Airline Cost Management by xiaopangnv

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									                              Airline Cost Management
                            Significant Periods of Change

                                   The Early Years
                                (1938 to Deregulation)

• Civil Aeronautics Board Controlled
    –Entry
   – Exit
   – Routes
   – Fares
• CAB made sure that no one airline controlled the industry
• The industry was viewed as “still fragile”
The Pre-Deregulation Situation

•   There were many large carriers that were quite ponderous
•   Seldom was there a carrier that had financial problems
•   There was excess capacity in the system
•   CAB:
     – Propped up ailing airlines
     – Used lucrative mail subsidies as a “tonic”


1976 Domestic Trunk Carriers
•   American
•   Braniff International
•   Continental
•   Delta
•   Eastern
•   National
•   Northwest
•   Pan American
•   Trans World
•   United
•   Western


After Deregulation
• All barriers were removed
• Airlines could go and come as they pleased
• New entrants into the market had a keen sense of competition and service
• Low fare carriers like Peoplexpress, New York Air, Braniff made major inroads
    in the marketplace
•   Mergers were on the horizon
•   Prior to Deregulation, the airlines did not have to be too concerned about
    marketing- everyone made money
•   After Deregulation, the domestic “open skies” that resulted made things
    extremely competitive
•   There were several recessions as well as oil problems that made matters
    worse
•   The 1980s was a decade of expansion and mergers like we will never see
    again

                            Ability to Compete - Slots
                              (GAO Report- 1997)
• ORD
   – 1986: American and United – 66%; Others – 28%; and New Entrants – 6%
   – 1991: American and United – 83%; Others – 13%; New Entrants – 1%
   – 1996: American and United – 87%; Others – 9%; and New Entrants – 1%
• LGA
   – 1986: American, Delta, and USAir – 27%; Others – 58%; and New entrants
     15%
   – 1991: Now 43%; 39%; and 12%
   – 1996: Now 64%; 14%; and 2%
• DCA
   – 1986: American, Delta, and USAir – 25%; Others – 58%; and New Entrants
     – 17%
   – 1991: Now 43%; 42%; and 8%
   – 1996: Now 59%; 20%; and 3%
• Financial Institutions hold many slots
Frequent Flier Program

•   An attempt at gaining customer loyalty
•   Rewards for repeat business (free tickets, upgrades, memberships in
    executive lounges)
•   AMR was the first to limited award length- miles ran out if not used
•   SWA has the simplest program; Delta used to have a very complex one
Computer Reservation Systems

• The advent to the computer reservation system (CRS) changed the way airline
  tickets are marketed
• The government is concerned though about an airline’s CRS (often leased to
  travel agents) and whether a bias can be introduced by that carrier into the
  architecture of the system
• Travel agents sold over ½ of all tickets during the 1980s and early1990s
Major 1980-90s Domestic CRS Systems
•   Apollo (United, USAir)
•   EAASY SABRE (American)
•   System One (Continental)
•   Worldspan - PARS (Northwest, TWA)
•   Worldspan - DATAS II (Delta)

Note: All airlines have abolished travel agent commissions as of 2004

Unique Major Airline Costs: Labor
• Accounts from anywhere from 30 to 40% of airline costs
• Often, labor contracts that were forged decades ago are still in force
• Some of the strongest unions in the industry have been forced to re-negotiate
• Certain high paid segments of the workforce have been asked to “give back”
Unique Major Airline Costs: Fuel
•   Fuel is the largest single uncontrollable operating cost (30- 40%)
•   Fuel prices have ranged from $.50 in 1998 to $1.00 per gallon in 1981
•   Average Fuel Price for the last 20 years is $.693 per gallon
•   Hedging requires good credit and an ample supply of money

Unique Major Airline Costs: Other
• Commission to Travel Agents
   – Used to be 10%
   – Lowered to 5%
   – Lowered to a maximum of $50
   – Abolished in recent years
• Landing Fees: To be discussed later
• B Scale: New hires started at a lower wage level but parity could be achieved
  after about 20 years
                ATA Airline Cumulative Net Profits (millions)
                         Chart High (or Low) Points

• Since 2001, the US air carriers have lost a total of $38B
• After Deregulation in 1978, the US air carriers have had 13 profitable years
  and 12 where the industry has lost money
• In 1992, the US air carriers reached a point where the industry’s cumulative
  net profits since 1938 were less than break-even
• Prior to Deregulation, the airlines always made money
• Should the industry be re-regulated?

10/24/08

								
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