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Kellogg J.L. Kellogg Graduate School of Management Northwestern University

THE U.S. AIRLINE INDUSTRY IN 1995†

“There does seem to be something about airplanes that drives otherwise rational investors out of their minds.”

— Alfred Kahn1

Almost 20 years had passed since the airline industry was deregulated in 1978, yetthe industry was still adjusting to its competitive environment. Entry and exit rates in theindustry continued to be high, and in 1994 several major carriers, including United Airlinesand Continental Airlines, announced new ‘airline-within-an-airline’ shuttle services — amove that called into question the use of the hub-and-spoke system that had formed thebasis of most route strategies throughout the first decade of deregulation. The industrycontinued to suffer from cutthroat price competition, despite attempts by American Airlinesin 1993 to impose pricing discipline on the industry through a new simplified fare structure.

INDUSTRY OVERVIEW

Market Structure

Eight carriers dominated the $49 billion domestic airline industry at the end of 1994,with an aggregate 89.4% share of the U.S. domestic airline market. The two largest carrierswere American Airlines with a 18.5% market share and United Airlines with a 17.7%market share (Exhibit 1). There were seven other carriers that the Department of Transportation classified as Major carriers: 2 Delta (16.7%), USAir (9.5%), Northwest(8.9%), Continental (8.2%), Southwest (5.2%), TWA (4.6%), and America West (3.2%).

In 1994 there were 19 National airlines. Like the Majors, National airlines flymedium to large-sized jet airplanes; however, they tended to focus more on specific areas of the country. There were also over 50 Regional Airlines operating in the United States,though some of these were wholly owned subsidiaries of the Major carriers and many hadcode-sharing agreements with the Major carriers. Regional airlines were much more likelyto provide service using propeller engine planes, and typically provided commuter service,connecting smaller airports with the airports served by the Major airlines.

Delta, American, and United each served at least one airport in each of the largestmetropolitan areas of the country, yet the distribution of traffic was extremely different.United traditionally had been stronger in the large West coast corridor markets (Exhibits 2,3), while American had been stronger in the East. Within particular airports, the differences

were even more striking. For example, Delta accounted for over 80% of all the passenger † © Copyright 1995 by James D. Dana Jr. and David A. Schmitt. This case was prepared by Professor James Dana and Kellogg Research Assistant David Schmitt. It is intended to be used as a basis for classdiscussion rather than as an illustration of either effective or ineffective handling of a managerial situation.1 Smith, T. K., “Why Air Travel Doesn’t Work,” Fortune April 3, 1995, p. 56.2 The Department of Transportation classified an airline as a Major carrier if its revenues exceed $1 billion.In 1994, two cargo carriers, Federal Express and United Parcel Service, were also classified as Major carriers. Airlines with $100 million to $1 billion of revenue were classified as National carriers, whilethose with under $100 million were classified as Regional carriers.

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enplanements (the number of passengers boarding a flight, including local and connectingpassengers) in Atlanta (Exhibit 4).

Customers

Most airline travelers were usually characterized as either business travelers or

leisure travelers, although some airlines have recently emphasized that leisure travel includedboth tourist travel and other types of personal travel. Of these three basic types, businesstravelers were the least flexible in their travel plans and the least sensitive to price. Thetypical business traveler did not pay for his or her own ticket, and instead chose the airlineand flight on the basis of convenience, services and fringe benefits.

Tourist travelers were the most sensitive to price, often changing their traveldestination in response to lower prices. They were also more likely to plan their travel inadvance and found it easier to take advantage of the advanced purchase discounts offered byall of the major airlines. Personal travelers, like tourist travelers, paid for their own travel,but their reason for traveling, such as travel to visit family or a close friend, was less flexible.Personal travelers were often able to arrange their travel in advance, and may haveconsidered using an alternative airport (sometimes called a reliever or satellite airport) in

order to save money. High frequency personal travelers were also the most likely to try tosave money through creative ticketing, such as staggering round trip tickets in order to avoidSaturday night stayover requirements.

In addition to offering service to a variety of destinations, major carriers competedfor passengers on frequency of departures, availability of seats, baggage handling, customerservice, on-board meals and entertainment, on-time performance, seating comfort andfrequent flyer programs. Exhibits 5 and 6 show the 1994 rankings of the major carriers onservice dimensions based on reader surveys from Consumer Report’s magazine andFrequent Flier magazine.

Industry Performance

Since deregulation, the airline industry’s profits had been volatile (Exhibit 7).Fluctuations in fuel prices, recessions, and the entry of new airlines all contributed to theproblem, though a significant rise in market concentration in the 1980s may have offsetsome of these other factors. While most of the major carriers’ profits followed the industrytrends, Southwest set its own trend by being the only consistently profitable airline since1989 (Exhibit 8).

Airlines used the available seat mile (ASM) as the standard measure of industrycapacity, since this enabled comparison between flights of different lengths and planes of different sizes. ASMs on each flight were calculated as the number of miles flown times thenumber of seats on the plane. A revenue passenger mile (RPM) was the standard measureof the volume of output and was defined as a paying passenger flown one mile. The

capacity utilization rate, called the load factor , was the ratio of RPMs to ASMs. Yield wascalculated as passenger revenue per RPM and was often used as a proxy for average price(although airlines earn other revenues, such as cargo, from their airline operations). Unitcosts were typically expressed as operating expenses per ASM.

Because much of an airline’s costs were fixed, profits depended largely on loadfactor. By increasing load factors, airlines could substantially increase profitability. Onebenchmark used to measure profitability was the break-even load factor , calculated as:

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Break-even load factor =Total expenses/Yield

ASM

This approximated the load factor that an airline would have to achieve at current yields inorder to beak even. Total expenses were calculated net of other revenues, so the calculationassumed that yield, operating expenses, and other revenues were all unaffected by changes

in load factor. Airlines with average load factors in excess of their break-even load factorwere profitable, while those whose load factors fell below their break-even load factor werelosing money.

THE AIRLINE INDUSTRY UNDER REGULATION: 1930-19783

Airline regulation began in the industry’s infancy when the major source of revenuewas the U.S. Post Office. The Kelly Airmail Act in 1925 and the Air Commerce Act in1926 made it possible for almost anyone to enter the industry and offer passenger andairmail service. In an effort to rationalize this fast growing and somewhat disorganizedindustry, Congress gave the Postmaster General authority to regulate route allocationthrough the McNary-Waters Act of 1930. Under the Postmaster General Walter Brown’scontrol, three airlines emerged with dominant market positions. The industry was dividedinto territories, largely based on east-west traffic. United Airlines controlled the northern-most routes, TWA the more central routes and American Airlines the southern-most routes.These airlines grew rapidly in the 1930s through mergers and the formation of holdingcompanies, which acquired smaller airlines.

However, this system of exclusive territories collapsed because of political protestagainst the extraordinary fares allowed under Brown’s tenure. President FranklinRoosevelt intervened and instituted a new system of competitive bidding that largelyprohibited former carriers from participating. New carriers, including Delta andContinental, made significant increases in market share, while the three major airlines spunoff smaller airlines in order to compete more effectively in the new environment. This rashof new competition dramatically lowered prices for both airmail and passenger service,

although none of the airlines were able to make money in the subsequent years.In an effort to stem the losses in the industry and to insulate firms from cutthroatcompetition, Congress passed the Civil Aeronautics Act in 1938, establishing the CivilAeronautics Board (CAB) as the regulatory body governing both domestic and interstatepassenger traffic, and domestic airmail service. The CAB was given authority over allpricing decisions, entry and exit, mergers and acquisitions, and to some extent over interfirmagreements. The CAB’s objective was to guarantee service while protecting the airlinesfrom excess competition. Typically two or three carriers were awarded the right to serveeach route, though in cases where traffic was light, a single carrier might be allowedexclusive rights. The CAB instituted a system of cost-based pricing, but prices were oftenset to cross-subsidize smaller routes with profits from an airline’s larger routes. Onaverage, rates were set at variable cost plus a markup that allowed firms to earn a reasonablerate of return on capital. Because fares were set by route and were based on the industry

wide cost levels, however, variations in airline profits because of differences in firm costswere expected.

Although price competition was prohibited, firms could compete on service to createvalue for the customers. Some of the key dimensions on which airlines competed were thefrequency of departures and the number of direct flights. Airlines also prided themselveson the size and comfort of their jet fleets and on their amenities for business travelers. As 3 This history of airline regulation is based in part on Donohue, Nancy and Ghemawat, Pankaj, The U.S. Airline Industry, 1978-1988, Harvard Business School, 1989.

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long as many of their costs were passed on to customers through regulatory rate hikes,airlines could maintain their cost-is-no-object mentality.

DEREGULATION, THE FIRST DECADE: 1978-1988

The first changes toward deregulation of the domestic airline industry came in 1976when the CAB permitted airlines to offer price discounts to passengers who met specificpurchase requirements. Often called supersaver fares, after the promotional name given tothem by American Airlines, these price promotions made it possible for airlines todiscriminate in the fares they offered to business and leisure travelers since businesstravelers were generally less willing to meet requirements such as purchase in advance andstayover on a Saturday night. These fare discounts also set the stage for the development of yield management. This sophisticated set of quantitative tools for allocating the number of available seats between fare categories allowed airlines to increase load factors withoutsignificantly reducing the revenues from business travelers.

Subsequent CAB regulatory actions included selectively relaxing long standingrules preventing carriers from entering routes already served by other carriers and allowingchartered service greater flexibility to compete with the major carriers. In 1978, as the

airlines were preparing to sue the CAB for violating its mandate to protect the industry fromincreased competition, Congress passed the Airline Deregulation Act, deregulating theindustry.

Overall, real prices dropped significantly after deregulation (Exhibit 7), even afteraccounting for cost changes. The average price changes did vary with the route length,however. In particular, routes under 500 miles, many of which had been cross-subsidizedunder regulation, experienced an average increase in price. The major carriers evenabandoned some smaller airports, but in most cases the lost jet service was replaced bypropeller service from smaller commuter airlines. The longest routes, those over 1,000miles, experienced the largest price declines, in part because the hub-and-spoke systemfostered an increase in the number of competitors on transcontinental and many other longroutes.

Entry of New Airlines

Perhaps the most significant consequence of deregulation was the wave of newentry. In 1979, 22 new airlines had been formed, and another 43 entered through 1982.New airlines such as Peoples Express, Midway Airlines, America West and New York Airseemed well positioned to flourish in the newly deregulated airline market, while the majorairlines, whose labor costs were inflated by years of union negotiations under the protectionof regulation, seemed particularly vulnerable to lower cost entrants. Surprisingly, thedifferences in the costs between airlines remained significant even 17 years afterderegulation.

The wave of new entry was consistent with many of the studies leading up toderegulation. These studies suggested that economies of scale in the airline industry were

small and that the industry could support many new airlines. Some economists in favor of airline deregulation argued that entry would be so easy that the airline market was ‘perfectlycontestable.’ The theory of contestable markets, developed by academic economists in thelate 1970s, argued that in markets where costs of entry and exit are extremely low, the merepotential for entry competition would be sufficient to discipline the prices of incumbentfirms. Unless firms set prices at or near cost, they would invite opportunistic entry. Theseexperts argued that barriers to entry (or more precisely, barriers to mobility) in the airlineindustry were low because airlines could easily deploy airplanes and other assets to newroutes in response to changes in price and market conditions.

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Growth of the Hub-and-spoke System

Proponents of deregulation largely anticipated the sharp reduction in prices and newentry that accompanied the relaxation of price and entry regulations; however, few industryobservers anticipated the rapid development of the hub-and-spoke system (Exhibit 11). Themajor carriers, including American, Delta, and United, began a rapid shift in their route

structures away from the almost ad hoc structures that developed under entry regulationtoward a hub-and-spoke pattern. Most carriers dropped nonstop service that did notconnect at one of their designated hub airports and added new nonstop service from theirhub airports to new destinations. In the wake of these major route structure shifts, manyabandoned routes served as entry points for new carriers.

Prior to deregulation, airlines could not develop hub-and-spoke route systemsbecause they were not allowed to enter enough routes originating at a particular hub city.Airlines did gain some of the economic advantages of the hub-and-spoke system, however,through interlining, where passengers who could not find nonstop service would often haveto change air carriers when taking a connecting flight. The practice of interliningdiminished rapidly following deregulation, because of the development of the hub-and-spoke system and code-sharing arrangements with smaller regional airlines.4

One measure of the impact of the hub-and-spoke system was the number of

passengers who changed planes to complete their flights. The percentage of passengershaving to change planes on trips over 1,500 miles rose from 42% in 1978 to 52% in 1990.Over the same time period, however, the percentage of all trips that included a change of airline fell from 11.2% in 1978 to 1.2% in 1990. So, while passengers disliked the increasein the number of trips that required a connection, they had deregulation and the hub-and-spoke system to thank for a reduction in the number of times that they needed to changeairlines, and the corresponding reduction in the risk of lost or mishandled baggage andmissed connections.

Frequent Flier Programs

First introduced by American Airlines in 1981 and adopted by all major airlines by1987, frequent flier programs (FFPs) attempted to win customer loyalty and were used to

differentiate the Major carriers from the early low-cost startups. Don Burr, former chairmanof Peoples Express, called FFPs “one of the most compelling competitive disadvantagesthat we had.” FFPs rewarded travelers with free flights based on the amount of travelaccumulated with the airline. This essentially resulted in a quantity discount, providing onefree trip for every certain number of paid trips. FFPs also provided additional strategicbenefit for airlines with significant service in a particular city by offering more destinationsfrom which the traveler could choose for the free flight. This loyalty also was consideredimportant to providing the scale necessary for an efficient hub operation.5

In 1994, 8% of air travelers flew 11 or more trips, accounting for 44% of all airtravel. The FFPs were specifically designed to attract these most frequent travelers. In thisrespect, they were quite successful, becoming so ingrained that business travelers came tosee frequent flier miles as compensation for the inconvenience of travel.6 FFPs were

designed so that the attractiveness of the rewards improved the more a traveler flew,providing an incentive to business travelers to try to limit their travel to one or two majorcarriers. 4 Code-sharing is defined in the section on commuter airlines.5 Borenstein, Severin, “The Evolution of U.S. Airline Competition,” Journal of Economic Perspectives,vol. 6, no. 2, pp. 61, 69.6 Berkowitz, Collier, Johns, Madison, Sachs, and Schmitt, “Breaking The Frequent-Flier Barrier,” June 8,1995, p. 12.

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Southwest Airlines, despite the belief that they could maintain customer loyaltythrough friendliness and quality of service, adopted a frequent flier program in 1987.However, many low-cost startups still believed that it was too costly to provide frequent flierprograms. In addition to the cost of offering free flights, the cost of tracking frequent fliermileage is substantial. Airlines have tried to keep the cost of free travel to a minimum byplacing restrictions on frequent flier awards, making seats available for free travel only at

off-peak times when load factors are lowest.

Mergers and Consolidation

In 1983, after the first wave of new entry into the industry there were 196 carriersoperating in the United States, however, by 1993 there were only 130, despite a 140%increase in total passenger enplanements. Only six of the airlines started between 1979 and1982 survived in 1995; the remainder had been liquidated or financially weakened and thenacquired.

Many airlines were absorbed through mergers. In a rush to build a national hub-and-spoke system many major airlines expanded through acquisition. Delta, American, andUSAir each acquired a major West Coast airline in the 1980s (Exhibit 10). The merger of Northwest and Republic in 1986 gave Northwest a stronghold in Minneapolis and Detroit,

and was viewed by some outsiders as evidence that the DOT was being too liberal in theirpostderegulation merger policy. Texas Air, which joined together major carriers Easternand Continental, and acquired startups Peoples Express and New York Air, managed tobuild a large market share, especially in the East. However, after the bankruptcy andliquidation of Eastern Airlines in the late 1980’s, all that remained was Continental.

Airport Congestion

Although some airports were congested before deregulation, the problem becameeven more severe in the years following deregulation. Airline travel increased by over 100%in the first decade of deregulation, yet no new airports were built. Hubbing also put a strainon airports, especially since airlines tried to schedule flights so that they would arrive anddepart within a short time window.

A few particularly congested airports, including O’Hare in Chicago, La Guardia inNew York, and National in Washington, were ‘slot’ restricted. Airlines at these airports hadto purchase a ‘slot’ — the right to land a plane at a particular time of day — for each of their daily departures. These landing slots have sold for as much as $1.2 million for a peak time slot. The supply of landing slots and airport gates (the passenger loading areas thatthat as ‘parking’ spaces for airplanes) limits the potential for growth and expansion inmany airports.

Commuter Airlines and Code-sharing

The major hub-and-spoke airlines had always relied to some extent on feeder trafficfrom commuter airlines. An often overlooked consequence of deregulation was that most

major airlines built up substantial vertical networks with commuter airlines. Commuterairlines flew passengers from smaller airports, which were typically too small toeconomically support jet service, to a major airport where they connected with a majorcarrier.

Through vertical mergers and joint marketing agreements major airlines were able tobuild up their access to this feeder traffic. Such agreements, called “code-sharing”agreements, meant that commuter airlines timed their flight schedules so that their flightswould arrive in time to connect with the flagship carrier’s jet service and that airlinereservation systems would list the connecting service of the commuter airline under thesame airline carrier code as its affiliated major carrier. Advantages of code-sharing

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agreements for the passengers included superior flight scheduling, reduced time waiting forconnections, better gate proximity, superior baggage handling, and more valuable frequentflier programs. For the commuter airline, these arrangements meant making a commitmentto serving a single major carrier; however, in most cases the difficulty of coordinating flightschedules and the costs of baggage interlining would prevent a commuter airline from tryingto offer connecting service with more than one major carrier.

INDUSTRY TRENDS IN THE 1990S

Airline management in the mid-1990s appeared to be taking the industry in adifferent direction than their predecessors in the 1980s. Employee ownership, ticketlesstravel, international code-sharing alliances, and the ‘airline-within-an-airline’ were thebuzzwords of these managers. For many carriers, the trend toward hub-and-spoke routesystems had reversed. Some major hub operations were closed and others were turned overto commuter airlines or affiliated low-cost competitors.

Airline-within-an-airline

The tremendous growth and profitability of Southwest and America West Airlines,the two lowest cost Major airlines, was the stimulus for many cost-cutting efforts by theother Major carriers. Unable to match these carriers’ low costs systemwide, United andContinental tried to reduce costs on selected routes by creating an ‘airline within an airline.’Both airlines cited cutbacks in passenger amenities, a shift in emphasis from hub-and-spoketo point-to-point route strategies and lower labor costs, as benefits of the ‘airline-within-an-airline’ approach. To an extent, USAir and Delta had both been offering ‘airline-within-an-airline’ shuttle service in the major East Coast corridor (Boston-New York-Washington) forsome time, though only USAir had ever discussed expanding service outside of that limitedcorridor.

United’s ‘Shuttle by United,’ born of United’s employee buyout in the summer of 1994, was started with the specific objective of matching Southwest Airline’s lower costs inthe California corridor (primarily flights from the San Francisco Bay area to the Los

Angeles Basin area). Lower costs were to be achieved by reducing amenities and increasingairplane utilization rates, but the biggest cost savings were reduced labor costs as a result of the buyout. As part of the employee buyout, United pilots and other union workers agreedto lower overall wages as well as to changes in work rules to increase labor productivity.

Continental announced its version of an airline-within-an-airline in 1994.Continental Lite, also called CALite, expanded rapidly in the southeastern United States andoffered extensive service out of Greensboro, North Carolina. After struggling to earn aprofit for less than a year, Continental decided to withdraw its CALite service in early 1995.The failure of CALite was largely attributed to the airline’s choice of low traffic markets andto their overly optimistic estimates of the responsiveness of demand to lower fares.

Ticketless Travel

Ticketing costs, including labor, printing and travel agent commissions, wereestimated at $15 to $30 per ticket. In an attempt to reduce these costs, some airlines turnedto ticketless travel. In the most extreme version of this system, passengers made reservationsvia the company’s centralized telephone reservation center, bypassing travel agents and thuseliminating commissions. The passengers received no boarding pass or ticket, only aconfirmation number. At airport check-in, the passenger were given a reusable laminatednumbered card on a first-come, first-served basis. At boarding time, passengers are calledby number groups (i.e., 1-10 first, then 11-20, etc.), and then boarded the plane and choseany available seat. ValuJet, a regional airline based in Atlanta, was one of the first airlines to

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universally implement this system – ValuJet passengers did not have the option of printedtickets.

Other airlines had employed variants of this system, including keeping travel agentsas distributors but eliminating the printed tickets. Under this system passengers wereusually given a confirmation number when they made their reservations, and were able tocheck in and receive their boarding pass at the gate by presenting their confirmation

number. On United’s Shuttle flights travelers could also use the credit card with which theypaid for their flight to obtain a boarding pass from automated-teller-machine-like terminalsat the gate. Only two Major carriers, Southwest, which pioneered the laminated boardingpass system, and United, offered the option of ticketless travel on all of their flights, whilethe other major carriers, many of whom were reluctant to give up assigned seating,continued to experiment with ticketless travel options.

Hub Reductions

The rapid expansion of the hub-and-spoke system in the 1980s seemed to reach itspeak in the early 1990s, but by the mid-1990s, the Major airlines were headed in theopposite direction. In 1992 USAir withdrew from its Dayton hub and United substantiallyscaled back its operations in Washington, D.C., dropping Dulles airport as one of its major

hub and replacing much of its jet service with commuter service by its United Expressaffiliate Atlantic Coast Airlines. American Airlines had withdrawn or was scheduled towithdraw from its Miami, San Jose and Raleigh/Durham hubs. Many of American’s flightsin San Jose were turned over to startup airline Reno Air, while their flights from theRaleigh/Durham hub were to be replaced with new hub service by the recently rebornMidway Airlines. Both Reno Air and Midway Airlines became affiliates of American’sfrequent flier program as part of their agreement to take American’s routes. In many casesthese routes were no longer flown as part of a hub network, but instead emphasized localtraffic.

As one airline analyst put it: “In the U.S. market the old formula has led to cutthroatcompetition and staggering losses. Carriers offer half a dozen ways to get from here to thereusing various routes through different hubs, but none of the megacarriers can figure outhow to do that and consistently make a profit.”7

Corporate Discounting

As the difference between full fares and discount fares increased corporations werelooking for innovative ways to reduce travel costs, including providing internal travel agencyservices, requiring employees to turn over their frequent flier points to the company, and,perhaps the most successful strategy, negotiating discounts directly with the airlines.Although most discounts were confidential, according to one survey 44% of 1,134 largeU.S. companies had negotiated some form of discount (e.g., discounts for travel to businessmeetings, discounts on particular routes, waivers of advance purchase restrictions ordiscounts on computer reservation equipment). The discounts almost never applied to all of a company’s travel, and were often negotiated on the basis of significant advance planning,

such as for business meetings and when companies moved their corporate headquarters.The size of the discounts depended on such factors as the anticipated number of travelers,the travel dates, and the airline’s demand forecast. Businesses that had accumulatedsignificant specific information about their employees’ expected travel needs were in thebest position to negotiate discounts since airlines valued this information to help themincrease load factors.

7 Woods, Wilton, “Good-bye Hub and Spoke,” Fortune, December 13, 1993.

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REVENUE MANAGEMENT, MARKETING AND DISTRIBUTION

Pricing

Prices were constantly adjusting in the industry. Pricing departments devoted agreat deal of attention to monitoring competitors’ prices (using computer reservation

systems) and matching any changes. Sometimes very small price cuts were made simply toincrease the likelihood that an airline’s flights would appear first on the travel agent’scomputer reservation system. Dramatic price changes, however, were usually accompaniedby significant advertising.

The sheer number of fares each airline set could be overwhelming. For each originand destination market that an airline served, fares had to be set for first-class, full-farecoach, and a variety of discount fares, all for both round-trip and one-way travel. Thetypical discount fare offered by a major carrier was for a coach seat when the buyer metcertain restrictions, including either a minimum 7-, 14- or 21-day advance purchase, and aSaturday-night stayover. Discount fares were also offered for flying at off-peak times andon off-peak days. Although discounting may have peaked in 1991, when discount faresaccounted for almost 95% of all traffic, in 1994 discount fares accounted for 90% of alltraffic and the average size of the discount was about 65% (Exhibit 14).

In 1992, after a series of price wars initiated by Northwest Airlines, Robert Crandall,president of American Airlines, tried to introduce a new simplified price system called‘Value Pricing,’ which was intended to reduce the frequency of price wars. Crandall’s planlimited the number of discount fare classes and was designed to reduce the size of the gapbetween discount fares and full fares. This gap, as shown in Exhibit 14, has grown steadilysince Crandall first introduced supersaver fares in 1976.

Yield Management

Yield management refers to the use of computer optimization techniques to allocateseats to different fare classes and price points. Consider a simple example in which anairline had two announced fares for its New York (JFK) to Dallas-Fort Worth (DFW)flight, a regular ‘full-fare’ coach fare and a supersaver fare, with restrictions such as a 7-day

advance purchase and Saturday night stayover.On a flight with 100 seats the yield management department had to decide how

many seats to allocate to the supersaver fare ‘bucket’ and how many seats to allocate to thefull-fare coach ‘bucket.’ In simplest terms, the airline hoped to sell as many seats aspossible at the lower fare without risking that a full-fare customer would be turned awaybecause all of the seats were sold. The exact size of each bucket was determined byweighing the benefit of additional sales at supersaver fares against the uncertain cost,including lost revenue and increased customer dissatisfaction, of potentially turning awayfull-fare passengers. To make this calculation the yield manager needed estimates of themean and variance of full-fare demand in order to determine the probability that potentialpassengers are turned away. In practice this relatively simple calculation was made muchmore difficult by the sheer number of different fare classes, the number of different

connections that a Dallas-Fort Worth bound passenger might take, and the difficulty of forecasting demand.American Airlines, a forerunner in computer reservation systems, was also the leader

in developing computerized yield management techniques, and its Management ServicesGroup was a leading source of yield management computer systems and software for othermajor carriers. USAir and other major carriers estimated that they increased operatingrevenues between 2% and 4% by adopting computer systems that perform yieldmanagement.

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Travel Agents

Travel agents were the major distribution channel for most airlines, accounting for75% of airline reservations. Travel agents had traditionally received a 10% commissionfrom the airline for providing services, including making the reservations, collectingpayments and ticketing. However, in an effort to convince travel agents to direct more

business to their firm, individual airlines offered additional financial incentives, called TravelAgent Commission Overrides (TACOs), which increased the agents’ commissions from anairline when the percentage of reservations made on that particular airline was sufficientlyhigh.

The incentive for airlines to reduce the commission paid to travel agents was high,and there had been several attempts to cut commissions. In the late 1980s, Unitedannounced a reduction in agent commissions to 5%, expecting other airlines to follow suit.However, while American had internally decided to match the commission cut, they alsoopted to delay matching United in order to take advantage of the short-term incentives foragents to pull business away from United and toward American and United’s othercompetitors. After the fourth day of seeing its business plunge, United relented and raisedcommissions back to 10%.

In early 1995, Delta lead a successful move to reduce commissions. The decision to

cap the 10% commissions at $50 per ticket was quickly matched by Delta’s competitors.Despite warnings that many agencies would go bankrupt, few agencies left the business as aresult of the commission cut.

Computer Reservation Systems

Many analysts foresaw streamlined distribution in the wake of deregulation,envisioning customers regularly using automated-teller-like machines for ticketing.However, the advent of the computer reservation system (CRS), which enabled morecomplex fare structures and frequent price changes, made the expertise of the travel agenteven more necessary. American’s Sabre system and United’s Apollo system were the firstentrants, enlisting most travel agents before competitors could roll out their own systems.Their systems listed the flights of almost every major U.S. airline and coordinated

reservations with those made directly with the airline or on other CRS systems.These CRSs allowed airlines to set-up complex fare structures for each flight. By

using advance-purchase and other requirements, the airlines were able offer a variety of discounted fares to more flexible travelers while last-minute travelers had no alternative butto pay full fares. This structure of multiple fares for travelers with differing needs gave theairlines the ability to gain additional revenue per flight by attracting the most price sensitivecustomers without sacrificing revenues from their least price sensitive customers.

CRSs are not without their critics, however. One major concern was travel agentbias, also known as the “halo effect.” There was well documented evidence that travelagents using the Apollo and Sabre CRSs book more flights on United and American,respectively, although the CRS providers were forbidden by law from giving their ownflights prominence in the CRS displays. An additional concern was that the ability to

transmit fare information at high speeds provides airlines with a method of signaling thatcould facilitate collusion. For instance, an airline could announce through the CRS a fareincrease on a particular route, effective at a future date. The carrier would then wait to see if its competitors matched the fare. If the fare was not matched, the carrier might extend theeffective date, or withdraw the fare. Competitors might also counteroffer by announcing asmaller fare increase through the CRS. As market concentration increased, so did the easeof this type of collusion.

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ROUTE STRATEGIES

The Hub-and-spoke System

The economics of the hub-and-spoke system can be described using a simpleexample (Figure 1). Consider a major carrier serving all of the passengers who want to

travel across the country between 10 different East Coast cities and 10 different West Coastcities. Since each departing passenger in the east may wish to go to any of the 10destinations in the west, and vice versa, there are 100 different origin and destinationmarkets. If the airline wanted to offer two nonstop departures each day for each of theseroutes, they would have to offer a total of 400 different one-way flight segments (100 city-pairs and two flights per day in each direction).

Instead of offering nonstop service the airline could set up a hub somewhere in themiddle of the country with spoke flights coming and going to each of the 10 east coast citiesand each of the 10 West Coast cities. Using a hub-and-spoke system, the airline couldoffer two daily departures from each spoke airport with a total of 40 one-way flights fromthe hub to each of the East Coast cities and 40 one-way flights to each of the West Coastcities. Although passengers may dislike having to change planes and wait for connections,by using a hub, the airline can offer the same number of daily departures for all of its 100

different origin and destination markets using only 80 flight segments per day. In addition,the airline can now offer service to passengers traveling between each of the 20 spoke citiesit serves and its hub city. If service to the hub city is included in the comparison, then thehub-and-spoke system makes it possible to offer one-stop service to passengers with up to120 different origin and destination travel requirements using only 80 flights, while theairline would need 440 flights to offer the same frequency of nonstop service.

Although the airline is flying many fewer routes, in fact the total amount of traffichas not changed. Under the hub-and-spoke system all of this traffic is routed on a smallernumber of flight segments, since all of the passengers originating their travel in the samecity share the same outbound leg and all of the passengers ending their travel in the samecity share the same connecting leg. Holding total traffic fixed, the traffic on each segmentwould be roughly six times higher under the hub-and-spoke system (20 segments) as itwould be on the nonstop route system (120 flight segments). However, since the airline

cannot accommodate all of the additional traffic with 1/6th of the flights, the airline musteither add larger planes on its spoke routes or add additional frequencies. While on the onehand costs per ASM are lower for larger planes, on the other hand passengers may be morelikely to choose the airline’s flights, rather than a competitor’s, if they offer more frequentservice.

The ideal hub has virtually 360 degrees of air service. Although the inconvenienceof changing flights is one of the main costs of the hub and spoke system, increased traveltime because of a poorly located hub is another important consideration for travelers.

Shuttle Routes and Point-to-point Service

The success of low-cost airlines such as Southwest was often been cited as evidence

that the hub-and-spoke system was unworkable. Executives at smaller startups referred tothe hub-and-spoke system as “a wasteful expenditure of manpower and aircraft” andpointed out that “to some airline passengers as well, hubs appeared to be simply aninconvenience, an extra stop to a final destination.”

An alternative to the hub-and-spoke system was point-to-point or shuttle service.By picking high traffic routes and offering high frequencies, a shuttle carrier could achievesignificant size advantages. Higher aircraft utilization rates and lower average station costs(gates and aircraft maintenance) were just two of the advantages Southwest was able toexploit.

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Route Selection, Market Share Models, and the S-Curve

One of the most important financial decisions made by airlines was which routes tofly. Although decisions about individual routes had to be made in light of their impact onthe entire route system, great attention was paid to measuring and forecasting routeprofitability.

Market share models were typically used to forecast the share of the market that anairline could expect as a function of the number of flights and types of connections that itoffered. One characteristic of the frequency of flights sometimes used in these models wasthe S-curve.8 Common sense suggests that an airline with twice as many flights each day asits competitor would be twice as likely to have the most convenient departure time for anyparticular customer. However, in practice an airline with twice as many flights was able toattract even more than twice the number of passengers. Adding an additional departurecould increase market share directly as well as generate a ‘frequency premium,’ in whichdemand for the airline’s other flights increases as well.

The importance of the S-curve is easier to see in an example. Consider the EastCoast shuttle market in 1995 where Delta flew every hour on the half hour and USAir flewevery hour on the hour. If Delta offered service every other hour, many customers wouldprefer to take the next USAir flight rather than to try to remember the departure time of

Delta’s next departure. And more importantly the security of knowing that they could takea flight an hour later if they miss their scheduled flight was very attractive to businesstravelers. Many business travelers purchased full-fare tickets on the airline with the mostflexible schedule because of the convenience of being able to take the first flight out of townonce their meeting was over. While a full-fare tickets would have had scheduled departuretimes, business travelers often viewed them as a general purpose tickets.

Another important factor in these models, after accounting for frequency andconvenience of the departure times, was the number and type of connections. Whencustomers were offered similar frequencies of nonstop and one-stop flights at the sameprices, they were four times more likely to choose the nonstop. If the choice was between acontinuing one-stop flight and one-stop flight that required a change of planes, they wereeight times more likely to choose the continuing flight.

Aircraft and Crew Scheduling

The hub-and-spoke system was complicated from an operations perspective.Consider United Airline’s hub at O’Hare Airport in Chicago. In order to provide servicefrom all of its east coast cities to Seattle through Chicago, every flight from United’s EastCoast cities had to arrive in O’Hare shortly before its flight to Seattle departed. Of course,the same was true of departures to Portland and every other west coast city that Unitedserved. To make these connections work, United scheduled “banks” of arrivals anddepartures so that passengers could all connect as quickly and efficiently as possible. As aconsequence, in early 1995 the average amount of time a passenger spent in the airportduring a connection was 59 minutes, a 5% increase over the 1990 layover time.9 At a largehub, an airline would schedule anywhere from 5 to 12 banks a day, which created a

significant amount of airport landing slot and gate congestion at those bank times. Becauseof the complexities involved in scheduling banks and connections, airlines usedsophisticated computer systems to do aircraft and flight crew scheduling.

8 The S-curve gets its name from the graph of market share (as measured in revenue passenger miles)against frequency.9 Wall Street Journal, June 1, 1995, p. A1.

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PROFILES OF SELECTED AIRLINES

American Airlines

Despite being poorly positioned in the late 70s, with high costs, an old, fuel-inefficient fleet and low-growth routes, American Airlines seemed to do everything right in

the first decade of deregulation. They were the first airline to introduce computerreservation systems (Sabre System in 1975) and frequent flier programs (AmericanAdvantage in 1981), and were the first creator of the restricted discount fare (the AmericanAirlines’ SuperSaver in 1976). In 1979 the airline moved its headquarters to Dallas whereit created its first and largest hub and aggressively pursued a hub-and-spoke strategy for allof its routes. American was also aggressive in negotiating wage concessions from itsunions and superior leasing terms from aircraft manufacturers, though they suffered from asevere flight attendants strike in 1993. Both industry insiders and outside observers viewedAmerican as the best-managed U.S. airline in the 1980s. And by the late 1980s American’smarket share had grown from 13.8%, seven points behind United, to 19%, the industryleader.

Always an advocate of price stability, American had occasionally received closescrutiny from the DOT’s and the Department of Justice’s antitrust departments for

potential price-fixing violations and other anti-competitive practices. CEO Robert Crandall’seffort to simplify and stabilize fares in 1994 was largely ineffective.

Delta Airlines

Delta pioneered the hub-and-spoke system with the development of its hub inAtlanta, a strategy that complemented its traditional strengths in the Southeast. In additionto developing other hubs in Dallas-Fort Worth and Cincinnati, Delta acquired WesternAirlines in 1986 in order to increase its national presence. Although Delta faced somecompetition in the East from Eastern Airlines (also in Atlanta), American (in Nashville), andPiedmont (in Charlotte), the acquisition of Western put Delta in head-to-head competitionwith United and American in the major transcontinental markets.

Long known for having strong labor relations and quality service, Delta focused on

quality management in the 1990s and shied away from aggressive price competition withlow cost carriers, such as Morris Air, which operated out of its Salt Lake City hub beforebeing acquired by Southwest.

In 1994 Delta turned down a proposal from Robert Priddy, the former CEO of Atlantic Southeast Airlines, Delta’s largest affiliated commuter airline, to develop a low costsubsidiary airline and instead embarked on an aggressive program to reduce costs andincrease revenues, named the ‘7.5 Leadership Program’ after its goal of reducing system-wide costs to 7.5 cents per ASM.

Southwest Airlines

As a result of its financial success and tremendous growth since its start as a small

regional airline serving only intrastate flights in Texas, Southwest’s low-cost strategy waswidely acclaimed by competitors and industry analysts. According to one analyst, “Theonly moneymaking U.S. airline, Southwest, doesn't follow the usual formula. Southwesthas no long flights; it links city-pairs with frequent flights almost like a shuttle, leaving theniceties of first class, advance seat selection, hot meals and baggage transfers to the otherairlines. It keeps a tight schedule and a tight budget.”

Southwest’s determination to keep costs low sometimes handicapped its marketingefforts. For example, by refusing to pay fees to American’s Sabre and United’s Apollocomputer reservation systems, the airline eventually gave up all access to these distribution

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channels. While Southwest adopted a frequent flier program, the lack of program partnersand international destinations made their program one of the least desirable.

USAir

USAir was the highest cost Major carrier in the industry, although part of that cost

difference could be explained by the fact that USAir’s average flight length was shorter thanother Major carriers. Described as having a conservative management, USAir avoided thewave of consolidations in the 1980s and focused on developing its hubs in Pittsburgh andPhiladelphia. USAir’s stronghold in Pittsburgh continued to grow; in 1993 USAirenplaned 82% of all of Pittsburgh’s passengers, while all of the other Major carrierscombined accounted for less than 10% of the market.

One of USAir’s more successful operations was the USAir Shuttle, which providesservice between Boston, New York and Washington, D.C. Acquired through a contractualarrangement with the Trump Shuttle’s creditors, the USAir Shuttle had only one majorcompetitor, Delta, and had been able to avoid severe price competition.

Although USAir had not formally announced an airline-within-an-airline strategy, itwas one of the first airlines to study the proposal and had discussed expanding the USAirShuttle to other routes in 1996 when it had the option to acquire full control of the

operation.In 1995, USAir experimented with their discount fare pricing, eliminating round trip

travel and Saturday night stayovers as requirements on many of its East-Coast, 21-dayadvance purchase discount fares. An airline spokesperson said “We thought this structurewould create a simpler, easier-to-sell fare menu that would more appropriately meet theneeds of both the business and leisure passengers.”

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Figure 1: Geography of the Hub-and-spoke System

Nonstop Service

Hub-and-spoke Connecting Service

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Exhibit 2: Airline Traffic Ranking By City, 50 Largest Markets, Twelve Months throughJune 1994.

Passengers

Rank City Number1 Percent of Total

12345

New York,NY/Newark, NJChicago, IllinoisLos Angeles, CaliforniaDallas/Ft. Worth, TexasSan Francisco, California

44626933268148277432021905681973047

6.804.984.233.343.01

6789

10

Atlanta, GeorgiaWashington, D.C.Boston, MassachusettsPhoenix, ArizonaLas Vegas, Nevada

18490971831911171571015740561570203

2.822.792.612.402.39

1112131415

Houston, TexasOrlando, FloridaDenver, ColoradoSeattle/Tacoma, WashingtonDetroit, Michigan

15337191345810128564412669321251031

2.342.051.961.931.91

1617181920

Miami, FloridaHonolulu, Oahu, HawaiiSan Diego, CaliforniaPhiladelphia, PA/Camden, NJMinneapolis/St. Paul, Minnesota

1233842114196310798891037673

989052

1.881.741.651.581.51

2122232425

St. Louis, MissouriTampa, FloridaFort Lauderdale, FloridaBaltimore, MarylandKansas City, Missouri

920763916469773330747516727836

1.401.401.181.141.11

2627282930

Cleveland, OhioSan Jose, CaliforniaOakland, CaliforniaPortland, Oregon

New Orleans, Louisiana

672943655755648265644702

640891

1.031.000.990.98

0.983132333435

Ontario&San Bernardino, CaliforniaPittsburgh, PennsylvaniaSalt Lake City, UtahSan Juan, Puerto RicoSanta Ana, California

600956588085580671579084565899

0.920.900.880.880.86

3637383940

San Antonio, TexasIndianapolis, IndianaSacramento, CaliforniaAlbequerque, New MexicoWest Palm Beach/Palm Beach, Fla.

519073506088502072495999474748

0.790.770.760.760.72

41424344

45

Austin, TexasColumbus, OhioNashville, TennesseeBurbank, California

Hartford, Connecticut

452756447743447542443734

411787

0.690.680.680.68

0.634647484950

Cincinnati, OhioCharlotte, North CarolinaRaleigh/Durham, North CarolinaReno, NevadaMilwaukee, Wisconsin

411381401528392238390204386573

0.630.610.600.590.59

1 The rankings and totals are based on a 10% sample of all travel during the period. The numbers in thetable can be multiplied by 10 to yield an estimate of total traffic. The figures include local traffic (originand destination) and do not include connecting passengers.

Source: US Department of Transportation

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Exhibit 3: Airline Traffic Rankings by Route, 50 Largest Origin and Destination Markets,Twelve Months through June 1994.

Passengers

Rank City Pair Number1 Percent of Total

12345

Los Angeles, CaliforniaChicago, IllinoisBoston, MassachusettsMiami, FloridaHonolulu, Oahu, Hawaii

New York, New York New York, New York New York, New York New York, New York Kahului, Maui, Hawaii

276148254359248093244261232368

0.860.790.770.760.72

6789

10

New York, NY/Newark, NJDallas/Ft. Worth, TexasLos Angeles, CaliforniaNew York, NY/Newark, NJNew York, NY/Newark, NJ

Washington, D.C.Houston, TexasSan Francisco, CaliforniaSan Francisco, CaliforniaOrlando, Florida

223097221370210818193083187226

0.690.690.650.600.58

1112131415

Fort Lauderdale, FloridaNew York, NY/ Newark, NJAtlanta, Georgia’Las Vegas, NevadaChicago, Illinois

New York, New York San Juan, Puerto RicoNew York, New York Los Angeles, CaliforniaDetroit, Michigan

178313166921165102153603135811

0.550.520.510.480.42

1617181920

Los Angeles, CaliforniaLos Angeles, CaliforniaHonolulu, Oahu, HawaiiHonolulu, Oahu, HawaiiNew York, NY/Newark, NJ

Phoenix, ArizonaOakland, CaliforniaLihue, Kauai, HawaiiLos Angeles, CaliforniaWest Palm Beach, Florida

133811127799127633126843123277

0.410.400.400.390.38

2122232425

Honolulu, Oahu, HawaiiChicago, IllinoisHilo, Hawaii, HawaiiSan Diego, CaliforniaBoston, Massachusetts

Kona, Hawaii, HawaiiLos Angeles, CaliforniaHonolulu, Oahu, HawaiiSan Francisco, CaliforniaWashington, D.C.

116617114433107866106448106398

0.360.350.330.330.33

2627282930

Chicago, IllinoisDallas/Ft. Worth, TexasHonolulu, Oahu, HawaiiChicago, IllinoisLos Angeles, California

St. Louis, MissouriNew York, New York San Francisco, CaliforniaMinneapolis, MinnesotaSeattle/Tacoma, WA

10119798478980259282392210

0.310.310.300.290.29

3132333435

NY, NY/Newark, NJDallas/Ft. Worth, Texas]Las Vegas, NevadaLos Angeles, CaliforniaAtlanta, Georgia

Tampa, FloridaSan Antonio, TexasPhoenix, ArizonaWashington, D.C.Chicago, Illinois

9179291664877778747886047

0.280.280.270.270.27

3637383940

Chicago, IllinoisPhoenix, ArizonaChicago, IllinoisChicago, IllinoisChicago, Illinois

Cleveland, OhioSan Diego, CaliforniaSan Francisco, CaliforniaKansas City, MissouriDenver, Colorado

8549483810837718367581812

0.270.260.260.260.25

4142434445

Chicago, IllinoisChicago, IllinoisChicago, IllinoisBoston, MassachusettsSan Francisco, California

Phoenix, ArizonaOrlando, FloridaWashington, D.C.Chicago, IllinoisWashington, D.C.

8177181616808818036380165

0.250.250.250.250.25

4647484950

Houston, TexasChicago, IllinoisDetroit, MichiganSan Francisco, CaliforniaBurbank, California

New York, New York Dallas/Ft. Worth, TexasNew York, New York Seattle/Tacoma, WashingtonOakland, California

7892778919781277716976836

0.240.240.240.240.24

1 The rankings and totals are based on a 10% sample of all travel during the period. The numbers in thetable can be multiplied by 10 to yield an estimate of total traffic.

Source: US Department of Transportation

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Exhibit 5: Consumer Union’s Reader Survey: Ratings of Domestic Airlines on Service Quality, 19941

Southwest Delta2 TWA American Northwest America West USAir2 United

Overall score3 74 72 71 69 68 68 67 67

On-time 4 3 3 3 3 3 3 3

Check-in 3 3 3 3 3 3 3 3

Seat comfort 3 3 5 3 3 3 2 2

Crowding 1 3 3 3 3 2 3 3

Flight attendant 3 3 3 3 3 3 3 3

Baggage problems 4 3 3 3 3 3 3 3

Source: Based on data presented in Consumer Reports, June 1995, pp. 386-387.

1 Results based on responses to Consumer Union’s 1994 Annual Questionnaire. About 120,000 subscribers to Consumer Reports papproximately 189,000 domestic flights they had taken between January 1993 and April 1994. Ratings of specific components of s5 point scale: 5 = highest; 1 = lowest rating.

2 Data do not include shuttle flights.

3 Overall score summarizes reader responses to Consumer Reports’ 1994 Annual Questionnaire concerning airline flights during thConsumer Reports used a six-point scale: 100 = excellent, 80 = very good, 60 = good, 40 = fair, 20 = poor, 0 = very poor. The avSlightly over half of respondents rated their flights as very good or excellent. Each airline was judged on at least 472 flights; a flightrip on a single airline, including stops and connections. An airline’s Rating includes judgments of the commuter carriers that use itthan three points are not meaningful. The survey reflects the experiences of Consumer Reports readers, not necessarily those of airl

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Exhibit 6: Frequent Flier Magazine Airline Rankings 1994

Part 1. Rankings of all Major Airlines

Overall Service Short-Haul Service Long-Haul Service

1. Delta 1. Delta 1. Delta2. American 2. America West 2. American3. United 3. America United4. TWA 4. United 4. TWA

America West Northwest 5. NorthwestNorthwest 6. TWA 6. America West

7. USAir 7. USAir 7. USAir8. Southwest 8. Southwest Southwest9. Continental 9. Continental 9. Continental

Part 2. The Top Rated Airline in Each of Ten Major Categories of Service

Category of Service Top Rated Airline(multiple entries indicates a tie)

Schedule/Flight Accommodations AmericanUnited

Frequent Flier Program Northwest Aircraft/Attendants American

DeltaFood Service AmericanOn Time Performance SouthwestSeating Comfort TWA In-Flight Amenities Delta Airport Check-In DeltaGate Location DeltaPost-Flight Services Southwest

Part 3. Top Rated Airlines in Several More Specific Categories

Category of Service Top Rated Airlines(in alphabetical order)

Availability of Seat Preference American/TWA/UnitedSeating Comfort Delta/TWA/UnitedKeeping Flyers Informed of Delays America/Delta/UnitedOverhead Storage America West/American/DeltaFlight Attendants Delta/Southwest/TWAFood Quality America/TWA/UnitedOn-Time Departure SouthwestOn-Time Arrival Delta/Southwest/United Baggage Delivery Speed Delta/Southwest/United

Fewest Lost Bags America/Southwest/United

Source: Frequent Flier , July 1995. Based on a J. D. Powers Survey of the U.S. OAG Pocket FlightGuide subscriber base. Respondents rated many different aspects of the flight experience (for each airlinethey flew during the first quarter of 1995) and these ratings were consolidated into the ten categories of service criteria listed in part 2 of the table. The mean respondent was 48 years old, flew 25 round trips peryear, and earned $137,000. 45% carried a laptop computer when they traveled and 87% were male.

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Exhibit 7: Financial and Traffic Performance, Domestic Airline Industry, 1950-1994

Year Yield(cents/RPM

)

UnitRevenues

(cents/ASM)

ConsumerPrice Index(1982=100)

Yield in1982

Dollars

RevenuePassenger Miles

AvailableSeat Miles

LoadFactor

1950 6.89 3.96 24.9 27.6 8,029,131 13,124,889 61.17

1951 7.61 4.63 26.9 28.3 10,589,668 15,614,681 67.821952 6.92 4.57 27.5 25.2 12,559,332 19,170,377 65.511953 6.68 4.33 27.7 24.1 14,793,875 23,337,498 63.391954 6.40 4.03 27.8 23.0 16,802,424 26,921,925 62.411955 6.62 4.09 27.7 23.9 19,852,118 31,371,182 63.281956 6.33 4.00 28.2 22.5 22,398,589 35,366,158 63.331957 6.27 3.97 29.2 21.5 25,378,769 41,746,375 60.791958 5.85 3.58 30.0 19.5 25,375,489 42,723,508 59.391959 6.88 4.08 30.2 22.8 29,307,600 48,404,952 60.551960 6.57 4.03 30.7 21.4 30,556,616 52,220,182 58.511961 6.24 3.46 31.0 20.1 31,062,345 56,087,214 55.381962 6.31 3.34 31.3 20.2 33,622,636 63,887,578 52.631963 6.09 3.23 31.7 19.2 38,456,612 72,254,533 53.221964 5.95 3.28 32.1 18.5 44,141,261 80,524,404 54.821965 5.87 3.24 32.7 18.0 51,887,415 94,787,113 54.741966 5.67 3.29 33.6 16.9 60,590,826 104,668,839 57.891967 5.49 3.10 34.6 15.9 75,487,327 133,699,795 56.461968 5.46 2.87 36.0 15.2 87,507,677 166,870,750 52.441969 5.68 2.84 38.0 15.0 95,945,897 194,447,654 49.341970 5.79 2.88 40.2 14.4 104,146,807 213,159,879 48.861971 6.06 2.94 42.0 14.4 106,438,408 221,503,165 48.051972 6.08 3.23 43.3 14.0 118,137,978 226,614,145 52.131973 6.34 3.31 46.0 13.8 126,317,334 244,699,119 51.621974 7.29 4.00 51.1 14.3 129,732,395 233,880,101 55.471975 7.59 4.08 55.8 13.6 131,728,492 241,282,125 54.601976 7.97 4.42 59.0 13.5 145,271,283 261,247,796 55.611977 8.42 4.71 62.8 13.4 156,609,249 280,618,915 55.811978 8.30 5.10 67.6 12.3 182,669,238 299,541,841 60.981979 8.71 5.48 75.2 11.6 208,890,884 332,796,130 62.77

1980 11.01 6.49 85.4 12.9 200,829,303 346,028,272 58.041981 12.32 7.22 94.2 13.1 198,714,755 346,171,952 57.401982 11.78 6.95 100.0 11.8 210,149,315 359,527,716 58.451983 11.61 7.05 103.2 11.3 226,908,925 379,150,158 59.851984 12.14 7.19 107.7 11.3 243,692,254 422,506,609 57.681985 11.65 7.15 111.5 10.5 270,584,011 445,825,864 60.691986 10.84 6.54 113.6 9.6 302,089,903 497,990,815 60.661987 11.11 6.92 117.7 9.4 324,637,336 526,958,361 61.611988 11.88 7.43 122.6 9.7 329,309,489 536,662,591 61.361989 12.43 7.86 128.5 9.7 329,975,206 530,079,041 62.251990 12.76 7.97 135.4 9.4 340,230,892 563,064,938 60.421991 12.74 7.98 141.1 9.0 332,565,881 543,637,976 61.171992 12.50 7.95 145.5 8.6 347,931,400 557,988,917 62.351993 13.06 8.29 149.7 8.7 354,176,730 571,489,249 61.971994 12.49 8.27 153.6 8.1 378,846,419 585,102,123 64.75

Source: Air Transport Association Annual Reports.

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Exhibit 9: Analysis of Jet Fleets of U.S. Major Carriers, First Quarter 1994

Airline Size of JetFleet

Average Age of JetFleet

America West 84 8.6American 699 8.3Continental 297 13.9Delta 555 9.7Federal Express (Cargo) 205 18.4Northwest 369 16.7Southwest 160 7.7TWA 199 18.7United 573 10.8United Parcel Service (Cargo) 154 20.4USAir 477 11.3

Source: The Aviation and Aerospace Almanac 1995, McGraw Hill, Inc., 1995.

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