Serving Bandaranaike International Airport
El Al - Israel Airlines
of the Airline Industry
Types of Airline
are classified as major, national and regional.
airlines hold two certificates from the federal government: a fitness
certificate and an operating certificate. The Department of Civil Aviation (DCA)
issues fitness certificates - called certificates of public convenience and
necessity - under it's statutory authority. Basically, the certificate
establishes that the carrier has the financing and the management in place to
provide scheduled service. The certificate typically authorizes both passenger
and cargo service. Some airlines, however, obtain only cargo-service authority.
Commuter airlines that use aircraft with a seating capacity of 60 or fewer seats
or a maximum payload capacity of no more than 18,000 pounds can operate under
the alternative authority of Part 298 of DOT’s economic regulations.
certificates, on the other hand, are issued by the Federal Aviation
Administration (FAA) under Part 121 of the Federal Aviation Regulations (FARs),
which spell out numerous requirements for operating aircraft with 10 or more
seats. The requirements cover such things as the training of flight crews and
aircraft maintenance programs. All majors, nationals and regionals operate with
a Part 121 certificate.
include everyone directly involved in producing or selling an airline’s
services - the mechanics, who maintain the planes; the pilots, who fly them; the
flight attendants, who serve passengers and perform various inflight safety
functions; the reservation clerks, airport check-in and gate personnel, who book
and process the passengers; ramp-service agents, security guards, etc. Line
personnel generally fall into three broad categories: engineering and
maintenance, flight operations, and sales and marketing. These three divisions
form the heart of an airline and generally account for 85 percent of an
department is responsible for operating an airline’s fleet of aircraft safely
and efficiently. It schedules the aircraft and flight crews and it develops and
administers all policies and procedures necessary to maintain safety and meet
all FAA operating requirements. It is in charge of all flight-crew training,
both initial and recurrent training for pilots and flight attendants, and it
establishes the procedures crews are to follow before, during and after each
flight to ensure safety.
also are part of flight operations. Their job is to release flights for takeoff,
following a review of all factors affecting a flight. These include the weather,
routes the flight may follow, fuel requirements and both the amount and
distribution of weight onboard the aircraft. Weight must be distributed evenly
aboard an aircraft for it to fly safely.
accounts for approximately 11 percent of an airline’s employees and 10-15
percent of its operating expenses. Maintenance programs keep aircraft in safe,
working order; ensure passenger comfort; preserve the airline’s valuable
physical assets (its aircraft); and ensure maximum utilization of those assets,
by keeping planes in excellent condition. An airplane costs its owner money
every minute of every day, but makes money only when it is flying with freight
and/or passengers aboard. Therefore, it is vital to an airline’s financial
success that aircraft are properly maintained
typically have one facility for major maintenance work and aircraft
modifications, called the maintenance base; larger airlines sometimes have more
than one maintenance base. Smaller maintenance facilities are maintained at an
airline’s hubs or primary airports, where aircraft are likely to be parked
overnight. Called major maintenance stations, these facilities perform routine
maintenance and stock a large supply of spare parts.
third level of inspection and repair capability is maintained at airports, where
a carrier has extensive operations, although less than at its hubs. These
maintenance facilities generally are called maintenance stations.
division encompasses such activities as pricing, scheduling, advertising, ticket
and cargo sales, reservations and customer service, including food service.
While all of them are important, pricing and scheduling in particular can make
or break an airline, and both have become more complicated. As explained in the
next chapter, airline prices change frequently in response to supply and demand
and to changes in the prices of competitors’ fares. Schedules change less
often, but far more often than when the government regulated the industry.
Airlines use sophisticated computer reservation systems to advertise their own
fares and schedules to travel agents and to keep track of the fares and
schedules of competitors. Travel agents, who sell approximately 80 percent of
all airline tickets, use the same systems to book reservations and print tickets
for travelers. More information about airline pricing and scheduling can be
are major changes in air transportation, which simplify the process for airline
passengers to make a reservation and to purchase a ticket. Electronic commerce
is playing a significant part in the airline industry. In addition to the paper
tickets issued in the past, all of the major airlines are now offering
electronic ticketing for domestic and international air travel. Electronic
ticketing allows an airline to document the sale and track the usage of
transportation. Passengers no longer worry about carrying flight coupons or
losing their tickets. Passengers have the ability to shop for the lowest priced
transportation, make or change a reservation, request refunds etc., not only
from their travel agent but from their own personal home computer or from a
telephone, on the way to the airport. A boarding pass is issued at the airport
in exchange for proof of a reservation (an airline confirmation number) and
payment (cash or a major credit card). The number of air travelers shopping,
making reservations and purchasing electronic tickets using the Internet is
increasing daily. Self-service automated ticketing machines are also widely
available at major airports around the country.
next step for airlines will be to automate the check-in procedure. Electronic
self-service check-in computer kiosks at major airports will soon be available
for most passengers using electronic tickets. Self-service machines will enable
passengers to verify their itinerary, obtain class of service upgrades, select
specific seat assignments, check baggage with bar-coded baggage tags and obtain
their own boarding passes.
include specialists in such fields as law, accounting, finance, employee
relations and public relations. Their function is to support the work of the
line personnel, so that the airline runs efficiently and earns a profit. For the
most part, staff personnel work out of corporate headquarters and fall into
seven broad job categories typical of major corporations: finance &
property, information services, personnel, medical, legal, public relations and
& property handles company revenues and finances. In addition, it oversees
all company property and the purchase of food, fuel, aircraft parts and other
supplies needed to run an airline. Information services designs and maintains
the company's internal computer systems, used to store and analyze data needed
for operations and planning. At an airline, this includes the important function
of fleet planning, explained in greater detail in the next chapter.
major airlines typically do most of their own work, it is common for them to
farm out certain tasks to other companies. These tasks could include aircraft
cleaning, fueling, airport security, food service and in some instances,
maintenance work. Airlines might contract out for all of this work or just a
portion of it, keeping the jobs in house at their hubs and other key stations.
However, whether an airline does the work itself or relies on outside vendors,
the carrier remains responsible for meeting all applicable federal safety
Characteristics of the Airline Business
of all of the equipment and facilities involved in air transportation, it is
easy to lose sight of the fact that this is, fundamentally, a service industry.
Airlines perform a service for their customers - transporting them and their
belongings (or their products, in the case of cargo customers) from one point to
another for an agreed price. In that sense, the airline business is similar to
other service businesses like banks, insurance companies or even barbershops.
There is no physical product given in return for the money paid by the customer,
nor inventory created and stored for sale at some later date.
many service businesses, airlines need more than storefronts and telephones to
get started. They need an enormous range of expensive equipment and facilities,
from airplanes to flight simulators to maintenance hangars. As a result, the
airline industry is a capital-intensive business, requiring large sums of money
to operate effectively. Most equipment is financed through loans or the issuance
of stock. Increasingly, airlines are also leasing equipment, including equipment
they owned previously but sold to someone else and leased back. Whatever
arrangements an airline chooses to pursue, its capital needs require consistent
High Cash Flow
airlines own large fleets of expensive aircraft which depreciate in value over
time, they typically generate a substantial positive cash flow (profits plus
depreciation). Most airlines use their cash flow to repay debt or acquire new
aircraft. When profits and cash flow decline, an airline's ability to repay debt
and acquire new aircraft is jeopardized.
also are labor intensive. Each major airline employs a virtual army of pilots,
flight attendants, mechanics, baggage handlers, reservation agents, gate agents,
security personnel, cooks, cleaners, managers, accountants, lawyers, etc.
Computers have enabled airlines to automate many tasks, but there is no changing
the fact that they are a service business, where customers require personal
attention. More than one-third of the revenue generated each day by the airlines
goes to pay its workforce. Labor costs per employee are among the highest of any
part because of its long history as a regulated industry, the airline industry
is highly unionized.
bottom line result of all of this is thin profit margins, even in the best of
times. Airlines, through the years, have earned a net profit between one and two
airline business historically has been very seasonal. The summer months were
extremely busy, as many people take vacations at that time of the year. Winter,
on the other hand, was slower, with the exception of the holidays. The result of
such peaks and valleys in travel patterns was that airline revenues also rose
and fell significantly through the course of the year. This pattern continues
today, although it is less pronounced than in the past.
agencies play an important role in airline ticket sales. Eighty percent of the
industry's tickets are sold by agents, most of whom use airline-owned computer
reservation systems to keep track of schedules and fares, to book reservations,
and to print tickets for customers. Airlines pay travel agents a commission for
each ticket sold. There are more than 40,000 travel agents in the United States,
providing a vast network of retail outlets for air transportation.
freight forwarders book the majority of air-cargo space. Like travel agents,
freight forwarders are an independent sales force for airline services, in their
case working for shippers.
to reports filed with the Department of Transportation in 1999, airline costs
were as follows:
Flying Operations - essentially
any cost associated with the operation of aircraft, such as
fuel and pilot salaries - 27 percent;
- both parts and labor - 13
and Traffic Service - basically the cost of handling passengers, cargo and
on the ground and including such things as the salaries of baggage
and airline gate
agents - 16 percent;
- including advertising, reservations and travel agent commissions – 13
Service - mostly in flight service and including such things as food and flight
attendant salaries - 9 percent;
Related - delivery trucks and inflight sales - 10 percent;
- 6 percent;
equipment and plants - 6
costs are common to nearly all of those categories. When looked at as a whole,
labor accounts for 35 percent of the airlines' operating expenses and 75 percent
of controllable costs. Fuel is the airlines' second largest cost (about 10 to 12
percent of total expenses), and travel-agent commissions is third (about 6
percent). Commission costs, as a percent of total costs, have recently been
declining, as more sales are now made directly to the customer through
electronic commerce. Another rapidly rising cost has been airport landing fees
and terminal rents.
airline has what is called a break-even load factor. That is the percentage of
the seats the airline has in service that it must sell at a given yield, or
price level, to cover its costs.
revenue and costs vary from one airline to another, so does the break-even load
factor. Escalating costs push up the break-even load factor, while increasing
prices for airline services have just the opposite effect, pushing it lower.
Overall, the break-even load factor for the industry in recent years has been
approximately 66 percent.
typically operate very close to their break-even load factor. The sale of just
one or two more seats on each flight can mean the difference between profit and
loss for an airline.
seats to an aircraft increases its revenue-generating power, without adding
proportionately to its costs. However, the total number of seats aboard an
aircraft depend on the operator's marketing strategy. If low prices are what an
airline's customers favor, it will seek to maximize the number of seats to keep
prices as low as possible. On the other hand, a carrier with a strong following
in the business community may opt for a large business-class section, with
fewer, larger seats, because it knows that its business customers are willing to
pay premium prices for the added comfort and workspace. The key for most
airlines is to strike the right balance to satisfy its mix of customers and
thereby maintain profitability.
occasionally overbook flights, meaning that they book more passengers for a
flight than they have seats on the same flight.
practice is rooted in careful analysis of historic demand for a flight,
economics and human behavior. Historically, many travelers, especially business
travelers buying unrestricted, full-fare tickets, have not traveled on the
flights for which they have a reservation. Changes in their own schedules may
have made it necessary for them to take a different flight, maybe with a
different airline, or to cancel their travel plans altogether, often with little
or no notice to the airline. Some travelers, unfortunately, reserve seats on
more than one flight.
airlines and customers are advantaged when airlines sell all the seats for which
they have received reservations. An airline's inventory is comprised of the
seats that it has on each flight. If a customer does not fly on the flight which
he or she has a reservation, his or her seat is unused and cannot be returned to
inventory for future use as in other industries. This undermines the
productivity of an airline's operations; it is increasing productivity, of
course, that contributes to lower airfares and expanded service. Consequently,
airlines sometimes overbook flights.
for travelers, airlines do not overbook arbitrarily. They examine the history of
particular flights, in the process determining how many no-shows typically
occur, and then decide how much to overbook that particular flight. The goal is
to have the overbooking match the number of no-shows.
most cases the practice works effectively. Occasionally, however, when more
people show up for a flight than there are seats available, airlines offer
incentives to get people to give up their seats. Free tickets are the usual
incentive; those volunteering are booked on another flight.
there are more volunteers than the airlines need, but when there are not enough
volunteers, airlines must bump passengers involuntarily. In the rare cases where
this occurs, federal regulations require the airlines to compensate passengers
for their trouble and help them make alternative travel arrangements. The amount
of compensation is determined by government regulation.
1978, airlines have had the same pricing freedom as companies in other
industries. They set fares and freight rates in response to both customer demand
and the prices of competitors. As a result, fares change much more rapidly than
they used to, and passengers sitting in the same section on the same flight
often are paying different prices for their seats.
this may be difficult to understand for some travelers, it makes perfect sense,
considering that a seat on a particular flight is of different value to
different people. It is far more valuable, for instance, to a salesperson who
suddenly has an opportunity to visit an important client than it is to someone
contemplating a visit to a friend. The pleasure traveler likely will make the
trip only if the fare is relatively low. The salesperson, on the other hand,
likely will pay a higher premium in order to make the appointment.
the airlines, the chief objective in setting fares is to maximize the revenue
from each flight, by offering the right mix of full-fare tickets and various
discounted tickets. Too little discounting in the face of weak demand for the
flight, and the plane will leave the ground with a large number of empty seats,
and revenue-generating opportunities will be lost forever. On the other hand,
too much discounting can sell out a flight far in advance and preclude the
airline from booking last-minute passengers that might be willing to pay higher
fares (another lost-revenue opportunity).
process of finding the right mix of fares for each flight is called yield,
inventory or revenue management. It is a complex process, requiring
sophisticated computer software that helps an airline estimate the demand for
seats on a particular flight, so it can price the seats accordingly. And, it is
an ongoing process, requiring continual adjustments as market conditions change.
Unexpected discounting in a particular market by a competitor, for instance, can
leave an airline with too many unsold seats if they do not match the discounts.
deregulation, airlines have been free to serve whatever domestic markets they
feel warrant their service, and they adjust their schedules often, in response
to market opportunities and competitive pressures. Along with price, schedule is
an important consideration for air travelers. For business travelers, schedule
is often more important than price. Business travelers like to see alternative
flights they may take on the same airline if, for instance, a meeting runs
longer or shorter than they anticipate. A carrier that has several flights a day
between two cities has a competitive advantage over carriers that serve the
market less frequently, or less directly.
establish their schedules in accordance with demand for their services and their
marketing objectives. Scheduling, however, can be extraordinarily complex and
must take into account aircraft and crew availability, maintenance needs and
airport operating restrictions.
to popular myth, airlines do not cancel flights because they have too few
passengers for the flight. The nature of scheduled service is such that aircraft
move throughout an airline's system during the course of each day. A flight
cancellation at one airport, therefore, means the airline will be short an
aircraft someplace else later in the day, and another flight will have to be
canceled. If an airline must cancel a flight because of a mechanical problem, it
may choose to cancel the flight with the fewest number of passengers and utilize
that aircraft for a flight with more passengers. While it may appear to be a
cancellation for economic reasons, it is not. The substitution was made in order
to inconvenience the fewest number of passengers.
the right aircraft for the markets an airline wants to serve is vitally
important to its financial success. As a result, the selection and purchase of
new aircraft is usually directed by an airline's top officials, although it
involves personnel from many other divisions such as maintenance and
engineering, finance, marketing and flight operations.
are numerous factors to consider when planning new aircraft purchases, beginning
with the composition of an airline's existing fleet. Do existing aircraft need
to be replaced, what plans does the airline have to expand service, how much
fuel do they burn per mile, how much are maintenance costs, and how many people
are needed to fly them. These are the type of questions that must be answered.
general, newer aircraft are more efficient and cost less to operate than older
aircraft. A Boeing 727, for example, is less fuel efficient than the 757 that
Boeing designed to replace it. In addition, the larger 757 requires only a
two-person flight crew, versus three for the 727. As planes get older,
maintenance costs can also rise appreciably.
such productivity gains must be weighed against the cost of acquiring a new
aircraft. Can the airline afford to take on more debt? What does that do to
profits? What is the company's credit rating, and what must it pay to borrow
money? What are investors willing to pay for stock in the company if additional
shares are floated? A company's finances, like those of an individual
considering the purchase of a house or new car, play a key role in the aircraft
strategies are important, too. An airline considering expansion into
international markets, for example, typically cannot pursue that goal without
long-range, widebody aircraft. If it has been largely a domestic carrier, it may
not have that type of aircraft in its fleet. What's more, changes in markets
already served may require an airline to reconfigure its fleet. Having the
right-sized aircraft for the market is vitally important. Too large an aircraft
can mean that a large number of unsold seats will be moved back and forth within
a market each day. Too small an aircraft can mean lost revenue opportunities.
aircraft purchases take time (often two or three years, if there is a production
backlog), airlines also must do some economic forecasting before placing new
aircraft orders. This is perhaps the most difficult part of the planning
process, because no one knows for certain what economic conditions will be like
many months, or even years, into the future. An economic downturn coinciding
with the delivery of a large number of expensive new aircraft can cause major
financial losses. Conversely, an unanticipated boom in the travel market can
mean lost market share for an airline that held back on aircraft purchases while
competitors were moving ahead.
airline planners determine their company needs an aircraft that does not yet
exist. In such cases, they approach the aircraft manufacturers about developing
a new model, if the manufacturers have not already anticipated their needs.
Typically, new aircraft reflect the needs of several major airlines, because
start-up costs for the production of a new aircraft are enormous, manufacturers
must sell substantial numbers of a new model just to break even. They usually
will not proceed with a new aircraft unless they have a launch customer, meaning
an airline willing to step forward with a large order for the plane, plus
smaller purchase commitments from several other airlines.
have been several important trends in aircraft acquisition since deregulation.
One is the increased popularity of leasing versus ownership. Leasing reduces
some of the risks involved in purchasing new technology. It also can be a less
expensive way to acquire aircraft, since high-income leasing companies can take
advantage of tax credits. In such cases, the tax savings to a lessor can be
reflected in the lessor's price. Some carriers also use the leasing option to
safeguard against hostile takeovers. Leasing leaves a carrier with fewer
tangible assets that a corporate raider can sell to reduce debt incurred in the
second trend, since 1978, relates to the size of the aircraft ordered. The
development of hub-and-spoke networks, as described in Chapter 2, resulted in
airlines adding flights to small cities around their hubs. In addition,
deregulation has enabled airlines to respond more effectively to consumer
demand. In larger markets, this often means more frequent service. These
considerations, in turn, increased the demand for small- and medium-sized
aircraft to feed the hubs. Larger aircraft remain important for the more heavily
traveled routes, but the ordering trend is toward smaller aircraft.
third trend is toward increased fuel efficiency. As the price of fuel rose
rapidly in the 1970s and early 1980s, the airlines gave top priority to
increasing the fuel efficiency of their fleets. That led to numerous design
innovations on the part of the manufacturers. Airlines, today, average about 40
passenger miles per gallon - a statistic that compares favorably with even the
most efficient autos.
the fourth trend has been in response to airline and public concerns about
aircraft noise and engine emissions. Technological developments have produced
quieter and cleaner-burning jets. A ban on the operation of Stage 1 jets, such
as the Boeing 707 and DC-8, has been in effect since January 1, 1985.
Authorities in some countries dictated that all Stage 2 jets, such as 727s and
DC-9s, were to be phased out by the year 2000. Today, Stage 3 jets, taking their
place, include the Boeing 757 and the MD-80. Hush kits are also available for
older engines, and some airlines have chosen to pursue this option rather than
make the much greater financial commitment necessary to buy new airplanes.
Others have chosen to re-engine, or replace their older, noisier engines with
new ones that meet Stage 3 standards. While more expensive than hush kits, new
engines have operating-cost advantages that make them the preferred option for