airport noise often bring up this deficiency of
cumulative measures of noise.
In most cases, the main product of noise analyses is a set of noise contours. These are lines on a map defining the areas
around an airport that are estimated to be subjected to specific levels of noise after completion of the proposed project: an
example is shown in Fig. 6.6. It can be seen how noise exposure areas are impacted by arrival and departure flight patterns.
Airports often publish aggregate contours annually to show their noise performance over time. Airports often use noise
monitoring systems with sensors at strategic locations to assess their actual noise performance. Airports may also employ
web applications to allow the public to have timely access to aircraft flight track and noise impact information, which can
facilitate communication between airports and community stakeholders.
max
eq
eq
dn eq
eq
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Figure 6.6 Sample noise contours. (Source: NATS.)
Noise contours are typically drawn for DNL or L values in the range 50 to 80 dBA in appropriate increments. They can be
generated by computer models, such as the U.S. FAAs Integrated Noise Model (INM) and Noise Integrated Routing System
(NIRS), the U.K. Department for Transports Aircraft Noise Contour version 2 (ANCON-2) model, and EUROCONTROLs SysTem
for AirPort noise Exposure Studies (STAPES). For INM, trajectory information is required in the form of aircraft type, ground
track, and altitude profiles over a given time period, as well as airport characteristics such as length of runways and proportion
of time in each runway configuration. The model then uses noise-power-distance (NPD) characteristics for different aircraft to
calculate the noise contours on the ground. Users need to spend considerable effort preparing good-quality, location-specific
inputs for INM and carefully calibrate the results with appropriate field measurements. Population distributions (e.g., from
census data) can then be overlaid on the noise contours to determine how many people and properties are subject to noise of
different levels. This can then be used to determine which properties qualify for noise mitigation funds for sound-proofing or
relocation, as well as help land planners determine appropriate usage of certain areas regarding new development. For
example, approval of noise-sensitive activities (e.g., schools, hospitals, religious institutions, and residences) would generally
not be recommended in high-noise areas, but they might be acceptable for industrial and commercial purposes (employment
zones) instead.
Past airport environmental assessments in the U.S. have concentrated on the number of people living in areas that experience
noise above a certain level (e.g., DNL values of 65 dBA or higher), based on the premise that this group suffers the most and
reacts most strongly to noise. This was consistent with research conducted in 1970s relating transportation noise exposure to
annoyance level (Schultz, 1978) which became the U.S. governments preferred noise impact metric based on the
recommendations of the U.S. Federal Interagency Committee on Noise (FICON). However, more recent research (e.g., Fidell and
Silvati, 2004) suggests that the annoyance curve is shifting such that people are becoming highly annoyed at lower DNL levels
(see Fig. 6.7). For example, at the 65 dBA DNL level, the fraction of people expected to be highly annoyed has moved from 15
percent using the older data to around 25 percent using more recent studies. Although most of these studies have been
conducted in the United States and Europe, and scatter in the data is relatively high, the general trends are likely to be similar in
other world regions.
eq
[1]
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Figure 6.7 Annoyance level as a function of noise level. [Source: based on data from (Schultz, 1978;
Fidell and Silvati, 2004; Mahashabde et al., 2011).]
There are extensive studies into the behavioral and physiological impacts from short- and long-term exposure to aircraft noise.
Potential impacts include sleep disturbance; stress-related health effects such as hypertension, hormone changes, and mental
health effects (Mahashabde et al., 2011); deteriorations in work performance; and child learning disruption. Attributing impacts
to specific aircraft operational and performance parameters is challenging due to the many confounding variables such as
income and dietary habits, but research is identifying some well-defined exposure-response relationships at much lower levels
than 65 dBA DNL. The World Health Organization has recommended that a limit of an L value of approximately 50 dBA (16-
hour time base) in exterior sound levels is necessary to avoid serious annoyance (WHO, 1999). In addition to suspected human
health effects, aircraft noise also leads to monetary impacts in terms of reducing property values. This effect is commonly
captured using noise depreciation indices (NDIs) that relate the percent loss in housing stock value for each dB of aircraft
noise. Typical NDI values of 0.5 to 1.0 percent per dB of noise have been reported (Nelson, 2004), that is, a 0.5 to 1.0 percent
loss of housing value for each dB of noise. However, significant variations exist between regions and countries and careful
consideration is required in any specific analysis.
Given this information, noise levels of 55 dBA DNL and above are now becoming important for aviation impact analyses. This is
consistent with maintaining annoyance levels at no more than around 15 percent in Fig. 6.7 to account for the increasing
sensitivity to noise in recent years. This is significant because, not only are many more people then included, but also the
communities in the 55- to 65-dBA DNL exposure zone are often wealthier (compared to the higher-noise 65 dBA DNL and above
regions) and are more effective politically in objecting to airport activities.
6.2.4. Airport-Level Noise Mitigations
ICAO recommends a balanced approach to aircraft noise management (ICAO, 2007a, 2010b). This comprises the following:
1. Reductions at source
2. Land use planning and management
3. Noise abatement operational procedures
4. Operating restrictions
Noise charges are a complementary mitigation mechanism and each of these elements is examined in turn.
6.2.5. Reductions at Source
eq
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Reductions at source decrease the amount of noise being generated by the aircraft. They comprise the engine and airframe
modifications and technology improvements previously described. Airframe and engine manufacturers are developing and
implementing these improvements in response to the certification environment and airline customer requirements. The main
impact for airport planners and operators is to ensure compatibility of airport infrastructure to any new airframe and engine
configurations introduced in response to source noise reduction efforts. For example, future alternatives such as blended wing
bodies would have to overcome significant barriers from an airport operating perspective.
6.2.6. Land Use Planning and Management
Land use planning and management policies should minimize the impact of any noise that is generated. They include
appropriate zoning, building codes, and mandated noise disclosures in real estate transactions set by the local authorities of
residential, municipal, and commercial areas around airports given the noise environment. The airport authority does not
directly control these policies but needs to interact with local authorities to ensure effective implementation. In addition, the
airport is sometimes required to provide sound insulation upgrades to certain properties within the highest noise contours (e.g.,
as described under FAR Part 150 Airport Noise Compatibility Planning Program in the United States).
6.2.7. Noise Abatement Operational Procedures
Airports can promote runway, taxiway, and airspace designs and associated …
2
THE INTERNATIONAL INSTITUTIONAL AND
REGULATORY ENVIRONMENT
Amedeo R. Odoni
2.1 Introduction
Very few global industries are as deeply affected by changes in the international and
domestic regulatory environment as the airline industry. The worlds airlines have
experienced dramatic regulatory changes over the past half-century and today are
subject to a wide variety of rules and regulations in different parts of the world. To
complicate things further, a large number of organizations, agencies, and associations
– international and national, governmental and nongovernmental – play important
regulatory, oversight, or advocacy roles on critical issues affecting air transport, such
as safety, economics, security, and even national defense. In this light, the objective
of this chapter is to present a summary of the regulatory and institutional context
within which air transport operates – and thus provide adequate background for
several chapters in this book that require an understanding of this context. The
presentation is in laymans terms and omits many of the (often important) distinctions
and details that pervade the highly specialized area of air transport regulation and
law.1
Section 2.2 provides a brief account of the contributions of the Chicago Convention
that laid the foundation for todays global air transport system. It also describes the
nine “Freedoms of the Air,” which are used in international bilateral and multilateral
agreements to specify the rights of access to international and domestic air travel
markets. Section 2.3 is concerned with the regulation of airline markets. It describes
briefly the movement toward airline privatization, which has become dominant in most
parts of the world, as well as the deregulation of the US domestic market after 1978.
It then reviews the evolution of international aviation agreements with respect to
access to markets, airline designation, capacity offered, and the setting of airfares.
The fundamental provisions contained in the three main categories of existing bilateral
and multilateral agreements are outlined and several examples of the continuing
movement toward a “liberalized” international environment are provided.
Section 2.4 focuses on airports and discusses two important relevant developments:
the trend toward airport privatization and issues that arise as a result; and the
emergence of airport capacity constraints and attendant allocation procedures as a
significant restraint on competition in international air transportation markets. Section
2.5 summarizes the more limited movement toward the “corporatization” or
“commercialization” of the provision of air traffic management (or “air navigation”)
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 2021-08-18 07:58:39.
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services. Section 2.6 presents brief descriptions of several important international and
national organizations and agencies in the air transport sector, outlining the role and
some of the characteristics of each. Finally, Section 2.7 contains some general
conclusions.
2.2 Background on the International Regulatory
Environment
This section provides background for the remainder of this chapter. To understand
why the regulations that govern international air transport exhibit such major
differences from country to country, it is necessary to have a historical perspective on
the framework within which these regulations have been established. The “Chicago
Convention,” whose main contributions are summarized in Section 2.2.1, developed
the core elements of this framework. The resulting regulations and international
agreements make constant reference to the “Freedoms of the Air,” which are
described in Section 2.2.2.
2.2.1 The Chicago Convention
In 1944, shortly before the end of the Second World War, representatives of 54
States2 attended the International Convention on Civil Aviation, a conference on the
future of international air transport that took place in Chicago. This conference – and
the international treaty that was signed as a result – became known as the “Chicago
Convention.” The treaty marks a critical milestone in the history of aviation, as it laid
the foundation for todays global air transportation system. The Convention made
several fundamental contributions to the conduct of domestic and, especially,
international civil aviation that underpinned the industrys dramatic growth over time.
First, at a general level, the Convention confirmed the emerging realization that civilian
air transportation was an activity of potentially enormous global importance, deserving
to be nurtured and promoted through a set of internationally accepted rules for the
rights of access to markets. In trying to define these rules, the Convention, for the
first time in the history of aviation, had to confront seriously the choice between a
“liberal” and a “protectionist” regulatory environment for international services. This
fundamental choice has been at the center of much controversy ever since. The
United States advocated at the time a liberal competitive environment that would
place few restrictions on access to the worlds air transportation markets and permit
open competition among airlines, including the right to set market-driven flight
frequencies and airfares. However, most other States, led by the United Kingdom,
advocated a much more restrictive system for reasons of national security and of
preserving airspace sovereignty, as well as of facilitating the growth of the then-
nascent airline industry. An apparent underlying concern of this group was that a
liberal competitive environment might lead to dominance by US airlines, which were
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believed to be much stronger, financially and in many other respects, than the airlines
of other nations at the time. Using the threat of refusing landing rights as their
bargaining tool, the protectionist group largely prevailed.
Rather than establish a universal set of rules, the Convention thus decided to simply
create a framework within which such rules could be established for regulating air
transport services on a bilateral basis, that is, between pairs of States. As a result,
bilateral air service agreements (ASAs) between States emerged as the instrument
for initiating or modifying international transportation services and for regulating these
services. The initial “model” for such agreements was developed only 2 years later,
through the 1946 “Bermuda I” agreement, which established the ground rules for US–
UK air services. Bilateral ASAs continue to be prevalent today, but multilateral ASAs
have also become increasingly common and important in recent years. The key
provisions of the principal types of such agreements will be discussed in Section 2.3.
In another fundamental contribution, the Convention recognized the critical need for
international commonality in airport and air traffic control facilities, equipment, and
procedures to ensure the safety and operability of aircraft across national
boundaries. It recommended the establishment of a permanent international body
charged with coordinating the rules guiding air transport operations around the world,
developing international standards for aviation facilities and equipment, and
overseeing adherence to these rules. This body became a reality in 1947 in the form
of the International Civil Aviation Organization (ICAO), headquartered in Montreal
(Section 2.6).
2.2.2 Freedoms of the Air
The Chicago Convention also originated the concept of the so-called Freedoms of the
Air. The Convention specified only the first five of the nine freedoms described below.
The remaining four were subsequently defined informally over time, in response to the
development of additional types of international aviation services. The freedoms refer
to the rights that an airline of any State may enjoy with respect to another State or
States (e.g., “the bilateral agreement between States A and B includes Fifth Freedom
rights for carriers of State A”).
Consider then a commercial carrier X whose Home State is A:
The First Freedom refers to the right of carrier X to fly over another State B
without landing.
The Second Freedom refers to the right of carrier X to land in another State B for
technical (e.g., maintenance or refueling) or other reasons, without picking up or
setting down any revenue traffic.
First and Second Freedom rights are granted essentially automatically in all but
exceptional cases: they are exchanged among States under the so-called
International Air Service Transit Agreement. Any exceptions are typically due to
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reasons of national security and are applied in a selective way by individual States –
for example, a particular State may bar the airlines of one or more specified States
from flying in its airspace.
The remaining freedoms refer to commercial rights and are best understood in the
context of an ASA between two States A and B.
The Third Freedom (Figure 2.1a) refers to the right of carrier X to enplane
revenue traffic from its Home State A for transport to an airport of State B.
The Fourth Freedom (Figure 2.1b) refers to the right of carrier X to enplane
revenue traffic at an airport of the agreement partner, State B, for transport to its
Home State A.
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Figure 2.1 The Nine Freedoms of the Air. In all cases, the “Home” State of
the carrier involved is State A. (a) Third Freedom flight. (b) Fourth Freedom
flight. (c) Fifth Freedom: the flight in each direction is a continuing one (A-to-
B-to-C and C-to-B-to-A); in picking up passengers at B to carry on to C (and
vice versa), the carrier of State A exercises Fifth Freedom rights. (d) Sixth
Freedom: the carrier of State A uses different flights to carry traffic from B
to A and then from A to C (and vice versa). (e) Seventh Freedom: the flight of
the carrier of State A carries traffic between two other States B and C; the
flights do not originate from or terminate in A. (f) Eighth Freedom: on the
continuing leg of the flight from an airport of State A (own State) to an
airport of State B, domestic traffic of State B is carried between two airports
of State B, and vice versa on the return flight. (g) Ninth Freedom: a carrier of
State A transports purely domestic traffic within State B without restrictions
Third and Fourth Freedom rights are fundamental to any bilateral ASA. The Fifth and
Sixth Freedoms involve third States, in addition to A and B.
The Fifth Freedom (Figure 2.1c) refers to the right of carrier X to enplane revenue
traffic at an airport of the agreement partner, State B, for transport to a third
State C, and vice versa, as part of the continuation of a service (flight) originating
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or terminating in its Home State A.
As an example, consider a flight by US carrier Delta Air Lines from New York to
Paris, continuing to Mumbai. Fifth Freedom rights would make it possible for Delta to
transport passengers from Paris to Mumbai on this flight and vice versa. Note that,
although Fifth Freedom rights are agreed to between pairs of States (A and B in
Figure 2.1c), it is necessary to also obtain the agreement of a third State (C) in order
to implement such service.
The Sixth Freedom (Figure 2.1d) refers to the right of carrier X (with Home State
A) to use separate sets of Third and Fourth Freedom rights with two other States
(B and C in Figure 2.1d) in order to transport revenue traffic between these two
other States (B and C) using an airport in A as a connection point.
Sixth Freedom rights are a natural consequence of Third and Fourth Freedom rights
and provide the basis for many international “hubbing” operations. Lufthansa, for
example, can pick up passengers in Cairo, Egypt, fly them to Frankfurt, Germany,
and transfer them to a Lufthansa flight to Boston, USA. Note that, once Third and
Fourth Freedom rights are in place between States A and B and between States A
and C, it becomes very difficult, in practice, for States B and/or C to curtail “Sixth
Freedom traffic,” should they ever wish to do so. In the example, Lufthansa could
easily circumvent any restrictions that Egypt and/or the United States might try to
impose on flying passengers between their two countries via Frankfurt, for example,
by issuing separate sets of tickets for the two segments of the trip. Sixth Freedom
rights are therefore typically taken for granted and are rarely mentioned or specified
explicitly in an ASA.
Finally, the Seventh, Eighth, and Ninth Freedoms are more “advanced” in that they
greatly diminish the importance of the concept of the “Home State” of an airline.
The Seventh Freedom (Figure 2.1e) refers to the right of carrier X of State A to
transport revenue traffic between a pair of airports in States B and C on a service
that operates entirely outside State A.
Note that the Home State A does not figure at all in the service provided. For
example, Air Canada could serve the Los Angeles–Mexico City market, without the
flights having to originate or terminate in Canada.
The Eighth and Ninth Freedoms involve “cabotage,” that is, the transport of domestic
revenue traffic within a State other than a carriers Home State.
The Eighth Freedom (Figure 2.1f) refers to the right of carrier X of State A to
carry domestic revenue traffic between two points within State B on a service
originating or terminating in State A.
The Ninth Freedom (Figure 2.1g) is the same as the Eighth, but with no
requirement that the flight of carrier X originate or terminate in Xs Home State A.
Eighth Freedom rights would allow a Toronto–Chicago–Los Angeles flight of Air
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Canada to pick up Los Angeles-bound passengers in Chicago, while the Ninth
Freedom would allow Air Canada to serve the Chicago–Los Angeles domestic market
with flights originating from Chicago or from Los Angeles, or from any other point in
the United States, for that matter.
Thus, the Ninth Freedom removes all restrictions on cabotage. The Eighth Freedom is
sometimes referred to as “consecutive” or “fill-up” cabotage, while the Ninth Freedom
as “full” or “pure” cabotage.3
2.3 Airline Privatization and International Economic
Regulation
This section is concerned with the ownership of airlines and with their rights of access
to international markets. It first discusses briefly (Section 2.3.1) the relatively recent
international movement toward airline privatization. It then identifies the three principal
types of air service agreements currently in existence and describes their main
characteristics with respect to four principal attributes: access to markets, airline
designation, capacity offered, and the setting of airfares (Sections 2.3.2–2.3.4).
2.3.1 Airline Privatization
As recently as the early 1980s, the great majority of the worlds major airlines were
government-owned – with the notable exception of those in the United States.
Perhaps the most important of the many reasons for this state of affairs was the
perception of the airline industry as a nascent one, too fragile to be exposed to the
rigors of competition.4 Government-owned, and often government-subsidized, “flag
carriers” were deemed to be the best way to sustain the growth of the industry to
economic maturity. The flag carriers operated mostly as monopolists in domestic
markets and in a protectionist environment on their international routes (Section
2.3.3). Even in the United States, where government-owned airlines did not exist, the
airline industry was tightly regulated until 1978, to prevent “excessive” competition
(Section 2.3.2). In addition, and even in some of the wealthiest countries in the world,
the private sector was generally reluctant to assume the financial cost and economic
risk associated with starting and operating an airline. Other contributing factors were
the popularity with the general public of the notion of the “national flag” carrier, the
potential role of such carriers at times of national emergency, and the use of coveted
jobs at many of these national carriers as an instrument of political patronage.
All this changed dramatically, when the industry began reaching economic maturity,
first in the United States and then in much of the rest of the world. In economically
developed countries, very few airlines currently remain fully in government hands5 and
more and more private airlines are emerging in the less developed parts of the world.
There has also been a veritable explosion in the number of private, low-cost carriers
(LCCs) – “no frill” airlines that emphasize low fares to attract passengers. However,
Belobaba, P., Odoni, A., & Barnhart, C. (Eds.). (2015). The global airline industry. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank)
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the remaining (primarily or fully) government-owned flag carriers continue to compete
with privatized carriers in many markets and regions. In such cases, the burden of
“leveling the playing field” and ensuring a fair competitive environment for all market
participants necessarily falls on regulatory authorities. The European Commission, for
example, has had to address several contentious cases since the mid-1990s involving
such flag carriers as Sabena (Belgium), Air France, Alitalia, and Olympic Airways
(Greece), all of which were accused at some point of receiving overt or covert
subsidies from their national governments or of being treated preferentially by these
governments.
From a long-term perspective, the complete or partial privatization of many
government-owned airlines since the mid-1980s has been one of the most important
transformations that the industry has undergone in its history. In light of the steadily
increasing “liberalization” of the international economic regulatory environment
(Sections 2.3.2 and 2.3.3), the global trend toward airline privatization would seem to
be irreversible for the foreseeable future.
2.3.2 Types and Critical Aspects of Air Service Agreements
As noted earlier, the Chicago Convention established a framework for regulating
international air transportation services on the basis of air service agreements. All
bilateral and multilateral ASAs make reference to four critical aspects of the services
to be provided:
a. Market access: the potential city-pairs to be served between the States involved
in the ASA, as well as any Freedoms beyond the Third and Fourth, which may be
granted under the ASA.
b. Airline designation: the number and/or the attributes of the airlines6 from each of
the States that have the right to provide service in each city-pair included in the
agreement.
c. Capacity: the frequency of flights and the number of seats that can be offered on
each city-pair.
d. Airfares (tariffs): the manner in which passenger fares and/or cargo rates to be
charged are determined and any steps necessary for government approval of
these fares.
Depending on how it deals with each one of the above four aspects, an ASA can be
classified into one of the following three categories (Doganis, 2001):
1. Traditional: the earliest example is the 1946 “Bermuda I” agreement between the
United States and the United Kingdom; more “liberal” examples of traditional ASAs
emerged subsequently starting with the 1973 “Bermuda II” agreement between
the United States and the United Kingdom.
2. Open market: the earliest examples are the ASAs between the United States and
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The Netherlands, the United States and Singapore, and the United Kingdom and
The Netherlands, all signed in 1978–1979.
3. Open skies: the earliest examples are the ASAs between the United States and
The Netherlands, the United States and Singapore, and New Zealand and Chile in
1992.
Agreements of all three types are still being signed today. Many countries outside
North America and Western Europe continue to enter into bilateral ASAs of the
traditional type. In fact, the majority of ASAs currently in force around the world are
of the traditional type – although these are no longer the most important in terms of
impact, as measured by the number of passengers affected and the economic
significance of the markets involved.
In addition to the air service agreements mentioned above, there are several other
landmarks in the regulatory history of the airline industry. By far the most important
before the 1990s was the deregulation of the US domestic market. Under the Airline
Deregulation Act that went into effect in 1978, US airlines (only) have complete
freedom to enter or exit any US domestic market. Each airline can also determine for
itself the frequency of flights and the number of seats it offers in any market, the
airfares it charges, and the number of seats it allocates to each airfare class on each
flight. The role of the federal government – the US Department of Justice (DOJ), the
US Department of Transportation (DOT), and the Federal Aviation Administration
(FAA) – is limited to monitoring and policing the air transportation system in such
matters as potential predatory or monopolistic pricing (DOJ and DOT), potential
collusion in setting airfares (DOJ), compliance with fair competitive practices in
advertising or in listing flights on computer reservations systems (DOT), and
compliance with safety and security regulations (FAA and, since 2001, the
Transportation Security Administration (TSA)).
Other landmarks in international airline regulation, to be described in Section 2.3.4,
include the three-stage “liberalization” of the European Union market (1988–1993),
the Asia-Pacific Economic Community (APEC) multilateral ASA (2001), and the open
skies agreement between the European Union, as a whole, and the United States
(2007).
2.3.3 Typical Content of Bilateral and Multilateral ASAs
The typical content of each of the three ASA categories (traditional, open market, and
open skies) can now be summarized. The reader is warned, however, that significant
variations may exist among agreements within each of the three classes. The
discussion is structured with reference to each of the four main characteristics of
ASAs (market access, airline designation, capacity, and airfares) identified in Section
2.3.2.
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Market Access
Under traditional agreements, which are always bilateral, access is permitted to only
a limited number of specified city-pair markets. Moreover, the number of airlines that
may operate on these markets is specified in the ASA. In practically every case, no
Fifth Freedom rights are granted. Rights for charter flights between airports in the
two States are typically granted only on a flight-by-flight basis – there is no general
provision for charter flights.
Under open market agreements, access is generally open to all potential city-pairs in
the two signatory countries. However, bilateral open market agreements signed by
the United States have restricted access by foreign airlines to only a limited number
of US airports, specified in the agreement, while US airlines have been granted
unlimited access to all (qualified) airports in the other signatory country.7 Open
market agreements usually provide unlimited rights for charter flights from each side,
as well as offer Fifth Freedom rights to/from a specified set of third-party countries.
Under open skies agreements, access to city-pairs is unlimited at both ends. So are
Fifth Freedom rights (subject to concurrence from third-party countries) and the right
to organize and operate charter flights. Eighth or Ninth Freedom rights are not
included, while limited Seventh Freedom rights have recently become part of some
multilateral open skies agreements. For example, the APEC agreement of 20018
(Section 2.3.4) includes Seventh Freedom rights for all-cargo flights only.
Airline Designation
Under traditional agreements, each country may typically designate only one of its
airlines for the right to operate flights between any specific pair of cities. Double
designation may be allowed for major markets with high volumes of demand, for
example, New York–London, under more “liberal” ASAs such as Bermuda II. Under
open market and open skies agreements, multiple designations are permitted – and
indeed are the rule, when feasible.
…
3
OVERVIEW OF AIRLINE ECONOMICS, MARKETS AND
DEMAND
Peter P. Belobaba
The provision of air transportation service is driven primarily by the demand for air
travel, as well as the demand for the shipment of goods by air. Virtually all of the
interrelated decisions of the many stakeholders in the airline industry stem from the
need to accommodate the historically growing demand for air transportation. And,
many of the activities of governments, airlines, airports, and aircraft manufacturers
are determined by the interaction of supply and demand in a variety of different
markets associated with the airline industry. This chapter provides a foundation for
the discussion of the many facets of the airline industry addressed in the remainder of
this book by introducing some basic airline terminology and definitions, along with the
concepts of air transportation markets and the demand for air travel.
3.1 Airline Terminology and Definitions
In the airline industry, there exist standard measures of passenger traffic and airline
output, which are also combined to generate several common measures of airline
performance. As we shall see later in this section, some of these performance
measures are not particularly useful on their own, and in fact are often misinterpreted.
At this point, we introduce the measures and their definitions.
Airline Traffic and Revenue
Measures of “airline traffic” quantify the amount of airline output that is actually
consumed or sold. Traffic carried by airlines consists of both passengers and cargo,
which can include air freight, mail, and passenger baggage. All-cargo airlines
transport primarily air freight, whereas passenger or “combination” airlines transport a
mix of traffic that can include all four types of traffic mentioned. Combination carriers
can operate a mix of all-cargo (freighter) and passenger aircraft, but even the
passenger aircraft can carry one or more types of cargo in their belly compartments.
In the following paragraphs, the definitions and examples focus on passenger airlines,
although there is a parallel terminology for cargo airlines.
For passenger airlines, “traffic” refers to passengers carried or enplaned passengers,
as opposed to “demand,” which includes both those who boarded the flight(s) and
those who had a desire to travel but could not be accommodated due to insufficient
capacity. Thus, at a given price level (or set of prices), there exists a total potential
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demand for air transportation between cities. Given a limited total capacity (available
seats) offered by airlines, this potential total demand includes both passengers
carried (traffic) and passengers unable to find seats, also known as “rejected
demand” or “spill.”
Passenger airline traffic can be measured in terms of the number of passengers
transported, but the most common measure of airline traffic is a revenue passenger
kilometer (RPK) or, alternatively, a revenue passenger mile (RPM). In the following
examples, we use kilometers. One RPK is defined as one paying passenger
transported 1 km. For example, a flight carrying 140 passengers over a distance of
1000 km generates 140 000 RPK of airline traffic.
The fare paid by passengers to travel by air varies by distance, season, and
conditions and characteristics of the fare product purchased (e.g., business class or
advance purchase excursion fares). Yield is a measure of the average fare paid by all
passengers per kilometer (or mile) flown, in a market, on a set of routes, or a region
of operation for an airline. Yield is calculated by dividing the total passenger revenues
collected by the RPK carried. In our example, if the flight that carried 140 000 RPK
generates $16 000 of total passenger revenue, its yield would be $0.114 per RPK
(i.e., $16 000/140 000).
Airline Output and Operating Expense
As we shall see later in this book, the output of a passenger airline can be
represented in a variety of ways, including the number of flight departures operated
and number of seats flown. Similar to RPKs, the most common measure of airline
output is an available seat kilometer (ASK) or available seat mile (ASM). One ASK is
defined as one available seat flown 1 km. In our example, if the flight operates over a
distance of 1000 km with a 200-seat aircraft, it generates 200 000 ASK of airline
output.
In generating its output, the airline incurs a variety of operating expenses, as will be
detailed in Chapter 6. The average operating expense per unit of output (ASK) is the
unit cost of the airline, an important measure of cost efficiency, which can be
compared both over time and across airlines. Unit cost is defined as the total
operating expense divided by the ASK produced by an airline, for a route, region, or
total network. If the airline incurs $15 000 of expense to operate our example flight,
the unit cost for this flight would be $0.075 per ASK (i.e., $15 000/200 000).
Load Factor
Load factor refers to the ratio of traffic to airline output, representing the proportion
of airline output that is sold or consumed. For a single flight leg (i.e., a nonstop
operation), its load factor can simply be defined as number of passengers divided by
Belobaba, P., Odoni, A., & Barnhart, C. (Eds.). (2015). The global airline industry. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank)
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the number of seats on the flight. For our example flight, the load factor can be
calculated as passengers carried divided by available seats, or 70\% (140/200).
Because most airlines operate many flights, each with different distances flown, the
proportion of output consumed is better represented by an average load factor,
defined as the ratio of RPK to ASK (or RPM/ASM). Our example flights load factor
can thus also be calculated as 140 000 RPK divided by 200 000 ASK, or 70\%.
Now, assume that the same airline operates another flight leg using the same 200-
seat aircraft over a distance of 2000 km, and this second flight carries 170
passengers. The load factor of this second flight leg is
What is the total average load factor of this small “network” of two flights? There are
two different (and correct) answers:
The average leg load factor is the simple mean of the load factors of the two flight
legs:
The average network or system load factor is the ratio of total RPK to ASK, as
defined earlier:
Both measures of load factor are correct, but are used in different ways. The
average leg load factor is more appropriate for analysis of demand to capacity or
passenger service levels on a series of flight leg departures (on a particular route
over a month, for example). The average network load factor is the more common
measure and is used in most financial and traffic reports of system-wide airline
Belobaba, P., Odoni, A., & Barnhart, C. (Eds.). (2015). The global airline industry. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank)
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(3.1)
performance.
These five measures – traffic (RPK), yield, capacity (ASK), unit cost, and load factor
– are the most common measures of passenger airline performance and will be
referred to throughout the rest of this book. Of course, there are numerous other
measures of cost efficiency, productivity, and financial performance, which will be
introduced in the relevant chapters. And, although we have defined these measures
for a passenger airline, there are parallel and very similar measures that apply to
cargo air transportation. For example, cargo traffic carried is measured in revenue
tonne kilometers (RTK) or (revenue ton miles (RTM), meaning 1 t of cargo
transported 1 km. Cargo airlines provide output in available tonne kilometers (ATK),
and make use of both yield and unit cost measures in analyzing their performance.
3.1.1 Basic Airline Profit Equation
As for any industry, operating profit for an airline is defined as total revenues minus
total operating expense. For passenger airlines, the revenue and expense terms can
be broken down into the measures of output and sales defined above, as follows:
This basic airline profit equation illustrates how the use of any of the individual terms
defined above to measure airline performance can be misleading. For example, high
yield is often (incorrectly) used as an indicator of airline success and even profitability.
A high yield is clearly not desirable if only a few passengers pay a very high fare and
leave a large proportion of seats unused, resulting in a low average load factor (ALF)
and total revenues that do not cover total operating expenses. As a general rule, yield
is a poor indicator of airline profitability by itself.
Low unit costs are also often mentioned as a measure of airline success. Although
low costs of production provide a competitive advantage in any industry, low unit
costs alone are of little value to an airline if yields and/or load factors are low, with
total revenues falling short of covering total operating expenses. Even ALF on its own
tells us little about profitability, as high ALF could be the result of selling a large
proportion of seats at extremely low fares (yields). A high ALF does not guarantee
operating profit, as many high-cost airlines have realized in the recent past.
Given this basic profit equation, the obvious airline profit maximizing strategy is to
increase revenues and/or decrease costs. However, there exist important interactions
among the terms in the equation, so that no single term can be varied without
affecting other terms and, in turn, overall operating profit. For example, a strategy
Belobaba, P., Odoni, A., & Barnhart, C. (Eds.). (2015). The global airline industry. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank)
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designed to increase revenues requires the airline to increase its traffic carried (RPK)
and/or increase its average fares charged (yield). Either tactic can have unintended
and potentially negative impacts on other terms in the airline profit equation, as
explained below.
In order to increase traffic, an airline may decide to cut fares (average yields) to
stimulate demand, but the revenue impact of such a price cut depends on the
elasticity of demand for air travel. For revenues to increase, the price cut must
generate a disproportionate increase in total demand (i.e., “elastic demand”).
Alternatively, the volume of traffic carried (RPK) can be increased if the airline
increases its frequency of flights or improves its passenger service quality to attract
passengers, but both of these actions will also increase operating costs. Increases in
flight frequency, all else being equal, will increase total ASK and, in turn, total
operating expenses. Improvements in passenger service quality will increase unit
costs.
Increasing total revenues by simply increasing fares (yields) is another option.
However, economic theory tells us any price increase will inevitably lead to a traffic
decrease. A price increase can still be revenue positive if demand is “inelastic” (i.e.,
the percent decrease in passengers is less than the percent increase in price).
Airline efforts to improve profitability by reducing operating expenses include tactics
that reduce unit costs (cost per ASK) and those that reduce the airlines output
(ASK). Both strategies can lead to lower total operating expenses but, once again,
there can be negative impacts on other terms in the airline profit equation. A common
airline tactic is to reduce unit costs by cutting back on passenger service quality, for
example, eliminating meals, pillows, and extra flight attendants. However, excessive
cuts of this type can affect consumers perceptions of the airlines product, leading to
a reduced market share and, in turn, RPK. A tactic for reducing unit costs indirectly is
to actually increase ASK by flying more flights and/or larger airplanes, which can
lower unit costs by spreading fixed costs over a larger volume of output. But, such an
approach will still lead to higher total operating costs and potentially lower load
factors and reduced profitability.
Finally, an airline might decide to reduce its total operating expenses by decreasing
its level of output (ASK). Cutting back on the number of flights operated will clearly
reduce total operating costs, but lower frequencies might lead to market share losses
(lower RPK and lower revenues). At the same time, reduced frequencies and/or use
of smaller aircraft can lower ASK and total operating expenses, but can also lead to
higher unit costs, as the airlines fixed costs are now spread over fewer ASK.
The basic airline profit equation introduced here incorporates the five most common
measures of passenger airline performance introduced above, and illustrates the
interdependence among these measures in airline management decisions. Perhaps
more important, it provides preliminary insights into the difficulties of finding strategies
to improve and sustain airline profitability.
Belobaba, P., Odoni, A., & Barnhart, C. (Eds.). (2015). The global airline industry. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank)
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3.2 Air Transportation Markets
The second section of this chapter is devoted to the description of markets in air
transportation. The discussion begins with a description of a typical air passenger
trip, followed by alternative definitions of markets for air travel, focusing on scheduled
air services for passengers. The objective is to establish geographic or spatial
definitions of air transport markets, taking into account the characteristics of a typical
trip by passengers that use scheduled air transportation services.
3.2.1 Typical Air Passenger Trip
The spatial definitions of air transportation markets involving consumers and air
carriers (or “airlines”), as well as much of the economic modeling of demand and
supply in these markets depend on the characterization of a typical trip by an air
passenger. This characterization was originally proposed by Simpson (1995), and
provides the basis for our definitions here.
As shown in Figure 3.1, a typical air passenger trip starts not from an airport, but
from an origin point such as a residence or place of business. The ground access
portion of the trip from the passengers origin point to the originating airport can
involve travel by private car, taxi, or public transport. The origination airport region
containing the origin points of all travelers departing from an airport can have a radius
ranging from a few kilometers to several hundred kilometers. Travel times for ground
egress can therefore range from minutes to several hours.
Figure 3.1 Representation of a typical air passenger trip
Enplanement processing consists of purchasing tickets (if this has not been done in
advance), obtaining boarding passes, checking baggage, undergoing security
inspection, and boarding the aircraft. In short-haul domestic markets, this portion of
the total trip time can be as short as 15–20 minutes at some small airports. However,
heightened security requirements in the recent past have increased enplanement
processing times at most airports around the world, and especially in the United
Belobaba, P., Odoni, A., & Barnhart, C. (Eds.). (2015). The global airline industry. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank)
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States, to 1 hour or more in many cases. For long-haul international services,
enplanement processing can take even longer, as airlines can require minimum check-
in times of 2–3 hours before flight departure.
The aircraft portion of the outbound air trip lasts for 1 hour or more and covers
distances of 200–14 000 km (125–9000 miles) or more. From 2004 to 2013,
Singapore Airlines operated the longest nonstop flight offered in scheduled passenger
service between New York (Newark) and Singapore, covering 15 283 km (9524
miles) in a scheduled time (gate-to-gate or “block time”) of about 19 hours (Official
Airline Guides, 2008). Other “ultra-long haul” flights still being operated include
Johannesburg–Atlanta (Delta) and Dubai–Los Angeles (Emirates), both of which have
scheduled times over 16.5 hours. The average length of a typical airline passenger
trip worldwide is approximately 1824 km (1140 miles) (Airline Business, 2005). In the
United States, about one-fifth (21.5\%) of all domestic air trips are shorter than 500
miles in length (Aviation Daily, October 11, 2004].
After the flight arrives at its destination airport, deplanement processing can take
from just a few minutes for the passenger to exit the airport terminal to over an hour
when baggage retrieval and immigration and customs inspection are required. The
trip then concludes with a ground egress portion involving travel from the airport to a
destination point in the destination airport region.
Each airline trip has a duration of stay at the destination point that can range from a
few hours to several months or more, before the passenger returns to the originating
airport or region and makes a final ground egress trip to a location in the travelers
origination airport region (e.g., home or place of business).
This description of a typical air passenger trip raises several points important to the
definition of scheduled passenger air transportation markets and demand. First, the
purpose of each air trip is to move from the “true” origin to the “true” destination of
the passenger, not simply to travel from one airport to another. The characteristics of
the total trip, including the time required for each of its components in addition to the
actual times spent on board the aircraft, will affect the total demand for air
transportation between two airports.
Second, there is typically an outbound and inbound portion of passenger air trips,
such that consumers in an air transport market start their trip in the origination airport
region and return there after a trip of varying duration. As a result, every air travel
market has an opposite market consisting of passengers who originate their trips
from the destination airport region of the market described above. This opposite
market is serviced by the same airline flights as the original market (Simpson, 1995).
That is, the outbound flights for the original market are at the same time the inbound
flights in the opposite market. As we will see later in the discussion, the supply of air
service is also shared by demand from many markets, as passengers use various
multi-stop or connecting itineraries in any given market.
Belobaba, P., Odoni, A., & Barnhart, C. (Eds.). (2015). The global airline industry. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank)
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3.2.2 Spatial Definitions of Airline Markets
Another way to define air transportation markets is through their spatial boundaries,
as shown in Figure 3.2. The origination region around airport A contains all the origin
points of travelers, also referred to as that airports catchment area. An airports
catchment area can extend for hundreds of kilometers and can vary with the
destination and trip purpose of the traveler. For example, a traveler flying a short
distance for a business trip with a short duration of stay is more likely to minimize the
travel distance and time of the ground egress portion to an airport. On the other
hand, a vacation traveler flying a much longer distance and staying at the destination
for several weeks is more likely to be willing to travel much further to an originating
airport, perhaps to take advantage of lower fares.
Figure 3.2 Distinct and separate O-D markets
Similarly, airport B has a destination region that contains the destination points for
passengers originating in region A. As was the case with the origination airport
region, the size of destination airport region B can vary with trip purpose. For
example, for London Heathrow Airport, the majority of destinations for non-resident
business travelers are in a relatively small business area in central London, whereas
the destination region for pleasure travelers, visitors, and residents of the surrounding
area is much larger.
In Figure 3.2, the market for air services from A to C and back is distinct and
separate from the market ABA (Simpson, 1995). Improvements in the quality of airline
service or changes in the fares charged in the market ACA should not affect the
demand for air travel in the ABA market. These are clearly two different markets,
although the potential passengers in both markets are residents of originating airport
region A. There are also two “opposite” markets shown in Figure 3.2. Market BAB
has origination region B for consumers wishing to travel to points in destination region
A, and who use the same air services as market ABA.
Opposite markets can have different characteristics. The volume of demand of
opposite markets can be different, but since nearly all air trips are eventually round
Belobaba, P., Odoni, A., & Barnhart, C. (Eds.). (2015). The global airline industry. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank)
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trips, the flow of traffic in each direction will be approximately equal over an extended
time period. It might also be the case that the prices are not equal in each opposite
market even though both markets use the same airline flights. This can occur when
the origins and destinations are in different countries and fares are determined in
different currencies, for example.
Airport regions can overlap when two or more airports provide alternative flight
options for travelers in origin or destination regions. Figure 3.3 illustrates a scenario in
which there exist flight options from airports A and D to airport B, while the only flights
airport C are provided from airport A. In this example, the airport catchment area for
market ACA is the total shaded area around A and D, while the airport catchment
areas for markets ABA and DBD overlap. Passengers making trips originating in the
overlap area must choose which airport they access in order to travel by air to B.
Figure 3.3 Parallel markets and overlapping airport regions
Markets ABA and DBD are called parallel markets, and the flight options serving
each parallel market are to some extent substitutes for each other within the larger
region. For example, if the availability or speed of ground access/egress to and from
airport A improves, the catchment area of airport A will expand. The pricing of air
services in parallel markets will also affect the volume of demand using each market.
With competitive pricing by airlines, passengers have the option to increase the
ground egress portion of their trip to take advantage of lower fares in a parallel
market. For example, if the fares available to a European destination are much lower
from Montreals Trudeau Airport, then at least some passengers from the Ottawa
region (160 km away) can be expected to drive to Montreal rather than flying out of
Ottawa Airport.
As shown in Figure 3.4, a traveler in market A–B can connect between the flights
being provided in markets A–C and C–B. The flight from A to B is thus providing a
shared supply to both the A–B and A–C markets at the same time (as well as many
other markets, depending on the extent of the airlines network). It is possible that the
fares for travel A to B via C are lower than the nonstop AB fare. If service via C is
cheaper, it will affect nonstop demand in market ABA. It is also possible to find
examples where the fares from A to B via C are actually lower than the published AC
fares. This is an outcome of the fact that AB and AC are economically distinct 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)
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separate markets, in which prices for air travel are determined by the demand and
competitive characteristics of the different markets, not necessarily the distances
traveled. These and other airline pricing implications of the nature of air transportation
markets are discussed in more detail in Chapter 4.
Figure 3.4 Nonstop versus connecting service from A to B
These spatial definitions of air travel markets suggest that there can be multiple, even
overlapping geographical delineations of origination and destination regions for air
travel. The most common representation of origin–destination (O-D) demand is with
reference to a city-pair market – for example, the potential number of passengers per
day wishing to travel between Boston and Chicago. However, because Chicago is
served by two airports, the city-pair demand can be disaggregated to two (parallel)
airport-pair markets – between Bostons Logan Airport and Chicagos OHare and
Midway Airports, respectively. There is also a broader market for air travel between
the larger Boston metropolitan region and Chicago metropolitan region, which can
include additional airport-pairs such as Providence (Rhode Island)–Midway,
Providence–OHare, Manchester (New Hampshire)–Midway, and Manchester–
OHare. This broader region-pair market thus includes six airport-pair markets, all of
which are parallel and interrelated.
In summary, the spatial definitions of origin–destination markets presented here are
based on consideration of the total trip characteristics for a typical airline passenger.
Demand for air transportation is generated for a particular origin–destination market.
However, with the existence of overlapping airport regions, parallel markets, and the
sharing of scheduled airline supply on connecting flights, even “distinct and separate”
O-D markets are interrelated.
…
6
AIRLINE OPERATING COSTS AND MEASURES OF
PRODUCTIVITY
Peter P. Belobaba
With liberalization and increased competition in airline markets around the world,
control of operating costs and improved productivity have become critical to the
profitability of airlines. The emergence and rapid growth of “low-cost” airlines was
due in large part to their ability to deliver air transportation services at substantially
lower costs and at higher levels of productivity than the traditional “legacy” airlines. In
response, legacy airlines have had to find ways to reduce operating costs and
improve the efficiency of how they utilize both their aircraft and employees.
This chapter is devoted to a discussion of airline operating costs and productivity
measures. Section 6.1 provides an introduction to the source of cost and productivity
data used in much of the discussion – the US Department of Transportation (DOT)
Form 41 Traffic and Financial Statistics. It also describes some of the challenges in
categorizing airline operating costs and explores alternative categorization schemes.
Section 6.2 then provides more detailed comparisons of airline operating costs,
including the breakdown of total airline operating expenses by category, comparisons
of operating costs reported by US legacy and low-cost airlines in different categories,
and comparisons of operating expenses for different types of commercial aircraft. A
brief discussion of the major characteristics of the “low-cost carrier (LCC) business
model” is provided as background. Section 6.3 focuses on airline unit costs and their
interpretation, with further comparisons of publicly available unit cost data for US
airlines, both legacy and low-cost. Finally, Section 6.4 describes common measures
of aircraft and employee productivity, as used in the airline industry, and presents
recent trends in the productivity of US airlines.
6.1 Airline Cost Categorization
This section describes approaches for categorizing the operating costs incurred by
airlines in providing air transportation services. For the purposes of this description,
we rely primarily on cost data reported in the US DOT Form 41 database (US DOT,
2014) – a detailed and comprehensive source of traffic, financial, and operating cost
data reported to the DOT by US airlines. The volume and detail of data compiled in
this database, particularly data relating to airline operating costs, is unparalleled
among publicly available airline data sources. No other country makes available such
detailed operating cost data to the public (and, in turn, to competing air carriers).
There do exist some public sources of world airline operating cost data at
Belobaba, P., Odoni, A., & Barnhart, C. (Eds.). (2015). The global airline industry. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank)
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substantially greater level of aggregation, including the International Civil Aviation
Organization (ICAO) annual reports of “Series F” Financial Data (ICAO, 2007a),
which we will use to illustrate differences in cost categorization and to compare
overall airline cost trends.
In the US DOT Form 41 database, operating cost data are reported by US airlines
and published quarterly for most tables. The detail of reporting differs for different
expense categories. For example, airlines are required to report aircraft operating
expenses by specific aircraft type (e.g., Boeing 757-200) and region of operation
(e.g., Domestic, Latin, Atlantic, and Pacific) for each calendar quarter. Other
expenses that are more difficult to allocate by aircraft type, such as ground operating
costs associated with processing passengers and baggage at the airport, are
reported as system-wide totals.
Although the Form 41 reporting requirements have, from their inception in the early
1940s, attempted to impose a “Uniform System of Accounts” (Civil Aeronautics
Board, 1942), airlines employ accounting methods and cost allocation schemes that
may not always be completely “uniform.” Consequently, inter-airline operating cost
differences or yearly cost trends can in some cases be attributed as much to
differences in cost accounting rules as to real differences in operating cost
performance.
6.1.1 Administrative versus Functional Cost Categories
One approach to airline cost categorization makes use of “administrative cost
categories,” which are typical of financial accounting statements used in many
industries. Administrative cost categories in the Form 41 database include separate
reporting of
salaries and related fringe benefits for all personnel, including general
management, flight personnel, maintenance labor, aircraft and traffic handling
personnel, and other personnel;
materials purchased, for example, aircraft fuel and oil, maintenance materials,
passenger food, and other materials;
services purchased, such as advertising and promotions, communications,
insurance, outside maintenance, commissions, and other services; and
additional categories for landing fees, rentals (including aircraft), depreciation
(including aircraft), and other expenses.
Administrative cost categorization is typical of financial statements, as it reports funds
expended for labor (salaries), materials, and services used as inputs for the
“production” of the airlines output. Figure 6.1 shows an administrative categorization
of airline costs, as reported by US airlines for 2013. Although consistent with general
accounting principles, administrative cost categorization does not allow for 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)
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detailed analysis of the specific activities that comprise the airline operation and
contribute to airline costs.
Figure 6.1 Administrative cost allocation, 2013. (Data source: US DOT (2014))
For example, the category “salaries and benefits” does not allow one to separate out
important subsets of this category, most notably aircraft crew costs. In practice, total
aircraft operating costs (AOCs) include elements of salaries (pilots and maintenance
personnel), materials (fuel and spare parts), and services (insurance). Under the
administrative cost categorization, it is difficult to separate out the components of
salaries, materials, and services that are explicitly associated with operating the
aircraft, as opposed to ground operations, for example.
An alternative approach is to define “functional” cost categories, in a way that
allocates costs to different functions within the airlines operation. The three major
functional cost categories for airlines are aircraft operating costs, ground operating
costs, and system operating costs (Simpson and Belobaba, 2000).
“Aircraft operating costs” include all expenses associated with operating aircraft, and
are also referred to as “direct operating costs” (DOCs) or “flight operating costs.”
Aircraft operating costs represent the largest proportion of an airlines operating
expenses (historically about half) and are usually allocated against the number of
block hours operated by the airlines fleet of aircraft. In the Form 41 database, the
following cost items contribute to aircraft operating costs (US DOT, 2014):
Flying operations: This function consists of “expenses incurred directly in the in-
flight operation of aircraft, including all costs associated with flight crew and fuel
costs.”
Maintenance: Maintenance expenses are “all expenses, both direct and indirect,
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>
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specifically identifiable with the repair and upkeep” of aircraft and equipment.
Depreciation and amortization: This function spreads the capital cost of the
airlines assets – specifically, aircraft – over their expected lifetime.
“Ground operating costs” are incurred at the airport stations in handling passengers,
cargo, and aircraft or by the airline in making reservations and ticket sales, and are
directly incurred in providing transportation services to the customer. The three major
components of ground operating costs are
aircraft servicing costs incurred in handling aircraft on the ground, including
landing fees;
traffic servicing costs of processing passengers, baggage, and cargo at airports;
and
reservation and sales costs associated with airline reservations centers and ticket
offices, including travel agency commissions and distribution system fees.
“System operating costs” are the indirect operating costs remaining after ground
operating costs are accounted for. They are not directly associated with supplying the
transportation service, but are more of a corporate overhead expense. For example,
advertising costs are those spent to increase system revenues, while onboard
passenger service expenses include food, entertainment, and cabin crew costs.
Administrative expenses are those of a general management nature for the complete
airline system (except maintenance administration). The major components of system
operating costs can be summarized as follows:
Passenger service costs, including meals, flight attendants, and in-flight services.
Advertising and publicity expense.
General and administrative expenses that cannot be associated with a particular
activity.
Transport-related expense items are costs associated with “the generation of
transport-related revenues” (US DOT, 2014). They include fees paid to regional
airline partners for providing regional air service, extra baggage expenses, and
other miscellaneous overhead.
Figure 6.2 shows the functional categorization of US airline operating costs reported
for 2013, as a direct comparison to the administrative categorization of Figure 6.1. To
summarize, administrative and functional cost categorization schemes reflect two
different approaches for partitioning airline operating costs. While the administrative
approach is useful in financial reports and related analyses, it is the functional
categorization that allows us to perform more detailed cost comparisons across
airlines and even among different aircraft types.
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>
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Figure 6.2 Functional cost allocation, 2013. (Data source: US DOT (2014))
The distribution of airline operating expenses by functional cost category depends, of
course, on the specific definitions of the cost elements to be included in each
category. There can be differences between the cost categorizations used by
different entities, depending on their perspectives and history of cost analysis. ICAO
has historically provided the closest to what can be considered a worldwide standard
of airline cost categorization, as it requires its member states to submit annual
operating cost data for their airlines in a standardized form (in addition to various
traffic and financial data). The ICAO cost categories are summarized in Figure 6.3,
and are in many respects similar in structure to both the US Form 41 functional
categories and allocation schemes used by airlines and government authorities
around the world.
Figure 6.3 ICAO airline operating cost categories. (Adapted from ICAO
(2007b))
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>
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There are nonetheless some differences. Most relevant to our ability to perform
detailed comparisons with US airline operating costs reported in Form 41 is the
greater level of aggregation of the ICAO categories. Within the functional categories
described above for US Form 41, there are, in many cases, even more detailed
allocations that must be reported by airlines. For example, the Form 41 data break
their “maintenance” category into “direct airframe maintenance,” “direct engine
maintenance,” and “maintenance burden” (overhead) subcategories. This is not the
case for the ICAO data, which group all “maintenance and overhaul” expenses into a
single cost category. Thus, any comparisons of US and non-US airlines maintenance
costs can only be made at the more aggregate level. Overall, however, the “direct
aircraft operating costs” of the ICAO scheme are reasonably comparable to the
“aircraft operating costs” of the functional cost categorization described above.
Looking at the ICAO “indirect operating cost” categories, there are some further
differences. The ICAO approach does not separate “station expenses” into the
“aircraft servicing” and “traffic servicing” categories of ground operating costs
described above. ICAO includes landing fees and airport charges in the same
category as station expenses, similar to the categorization by the US DOT of landing
fees as aircraft servicing expenses. The allocation of landing fees to the “aircraft
servicing” category of ground operating costs (as is done in the US DOT
categorization) might make sense to some, but others (e.g., some large European
airlines) include landing fees in aircraft operating costs, since an aircraft cannot
operate a flight without landing at an airport.
The ICAO scheme also aggregates all “ticketing, sales, and promotion” into a single
category, whereas the US Form 41 data separate out the advertising components
from the remaining distribution costs (reservations, ticketing, and distribution system
fees). Under “passenger services,” both approaches include cabin crew (flight
attendant) costs. Thus, neither the US DOT nor ICAO include flight attendant
expenses in aircraft operating costs with the rationale that different airlines will
operate the same aircraft type with different numbers of flight attendants (above the
minimum requirement for safety), for passenger service reasons. The logic of not
including flight attendant expenses in aircraft operating costs is that doing so would
distort potential comparisons of aircraft-related operating expenses. On the other
hand, the European Joint Aviation Authorities (JAA) has in the past categorized all
flight attendant expenses as part of aircraft operating costs, based on the logic that
passenger aircraft cannot be operated without flight attendants on board.
These examples illustrate the difficulties of cost categorization and the reality that
there exists no perfectly “clean” or fully defensible definition of airline cost categories.
In the airline industry, much of the rationale for existing operating cost categories and
the way in which costs are allocated and reported is historical. Fortunately, many of
the differences between the US Form 41 approach that we rely on for detailed cost
analysis and the ICAO standard for world airline costs are in the level of aggregation
and in the allocation of a few minor expenses to different categories. Overall, 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>
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structure of the cost allocation schemes is very similar.
6.1.2 Cost Drivers by Functional Category
The reporting of operating costs for each functional category is typically based on
various cost “drivers” or specific activities that generate the expenses for the airline in
that category. These cost drivers are based largely on historical precedent, but in
most cases they also make intuitive and economic sense:
Aircraft operating costs and all of the components of this category are reported
“per block hour,” given that the large majority of aircraft operating expenses are
directly correlated with the amount of time the aircraft is being utilized.
Aircraft servicing costs are reported per aircraft departure, given that these
expenses are incurred by preparing the aircraft for each departure (cleaning,
fueling, and marshaling the aircraft).
Traffic servicing costs are reported per enplaned passenger for passenger
airlines, since these expenses involve the processing of passengers and their
baggage at airports.
Passenger service costs are reported per revenue passenger kilometer (RPK),
reflecting the fact that onboard services for a particular passenger trip will cost
more for longer distances.
Reservation and sales costs are reported as a percentage of revenues, given that
this cost category is directly responsible for the generation of revenues for the
airline.
Other indirect and system overhead costs are reported as a percentage of total
operating expenses, given the difficulties of more specific functional allocation.
Although these are the most common ways in which the different cost categories are
reported and compared, more aggregate comparisons can involve measures of total
operating cost per available seat mile – also known as “unit cost” or “CASK” (i.e.,
cost per ASK). Other comparisons might be based on total operating expense per
passenger enplaned, or per RPK. The use of different bases for airline operating cost
measures, however, can lead to misleading conclusions when different airlines with
different networks and operating patterns are compared. In the following sections,
some of the potential distortions embedded in various aggregate cost measures are
described.
6.2 Operating Expense Comparisons
In this section, we make use of the functional cost categories and typical cost drivers
introduced in the previous section to perform several types of airline operating cost
comparisons. We begin with a closer look at the distribution of airline operating costs
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>
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by functional cost category, comparing the changes in this distribution in recent years,
including a comparison of US and world airlines. We then examine the aircraft
operating costs category in even greater detail, with comparisons across different
types of aircraft. The purpose of this section is not simply to describe these
comparisons and recent trends, but also to provide some insight into the potential
pitfalls of performing such analyses without ensuring a valid basis for comparison.
6.2.1 Percentage Breakdown of Operating Expenses
Based on the functional cost categorization described in Section 6.1, we can use the
breakdown of US airline operating costs for 2013 shown in Figure 6.2 to examine the
three major categories of airline costs introduced earlier:
“Aircraft operating costs” comprise 51.0\% of total airline operating expenses, as
reported by US airlines according to the DOT Form 41 categories in Figure 6.2.
Historically, AOCs have accounted for approximately one-half of total airline
operating expenses, with variations over the years driven in large part by
fluctuations in fuel prices.
“Ground operating costs” represent another 17.6\% of total operating expenses,
divided into the major functional components: aircraft servicing (5.0\%), traffic
servicing (8.7\%), and reservations and sales (3.9\%). While this category has
historically represented up to 30\% of total operating expenses, major reductions in
reservation and sales costs (as well as increases in other categories) over the
past two decades have reduced this proportion, reflecting the imposition of travel
agency commission caps and the lower costs associated with Internet distribution
of airline tickets.
“System operating costs” account for the remaining 39.7\%, including passenger
service (5.7\%), advertising (0.8\%), administrative (6.8\%), and transport-related
expenses (18.0\%). This category has grown dramatically in recent times, from its
historical average of approximately 20\% of total operating expenses. Since 2003,
US DOT has required airlines to report the amount they spend on capacity
purchases from regional airlines as “transport-related” costs. The growth in the
proportion of system operating costs is therefore attributable to both a change in
reporting rules and the recent trend of US network carriers to increase their use of
regional partners as feeder airlines.
This mandated change in the reporting of transport-related expenses also affects our
ability to make consistent and valid comparisons of the contribution of different cost
categories to total costs over time. In 2013, reported transport-related expenses of
US airlines comprised 18.0\% of total airline operating costs, up from 13.0\% in 2003.
This growth in the proportion of transport-related expenses has led to reduced
proportions for all other cost categories, making it more difficult to gauge how the
breakdown of airline operating costs has changed over time. Moreover, the payment
of transport-related expenses to partner airlines (mostly regional carriers) to carry
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 2021-08-18 08:00:06.
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connecting passengers has little to do with the actual operations of the airline itself.
For these reasons, a more valid comparison of operating cost proportions, both over
time and among airlines operating in different regions of the world, requires the
exclusion of transport-related expenses from the operating cost breakdown. By
excluding transport-related expenses, we can get a clearer picture of recent changes
in the composition of airline operating costs.
Figure 6.4 compares the breakdown by category of the total operating expenses for
both 2003 and 2013, with transport-related expenses removed. The most obvious
change in cost proportions since 2003 is the growth in the percentage of aircraft
operating costs, which increased from 52.7\% in 2003 to 61.9\% in 2013. This increase
was driven primarily by the increase in fuel costs for airlines. In particular, an
unprecedented surge in fuel prices to historically high levels since 2008 overwhelmed
the cost reductions achieved by airlines in other categories (e.g., lower labor costs).
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>
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Figure 6.4 US airline operating cost breakdown (excluding transport-related
expenses), 2003 and 2013. (Data source: US DOT Form 41, 2014)
Changes in the breakdown of operating expenses by functional category provide
some insight into shifts in airline operating costs, but it is important to remember that
any significant change in the share of one category will affect all other categories, in
the opposite direction. This phenomenon is well illustrated by Figure 6.4, in which
dramatic increases in the percentage of aircraft operating costs reduce the apparent
importance of most other categories shown.
Another example of the changes in the distribution of airline operating costs is
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 2021-08-18 08:00:06.
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provided by Figure 6.5, which shows the percentages based on major components of
the ICAO cost categorization scheme described in Section 6.1. Although the specific
categories differ slightly from those of Form 41, the general trends in world airline
cost proportions are nonetheless similar to those described above for US airlines.
Direct aircraft operating costs are shown in Figure 6.5 to have increased from 44\% in
1992 to almost 55\% in 2009. Recall that the equivalent “aircraft operating costs”
comprised 52.7\% of US airline costs in 2003 and 61.9\% in 2013 (Figure 6.4). With
the exception of periods of extremely high fuel prices, these proportions are quite
similar, averaging about 50\% of total operating expenses.
Figure 6.5 World airline cost distributions, 1992–2009. (Data sources: ICAO
(2007b, 2012))
As was the case with US airline operating costs, the most apparent shifts in the
proportions of total operating expenses for world airlines in Figure 6.5 are associated
with increasing fuel costs over the period shown. Between 1992 and 2009, the
proportion of fuel expenses increased by over 13 percentage points (from 12.2 to
25.9\%), while the share of aircraft operating costs increased by just over 10
percentage points. This suggests that improvements in other contributors to aircraft
operating costs were outweighed by the higher fuel costs. Also worth noting is the
substantial decrease in the share of ticketing, sales, and promotion costs, from 16.4
to 8.9\%, reflecting cost savings from electronic ticketing and more widespread
Internet distribution. And, the share of general and administrative costs has
decreased notably, to levels approximately the same as US airlines.
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One thing you will need to do in college is learn how to find and use references. References support your ideas. College-level work must be supported by research. You are expected to do that for this paper. You will research
Elaborate on any potential confounds or ethical concerns while participating in the psychological study 20.0\% Elaboration on any potential confounds or ethical concerns while participating in the psychological study is missing. Elaboration on any potenti
3 The first thing I would do in the family’s first session is develop a genogram of the family to get an idea of all the individuals who play a major role in Linda’s life. After establishing where each member is in relation to the family
A Health in All Policies approach
Note: The requirements outlined below correspond to the grading criteria in the scoring guide. At a minimum
Chen
Read Connecting Communities and Complexity: A Case Study in Creating the Conditions for Transformational Change
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Use the bolded black section and sub-section titles below to organize your paper. For each section
Losinski forwarded the article on a priority basis to Mary Scott
Losinksi wanted details on use of the ED at CGH. He asked the administrative resident