Flying Off Course: The Economics of International Airlines 3rd Edition

366 Pages·2002·1.37 MB·English

by  Rigas Doganis

Flying off Course
Third edition
The airline industry presents an enigma: high growth rates during the last
forty years have produced only marginal profitability. This book sets out to
explain, in clear and simple terms, why this should be so. It provides a unique
insight into the economics and operation of international airlines.
Flying off Course has established itself over the years as the indispensable
guide to the inner workings of this exciting industry. This enlarged third
edition, completed after September 2001, brings the story fully up to date
and includes much new material on key topics such as airline costs, ‘open
skies’ agreements and airline pricing.
Much has happened in the ten years since the second edition of this book
first appeared. Airline professionals and transport students will be eager tohear
Doganis’s views which are given added force by his own experience as
Chairman and Chief Executive Officer of Olympic Airways in themid-1990s.
Rigas Doganis is an airline and airport consultant. He is also Visiting Pro-
fessor in Air Transport at the College of Aeronautics, Cranfield University
and former Chairman and CEO of Olympic Airways in Athens. He is the
author of the hugely successful books The Airport Business and The Airline
Business in the 21st Century, also published by Routledge.
H
Flying off Course
The economics of
international airlines
Third edition
Rigas Doganis
London and New York
First published 1985
by HarperCollins Academic
Second edition 1991
Reprinted 1992, 1993, 1995, 1996, 1998 (twice), 2000, 2001
Third edition 2002
by Routledge
11 New Fetter Lane, London EC4P 4EE
Simultaneously published in the USA and Canada
by Routledge
29 West 35th Street, New York, NY 10001
Routledge is an imprint of the Taylor & Francis Group
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.”
© 1985, 1991, 2002 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 has been requested
ISBN 0-203-99526-0 Master e-book ISBN
ISBN 0-415-21323-1 (hbk)
ISBN 0-415-21324-X (pbk)
Contents
List of tables viii
List of illustrations xi
Acknowledgements xii
List of abbreviations xiv
Introduction 1
1 Characteristics and trends in airline operations 4
1.1 The paradox 4
1.2 The essence of airline planning 6
1.3 Rapid technological change 9
1.4 Impact of new technology 11
1.5 Declining yields 14
1.6 A cyclical industry 15
1.7 International focus shifts to East Asia 20
1.8 Passenger and freight business 22
1.9 The nature of the airline product 24
2 Traditional bilateralism: a highly regulated industry 26
2.1 Two regulatory regimes 26
2.2 Non-economic regulations 27
2.3 The growth of economic regulation 30
2.4 Bilateral air service agreements 31
2.5 Purchasing traffic rights 35
2.6 Inter-airline pooling agreements 36
2.7 The role of IATA 39
2.8 Limited regulation of non-scheduled air services 43
2.9 Operational constraints imposed by the regulatory framework 45
3 Liberalisation: open markets and open skies 48
3.1 The case for and against regulation 48
3.2 Mounting pressure for liberalisation 50
3.3 Reversal of US aviation policy 51
vi Contents
3.4 Open market phase of liberalisation, 1978–91 53
3.5 The United States pushes for ‘open skies’, 1992 onwards 60
3.6 ‘Open skies’ within the European Union 66
3.7 The missing pieces 69
4 The structure of airline costs 75
4.1 The need for costing 75
4.2 The traditional approach to airline costs 76
4.3 Direct operating costs 78
4.4 Indirect operating costs 85
4.5 Trends in airline costs 87
4.6 The concept of escapability 92
4.7 Allocation of costs for operating decisions 97
5 Determinants of airline costs 101
5.1 Management control of costs 101
5.2 The influence of demand on costs 104
5.3 Externally determined input costs 106
5.4 The cost of labour 115
5.5 Aircraft type and its characteristics 120
5.6 Route structure and network characteristics 128
5.7 Airline marketing and product policy 137
5.8 Financial policies 145
5.9 Corporate strategy 148
5.10 The quality of management 150
6 The economics of passenger charters 151
6.1 The charter enigma 151
6.2 The nature of non-scheduled passenger services 153
6.3 The charter industry 156
6.4 Vertical integration and consolidation 159
6.5 Financial performance 161
6.6 Cost advantages of charter operations 162
6.7 Planning and financial advantages 173
6.8 Charter versus scheduled competition 177
7 Airline marketing: the role of passenger demand 180
7.1 The interaction of supply and demand 180
7.2 The role of airline marketing 181
7.3 The motivation for air travel 183
7.4 Socio-economic characteristics of air travellers 186
7.5 Market segmentation 188
7.6 The peak problem 190
7.7 Factors affecting passenger demand 196
7.8 Income and price elasticities of demand 200
Contents vii
8 Forecasting demand 208
8.1 The need for forecasts 208
8.2 Qualitative methods 210
8.3 Time-series projections 212
8.4 Econometric or causal methods 222
8.5 Choice of forecasting technique 233
9 Product planning 236
9.1 Key product features 236
9.2 Schedule-based features 238
9.3 Comfort-based product features 241
9.4 Convenience features 245
9.5 Airline image 250
9.6 The ‘hubbing’ concept 254
9.7 The economics of hubbing 258
10 Pricing policies and fare structures 264
10.1 Objectives of airline pricing policy 264
10.2 Inherent instability of airline tariffs 266
10.3 Alternative pricing strategies 271
10.4 Choice of price and product strategies 276
10.5 Structure of passenger fares 277
10.6 The role of revenue management 282
10.7 Relating passenger tariffs to costs 288
10.8 Determinants of airline passenger yields 294
11 The economics of air freight 300
11.1 Freight traffic trends 300
11.2 The key players 304
11.3 The demand for air freight services 307
11.4 The challenge of the integrated carriers 312
11.5 The role of freight forwarders 315
11.6 The economics of supply 318
11.7 The pricing of air freight 323
11.8 Marginal profitability 329
11.9 Future prospects 332
Appendix: Freedoms of the air 336
Glossary of common air transport terms 337
Bibliography 340
Index 345
Tables
1.1 Operating results, selected airlines, 1999 7
1.2 Impact of technological advance on aircraft productivity 10
1.3 Average annual growth of scheduled international passenger
tonne-kms by region, 1978–97 20
1.4 Regional distribution of international scheduled tonne-kms,
1973–99 21
1.5 Distribution of traffic and revenue on scheduled services of
ICAO airlines, 2000 22
1.6 Traffic mix on international scheduled services, 2000 23
3.1 Key features of traditional and post-1978 ‘open market’
bilaterals 58
3.2 US ‘open market’ and post-1991 ‘open skies’ air service
agreements 65
4.1 Sources of Singapore Airlines’ profits, 1999–2000 77
4.2 Traditional categorisation of airline operating costs 79
4.3 Operating costs: scheduled airlines, ICAO member
states, 1980–99 88
4.4 Distribution of costs, IATA international scheduled
services, 1999 91
4.5 Cost structure based on fixed and variable direct
operating costs 95
5.1 Unit operating costs of major international airlines, 1999 102
5.2 Factors affecting airline operating costs 103
5.3 Average fuel prices paid by international scheduled airlines,
September 1999 107
5.4 Average fuel prices paid by international airlines at selected
airports, October 2001 108
5.5 Representative airport charges for a Boeing 747-400 aircraft,
October 2000 111
5.6 Comparative en-route charges in selected countries for
Airbus A321, 2001 113
5.7 Average annual remuneration of key staff of selected
major airlines, 1998 117
Tables ix
5.8 Impact of different airline seating density on costs per
seat, 1997 139
5.9 Passenger services expenditure on intra-European services,
1999 141
5.10 Advertising spend in UK by selected Asian airlines, 1995 143
5.11 Expenditure on ticketing, sales and promotion, selected
airlines, 1999 144
6.1 Conventional scheduled and charter fares, London–Athens,
summer 2000 152
6.2 Significance and distribution of passenger charters, 2000 156
6.3 Major carriers of non-scheduled passenger traffic, 2000 157
6.4 Vertical integration and consolidation in the UK charter
industry, 2000 160
6.5 Operating margin of larger UK scheduled and charter
airlines, 1999 162
6.6 Aircraft utilisation rates, UK scheduled and charter
airlines, 2000 165
6.7 Expenditure on passenger services, UK scheduled and
charter airlines, 1999–2000 167
6.8 Marketingcosts,UKscheduledandcharterairlines,

1999–2000 169
6.9 Passenger load factors on international services, 1999 171
6.10 Cascade analysis: charter versus scheduled cost,
London–Athens 174
7.1 Purpose of travel on air services between London-Heathrow
and selected markets, 1999 185
7.2 Passenger load factor of European airlines, peak summer
month, August 2000 194
7.3 Factors affecting the level and growth of passenger demand 196
7.4 Predicted income elasticities of demand for international
leisure trips to and from London airports 202
7.5 Short-haul international daily return service with 200 seats
and $100 single fare 204
7.6 Impact of $110 single fare 205
7.7 Impact of $90 single fare 205
7.8 Impact of two-fare price structure 206
7.9 Price and income elasticities of demand for scheduled air
travel within Europe 207
8.1 Total passenger traffic, London–Nice, 1972–83 215
8.2 Alternative time-series forecasts (1984) of London–Nice
traffic for 1988 220
8.3 Actual London–Nice traffic, 1983–88 220
8.4 Alternative time-series forecasts (made in 1995) of
London–Nice scheduled traffic for 1999 221
8.5 Attributes of airline passenger forecasting techniques 234