air transportation a management perspective by john g. wensveen

7/22/2019 Air Transportation a Management Perspective by John G. Wensveen

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Contents

About the Author ix

Preface xiAcknowledgments xxi

PART ONEAN INTRODUCTION TO AIR TRANSPORT

1 Aviation: An Overview 3Introduction 4Te Aerospace Industry 4Te Air Transportation Industry 21

2 Historical Perspective 29Introduction 31Te Formatie Period: 19181938 31Te grot Years: 19381958 39Maturityjets Arrie: 19581978 42Economic Deelopments Prior to Dereulation 43Federal Leislation and te Airlines 46Postdereulation Eolution 60general Aiation 67

3 Air Transportation: Regulators and Associations 79

Introduction 80Te Department of Transportation 81Te Federal Aiation Administration 87Te Transportation Security Administration 95Te National Transportation Safety Board 95Maor Aiation Associations 100

4 The General Aviation Industry 111Introduction 112general Aiation Statistics 112Te general Aiation Support Industry 127

The Available MarketThe Users 136


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PART TWOSTRUCTURE AND ECONOMICS OF AIRLINES

5 The Airline Industry 147Introduction 148Structure of te Airline Industry 148Maor and National Carriers 151Reional Carriers 154Airline Statistics 158Airline Certication 158Data Collection by te DOT 162Industry Areements 163Trac and Financial Highlights: 19602005 165

6 Economic Characteristics of the Airlines 175Introduction 176Te Airlines as Oliopolists 177Oter Unique Economic Caracteristics 186The Signicance of Airline Passenger Load Factors 191

PART THREEMANAGERIAL ASPECTS OF AIRLINES

7 Airline Management and Organization 201

Introduction 202Manaement 202Te Ne Corporate Structure 206Functions of Manaement 210Oranization 213Te Oranizational Cart 216Sta Departments 218Line Departments 223

8 Forecasting Methods 243Introduction 244

Te Purpose of Forecastin 244Forecastin Metods 246

9 Airline Passenger Marketing 257Introduction 258Development of the Marketing Concept 259The Marketing Mix 260The Consumer-oriented Marketing Concept 269Marketing Strategies Since Deregulation 274


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10 Airline Pricing, Demand, and Output Determination 283Introduction 285Te Trend in Domestic Passener Airfares 285

Pricin and Demand 288No-frills Airfare and Surey warfare 296Types of Passener Fares 297Te Pricin Process 298Airline Costs 304Pricin and Output Determination 309

11 Air Cargo 319Introduction 321historical Oerie 321Air Caro Today 325

Te Future 328The Market for Air Freight 329Types of Air Freit Rates 331Special Air Freit Serices 333Factors Aecting Air Freight Rates 337

12 Principles of Airline Scheduling 343Introduction 344Te Mission of Scedulin 344Equipment Maintenance 346Flit Operations and Cre Scedulin 349

ground Operations and Facility Limitations 351Scedule Plannin and Coordination 353Equipment Assinment and Types of Scedules 364Hub-and-Spoke Scheduling 366Data Limitations in Airline Scedulin 369

13 Fleet Planning: The Aircra Selection Process 373Introduction 374Factors in Fleet Plannin 374Desin and DeelopmentTe Manufacturers viepoint 382Te Fleet-plannin Process 387

Te Decision to Uprade or Replace 392Appendix: Fleet Plannin at American Airlines 396

14 Airline Labor Relations 399Introduction 400Te Railay Labor Act and te Airlines 401historical Oerie of Airline Union Actiity 406Labor Relations Since Dereulation 412human Resources in te 21st Century 423


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15 Airline Financing 427Introduction 428Sources of Funds 428

Sources and Uses of Funds by te U.S. Sceduled Airlines 437Cas Manaement and Financial Plannin 450

PART FOURTHE INTERNATIONAL SCENE

16 International Aviation 459Introduction 460Te Question of Soereinty in Airspace 460International Air La 463

Te Formation of IATA 470Te Bermuda Areement of 1946 471Tree Decades Later: From Bermuda to Dereulation 472The Pursuit of Open Skies 476globalization 480Future Callenes 484

Appendix A: Views of Industry Professionals 489Introduction 490Quotes 490

Article 492

Appendix B: Career Planning in Aviation 499Introduction 500Choosing and Geing Your First Job in Aviation 500Cover Leers and the Rsum 506Te Interie 508

Glossary 521Index 551


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ix

About the Author

Dr. jon wenseen is considered one of te aiation industrys leadin experts on lo-costand lo-fare i alue airline operations and is currently President & CEO of AirlineVisions, an advisory and futurist rm specialized in air carrier start-ups.

he as been dubbed te idea factory by many of is colleaues and as te abilityto identify trends and focus on fast results. Dr. wenseen is a leadin expert on businessand strategic plan development, marketing and branding, diversication strategies,partnersip deelopment, due dilience and M&A. Consultin proects include businessplan development for low-cost carrier (LCC) start-ups, formulation of strategic growthrecommendations, manain of clients rot mission and operational obecties,proidin ision and leadersip to carry out mission, and buildin of relationsips. Dr.wenseens consultin practice also includes expert itness testimony and adisoryservices to the television and lm industries.

In addition to aiation consultin, Dr. wenseen adises non-aiation oranizations onstrateic steps to success. he is an expert in sootin oles trou existin businesses

and identifying a corporations strengths, weaknesses, opportunities and threats utilizinga customized plan of action.

Until Marc 2005, Dr. wenseen as vice President of International Deelopment itWashington-Dulles based MAXjet Airways, the rst start-up US ag carrier to obtainFAA certication to operate on the trans-Atlantic since the events of 9/11. Dr. Wensveensinolement it MAXet started in 2003 as one of te foundin team members. wile atMAXet, e led partnersip deelopment it airlines, airports, international oernmentbodies, round andlin and security oranizations and represented te company asspokesperson. Dr. Wensveen was responsible for seing up the European infrastructureincludin round operations and as responsible for oerall P&L of European operationsand some aspects of US operations. While at MAXjet, he managed quick growth and

aided in te build out of a stron executie team.From 1999 to 2004, Dr. wenseen as employed as Professor of Airline Manaement

and Operations it te Scool of Business at Embry-Riddle Aeronautical Uniersity inDaytona Beac, Florida instructin courses at te underraduate, raduate and executielevels. He was the project lead on the creation of the worlds rst Airline OperationsCenter Simulation Laboratory (AOCSL), an international project in partnership withmajor aviation/aerospace companies including airlines, airports, ground handlingoranizations, manufacturers, academic institutions, and oernment at te local, federaland international leels. wile at Embry-Riddle, Dr. wenseen built a reputation in teaviation industry as one of the leading experts in his eld. He is well connected andrecognized for his thought leadership and subject maer expertise.


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In te early 1990s, Dr. wenseen as employed it Canada 3000 Airlines oldinsupervisory positions in ight operations and later, passenger services. While at Canada3000, he assisted with the management of quick growth and was a leading contributor to

base expansion in the Pacic.Dr. wenseen is a member of a number of professional oranizations and is a frequent

speaker at international aviation events. He is a faculty member of the International AirTransport Association (IATA) and is author of the Air Mercury and Strategic Managementcourses presented at IATA trainin centers around te orld. he is also an adunct facultymember of the University of Maryland University College (UMUC), University of theWest Indies (UWI) and Royal Roads University (RRU). He is also a faculty member of theArab Air Carriers Association (AACA).

Dr. wenseen publises frequently in maor aiation publications and is an aiationanalyst for the media oen seen on major television networks and quoted in majornespapers and maazines around te orld. he is autor of Nort Americas leadin

aviation textbook entitled,Air Transportation: A Management Perspective and is autor ofanother successful book entitled, Wheels Up: Airline Business Plan Development.

From 1996 to 1999, Dr. wenseen osted a number of leadin radio sos in teUnited Kindom and as aarded Best Male Presenter in 1997 at te BBC Radio OneAards.

Dr. wenseen, born and raised in vancouer, Canada earned a P.D. in InternationalAir Transport Management with a focus on Business, Strategy and Marketing from theUniversity of Wales Cardi (United Kingdom) and a B.A. in Geography and TransportationPlanning from the University of Victoria (Canada).


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Preface

It was only three years ago since the h edition of this book was published and thelobal aiation industry as experienced numerous canes tat in many cases, erenot predicted. Te sixt edition ofAir Transportation: A Management Perspective coers te

reasoning behind such changes and aempts to forecast the future to a certain degree interms of o air transportation ill eole.

On September 11, 2001, te aiation industry started a ne era in istory as a resultof the terrible terrorist aacks against the United States. The Iraqi crisis, Severe AcuteRespiratory Syndrome (SARS), record fuel and oil prices, massive nancial losses, loomingtreats of terrorism, and political instability ae contributed to continued restructurinof te industry. general aiation, includin business aiation, and commercial aiationae been impacted as ae manufacturers and all oter participants in aiation. At tetime of te last printin, te industry as in a period of surie, adapt and recoer. Today,the industry is in a period of rethink resulting in organizations becoming more ecientas a result of recent turbulent times. Airlines continue to fail as ill alays be te case

but there are a lot of positive success stories at the same time. Aircra manufacturers likeAirbus and Boeing have experienced positive growth with the design of new and ecientaircra while regional jet manufacturers have experienced, in some cases, negative resultsdue to the changing nature of route network development and airline restructuringprorams. Suc manufacturers are bein faced it te callene of determinin atthe next stage in aircra technology is.

The previous edition of this book said 2005 would be the year in which the global airtransportation industry would be back at normal levels. For the most part, this is true.Some regions of the world were somewhat isolated from the events of 9/11 and morerecent events and air carriers of dierent types and sizes are excelling. In other regions ofthe world, there are distinctive growth paerns ranging from slow to fast. Load factors

are back up to regular levels and yet airlines continue to struggle as a result of annuallyincreasin operational costs.

Te lobal air transportation industry canes on a daily basis and it is important tounderstand tis cane must be examined on a reional basis more so tan a lobal basis.As dened by the International Civil Aviation Organization (ICAO), the world consistsof North America, Latin America and Caribbean, Europe, Asia-Pacic, Africa and MiddleEast. Building on a tested framework of subject areas, this book incorporates the trends,callenes and strateies impactin all reions of te orld creatin a modern reisionsuitable for academic and industry use for some time to come. Te callene of an autorwriting a new edition of a well established book, is to produce something readers arealready familiar it but are introduced to ne information aboe and beyond te

predecessor.

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Te sixt edition remains introductory in nature proidin te reader it a solidfoundation of te air transportation industry and a reater appreciation of te maormanaement functions itin an airline. various references are proided at te end of

each chapter encouraging the reader to explore and keep abreast of current periodicalssuc asAirline Business, Air Transport World, Aviation Week and Space Technology, Air CargoWorld, Business and Commercial Aviation, Commuter Air, Interavia, Air Pilot, and ProfessionalPilot. The reader should grasp enough knowledge to reason accurately and objectivelyabout problems facin te industry and te deelopment of a lastin interest in teair transportation industry. Te basic concepts and problems facin te industry in astraitforard and loical fasion are presented trouout eac capter.

CHANGES IN THE SIXTH EDITION

Completely updated to reect the challenges facing airlines in the 21st century, this textproides compreensie, sopisticated coerae of bot classic and current practices inair transportation manaement. Te reader is uided trou te ins and outs of te airtransportation industry as ell as trou te details of manaement functions itinairlines. Tis edition places reater empasis on te lobal airline industry, it suctopics as airline passenger marketing, labor relations, nancing, and heightened securityprecautions integrated throughout the text. Tables, gures, statistics, key terms, reviewquestions, and lossary terms ae been added and updated.

One important change since the last edition of this book is the retirement of Dr.Alexander wells o is no enoyin traelin te lobe it is ife, Mary. I am ratefulto Dr. Wells for bringing me on board as co-author of the h edition and allowing me

to proceed it te sixt edition. Dr. wells contributions to academia and industry areknown throughout the world. He represents one era of aviation having witnessed itsrot decade by decade. Te torc as no been passed leadin to a ne era of aiation.I wish Dr. Wells the very best life has to oer. Enjoy retirement!

TEACHING AND LEARNIN G AIDS

The substantive content of a textbook is only part of what makes it usable in the classroom;for the book to be eective, its content must be taught by instructors and learned bystudents. To facilitate the process, this edition continues to pay particular aention to

teacin and learnin aids, suc as te folloin:

1. Chapter outlines. Eac capter opens it an outline of te maor topics to becoered.

2. Chapter checklists. Aer the outline, each chapter includes a checklist of objectives thatstudents sould be able to accomplis on completin te capter.

3. Relevancy. Most of te examples, applications, and extensions of te basic material aredran from and apply to te air transportation enironment of te 1990s.


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4. Staying power. Te text is desined to ae stayin poer oer te years. It empasizeste underlyin principles, practices, and policies tat ill not cane appreciablyoer time. It is reconized tat instructors ill supplement te material it current,

topical applications and eents.

5. Figures and tables. Important points in eac capter are illustrated it stron isualmaterials.

6. Logical organization and frequent headings. Air transportation can easily becomeoerelmin in its multitude of topics, concepts, practices, and examples. Tematerial covered here has been put in a systematic framework so that students knowere tey ae been, ere tey are, and ere tey are oin in te text. Frequenteadins and subeadins aid oranization and readability.

7. Key terms. Each chapter concludes with a list of key terms used in the text.

8. Review questions. Reie questions at te end of eac capter address importantpoints.

9. Appendix and suggested readings. One capter includes an appendix tat is of practicalinterest and tat reinforces te material coered. A list of suested readins isincluded in eac capter for students o is to pursue te material in reaterdept.

10. Career appendix. Tis edition once aain includes an appendix on obs in te air

transportation eld and ways to get them.

11. Glossary of air transportation terms. All key terms appearing at the end of eachchapter, as well as many other terms used in the text and others of signicance in airtransportation, are included in te lossary.

12. Complete index. The book includes a complete index to help students nd neededinformation.

INTENDED AUDIENCE

Because the aspirations of most students of air transportation (and, for that maer, mostcareer paths) lead to the airline segment of the air transportation industry, the major focusof tis text is on te manaement functions and oranization of airlines. hoeer, tesignicance and contribution of general aviation is not overlooked.

This book is intended for three somewhat dierent audiences with similar interests:students enrolled in a course such as Air Transportation or Airline Management;students in transportation and trafc management programs who wish to gain moreinsit into te air transportation industry because most of teir classes concentrateon surface transportation modes; and individuals who work for an airline and want togain a beer understanding of managerial aspects. Too oen, an airline employee, as a

specialist, sees only a limited part of the overall operation and has lile, if any, knowledge


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of such important subjects as marketing, pricing, scheduling, and eet planning. Evenindividuals within marketingreservations, for examplehave lile appreciation oftheir companys growth strategies and market segmentation. These employees are simply

too busy fullling the functions of the particular job description.

ORGANIZATION OF T HE TEXT

Te folloin is an outline ofAir Transportation: A Management Perspective, sixt edition.

Part One An Introduction to Air Transportation

Capter 1 Aiation: An Oerie. Capter 1 introduces students to techaracteristics, scope, and economic signicance of the aerospace

industry and its major segmentsthe government market and thecommercial market for air transport and general aviation aircra. Theair transportation industry is clearly dened, and its contribution to theeconomy is discussed in dept.

Chapter 2 Historical Perspective. This chapter provides a historical sketch of U.S.airlines and eneral aiation, includin te federal leislation tat asaected their growth and development. The Airline Deregulation Act of1978 and te circumstances leadin up to it are torouly explored. Tepostdereulation era from 1978 to te early 2000s is discussed, includincanes in te structure of te industry and ne airliners enterin temarket (low-cost carriers, virtual carriers, and mega-carriers).

Capter 3 Air Transportation: Reulators and Associations. Tis capterdiscusses te roles played by te four primary federal aencies tatinterface it bot sements of te air transportation industry:the Department of Transportation (DOT), the Federal AviationAdministration, te Transportation Security Administration, and teNational Transportation Safety Board. The ofces at the Departmentof Transportation responsible for carryin out te remainin functionsof te former Ciil Aeronautics Board are torouly explored. Tepurpose and maor functions of te prominent aiation trade associationsare also described.

Capter 4 Te general Aiation Industry. Tis capter concludes Part One by

reiein te eneral aiation industry, includin its statistics and adescription of idely dierse sements accordin to teir primary usecateories. Oter topics include te role of eneral aiation airports, FAAserices to eneral aiation, and te eneral aiation support industry,which, like a three-legged stool, is made up of the manufacturers, thexed-base operators, and the users of general aviation aircra.

Part Two Structure and Economics of the Airlines

Capter 5 Te Airline Industry. Tis capter reies te current structureof the U.S. airline industry and its composite nancial and

trafc statistics. A complete discussion of the postderegulation


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expansion, consolidation, and concentration of te industry isincluded. Te roin role of reional carriers and ne typesof airlines is torouly discussed. Tis capter also includes a

section on airline certication, including types of and requirements forcertication and ofces within the DOT responsible for this importantfunction. Te current trend of intra-industry areements, suc as codesharing and other cooperative eorts, are described in detail.

Capter 6 Economic Caracteristics of te Airlines. Tis capter deals itte economic caracteristics of oliopolies in eneral and te uniquecharacteristics of airlines in particular. Aention is also given to theeconomic forces in te postdereulation period tat ae led to suc mea-carriers as American, United, Continental, and Delta. The signicance ofairline passener load factors is torouly explored. Tis capter alsodiscusses how the industry has changed since the events of 9/11 and

current lobal eents.

Part Three Managerial Aspects of Airlines

Capter 7 Airline Manaement and Oranization. Te openin capter of PartTree introduces students to te principles and practices of airlinemanagement and organization. The dierent levels of managementitin an airline are explored, alon it te functions of manaementplanning, organizing, stafng, directing, and controlling. This isfolloed by a compreensie reie of oranization plannin anda description of a typical maor air carriers oranizational structure,

includin te purpose and function of arious administrations anddepartments. Departmentalization and te need for ne diisionsitin te oranization, suc as safety and security and trainin, areintroduced.

Capter 8 Forecastin Metods. Forecastin is extremely important in temanaement of airlines. All plannin inolin personnel and equipmentneeds is based on forecasts of future trafc and nancial expectations. Fortis reason, tis capter naturally precedes all of te capters relatinto te oter manaerial aspects of airlines. Te purpose of tis capteris to expose students to the primary forecasting methods used by rmsenaed in air transportation.

Chapter 9 Airline Passenger Marketing. This chapter begins with a discussionof how the marketing of air transportation has changed over the years.The marketing mix (product, price, promotion, and place) is analyzed indepth, and the consumer-oriented marketing concept of the late 1990sand early 2000s is discussed. Various current airline marketing strategiesare ten explored, includin suc intensie approaces as ainin deepermarket penetration, increasing product development, and developingnew target markets. Direct marketing, computerized reservation systems(CRSs), travel agents, frequent-ier programs, business-class service, codesharing, hub-and-spoke service, and advertising and sales promotion areall ilited.


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Capter 10 Airline Pricin, Demand, and Output Determination. Tis capterfocuses on pricin, certainly one of te most olatile of te four Ps ofmarketing since deregulation. Subjects include the determinants of airline

passener demand and elasticity of demand. Te types of airline passenerfares are discussed, folloed by in-dept coerae of te pricin process,includin pricin strateies and obecties, pricin analysis, and te stepsinoled in analyzin fare canes. Te important role of inentory, oryield, manaement is addressed as ell. Tis is folloed by an in-deptdiscussion of airline operating costs, prot maximization, and outputdetermination in te sort run.

Chapter 11 Air Cargo. Aer a brief discussion of the history of air cargo in theUnited States, students are introduced to te importance of air expressand air freit today and to te expectations for future rot in teindustry. The market for air freight is then covered, including the types

of air freit rates. Special air freit serices are discussed, as are factorsaecting air freight rates. The concept of the very large aircra (VLA) isalso discussed.

Capter 12 Principles of Airline Scedulin. Unquestionably one of te most criticaland yet most difcult tasks facing airline management is schedulingequipment in the most efcient and economical manner. This chapter dealswith the many internal and external factors that aect schedule planning.Types of scedules are discussed, alon it seeral examples of o acarrier goes about puing a schedule together. The chapter concludeswith a discussion of hub-and-spoke scheduling and its importance in thecompetitie postdereulation enironment of te 1980s, 1990s, and 2000s.

Chapter 13 Fleet Planning: The Aircra Selection Process. The decision to purchasenew aircra is certainly one on which management expends a great dealof time and eort. This crucial decision will entail millions of dollars, andits eects will remain with the carrier for years. Students are introduced tothe aircra selection process, rst from the standpoint of the manufacturerand ten from te indiidual carriers iepoint. Te trend toardleasin is torouly explored, alon it te roin problem of noiserestrictions on older aircra. All of the inputs to the process are addressed,as are the criteria by which a carrier evaluates a particular aircra. The newgeneration of aircra, including the regional jet and new long-range twin-engine aircra, are introduced. The chapter concludes with an appendix

demonstrating the eet-planning process at American Airlines.Capter 14 Airline Labor Relations. Representin oer 35 percent of a typical

carriers operatin expense, labor is certainly one of te most importantareas of concern to manaement. Tis capter opens it a toroudiscussion and analysis of te Railay Labor Act, folloed by a reieof the collective bargaining process under the act. A historical sketch ofairline union actiity in te United States, beinnin in te 1930s troute postdereulation period, also is proided. Tis capter educatesthe reader on trends aecting future development of human resourcesdepartments. Te capter ends it an oerie of te collectiebarainin process in recent years and its impact on te carriers.


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Chapter 15 Airline Financing. This chapter takes up the problem of airline capitalnancing. The major sources of funding are examined, followed bya discussion of te sources and te use of funds oer te to decades

following the introduction of jets. The nal portion of this chapter dealsit fundin sources in te 2000s and te important subects of casmanagement and nancial planning.

Part Four The International Scene

Chapter 16 International Aviation. The nal chapter rounds out the textcoerae of air transportation by addin te dimension of internationalaviation. Air transportation plays a signicant role in the movementof passeners and caro beteen countries, and tis capter discusses

o te arious international conferences and conentions aesaped orldide aiation. Te last section of te capter coers teinternational aviation market following passage of the International AirTransportation Competition Act of 1979. Te subects of lobalizationand international airline and airport alliances are torouly explored.

Appendix A Tis is a ne section, ic quotes te ies of airline industryprofessionals.

Appendix B Career Plannin in Aiation. Tis appendix proides a structuredapproac to te all-important subect of career plannin. Students aretaken through the steps of choosing and geing their rst job in aviation,identifying sources of career information, developing rsums, and

preparin for an interie. Included are numerous ob descriptions fromall sements of te aiation industry.

A NOTE TO INSTRUCTORS

Anyone o as taut courses in air transportation as surely reconized te paucityof texts on the subject. The few books that are available either are too broad in scope,resultin in a sallo oerie of most topics, or examine a particular sement of teindustry or phase of management in depth but with very lile breadth. I have aemptedto take a balanced approach, recognizing that most instructors will have their own ideas

regarding the importance of the subject maer under discussion and will supplementte text it teir on materials accordinly. Statistics appearin in tables and cartsae been dran from easily accessed sources, suc asAerospace Facts and Figures, FAAStatistical Handbook, and ATA annual reports, so tat tey can be readily updated by usersof te text.

This book is designed to carry its fair share of the burden of instruction. Students usingtis text sould not rely on you for detailed, repetitie explanations. Less class time isrequired to enerate functional understandin of te subect, so more time is aailablefor class discussion and te application of te material to current issues. In researcinthis book, I acquired a wealth of materials, most of them free, from numerous sources,includin te DOT, FAA, NTSB, ICAO, ATA, RAA, and World Aviation Directory. Te air

carriers are a ric source of material tat can be used to supplement your course: rite


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to the particular department about which you are seeking information. The GAMA, AIA,ATA, and individual aircra manufacturers can also supply a host of materials.

Anoter source tat I ae found elpful in our courses is te harard Business Scool

Case Serices, harard Business Scool, Boston, Mass. 02163. Some of te air transportationcases ill be appropriate for your courses, and te students ill enoy tem.

Suggested Outlines for a One-Semester Course

Courses in air transportation ary in content and empasis, and so ill te uses of tisbook. Some courses may cover the material from beginning to end; others will focus oncertain sections and omit the rest. Parts One and Two oer a broad-based introductionto air transportation and sould be suitable for most users. Airline manaement coursesmit focus on Parts Tree and Four.

These recommendations are exible. Other combinations are possible.

Capter Topic Introductory Air

Transportation

Course

Airline

Manaement

course

1. Aiation: An Oerie

2. historical Perspectie

3. Air Transportation: Reulators and Associations

4. Te general Aiation Industry

5. Te Airline Industry

6. Economic Caracteristics of te Airlines

7. Airline Manaement and Oranization

8. Forecastin Metods

9. Airline Passenger Marketing

10. Airline Pricin, Demand, and Output Determination

11. Air Caro

12. Principles of Airline Scedulin

13. Fleet Planning: The Aircra Selection Process

14. Airline Labor Relations

15. Airline Financin

16. International Aiation

A. vies of Industry Professionals

B. Career Plannin in Aiation


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A NOTE TO STUDENTS

I ear and I foretI see and I rememberI do and I understand

Confucius

The most eective and interesting way to learn any subject is by doing it. No professor ortextbook could ever teach you all about air transportation; all they can do is help you tolearn it. Muc of te learnin process is up to you. Tis text as been desined to be easyto understand. Usually, as you read te text, you ont ae to strule to et te meaninof a concept or principle. But understanding is one thing; learning something well andapplyin it to current eents is sometin else.

Before starting a chapter, review the chapter outline and checklist. Take notes andhighlight the major points as you proceed with your reading. Aer reading the chapter, see

if you can accomplish the objectives listed in the chapter checklist. The review questionsat te end of eac capter are also desined to brin out te most important points madein te capter.

Become familiar it aiation trade ournals and maazines. You ill be surprised tosee o many articles tere are relatin to te material discussed in class. Tis literaturewill not only enhance your own knowledge of the subject maer but also enrich yourclassroom experience as you discuss te material it classmates.

Tis is probably one of te most excitin periods in te brief istory of our airtransportation industry. wit te passae of te Airline Dereulation Act of 1978, e aeitnessed te emerence of a completely ne structure for air transportation serices inte United States. Te industry stands poised for a ne sure of rot. Many ne career

pats ill surface in te next seeral years for tose of you o ae prepared for tem.Good luck!


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Acknowledgments

My passion for aviation began at the age of three when I had to evacuate a large jet aircrawith an engine re. I was dressed in a pilots uniform proudly displaying my wings. Liledid I know the events of that day would change the course of my life and y me down

a path to a lifelong career in aviation. As a small child, my dream was to learn to y andaer a few hours holding the stick and a few years of maturity, I realized my real passionas aiation business.

I owe many thanks to the pioneers of aviation and the entrepreneurs of today thatcontinuously amaze me it ne deelopments. Tere are fe industries in existencewhere one can go to sleep at night and wake up the next morning faced with challengestat did not exist te day prior. Te excitement created by te daily stresses of tisbusiness keep me going and striving toward the design of the ultimate airline. Is thiseen possible?

Many thanks are owed to industry sources who provided a great deal of material thatwas extremely helpful in puing together this textbook. Thank you to the Department of

Transportation, Federal Aiation Administration, Transportation Security Administration,National Transportation Safety Board, Air Transport Association, Aircra Owners andPilots Association, International Ciil Aiation Oranization, and te International AirTransport Association. Additional thanks to Airbus Industrie, The Boeing Company,Raytheon Corporation, Cessna Aircra Company, and the New Piper AircraCorporation.

A textbook of this nature cannot come together without the assistance of a team. Thankyou to Ashgate Publishing especially Guy Lo.

Finally, I would like to show my appreciation and love for my parents, John Sr. andSandi, my sister, Kristy, and my lile girl, Bryanne. Your continued patience and supportill alays be remembered.

jon wenseen


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PART ONE

An Introduction toAir Transportation


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1Aviation: An Overview

IntroductionThe Aerospace IndustryThe Air Transportation Industry

Chapter Checklist You Should Be Able To:

Dene aerospace industry and describe its basiccaracteristics and economic manitude

Discuss some of te problems faced by tegovernment market

Describe the current economic outlook for the three

segments included in the civil aviation marketIdentify and briey describe the factors aectingcommercial transport sales

Dene related aerospace products and services

Dene air transportation industry and distinuisbetween certicated air carriers and general aviation

Describe te impact of te air transportation industryon te economy

Describe o air transportation contributes to te

ecient conducting of business and aects personaland pleasure travel paerns

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INTRODUCTION

In a short span of 100 years, we have gone from making a few test ights to orbiting

celestial bodies, from slidin alon sand dunes to spannin oceans, from performin featsof isolated darin to dependin on aiation in our eeryday lies. Speeds ae increased athousandfold, as have altitude and range capability. No longer is the sky the limit. Aheadlie risks and rewards as vast as space itself. We have the promise of new airliners thaty with greater fuel efciency, of huge air freighters that move the nations goods, of anexpanding general aviation eet, and of the peaceful uses of space for exploration andresearc.

THE AEROSPACE INDUSTRY

Te aerospace industry includes those rms engaged in research, development, andmanufacture of all of te folloin: aerospace systems, includin manned and unmannedaircra; missiles, space-launch vehicles, and spacecra; propulsion, guidance, and controlunits for all of the foregoing; and a variety of airborne and ground-based equipment essentialto the testing, operation, and maintenance of ight vehicles. Virtually all of the major rmsin te aerospace industry are members of te Aerospace Industries Association (AIA) orte General Aviation Manufacturers Association (GAMA). Founded in 1919 and basedin wasinton, D.C., te AIA is a trade association representin te nations manufacturersof commercial, military, and business aircra, helicopters, aircra engines, missiles,spacecra, and related components and equipment. GAMA, also based in Washington,

D.C., is the trade association that represents the interests of manufacturers of light aircraand component parts.

As te 21st century bean, approximately to-tirds of te aerospace industrys outputwas bought by the federal government. During the past two decades, this gure has rangedas i as 74 percent. At te same time, te aerospace industry is te orlds larestproducer of civil aircra and equipment. Roughly 6 out of every 10 transports operatingit te orlds ciil airlines are of U.S. manufacture, and in addition, te industry turnsout seeral tousand ciil elicopters and eneral aiation planes yearly.

Tese facts underline te unique status of te aerospace industry. Its role asprincipal deeloper and producer of defense, space, and oter oernment-required systems in lare measure dictates te industrys size, structure, and product

line. Because it operates under federal oernment procurement policies and practices,the industry is subject to controls markedly dierent from those of the commercialmarketplace. But the aerospace industry is also a commercial entity, and it must competein the civil market for economic and human resources with other industries less feeredby government constraints. Its dual nature as government and commercial supplier makeste aerospace industry particularly important to te national interest. Its tecnoloicalcapabilities inuence national security, foreign policy, the space program, and othernational goals. Also, the efcacy of the national air transportation system depends toconsiderable deree on te quality and performance of equipment produced for teairlines and te airays operators.



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Naturally, suc an industry is ital to te U.S. economy, especially in te folloinareas:

1. Trade balance. Te excellence of U.S. aerospace products as created stron demandabroad, it te result tat te industry consistently records a lare internationaltrade surplus.

2. Employment. Despite several years of decline in number of workers, the aerospaceindustry remains one of te nations larest manufacturin employers.

3. Research and development. Te industry conducts more research and development(R & D) tan any oter industry, and R & D is a maor lon-term determinant ofnational economic rot.

4. Impact on other industries. A reat many ne aerospace-related products and pro-cesses have spun o from the initial aerospace requirement and have provided value

to other industries, both in sales and in productive efciency. In addition, the aero-space industry is a lare-scale user of oter industries oods and serices: it as beenestimated tat for eery 100 aerospace obs created, anoter 73 are created in oterindustries.

Each of these factors represents a signicant contribution to the U.S. economy; collectively,they elevate aerospace to a key position among the nations major industries.

Characteristics of the Industry

Te istory of te aerospace industry as been a saa of continuin adustment tochanging national policy and economic conditions. Since 1960, uctuating government

demands and a ariety of international eents ae teamed up to produce a roller-coaster-like sales curve: up to a peak, down to a valley. Over the years, the industrys operationsae become increasinly complex, it eac increment of complexity eitenin teindustrys problems in adaptin to cane. Today, te industrys unique caracteristicsmake the adaptive process extraordinarily difcult. An understanding of the difcultiesis best promoted by an explanation of o te industry as been transformed in te pastquarter of a century.

Prior to 1950, te industry as relatiely unsopisticated. Its product line as entirelyaeronauticalaircra, engines, propellers, avionic components, and accessories. Long-run production of many airplane types as te order of te day. Te labor force, durinthe post-World War II retrenchment period, was less than one-h of the later peak.

Three-fourths of the workers were moderately skilled production workers. R & D wasan essential prelude to production, but the subsonic aircra then being built were lessdemandin of tecnoloical adance, and R & D represented a considerably less sini-cant portion of the total workload than it does today.

Te transformation bean in te early 1950s it te production of te et-poeredsupersonic military airplane, ic brout about across-te-board canes in teindustrynew types of engines, totally dierent airframes, dierent on-board equipment,ne toolin and facilities, and, most of all, a astly reater deree of complexity inproducts and te metods employed in producin tem. Ne-airplane performancedictated tat far reater empasis be placed on R & D. Te combination of R & D andproduct complexity required a major shi in the composition of the work force to include

ever-increasing numbers of scientists, engineers, and highly skilled technicians. All of

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tese canes resulted in increased empasis on an eer more sopisticated manaerialprocess.

wile te industry as adustin to tese canes, it inerited a ne responsibility:

deelopment and production of uided missiles, particularly lon-rane ballistic eapons.Ten came anoter maor cane: te application of turbine poer to commercial airliners,ose resemblance to military ets ended it teir propulsion systems. Te need totransport lare numbers of people at i subsonic speeds and multimile altitudesinvolved a further modication of the industrys methods. Finally, in the late 1950s, theindustry as assined still anoter responsibility: fabrication of equipment to meet tenations oals in space exploration.

Eac of tese canes compounded te need for cane in te entire industrymore R& D, greater product complexity, more personnel per unit produced, higher skill levels inthe work force, longer program development time, and greater need for new facilities withonly sinle-proram utility because of teir specialized natures. Suc canes contributed

to ier costs of te endproducts, and te demand in te 1960s and 1970s for still moreadanced aerospace systems furter escalated bot te rate of cane and te costs. Indefense output, costtoeter it te reater capability of te indiidual systeminuenced a trend away from volume production and toward tailored manufacture offeer types of eapons and feer numbers of eac type.

A half-century of evolution has le the aerospace industry with a set of characteristicsunique in U.S. manufacturin:

1. Performance demands for ne systems require continual adancement of te tecno-logical frontier, which in turn involves unusual degrees of uncertainty and risk.

2. Because te oernment is te principal customer, te product line is subect toreisions in proram leels occasioned by canin requirements and fundinaailability.

3. Equipment tat callenes te state of te art is necessarily costly, te more so becauserequirements enerally dictate sort production runs, neatin te economies oflare-scale production.

4. Tecnoloically demandin prorams require personnel empasis in te ierskill levels. Hence, labor input per unit of output is substantially larger than in othermanufacturin industries.

5. The combination of technological uncertainty and long lead times, oen 710 yearsand frequently longer, between program initiation and completion, makes advanceestimation of costs particularly dicult.

6. Because tere are fe customers and relatiely fe prorams, competition for teaailable business is intense.

7. All of tese caracteristics contribute to exceptional demand for industry capital, yetprots as a percentage of sales are consistently well below the average for all manu-facturin industries.



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Economic Profile of the Industry

The aerospace industry is composed of about 60 major rms operating some 1,000 facilities,

backed by thousands of subcontractors, vendors, and suppliers. The principal productlineaircra, missiles, space systems and related engines, and parts and equipmentiscaracterized by i performance and i reliability, and ence i tecnoloy andi unit alue.

Activity, as measured by sales volume, focuses on aircra, both civil and military, whichaccount for almost 55 percent of the industrys workload. Missile systems represent about6 percent of te total, and space fabrication for about 21 percent. In addition, 17 percentcomes from related products and services, which embrace the industrys growing eortsto transfer to te nonaerospace sector some of te tecnoloy deeloped in aerospaceendeaors.

Sales in 2005 amounted to $170 billion, broken down as follows: aircra, $89.1 billion;

missiles, $15.3 billion; space-related materials, $37.3 billion; and related products andserices, $28.3 billion. Related products and services include all nonaircra, non-spaceeicle, and nonmissile products and serices produced or performed by tose companiesor establishments whose principal business is the development or production of aircra,aircra engines, missile and spacecra engines, missiles, or spacecra.

The early 1990s were difcult for U.S. aerospace companies. Declining defense spendingand a protracted airline recession caused U.S. aerospace sales to plummet, resultin in teindustrys orst donturn in 40 years. By 1996, te industry bean to turn around (seeTable 1-1). The 8 percent rise between 1995 and 1996 was largely aributable to increasedsales of civil aircra, engines, and parts. Sales of missiles have steadily increased for theyears 20002005. Tis cateory sould increase in te years aead as te ar on terrorism

continues around te lobe.Canes in aerospace product sales are drien by te dynamics of te industrys

customer base. Durin te 1980s, te Cold war enironment set te tone for increased U.S.defense spendin, and aerospace companies responded accordinly. In 1987, industrysales to the Department of Defense (DOD) accounted for 56 percent of total aerospacebusiness. Yet federal spendin priorities ae radually caned. Te end of te Coldwar and pressures to balance te federal budet led to spendin cuts in defense prorams.Aerospace sales to the DOD fell substantially between 1987 and 1999 (Table 1-2). There wasa slit rise in defense spendin in 2000 and 2001, larely as a result of te nations aron terrorism folloin te traedy of September 11, 2001. hier procurement spendinoccurred in 2002 and beyond as te lobal ar on terrorism continued.

Although DOD purchases continued to slide during the beer part of the 1990s, thedemand for commercial transports increased signicantly with the resurgent economyand the return to protability by the airline industry. General aviation sales also increasedfolloin passae of te general Aiation Reitalization Act in 1994. Bot te airline andgeneral aviation sectors were signicantly aected by the slowdown in the economystartin in 2000 and continuin trou 2002.

Te aerospace industry represents one of te nations larest employers, itapproximately 625,000 workers on the rolls at the end of 2005. Combined with multipliereects on other industries, it is estimated that the aerospace industry accounts directly orindirectly for close to 2 million U.S. obs.

A labor-intensive industry, aerospace employs as many salaried as production workers,

te iest suc ratio amon comparable industries. Te empasis on i-tec R & D in



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te aerospace industry demands a reater number of scientists, enineers, and tecniciansthan are utilized by most industries. At its peak, the aerospace industry employed almost 30percent of all U.S. scientists and engineers engaged in R & D. The gure has still averaged a

relatiely i 15 percent for te past 20 years or so.Testifyin to te excellence of U.S. aerospace products is te stron performance of te

industry on the international market. The industry has a signicant impact on the U.S.balance of trade. Back in 1967, aerospace exports reached the $2-billion-a-year level, andin succeedin years, tey rose sarply, mainly because of delieries abroad of adanced-tecnoloy commercial etliners. In 1973, te industry set an all-time export record ofmore than $5 billion, and in 1974, that gure increased by almost $2 billion. In 1981, therewas another substantial increase, to a new record of $17.6 billion, and in 1986, the gurerose to $19.7 billion, ic represented 9.6 percent of total U.S. exports. In 2005, exportstopped $65 billion. At te same time, aerospace imports ae traditionally amounted toonly a fraction of te alue of oods exported. Tus, aerospace as consistently son a

substantial trade surplus.

Year Total Sales Aircra Missilesa Spacea Related

Products &

SericesTotal Civil Militarya

CURRENT DOLLARS

1990 $134,375 $ 71,353 $31,262 $40,091 $14,180 $26,446 $22,396

1991 139,248 75,918 37,443 38,475 10,970 29,152 23,208

1992 138,591 73,905 39,897 34,008 11,757 29,831 23,099

1993 123,183 65,829 33,116 32,713 8,451 28,372 20,531

1994 110,558 57,648 25,596 32,052 7,563 26,921 18,426

1995 107,782 55,048 23,965 31,082 7,386 27,385 17,9641996 116,812 60,296 26,869 33,427 8,008 29,040 19,469

1997 131,582 70,804 37,428 33,376 8,037 30,811 21,930

1998 147,991 83,951 49,676 34,275 7,730 31,646 24,665

1999 153,707 88,731 52,931 35,800 8,825 30,533 25,618

2000 144,741 81,612 47,580 34,032 9,298 29,708 24,123

2001 151,632 86,470 51,256 35,215 10,391 29,499 25,272

2002 r 152,349 79,486 41,340 38,147 12,847 34,624 25,392

2003 r 146,625 72,844 32,441 40,402 13,488 35,857 24,438

2004 155,717 79,128 32,519 46,609 14,704 35,933 25,953

2005 p 170,055 89,117 39,165 49,952 15,287 37,308 28,343

2006 e 183,996 100,365 49,519 50,846 14,438 38,528 30,666

TABLE 1-1 Aerospace Industry Sales By Product Group, 19902006 (millionsof dollars)

Source: Aerospace Industries Association, Aerospace Facts and Fiures, 2005.a Includes fundin for researc, deelopment, test, and ealuation.b Estimater Reisedp Preliminarye Estimate



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TABLE 1.2 Aerospace Industry Sales by Customer, 19872006 (millionsof dollars)

Aerospace Products and Serices

NASA and RelatedTotal Department Other Other Products

Year Sales Total of Defense a Agencies Customers and Serices

1987 $110,008 $ 91,673 $61,817 $ 6,813 $23,043 $18,335

1988 114,562 95,468 61,327 7,899 26,242 19,094

1989 120,534 100,445 61,199 9,601 29,645 20,089

1990 134,375 111,979 60,502 11,097 40,379 22,396

1991 139,248 116,040 55,922 b 11,739 48,379 23,208

1992 138,591 115,493 52,202 12,408 50,882 23,099

1993 123,183 102,653 47,017 12,255 43,380 20,531

1994 110,558 92,132 43,795 11,932 36,405 18,4261995 107,782 89,818 42,401 11,413 36,004 17,964

1996 116,812 97,344 42,535 12,391 42,418 19,469

1997 131,582 109,651 43,702 12,753 53,196 21,930

1998 147,991 123,326 42,937 13,343 67,047 24,665

1999 153,707 128,089 45,703 13,400 68,986 25,618

2000 144,741 120,617 47,505 13,382 59,730 24,123

2001 151,632 126,360 50,118 14,481 61,761 25,272

2002r 152,349 126,958 57,701 16,385 52,872 25,392

2003r 146,625 122,188 64,009 15,522 42,656 24,438

2004 155,717 129,764 70,085 16,000 43,679 25,953

2005p 170,055 141,173 74,261 17,389 50,063 28,343

2006e 183,996 153,330 74,933 17,788 60,609 30,666Source: Aerospace Industries Association, Aerospace Facts and Fiures, 2005.aIncludes fundin for researc, deelopment, test, and ealuation.bEstimate.r Reisedp Preliminarye Estimate

Industry Suppliers

Aerospace products perform ery sopisticated functions and are complex and costlyto manufacture. Because of this, aerospace companies do not aempt to design and

assemble nished products entirely in-house. Instead, companies specialize and, whereappropriate, contract work out to other companies. A major aircra manufacturer mayuse oer 15,000 suppliers in its transport manufacturin actiities.

It sould be noted tat aerospace suppliers are predominantly U.S. companies. In fact,data from 2005 indicate that imports of aircra parts, engines, and engine parts amountedto $27.8 million or approximately only 19 percent of total U.S. aerospace sales. In te caseof Boein, less tan 4 percent of its supplier base is located oerseas, and te foreincontent of its commercial ets aeraes 13 percent. In sort, aerospace elps drie tedomestic economy.

Naturally, te larest amount of economic actiity inoled in te assembly of aerospaceproducts occurs among aerospace companies themselves. One aerospace rm may be

responsible for the design, assembly, systems integration, and nal testing of a product,



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such as an aircra. That company subcontracts work to other aerospace manufacturers,who supply aircra wings, tails, and engines. These relationships vary from program toproram, it companies excanin roles as prime contractor and subcontractor. Te

most recent gures suggest that this interchange, or intra-industry trade, accounts forapproximately 34 percent of aerospace purcasin actiity.

In addition, muc of te aerospace sectors impact on te U.S. economy arises from teindustrys position as a major consumer of goods and services supplied by rms outsideof aerospace. Tese serices include leal assistance, adertisin, accountin, and data-processin actiities. Oter serice industries tat are prominent aerospace suppliersinclude wholesale and retail trade, nance, and insurance.

Te importance and alue content of electronic components in aerospace endproductshave grown signicantly in recent years. Items such as antennas, electronic connectors,and liquid crystal displays are included itin tis commodity cateory. Teir roinsare of te alue of aerospace systems and eicles is due principally to to factors. First,

electronic component costs are bein drien upard by Pentaon demands for state-of-te-art tecnoloy. Tis demand, coupled it te sort production runs inerent in mostmilitary programs, has increased technology unit costs. Second, in an aempt to restrainmilitary spendin, te DOD as postponed ne product acquisitions and instead asbeen upradin existin eapons systems it improed aionics. Te costs of electroniccomponents are clearly risin relatie to tose of oter inputs.

Oter important commodities purcased by te aerospace industry include primary,nonferrous metals (for example, copper, aluminum, lead); radio, TV, and communicationsequipment; and scientic and controlling instruments.

The Government Market

Despite roin percentaes of nonoernment and nonaerospace business, industryactiity is still dominated by oernment contracts it te DOD and te NationalAeronautics and Space Administration (NASA), a factor that has important eects on theindustrys economic status. Preliminary sales gures for 2006 indicate that approximately$93 billion of the total sales were to these twogovernment agencies (see Table 1-2).

Defense Contractors The optimism that followed the breakup of the former SovietUnion was replaced by the reality of the Persian Gulf War in 1991 and what it signied:continued reional treats from arious corners of te orld. Fast on te ars eels camethe conict in the Balkans and an understanding that peace was equally threatened by

European reional and etnic tensions. Noneteless, te military arsenals of te maorpowers clearly were too large once the possibility of conict between the United Statesand te former Soiet Union as reatly diminised.

Te process of adustin to te post-Cold war era is still under ay. Te defense forcesof te United States, its western allies, and tose of te former Soiet bloc nations aredeclinin in size, nuclear arsenals are bein dismantled, and te defense industrial basesof major Cold War players are shrinking and consolidating.

Leading up to the catastrophic events of 9/11, defense companies experienced decreasesin business as a result of dindlin oernment contracts. Companies cut costs bytrimmin personnel at all leels. In te United States, aerospace sales to te DOD declinedfrom a i of $61.8 billion in 1987 to $47.6 billion in 2001. Total employment fell from

1.3 million in 1987 to an estimated 794,000 at year-end 2000, larely as a result of defense

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cutbacks. Military aircra-related jobs declined from 656,000 in 1986 to 459,000 by year-end 2000. Despite te drops in business, defense companies impacted by a lesser numberof contracts overcame the challenge of keeping key technical teams in place to maintain

te tecnoloy capabilities on ic te cances for future contracts rest. In 2006, businesshas picked up as a result of continued terrorism threats and political instability in theMiddle East.

Companies are also focusin on improin teir desin and manufacturin processesand procedures, suc as concurrent enineerin and inentory control, to enanceproductivity and competitiveness. They are restructuring by eliminating less protablelines of business and addin ne capabilities. Many companies are striin for reaterbalance between defense and commercial work, while others concentrate on the coredefense business in ic tey are stron.

Te industry continued its consolidation trouout te 1990s. Te merer of MartinMariea and GE Aerospace made Martin Mariea the largest defense electronics company

in the world until the mid-1990s, when Lockheed purchased Martin. Lockheed went onto purchase the tactical aircra business from General Dynamics, which signicantlystrengthened that companys positon as a leading producer of ghter aircra. The purchaseby Hughes Aircra of the missile division from General Dynamics enabled Hughes tomoe into a oint lead it Rayteon in missile production and sales until Rayteonacquired huess missile diision. In 1998 Texas Instruments became a part of Rayteon.Later, Boein acquired te hues satellite diision. Oter maor acquisitions ere tepurcase by Loral of LTvs missile diision and by te Carlyle group and Nortrop ofLTVs aircra division.

In addition to consolidation in te defense sector, some companies it existin ciiland military product mixes are taking steps to expand their nondefense activities or to

moe into related areas. Boein is allocatin resources to its ne 777 transport proram.Rayteon purcased te corporate et unit of Britis Aerospace to expand its commercialaircra business. Textron purchased General Dynamics Cessna Aircra Company. Buttese ere only te most sizable and nesorty of many merers and acquisitions asaerospace and related business diisions sitced ands.

U.S. companies teamed up to perform R & D and to bid on government work. They areseing up joint ventures and other arrangements (sometimes including foreign partners)to apply tecnoloy deeloped for military purposes to commercial aerospace andnonaerospace markets. The anticipated growth of the civil aircra business invites theapplication of technology to commercial avionics, air trafc control systems, and aircramaintenance and uprades.

Other civil business opportunities being sought include highway trafc management,the potential electric car market, hazardous waste and weapons disposal, high-speed datatransmission, enironmental sensin, space satellite communications, la enforcement(aircra surveillance, smart computer-linked police cars, biosensing of drugs andbomb-making chemicals), large-screen television and home TV satellite service, sowareconersion, factory automation, lit-rail systems, and cellular telepone systems.Although the range of new business is extensive, it will take time to develop markets. Theamount of new business will not totally oset lost defense procurement dollars for yearsto come, if at all.

As companies deal with nancial pressures, a smaller market, and uncertainty aboutDOD acquisitions, not surprisinly, R & D spendin is don, as is capital inestment,

it fe exceptions.

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wit te end of te procurement budet decline not yet in sit, defense contractors aremore dependent on a balanced governmentindustry sharing of the work performed inoernment laboratories and serice maintenance depots. Military exports are also more

important bot as a sare of total defense sales and as an aid to preserin te tecnoloyand production base that keeps down the cost of defense systems for U.S. taxpayers.

NASA. Te days of te Apollo proram, en annual real increases in U.S. oernmentspace spendin ere te norm, are lon past. Te Challenger space shule disaster ofjanuary 28, 1986, and reduced spendin on discretionary prorams resulted in reatercongressional scrutiny of civil space budgets. In addition, space eorts have beentempered by te diminised competition from te Russian space proram and te endof te ideoloical competition beteen te leadin capitalist and te maor communistnations. The loss of the Space Shule Columbia on February 1, 2003, as led to furterexamination of space spendin.

Yet many U.S. policymakers also recognize the importance of space from a technical,environmental, and commercial standpoint. As defense programs shed skilled workers,a ealty space sector is ieed as a mecanism tat can reabsorb some of te talenttat becomes aailable. In addition, te commercial sement of te industry, particularlytelecommunications, has been a growth area in an otherwise troubled aerospace market.Environmental problems are receiving greater aention today, and the ability to monitorlobal armin, ozone depletion, and climatic canes from space is a aluable capability.A ariety of space platforms are needed to meet tese needs.

The cumulative eect of these opposing forces is a NASA budget that, while notdeclinin, is also not soin any sins of real rot. Since 1990, NASA spendin asbeen at. In addition, some funds that once were earmarked for space programs will

instead be shied into aeronautical projects; the space station program will experience thegreatest cutbacks. Consequently, U.S. government funding for civil space activities is notexpected to rise signicantly any time soon. Companies remaining in this business willhave to be very skillful at selecting which space programs will demonstrate returns withina zero-growth NASA budget. This situation may prompt U.S. companies to seek foreignopportunities it reater ior.

The Civil Aviation Market

The United States traditionally has been the largest market outside of the former SovietUnion for commercial transports, helicopters, and general aviation aircra. Close ties

beteen U.S. manufacturers and teir domestic customers ae proided U.S. aerospacecompanies it a solid sales base.

Although the domestic market will remain vital to U.S. aircra programs, the economiesof scale necessary for success in todays commercial market compel manufacturers to takean international approac. Tis is due to te fact tat an enormous amount of capital isrequired to coer te deelopment and toolin costs associated it a ne proram. Forexample, te cost of launcin a commercial transport proram today is approximately$5 billion. Manufacturers must ait about four years before delieries bein and reenueis enerated from teir initial inestments. Compared to oter industries, te customerbase for commercial passener ets is limited and te olume of orders is lo. generally,between 400 and 600 aircra must be sold before a program reaches the break-even point.

These market characteristics also apply to other civil aircra manufacturing sectors.

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Consequently, every sale is important in order to pay back the nonrecurring costs of R &D and production tooling and to make a prot. This is why exports are an integral part ofthe product and marketing strategies of civil aircra companies. Since 1990, foreign sales

ae accounted for oer 70 percent of commercial transport and ciil elicopter sales andabout 40 percent of general aviation aircra sales. Total civil aerospace exports reachedmore tan $55 billion in 2005.

Civil aircra manufacturers have had a global view for some time, as their exportgures indicate, but recent changes in market conditions have increased the need forthem to remain commied to an international strategy.

Air Transport. Te principal ciil aiation product is te airline transport. Tetraditional and obvious difculty in this area is the fact that sales depend on thenancial health of another industrythe worlds airlines. The need for new jetliners isevident. The world transport eet is aging, and the older, less efcient aircra must be

replaced. Aer reaching a high of 589 units in 1991, the number of shipments declinedprecipitously durin te early 1990s as te economy ent into recession and te airlineslost $13 billion during the rst four years. The economy rebounded by the mid-1990s,and the orders poured in as the airline industry returned to protability. The number oftransport aircra shipments reached a peak of 620 in 1999, when the industry recordedrecord prots. Once again, the economy slowed down in 2000 and fell into recession in2001. Te traedy of September 11, 2001, exacerbated te decline, and te carriers lost$7.7 billion for the year. Transport aircra shipments followed the decline during therst few years of the 21st century (see Table 1-3).

Before world war II, more tan to dozen companies ere in te business ofdesinin and buildin lare commercial airlinerslare at tat time meanin 20 seats

or morealmost all for airlines in teir ome countries. Today, te number of primemanufacturers of lare airlinersand tat no means 100-plus seatsis don to to:Boein and Airbus. In 1997, Boein proposed a merer it McDonnell-Doulas foran estimated $14 billion. Altou te proposed merer dre seere criticism fromAirbus, it as approed.

Te innoin-out in tis industry as appened for many reasons, te cief one beinthe cost of developing new aircra. As one generation of aircra has succeeded another,the costs of building the latest aircra and designing its successor have risen exponentially.Combined with the uncertainties of the marketplace, the spiraling cost of developmentand early production of new aircra has made the commercial aircra business a riskyenture.

Since dereulation in te late 1970s, te trend as been toard less and lessdierentiation within the airline industry as the airlines have competed more and moreon te basis of price and scedule and as some of te oldest and proudest names in teindustry have disappeared through merger or bankruptcy. In making their purchasingdecisions, te airlines, in turn, ae increasinly focused on a sinle factor: ic of tevarious aircra available to them in a few distinct categories is the low-cost solution tothe task of carrying a certain number of passengers a certain distance? Each of the twomajor competitors strives to enter new markets ahead of the other by developing newand more cost-efcient aircra, and each one tries to defend its markets in the absenceof any natural barriers on te strent of bein te lo-cost producer.

Boeing has been able to maintain approximately 60 percent of the market for large

jet transports in an increasingly competitive global market. The companys commercial

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transport products include the 737, 747, 757, and 767 models; the latest, the 777, enteredserice in 1995. Boeins most formidable competitor as been and ill continue to beAirbus Industrie. Airbus launched its rst aircra, the A300, just 30 years ago. By 1995,Airbus had captured approximately 30 percent of the worldwide market for commercialjet transports. Airbuss goal is to increase further its market share in the United States andabroad; the companys latest design, the 555-seat A380, which made its rst ight in 2005,aims to see tat tis oal is reaced.

Extensie leels of oernment subsidization by France, germany, te United Kindom,and Spain have enabled Airbus to develop a full family of aircra without ever havingmade a prot, to price these aircra without full cost recovery, and to oer concessionarynancing terms to customers. Boeing and McDonnell-Douglas objected strenuously

to tis practice, claimin unfair competition. Airbus, in turn, claimed tat Boein andMcDonnell-Douglas beneted over the years from the large military contracts that haveoset a large part of their R & D expenses. In fact, the United States has long had a defensebudget double that of Western Europe, with a large investment in military aircra R & Dand lon production lines.

While both Boeing and Airbus were able to oer customers a full range of jetliners,McDonnell-Doulas as unable to. wit a limited product rane, McDonnell-Doulasdropped from being number two in the commercial aircra marketplace in the late 1970s,with more than a 20 percent share of the total world backlog, to number three in 1995,it less tan a 10 percent sare. McDonnell-Doulas as subsequently purcased byBoein.

TABLE 1-3 Civil Aircraft Shipments, 19922006

Number of Aircra Shipped Value (millions)

Transport General Transport GeneralYear Total Aircra a Helicopters Aviation Total Aircra a Helicopters Aviation

1992 1,790 567 324 899b 30,728 28,750 142 1,836b

1993 1,630 408 258 964 26,389 24,133 113 2,144

1994 1,545 309 308 928 20,666 18,124 185 2,357

1995 1,625 256 292 1,077 18,299 15,263 194 2,842

1996 1,662 269a 278 1,115 20,805 17,564e 193 3,048

1997 2,269 374 346 1,549 31,753 26,929 231 4,593

1998 3,115 559 363 2,193 41,449 35,663 252 5,534

1999 3,456 620 361 2,475 45,161 38,171 187 6,803

2000 3,780 485 493 2,802 38,637 30,327 270 8,040

2001 3,559 526 415 2,618 42,399 34,155 247 7,997

2002 2,893 379 318 2,196 35,000 27,574 157 7,269

2003 2,928 281 517 2,130 27,523 21,033r 366 6,1242004 3,440 283 805 2,352 27,682 20,484 515 6,683

2005p 4,171 290 925 2,956 31,150 21,900 750 8,500

2006e 4,006b 400 650 NA 39,385b 30,200 685 NA

Source: Aerospace Industries Association, based on company reports, data from te general Aiation Manufacturers Association, andAIA estimates.aIncludes all U.S.-manufactured civil jet transport aircra plus the turboprop-powered Lockheed L-100.bDue to an unavailability of general aviation forecast data, 2006 totals include 2005 general aviation gures for the purpose of estimating.e Estimate.NA Not aailable.p Preliminary.r Reised.

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Te cost of deelopin ne airplanes as become staerin. Eery time a companylike Boeing moves forward with a new program, it is essentially puing its entire net worthon te line. Enormous front-end inestments must be made for a return tat ill not be

realized until many years laterif at all. Boeins proram to deelop and manufacturete 350-seat 777 airplane proided a ood example of te enormity of te callene. Tecompany spent billions to deelop te ne airplane, ic inoles seeral tousandsuppliers and over 800,000 dierent parts.

As Airbus and Boein continue to compete, tey are forced to deelop ne products andservices that are aractive to an existing and potential customer base. Both manufacturersare going head-to-head on development of new aircra technology that will revolutionizete future of air transportation. Airbus is launcin te A350 in response to Boeins B787Dreamliner. Both aircra are being developed with twin-engines capable of ying 250 to300 passengers on long distance routes at costs much less than todays modern aircra.Both aircra will be light in weight consisting of composite materials amounting to

signicant decreases in fuel costs.Altou te cost of deelopin ne airplanes is enormous, te cost of not moin

aead is een reater. A companys ability to maintain its position as a lobal aerospacemanufacturer depends fundamentally on its capitalizing on new market opportunities. Ininstances in which the market is limited or the barriers to entry are prohibitively high forone company, international collaboration may be te ae of te future.

Although U.S. aerospace companies have dominated the global market for many years,te use of oerseas suppliers of components and subassemblies is increasin. Tere isnothing strange about that, because two-thirds of the world market for large airliners existsoutside te United States. Tou companies in countries suc as Italy and Spain aebeen major suppliers for many years, the nations of Asia and the Pacic Rim collectively

ae been distinctly minor suppliers. Tat is bound to cane, for to reasons: tose samecountries already account for a substantial portion of the world market for commercialairliners (20 percent and growing rapidly), and they plainly have both the desire and thecapability to participate in the production of new aircra.

Unquestionably, international collaboration is a key strategy in the broader eort toremain competitie in te aerospace industry. joint prorams in ic te partners sarecosts oer a means of generating the requisite capital for advanced commercial airplaneand enine deelopment in te face of i and risin costs. Tey also ie te U.S.companies involved access to foreign markets that might otherwise be denied to themin view of the trend toward directed procurement. Oseing these advantages to someextent is te fact tat oint U.S.-forein entures ineitably strenten te tecnoloical

capabilities of foreign industry. In short, sharing American know-how might prove costlyin te lon run, because it furter enances te competitie posture of forein companies.But sarin, it sould be remembered, is a to-ay street.

Factors Affecting Commercial Transport Sales

Continued market leadership of U.S. aircra manufacturers is closely tied to the existenceof healthy, protable U.S. airlines. The huge size of the U.S. domestic market has beenimportant to U.S. manufacturers by proidin tem it te broad base of demandnecessary to launch new aircra programs. Traditionally, over 40 percent of commercialjets on order from U.S. manufacturers have been delivered to U.S. airlines. These aircra

make up one-third of the value of the manufacturers backlog of unlled orders. Large

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order olumes elp manufacturers spread costs oer a larer production run, ic allostem to reduce teir unit costs and be more competitie. No more tan eer, as teyseek the export sales crucial to market leadership, manufacturers need the foundation of

a stron U.S. sales base.By the end of 1993, the airline industry was in a tailspin. Passenger and freight trafc

was stagnant, aircra by the hundreds had been placed in storage, industry losses anddebts were mounting, and aircra orders were being canceled. The downturn had alsospread to the commercial transport sector, and aircra manufacturers were forced to scaleback production and lay o thousands of workers.

By 1997, however, the airline industry was taking o. Air trafc and prots were backup, and net orders for U.S. transports umped from 256 in 1995 to 620 in 1999. Te pace ofthis recovery le commercial aircra producers struggling to keep up.

Ciil aiation as a istory of cycles, and it te slodon of te economy in 2000shipments began to tumble. Aircra companies are implementing programs to reduce

these market swings. Also, some economists are suggesting that business cycles ineneral sould be less seere due to factors suc as dereulation and lobal competition.Nevertheless, several factors strongly inuence cycles in the air transport industry.

Economic Growth. Economic rot as a tremendous impact on te ciil aiationmarket. It is important because it broadly inuences the demand for air transportationservices, which, in turn, aects aircra orders and deliveries. During periods of economicrot, companies build and serice ne outlets, ic leads to an increase in businesstrael. In addition, family incomes enerally rise, ic results in reater spendin onleisure trael. Yet, te reerse is also true: en economic output falls, businesses closefacilities, unemployment rises, and air trafc declines.

Te correlation beteen economic rot and air trael as been reconized by analystsfor many years. A enerally accepted rule of tumb olds tat tere is a 2.53 percentincrease in world air trafc for every 1 percent increase in world economic growth.

Inflation. Ination is important because it inuences economic growth. When pricesare stable, interest rates tend to be lo, and tis encouraes inestment and businessexpansion. When prices rise quickly, interest rates also climb. Eventually, high interestrates will inhibit economic activity, which can put a damper on air trafc. Because highinterest rates raise the cost of borrowing, they can also make aircra nancing prohibitive.In addition, ination can result in escalating labor and fuel costs. When this happens,airlines are faced it te unpleasant coice of eiter absorbin tose ier costs or

raisin teir fares.Ination has grounded the airline industry on more than one occasion. In 1970, 1973,

1978, and 1991, air carriers faced risin fuel and labor costs. Durin tose same years,ination also plunged the major world economies into a recession, causing air trafc andairline prots to decline.

During the recent recessionary periods (19901994 and 20002002), air carriers sustainedhuge losses. Airlines have aempted to control their costs and have made it clear to aircramanufacturers that they want the price of planes to come down. Aircra companies havereduced their prices through implementation of long-term programs aimed at cuingcosts and improving efciencies, eorts that should benet airlines well into the future.

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Fleet Capacity. Te passener load factor is used to measure airline capacity utilization.The indicator is expressed as a percentage, relating the number of passengers own toavailable seats. When load factors are low, airlines have more excess li capacity than

when load factors are high. High load factors and rising air trafc place airlines underpressure to buy aircra. If load factors are rising during a business cycle, this also suggeststat airline reenues are improin. Tis is important if airlines are plannin to orderaircra because it enhances their ability to purchase or lease planes.

The passenger load factor for world airlines rose during the laer half of the 1990s, andorders for new aircra reached record levels. Unfortunately, as was the case in previouseconomic downturns, air trafc declined in the early 2000s and load factors fell, promptingthe air carriers to reduce eet capacity and cancel orders. By year-end 2006, load factorsere at normal leels and in some cases ier tan eer.

Replacement Aircra. Airlines order aircra to increase their capacity; they also

purchase new transports to replace their older, less efcient models. The advancing ageof current eets suggests that replacement orders should be on the rise through the midto late 2000s.

In a related issue, te airlines ere required to meet lo stae 3 noise leels in teUnited States by December 31, 1999; the date in Europe was April 1, 2002. Althoughmany of the over 3,000 aircra have been grounded, modied using engine hushkits, orsold outside the United States and Europe, there is still a signicant pent-up demand forreplacement aircra.

Airline Profitability. Commercial transports are expensie assets: smaller models startat approximately $25 million and jumbo jets cost over $140 million. To make these types

of purchases, air carriers need to raise capital in the nancial markets, and therefore,they need to demonstrate to potential investors that their operations are protable. Aerlosing billions of dollars in the early 1990s, the airlines returned to protable operationsin the laer half of the decade. Airline stocks were soaring and optimism prevailed as thecarriers entered te ne century. Te economy sloed don in te sprin of 2000 andent into recession in 2001, folloed by te traedy of September 11, 2001. Once aain,the carriers experienced record losses in 2001 and 2002. US Airways led for bankruptcy,and other major carriers were not faring much beer. Massive employee furloughs tookplace during these years. United won $5.8 billion in wage and benet concessions fromits employees to stave o bankruptcy. By the end of 2002 the industry was in shambles.Over 90 percent of the passengers were ying on discount fares and low-cost carriers were

eating away at market share from the old-line airlines.With no retained earnings and stock prices at record lows, the carriers only source of

funds in the foreseeable future appears to be the debt market. This will not be an easy taskbecause te carriers are already faced it a substantial debt load from te last round ofaircra purchases.

A Cyclical Industry. The civil aviation market is cyclical. This is important to recognizeto fully understand te enironment surroundin transport orders and delieries. Since1971, orders for U.S. transports have peaked ve dierent times, and the average periodbetween a trough and a peak has been three years. The delivery picture shows a similarpaern. World transport deliveries have peaked six dierent times since 1960. When

deliveries have fallen, the declines have been steep (drops average over 50 percent);

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neerteless, delieries ae continued to rise oer te lon term. Tese cycles are setin motion by te underlyin forces of economic rot and recession and are furtermagnied by the nature of aircra manufacturing.

In the retail industry, items oen sit on store shelves for weeks before they are sold, andbuyers usually can take their purchases home the day they are bought. But aircra are tooexpensive to build and then keep in inventory. Instead, they are manufactured only aeran order is placed. Tis creates a time la beteen order and deliery dates tat can lastell oer a year.

Also, in te retail industry, tere are many suppliers. If a customer as to ait fordelivery from one supplier, that customer can go to another vendor oering a moreimmediate response. But again, the aircra industry is dierent. Building a commercialtransport takes an enormous investment, limiting the number of manufacturers in thebusiness. If the order line for aircra lls up, customers have lile recourse but to wait.

If aircra demand rises, manufacturers will initiate a new program or increase their

production rates. Unfortunately, due to the tooling and supplier links that must be set upand the bolenecks that can develop among strategically important suppliers, reachingfull implementation takes time. For example, it took Boeing two years to double itsproduction rate for all models.

Tese situations can create an imbalance beteen demand and supply tat causesorders and delieries to sin abruptly. Yet tere is also a beaioral side to tese cycles.Airlines and aircra leasing companies worry that they might miss a market upturn if theyare placed near the end of an ordering line. At the rst sign of a market turnaround, theyfrequently scramble en masse to place orders. Tis creates a sure in orders tat can pusback delivery dates even further. As a result, air carriers near the end of the line might,in fact, receive their deliveries years later, as air trafc is subsiding. These deliveries then

create an overcapacity problem, causing aircra orders to swing downward. Manufacturerswho had just invested in greater production capability now nd themselves with excesscapacity, and a sutdon reerberates trou te industry.

These cycles are disruptive, and aircra manufacturers are working to minimize them.Companies have launched eorts to shorten the product development phase and reducethe time gap between aircra order and delivery. This is being accomplished by adaptingcomputer-aided desin and manufacturin tecnoloies tat obiate te need to buildmock-ups. To improve program communication and efciency, manufacturers are usingconcurrent enineerin, ic inoles establisin teams of desin, deelopment,production, and sales people at te beinnin of a proram. Prime contractors arestrengthening their relationships with their suppliers and increasing the two-way ow

of technology. Boeing, specically, is overhauling its production and systems sowareto simplify the way it tracks and handles millions of parts. Boeing also has reachedareements it American, Delta, and Continental tat ill proide tose airlines itgreater exibility for ordering aircra over a 20-year period. This will alleviate pressureon those carriers to order aircra during a surge period.

Future Trends in Air Transport. Te air transport sector as son a stron tendencyto recover from each downturn with renewed vigor. Economic growth an

air transportation a management perspective by john g. wensveen

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