Flying Off Course: The Economics of International Airlines, 2nd Edition

352 Pages·1991·2.93 MB·English

by  Rigas Doganis

Flying off Course
Flying off Course
The Economics of International
Airlines
(2nd Edition)
RIGAS DOGANIS
London and New York
First published 1985 by HarperCollins Academic
Second edition 1991
This edition published in the Taylor & Francis e-Library, 2005.
“To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of
thousands of eBooks please go to www.eBookstore.tandf.co.uk.”
Simultaneously published in the USA and Canada
by Routledge
29 West 35th Street, New York, NY 10001
© 1985, 1991 Rigas Doganis
All rights reserved. No part of this book may be reprinted or
reproduced or utilised in any form or by any electronic, mechanical, or
other means, now known or hereafter invented, including photocopying
and recording, or in any information storage or retrieval system, without
permission in writing from the publishers.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging in Publication Data
A catalog record for this book is available from the Library of Congress
ISBN 0-203-97619-3 Master e-book ISBN
ISBN 0-415-08439-3 (Print Edition)
Contents
Acknowledgements viii
Introduction ix
1 Characteristics and Trends in Airline Operations 1
1.1 Rapid technological change 1
1.2 The impact of technological change 3
1.3 High-growth industry 7
1.4 Rapid growth of non-scheduled operations 10
1.5 Marginal profitability 16
1.6 The nature of the airline product 19
1.7 Passengers, freight or mail 20
2 The Regulation of International Air Transport 22
2.1 Non-economic regulations 22
2.2 The growth of economic regulation 24
2.3 Bilateral air services agreements 25
2.4 Inter-airline pooling agreements 28
2.5 Inter-airline royalty agreements 31
2.6 The role of IATA 33
2.7 Limited regulation of non-scheduled air services 37
2.8 The economic consequences of international regulation 39
3 Deregulation and its Impact on the Industry 43
3.1 The case for and against regulation 43
3.2 The regulatory system under pressure after 1972 45
3.3 Moves towards deregulation 48
v
3.4 Reversal of US aviation policy 49
3.5 New concepts in international regulation 51
3.6 Bermuda 2: the United States-United Kingdom bilateral 53
3.7 Deregulation through bilateral renegotiation 54
3.8 The Show Cause Order and the declining influence of IATA 57
3.9 Deregulation spreading 58
3.10 The impact of international deregulation on the North Atlantic and 61
transpacific
3.11 Competition in international air transport in theory and practice 70
4 1992 and All That—Liberalization in Europe 74
4.1 The focus switches to Europe 74
4.2 Bilateral liberalization 74
4.3 Multilateral liberalization 77
4.4 The impact of deregulation on European air transport 88
5 The Structure of Airline Costs 100
5.1 The need for costing 100
5.2 The traditional approach to airline costs 101
5.3 Trends in airline costs 110
5.4 The concept of ‘escapability’ 112
5.5 Allocation of costs 117
6 Determinants of Airline Costs 120
6.1 Management control of costs 120
6.2 Externally determined input costs 123
6.3 The influence of demand on costs 134
6.4 Aircraft type and characteristics 135
6.5 Pattern of operations 144
6.6 Marketing policy 152
6.7 Financial policies 158
6.8 The quality of management 162
7 The Economics of Passenger Charters 164
vi
7.1 The nature of non-scheduled passenger services 164
7.2 The charter airlines 167
7.3 Non-scheduled cost advantages 170
7.4 The Cascade and Reverse Cascade studies 178
7.5 Planning and financial advantages 181
7.6 Charter versus scheduled competition 184
8 Airline Marketing—The Role of Passenger Demand 188
8.1 The interaction of supply and demand 188
8.2 The role of airline marketing 190
8.3 The pattern of air travel 192
8.4 Socioeconomic characteristics 194
8.5 Market segmentation 195
8.6 The peak problem 198
8.7 Factors affecting passenger demand 203
8.8 Income and price elasticities of demand 207
9 Forecasting Demand 216
9.1 The need for forecasts 216
9.2 Qualitative methods 218
9.3 Time-series projections 220
9.4 Causal models 230
9.5 Choice of forecasting technique 240
10 Product Planning 244
10.1 Key product features 244
10.2 Schedule-based features 245
10.3 The hub-and-spoke concept 248
10.4 Comfort-based product features 252
10.5 Convenience features and the role of CRS 256
10.6 Airline image 262
11 Pricing Policies and Fare Structures 263
vii
11.1 Objectives of airline pricing policy 263
11.2 The inherent instability of airline tariffs 265
11.3 Alternative pricing strategies 267
11.4 Setting passenger tariffs 270
11.5 Choice of price and product strategies 276
11.6 Passenger fare structures 277
11.7 The role of yield management 283
11.8 Geographical differences in fare levels 288
11.9 Determinants of airline passenger yields 290
12 The Economics of Air Freight 296
12.1 Air freight trends 296
12.2 The challenge of the integrated carriers 300
12.3 The demand for air freight services 302
12.4 The role of freight forwarders 306
12.5 The economics of supply 309
12.6 Pricing of air freight 314
12.7 Future prospects 319
13 Future Problems and Prospects 320
Appendix A: Freedoms of the Air 324
Appendix B: Definition of Airline Terms 325
Bibliography 327
Index 333
Acknowledgements
The international airline industry is complex, dynamic and subject to rapid
change and innovation. To understand its economic and operational features one
must be close to its pulse-beat. In this I have been fortunate: for over 15 years I
have been lecturing at the Royal Aeronautical Society’s Air Transport Course
held annually at Oxford and at the similar course in Manila organized for the
Orient Airlines Association by the Asian Institute of Management. These courses
bring together each year a group of managers with wide international experience
from various fields of air transport. They provide an open forum for frank
discussion of airline trends and problems, where established truths are constantly
questioned. I am indebted to the numerous participants at Oxford and Manila
who, through their comments and questions, have helped me gain a deeper
insight into the workings of the airline business. For the same reasons I would
like to thank my former students at the Polytechnic of Central London and the
participants of the various in-house air transport courses I have taught for airlines
such as SIA, Malaysia Airlines, Thai International and others.
In the years of my involvement with air transport there have been so many
who have influenced my thoughts that it is difficult to mention them all. But I
would like to single out Stephen Wheatcroft, Peter Smith, Professor Bobby Lim
and Tom Bass. Over many years they have given me the benefit of their wide
aviation experience and have always been willing to discuss new ideas and
concepts. In addition I would like to thank Anne Graham and Dr Nigel Dennis,
of the Air Transport Unit at the Polytechnic of Central London, who have
generated much original research. This book has benefited significantly from
their work and valued comments. Thanks are also due to the staff of the Civil
Aviation Authority’s Library in London. They have always been most helpful
and willing to search for obscure articles and statistics that no one else has ever
asked for. The library undoubtedly provides an invaluable service to the air
transport industry and to researchers. I am also indebted to Airbus Industrie for
their help with some of the diagrams in Chapter 6.
Lastly, I am grateful to my wife Sally, who, with her television journalist’s
flair and abandon—‘don’t let the facts get in the way of a good story’—has
always encouraged me in writing this book. I am also thankful to Dimitri and
Chloe for their understanding and for not taking me too seriously.
Introduction
In the five years since the first edition of this book appeared the international
airline industry has changed dramatically. The trend towards deregulation has
become widespread and has brought with it new operating practices and
management concepts. This second edition sets out to reflect these changes.
A great deal in the book is entirely new. The title, however, remains the same!
The first edition appeared in 1985 at the end of a period of unprecedented losses
in the international airline industry. The title ‘Flying off Course’ pinpointed the
apparent inability of airline managers effectively to match supply of and demand
for air transport so as to generate profits. After 1986 the profitability of the
industry world wide improved dramatically. The managers seemed to have got it
right. Is the title of the book still justified and relevant? The answer must be yes,
because as the 1990s progress more and more airlines will see their profits
reduced or disappear altogether. Yet as the 1980s ended the industry was buzzing
with success and looking forward to continued, if less rapid, growth.
During the last 35 years the airline industry has undergone an expansion
unrivalled by any other form of public transport. Its rate of technological change
has been exceptional. This has resulted in falling costs and fares, which have
stimulated a very rapid growth in demand for its services—a seemingly
insatiable demand. In addition, for much of the period scheduled airlines have
enjoyed considerable protection from both internal and external competition.
Any other industry faced with such high growth of demand for its products while
cushioned from competition would be heady with the thought of present and future
profits. But not the airline industry. It is an exception to the rule. High growth
has for the most part spelt low profits. Increased demand has not resulted in
financial success. While some airlines have consistently managed to stay well in
the black, the industry as a whole has been only marginally profitable.
The conundrum of high growth and poor financial performance, which
characterizes the airline industry, is the background to this book. It is partly
explained by some of the problems facing the industry recently. The most
dramatic have been the increase in fuel prices in 1974 and 1978/9 and the world
economic recession which followed. That recession coincided with the easing of
many of the economic regulations and controls on air services. This
happened most dramatically and rapidly in the United States from 1978 onwards