An airline is a company that provides air transport services for traveling passengers and freight. Airlines utilize aircraft to supply these services and may form partnerships or alliances with other airlines for codeshare agreements. Generally, airline companies are recognized with an air operating certificate or license issued by a governmental aviation body.
Airlines vary in size, from small domestic airlines to full-service international airlines. Airline services can be categorized as being intercontinental, domestic, regional, or international, and may be operated as scheduled services or charters. The largest airline currently is American Airlines Group.
Many countries have national airlines that the government owns and operates. Fully private airlines are subject to a great deal of government regulation for economic, political, and safety concerns. For instance, governments often intervene to halt airline labor actions to protect the free flow of people, communications, and goods between different regions without compromising safety.
The United States, Australia, and to a lesser extent Brazil, Mexico, India, the United Kingdom, and Japan have “deregulated” their airlines. In the past, these governments dictated airfares, route networks, and other operational requirements for each airline. Since deregulation, airlines have been largely free to negotiate their own operating arrangements with different airports, enter and exit routes easily, and to levy airfares and supply flights according to market demand.
The entry barriers for new airlines are lower in a deregulated market, and so the U.S. has seen hundreds of airlines start up (sometimes for only a brief operating period). This has produced far greater competition than before deregulation in most markets. The added competition, together with pricing freedom, means that new entrants often take market share with highly reduced rates that, to a limited degree, full service airlines must match. This is a major constraint on profitability for established carriers, which tend to have a higher cost base.
As a result, profitability in a deregulated market is uneven for most airlines. These forces have caused some major airlines to go out of business, in addition to most of the poorly established new entrants.
In the United States, the airline industry is dominated by four large firms. Because of industry consolidation, after fuel prices dropped considerably in 2015, very little of the savings were passed on to consumers.
Groups such as the International Civil Aviation Organization establish worldwide standards for safety and other vital concerns. Most international air traffic is regulated by bilateral agreements between countries, which designate specific carriers to operate on specific routes. The model of such an agreement was the Bermuda Agreement between the US and UK following World War II, which designated airports to be used for transatlantic flights and gave each government the authority to nominate carriers to operate routes.
Bilateral agreements are based on the “freedoms of the air”, a group of generalized traffic rights ranging from the freedom to overfly a country to the freedom to provide domestic flights within a country (a very rarely granted right known as cabotage). Most agreements permit airlines to fly from their home country to designated airports in the other country: some also extend the freedom to provide continuing service to a third country, or to another destination in the other country while carrying passengers from overseas.
In the 1990s, “open skies” agreements became more common. These agreements take many of these regulatory powers from state governments and open up international routes to further competition. Open skies agreements have met some criticism, particularly within the European Union, whose airlines would be at a comparative disadvantage with the United States’ because of cabotage restrictions.
Historically, air travel has survived largely through state support, whether in the form of equity or subsidies. The airline industry as a whole has made a cumulative loss during its 100-year history, once the costs include subsidies for aircraft development and airport construction.
One argument is that positive externalities, such as higher growth due to global mobility, outweigh the microeconomic losses and justify continuing government intervention. A historically high level of government intervention in the airline industry can be seen as part of a wider political consensus on strategic forms of transport, such as highways and railways, both of which receive public funding in most parts of the world. Although many countries continue to operate state-owned or parastatal airlines, many large airlines today are privately owned and are therefore governed by microeconomic principles to maximize shareholder profit.
In July 2016, the total airline capacity was 181.1 billion Available Seat Kilometers (+6.9% compared to July 2015): 57.6bn in Asia-Pacific, 47.7bn in Europe, 46.2bn in North America, 12.2bn in Middle East, 12.0bn in Latin America and 5.4bn in Africa.
Following the 1978 deregulation, U.S. carriers did not manage to make an aggregate profit for 12 years in 31, including four years where combined losses amounted to $10 billion, but rebounded with eight consecutive years of profits since 2010, including its four with over $10 billion profits. They drop loss-making routes, avoid fare wars and market share battles, limit capacity growth, add hub feed with regional jets to increase their profitability. They change schedules to create more connections, buy used aircraft, reduce international frequencies and leverage partnerships to optimise capacities and benefit from overseas connectivity.
Top 150 airline groups
|Operating result ($bn)||58.9||65.0||30.4||27.5||20.7||21.3||32.4||1.7||−15.3|
|Operating margin (%)||8.5%||9.3%||4.3%||4.0%||3.1%||3.4%||5.8%||0.4%||−2.8%|
|Net result ($bn)||34.2||42.4||11.7||15.3||4.6||0.3||19.0||−5.7||−32.5|
|Net margin (%)||4.9%||6.1%||1.7%||2.2%||0.7%||0.0%||3.4%||−1.2%||−6.0%|
The world’s largest airlines can be defined in several ways. American Airlines Group is the largest by its fleet size, revenue, profit, passengers carried and revenue passenger mile. Delta Air Lines is the largest by assets value and market capitalization. Lufthansa Group is the largest by number of employees, FedEx Express by freight tonne-kilometers, Ryanair by number of international passengers carried and Turkish Airlines by number of countries served.
Airlines assign prices to their services in an attempt to maximize profitability. The pricing of airline tickets has become increasingly complicated over the years and is now largely determined by computerized yield management systems.
Because of the complications in scheduling flights and maintaining profitability, airlines have many loopholes that can be used by the knowledgeable traveler. Many of these airfare secrets are becoming more and more known to the general public, so airlines are forced to make constant adjustments.
Most airlines use differentiated pricing, a form of price discrimination, to sell air services at varying prices simultaneously to different segments. Factors influencing the price include the days remaining until departure, the booked load factor, the forecast of total demand by price point, competitive pricing in force, and variations by day of week of departure and by time of day. Carriers often accomplish this by dividing each cabin of the aircraft (first, business and economy) into a number of travel classes for pricing purposes.
A complicating factor is that of origin-destination control (“O&D control”). Someone purchasing a ticket from Melbourne to Sydney (as an example) for A$200 is competing with someone else who wants to fly Melbourne to Los Angeles through Sydney on the same flight, and who is willing to pay A$1400. Should the airline prefer the $1400 passenger, or the $200 passenger plus a possible Sydney-Los Angeles passenger willing to pay $1300? Airlines have to make hundreds of thousands of similar pricing decisions daily.
The advent of advanced computerized reservations systems in the late 1970s, most notably Sabre, allowed airlines to easily perform cost-benefit analyses on different pricing structures, leading to almost perfect price discrimination in some cases (that is, filling each seat on an aircraft at the highest price that can be charged without driving the consumer elsewhere).
The intense nature of airfare pricing has led to the term “fare war” to describe efforts by airlines to undercut other airlines on competitive routes. Through computers, new airfares can be published quickly and efficiently to the airlines’ sales channels. For this purpose the airlines use the Airline Tariff Publishing Company (ATPCO), who distribute latest fares for more than 500 airlines to Computer Reservation Systems across the world.
The extent of these pricing phenomena is strongest in “legacy” carriers. In contrast, low fare carriers usually offer pre-announced and simplified price structure, and sometimes quote prices for each leg of a trip separately.
Computers also allow airlines to predict, with some accuracy, how many passengers will actually fly after making a reservation to fly. This allows airlines to overbook their flights enough to fill the aircraft while accounting for “no-shows”, but not enough (in most cases) to force paying passengers off the aircraft for lack of seats, stimulative pricing for low demand flights coupled with overbooking on high demand flights can help reduce this figure. This is especially crucial during tough economic times as airlines undertake massive cuts to ticket prices to retain demand.
Over January/February 2018, the cheapest airline surveyed by price comparator rome2rio was Tigerair Australia with $0.06/km followed by AirAsia X with $0.07/km, while the most expensive was Charterlines, Inc. with $1.26/km followed by Buddha Air with $1.18/km.
For the IATA, the global airline industry revenue was $754 billion in 2017 for a $38.4 billion collective profit, and should rise by 10.7% to $834 billion in 2018 for a $33.8 billion profit forecast, down by 12% due to rising jet fuel and labor costs.
The demand for air transport will be less elastic for longer flights than for shorter flights, and more elastic for leisure travel than for business travel.
Full-service airlines have a high level of fixed and operating costs to establish and maintain air services: labor, fuel, airplanes, engines, spares and parts, IT services and networks, airport equipment, airport handling services, sales distribution, catering, training, aviation insurance and other costs. Thus all but a small percentage of the income from ticket sales is paid out to a wide variety of external providers or internal cost centers.
Moreover, the industry is structured so that airlines often act as tax collectors. Airline fuel is untaxed because of a series of treaties existing between countries. Ticket prices include a number of fees, taxes and surcharges beyond the control of airlines. Airlines are also responsible for enforcing government regulations. If airlines carry passengers without proper documentation on an international flight, they are responsible for returning them back to the original country.
Analysis of the 1992–1996 period shows that every player in the air transport chain is far more profitable than the airlines, who collect and pass through fees and revenues to them from ticket sales. While airlines as a whole earned 6% return on capital employed (2–3.5% less than the cost of capital), airports earned 10%, catering companies 10–13%, handling companies 11–14%, aircraft lessors 15%, aircraft manufacturers 16%, and global distribution companies more than 30%. (Source: Spinetta, 2000, quoted in Doganis, 2002)
The widespread entrance of a new breed of low cost airlines beginning at the turn of the century has accelerated the demand that full service carriers control costs. Many of these low cost companies emulate Southwest Airlines in various respects, and like Southwest, they can eke out a consistent profit throughout all phases of the business cycle.
As a result, a shakeout of airlines is occurring in the U.S. and elsewhere. American Airlines, United Airlines, Continental Airlines (twice), US Airways (twice), Delta Air Lines, and Northwest Airlines have all declared Chapter 11 bankruptcy.
Where an airline has established an engineering base at an airport, then there may be considerable economic advantages in using that same airport as a preferred focus (or “hub”) for its scheduled flights.
Operating costs for US major airlines are primarily aircraft operating expense including jet fuel, aircraft maintenance, depreciation and aircrew for 44%, servicing expense for 29% (traffic 11%, passenger 11% and aircraft 7%), 14% for reservations and sales and 13% for overheads (administration 6% and advertising 2%). An average US major Boeing 757-200 flies 1,252 mi (2,015 km) stages 11.3 block hours per day and costs $2,550 per block hour : $923 of ownership, $590 of maintenance, $548 of fuel and $489 of crew; or $13.34 per 186 seats per block hour. For a Boeing 737-500, a low-cost carrier like Southwest have lower operating costs at $1,526 than a full service one like United at $2,974, and higher productivity with 399,746 ASM per day against 264,284, resulting in a unit cost of 0.38 $cts/ASM against 1.13 $cts/ASM.
Assets and financing
Airline financing is quite complex, since airlines are highly leveraged operations. Not only must they purchase (or lease) new airliner bodies and engines regularly, they must make major long-term fleet decisions with the goal of meeting the demands of their markets while producing a fleet that is relatively economical to operate and maintain; comparably Southwest Airlines and their reliance on a single airplane type (the Boeing 737 and derivatives), with the now defunct Eastern Air Lines which operated 17 different aircraft types, each with varying pilot, engine, maintenance, and support needs.
A second financial issue is that of hedging oil and fuel purchases, which are usually second only to labor in its relative cost to the company. However, with the current high fuel prices it has become the largest cost to an airline. Legacy airlines, compared with new entrants, have been hit harder by rising fuel prices partly due to the running of older, less fuel efficient aircraft. While hedging instruments can be expensive, they can easily pay for themselves many times over in periods of increasing fuel costs, such as in the 2000–2005 period.
In view of the congestion apparent at many international airports, the ownership of slots at certain airports (the right to take-off or land an aircraft at a particular time of day or night) has become a significant tradable asset for many airlines. Clearly take-off slots at popular times of the day can be critical in attracting the more profitable business traveler to a given airline’s flight and in establishing a competitive advantage against a competing airline.
If a particular city has two or more airports, market forces will tend to attract the less profitable routes, or those on which competition is weakest, to the less congested airport, where slots are likely to be more available and therefore cheaper. For example, Reagan National Airport attracts profitable routes due partly to its congestion, leaving less-profitable routes to Baltimore-Washington International Airport and Dulles International Airport.
Other factors, such as surface transport facilities and onward connections, will also affect the relative appeal of different airports and some long distance flights may need to operate from the one with the longest runway. For example, LaGuardia Airport is the preferred airport for most of Manhattan due to its proximity, while long-distance routes must use John F. Kennedy International Airport’s longer runways.
Codesharing is the most common type of airline partnership; it involves one airline selling tickets for another airline’s flights under its own airline code. An early example of this was Japan Airlines’ (JAL) codesharing partnership with Aeroflot in the 1960s on Tokyo–Moscow flights; Aeroflot operated the flights using Aeroflot aircraft, but JAL sold tickets for the flights as if they were JAL flights. This practice allows airlines to expand their operations, at least on paper, into parts of the world where they cannot afford to establish bases or purchase aircraft. Another example was the Austrian–Sabena partnership on the Vienna–Brussels–New York/JFK route during the late ’60s, using a Sabena Boeing 707 with Austrian livery.
Since airline reservation requests are often made by city-pair (such as “show me flights from Chicago to Düsseldorf”), an airline that can codeshare with another airline for a variety of routes might be able to be listed as indeed offering a Chicago–Düsseldorf flight. The passenger is advised however, that airline no. 1 operates the flight from say Chicago to Amsterdam, and airline no. 2 operates the continuing flight (on a different airplane, sometimes from another terminal) to Düsseldorf. Thus the primary rationale for code sharing is to expand one’s service offerings in city-pair terms to increase sales.
A more recent development is the airline alliance, which became prevalent in the late 1990s. These alliances can act as virtual mergers to get around government restrictions. Alliances of airlines such as Star Alliance, Oneworld, and SkyTeam coordinate their passenger service programs (such as lounges and frequent-flyer programs), offer special interline tickets, and often engage in extensive codesharing (sometimes systemwide). These are increasingly integrated business combinations—sometimes including cross-equity arrangements—in which products, service standards, schedules, and airport facilities are standardized and combined for higher efficiency. One of the first airlines to start an alliance with another airline was KLM, who partnered with Northwest Airlines. Both airlines later entered the SkyTeam alliance after the fusion of KLM and Air France in 2004.
Often the companies combine IT operations, or purchase fuel and aircraft as a bloc to achieve higher bargaining power. However, the alliances have been most successful at purchasing invisible supplies and services, such as fuel. Airlines usually prefer to purchase items visible to their passengers to differentiate themselves from local competitors. If an airline’s main domestic competitor flies Boeing airliners, then the airline may prefer to use Airbus aircraft regardless of what the rest of the alliance chooses.
Fuel hedging is a contractual tool used by transportation companies like airlines to reduce their exposure to volatile and potentially rising fuel costs. Several low-cost carriers such as Southwest Airlines adopt this practice.
Southwest is credited with maintaining strong business profits between 1999 and the early 2000s due to its fuel hedging policy. Many other airlines are replicating Southwest’s hedging policy to control their fuel costs.
Airlines often have a strong seasonality, with traffic low in Winter and peaking in Summer. In Europe the most extreme market are the Greek islands with July/August having more than ten times the winter traffic, as Jet2 is the most seasonal among low-cost carriers with July having seven times the January traffic, whereas legacy carriers are much less with only 85/115% variability.
Aircraft engines emit noise pollution, gases and particulate emissions, and contribute to global dimming.
Growth of the industry in recent years raised a number of ecological questions.
Domestic air transport grew in China at 15.5 percent annually from 2001 to 2006. The rate of air travel globally increased at 3.7 percent per year over the same time. In the EU greenhouse gas emissions from aviation increased by 87% between 1990 and 2006. However it must be compared with the flights increase, only in UK, between 1990 and 2006 terminal passengers increased from 100 000 thousands to 250 000 thousands., according to AEA reports every year, 750 million passengers travel by European airlines, which also share 40% of merchandise value in and out of Europe. Without even pressure from “green activists”, targeting lower ticket prices, generally, airlines do what is possible to cut the fuel consumption (and gas emissions connected therewith). Further, according to some reports, it can be concluded that the last piston-powered aircraft were as fuel-efficient as the average jet in 2005.
Despite continuing efficiency improvements from the major aircraft manufacturers, the expanding demand for global air travel has resulted in growing greenhouse gas (GHG) emissions. Currently, the aviation sector, including US domestic and global international travel, make approximately 1.6 percent of global anthropogenic GHG emissions per annum. North America accounts for nearly 40 percent of the world’s GHG emissions from aviation fuel use.
CO2 emissions from the jet fuel burned per passenger on an average 3,200 kilometers (2,000 mi) airline flight is about 353 kilograms (776 pounds). Loss of natural habitat potential associated with the jet fuel burned per passenger on a 3,200 kilometers (2,000 mi) airline flight is estimated to be 250 square meters (2700 square feet).
In the context of climate change and peak oil, there is a debate about possible taxation of air travel and the inclusion of aviation in an emissions trading scheme, with a view to ensuring that the total external costs of aviation are taken into account.
The airline industry is responsible for about 11 percent of greenhouse gases emitted by the U.S. transportation sector. Boeing estimates that biofuels could reduce flight-related greenhouse-gas emissions by 60 to 80 percent. The solution would be blending algae fuels with existing jet fuel:
Boeing and Air New Zealand are collaborating with leading Brazilian biofuel maker Tecbio, New Zealand’s Aquaflow Bionomic and other jet biofuel developers around the world.
Virgin Atlantic and Virgin Green Fund are looking into the technology as part of a biofuel initiative.
KLM has made the first commercial flight with biofuel in 2009.
There are projects on electric aircraft, and some of them are fully operational as of 2013.
Each operator of a scheduled or charter flight uses an airline call sign when communicating with airports or air traffic control centres. Most of these call-signs are derived from the airline’s trade name, but for reasons of history, marketing, or the need to reduce ambiguity in spoken English (so that pilots do not mistakenly make navigational decisions based on instructions issued to a different aircraft), some airlines and air forces use call-signs less obviously connected with their trading name. For example, British Airways uses a Speedbird call-sign, named after the logo of its predecessor, BOAC, while SkyEurope used Relax.
The various types of airline personnel include: Flight operations personnel including flight safety personnel.
Flight crew, responsible for the operation of the aircraft. Flight crew members include:
Pilots (Captain and First Officer: some older aircraft also required a Flight Engineer and/or a Navigator)
Flight attendants (led by a purser on larger aircraft)
In-flight security personnel on some airlines (most notably El Al)
Groundcrew, responsible for operations at airports. Ground crew members include:
Aerospace and avionics engineers responsible for certifying the aircraft for flight and management of aircraft maintenance
Aerospace engineers, responsible for airframe, powerplant and electrical systems maintenance
Avionics engineers responsible for avionics and instruments maintenance
Airframe and powerplant technicians
Electric System technicians, responsible for maintenance of electrical systems
Remote centralised weight and balancing
Passenger service agents (such as airline lounge employees)
Reservation agents, usually (but not always) at facilities outside the airport.
Airlines follow a corporate structure where each broad area of operations (such as maintenance, flight operations (including flight safety), and passenger service) is supervised by a vice president. Larger airlines often appoint vice presidents to oversee each of the airline’s hubs as well. Airlines employ lawyers to deal with regulatory procedures and other administrative tasks.
The pattern of ownership has been privatized in the recent years, that is, the ownership has gradually changed from governments to private and individual sectors or organizations. This occurs as regulators permit greater freedom and non-government ownership, in steps that are usually decades apart. This pattern is not seen for all airlines in all regions.
Growth rates are not consistent in all regions, but countries with a de-regulated airline industry have more competition and greater pricing freedom. This results in lower fares and sometimes dramatic spurts in traffic growth. The U.S., Australia, Canada, Japan, Brazil, India and other markets exhibit this trend. The industry has been observed to be cyclical in its financial performance. Four or five years of poor earnings precede five or six years of improvement. But profitability even in the good years is generally low, in the range of 2–3% net profit after interest and tax. In times of profit, airlines lease new generations of airplanes and upgrade services in response to higher demand. Since 1980, the industry has not earned back the cost of capital during the best of times. Conversely, in bad times losses can be dramatically worse. Warren Buffett in 1999 said “the money that had been made since the dawn of aviation by all of this country’s airline companies was zero. Absolutely zero.”
As in many mature industries, consolidation is a trend. Airline groupings may consist of limited bilateral partnerships, long-term, multi-faceted alliances between carriers, equity arrangements, mergers, or takeovers. Since governments often restrict ownership and merger between companies in different countries, most consolidation takes place within a country. In the U.S., over 200 airlines have merged, been taken over, or gone out of business since deregulation in 1978. Many international airline managers are lobbying their governments to permit greater consolidation to achieve higher economy and efficiency.
Source from Wikipedia