Airline Costs Research Articles

Operating cost control strategies for airlines

The purpose of this study is to explore the ranking of international airlines operating cost control strategies based on empirical studies of an international full-service airlines operation in Taiwan. Cost control has become more and more important for airlines in recent years, especially after the dramatic increases in crude oil prices that began in 2008, as well as the on-going global financial crisis that started in the same year. In this study, the ranking policies and cost control strategies were extracted from questionnaires answered by airline industry experts and evaluated using the fuzzy Delphi method. The cost control strategies were then ranked using the analytic hierarchy process. The findings of this study can provide international full-service airlines with five key policies for operating cost control, including a fuel cost reduction policy, employee productivity improvement, flight operations, aircraft maintenance cost reduction, and operating procedure simplification. By ranking these potential cost reduction strategies, we identified the ten most significant ones out of twenty-one that branched out of the upper five criteria. These were as follows: (1) optimizing aircraft fleet dispatch, (2) conducting fuel hedging strategies, (3) improving aircraft fuel saving performance, (4) reducing the dead weight of an aircraft, (5) optimizing flight speeds using the efficient cost index, (6) scheduling reasonable flight hours for flight crew, (7) correcting en route flight plans and alternate airports, (8) increasing direct ticket sales, (9) encouraging employees to provide cost-control strategies, and (10) replacing old aircraft. The results of this study could be used to establish guidelines for international airlines with regard to the possibly best distribution of operational resources. We expect that the total operating costs of airlines can be reduced significantly through the use of these cost control strategies. Key words: Airline, operating cost control, fuzzy Delphi, analytical hierarchy process.

Decision-Theoretic Prediction and Policy Design of GDP Slot Auctions

We examine the potential for a simple auction to allocate arrival slots during Ground Delay Programs (GDP’s) more efficiently than the currently used sys- tem. The analysis of these auctions uses Predictive Game Theory (PGT) Wolpert and Bono (2010a,b), a new approach that produces a probability distribution over strategies instead of an equilibrium set. We compare the simple auction with other allocation methods, including combinatorial auctions and theoretical benchmarks using data from a one-hour GDP at Chicago Midway. We find that the simple slot auction overcomes several practical shortcomings of other approaches, while offering economically significant efficiency gains with respect to current practices and the potential to lower airline costs. We also find that the second price version of the simple auction dominates the first price version in nearly every decision-relevant category. This is despite the fact that none of the conventional arguments for second price auctions, such as dominant strategy implementability, even apply to GDP slot auctions. Finally, the results indicate that combinatorial auctions, if made operationally practical, might be more efficient than our auction, even though the combinatorial auction does not implement the social optimum in dominant strategies.

The Impact of the EU–US Open Skies Agreement and the Resulting British Airway's Open Skies Initiative: Passenger Numbers in London, Amsterdam and Paris

The advent of the EU–US Open Skies Agreement has been widely anticipated. A number of consequences have been predicted, for example, impacts on fares, passenger volumes, choice and consumer welfare. Airline costs are also predicted to fall as a result of increased competitiveness and increased cooperation among airlines. For the short period since the implementation of the Agreement, it is relatively easy to assess the supply-side changes that have been made, but more difficult to make wider judgements. This paper indicates the data that will be required to make these judgements and notes some methodological difficulties. Early estimates of the impact on passenger numbers are given using time series analysis focusing on London airports, in particular London Heathrow and airports served by British Airway's Open Skies Airline from Paris Orly and Amsterdam Schipol. Impact de l'accord Ciel Ouvert entre l'UE et les États-Unis et de l'initiative Open Skies résultante de British Airways: nombre de passagers à Londres, Amsterdam et Paris Résumé L'avènement de l'accord Ciel ouvert entre l'UE et les États-Unis avait été très largement prévu, et on a prédit un certain nombre de conséquences, notamment l'impact sur le prix des billets, sur les volumes de passagers, sur le choix pour les consommateurs et sur leur bien-être, entre autres. On prévoit également que les coûts des compagnies d'aviation devraient baisser, en conséquence de l'augmentation non seulement de la compétitivité, mais aussi de la concurrence entre les compagnies. A l'issue de la courte période qui s'est écoulée depuis l'implémentation de l'Accord, il est relativement aisé d’évaluer les variations qui se sont produites du côté de l'offre, mais beaucoup plus difficile de formuler des opinions plus générales. La présente communication indique les données qui seront requises pour formuler ces jugements, et souligne certaines difficultés sur le plan de la méthodologie. Des premières évaluations de l'impact sur le nombre de voyageurs ont été avancées, sur la base d'analyses à série temporelle concentrées sur les aéroports de Londres, notamment l'aéroport Heathrow de Londres et les aéroports desservis par la compagnie Open Skies de British Airway entre Paris Orly et l'aéroport Schipol d'Amsterdam. El efecto del Acuerdo de Cielos abiertos entre la UE y EE.UU. y el resultado de la Iniciativa de Cielos abiertos de British Airways: número de pasajeros en Londres, Ámsterdam y París Resumen El advenimiento del Acuerdo de Cielos abiertos entre la EU y EE.UU. era algo ampliamente esperado. Se han pronosticado muchas consecuencias, por ejemplo, los efectos sobre las tarifas, los volúmenes de pasajeros, las opciones y el bienestar de los consumidores. También se ha pronosticado la caída de los costes de las aerolíneas debido a una mayor competitividad y el incremento de la cooperación entre las aerolíneas. En el corto periodo de implantación del Acuerdo, es relativamente fácil evaluar los cambios que se han dado en el lado de la oferta, sin embargo, es más difícil realizar estimaciones mayores. Este trabajo indica que se necesitan datos para realizar estas estimaciones y hace referencia a algunas dificultades metodológicas. Los primeros estimativos del efecto sobre los números de pasajeros se han obtenido mediante análisis de series de tiempo centrados en los aeropuertos de Londres, en particular, el de Heathrow, y en los aeropuertos atendidos por la Aerolínea de Cielos abiertos de British Airways de Orly, en París, y Schipol, en Ámsterdam.

Scheduling of runway operations for reduced environmental impact

Efficient runway operations are a necessary input for the optimal use of the air transportation system. Most efforts at improving runway efficiency have failed to capture the impact of environmental costs. Here we develop an integrated approach that models this complex relationship, and provides insights regarding the value of environmental optimization for runway scheduling. More specifically, using actual flight data we compare environmentally optimal schedules with first-come-first-serve based policies and fuel-optimal schedules. We determine that while significant savings in environmental costs can be achieved through environmentally optimal schedules, these savings are not very different than those obtained through fuel-optimal schedules. Further, we find that any increase in the operational costs of airlines due to an environmentally optimal schedule is minimal.

Mitigation of Aviation Emissions of Carbon Dioxide

This paper investigates the interaction between economic, technological, and operational measures intended to reduce air transport-related emissions of carbon dioxide (CO2). In particular, the introduction of aviation to the European Union Emissions Trading Scheme (ETS) in 2012 may prompt increased uptake of presently available options for emission reduction (e.g., retrofitting winglets, expanding maintenance programs) by airlines operating in Europe. Carbon prices may also determine the use of options currently under development [e.g., open-rotor engines, second-generation biofuels, and improved air traffic management (ATM)]. The results of a several studies analyzing airline costs and emission reductions that are possible from different mitigation options are applied to a systems model of European aviation. With a set of nine scenarios (three internally consistent projections for future population, gross domestic product, oil and carbon prices, each run with three policy cases), technology uptake and the resulting effect on fuel life cycle CO2 emissions with and without an ETS are analyzed. Some options are rapidly taken up under all scenarios (e.g., improved ATM), others are taken up more slowly by specific aircraft classes depending on the scenario (e.g., biofuels), and others have negligible impact in the cases studied. High uptake of one mitigation option may also reduce the uptake of other options. European aviation fuel life cycle emissions could be reduced below 2005 levels before 2050 if cellulosic biomass fuels are made available by 2020. However, the land use requirements in this scenario may limit its practicality at currently projected cellulosic biomass yields.

The assessment of the EU–US Open Skies Agreement: The counterfactual and other difficulties

The advent of the EU–US Open Skies Agreement has been widely anticipated. A number of consequences have been predicted, for example, impacts on fares, on passenger volumes, choice and on consumer welfare. Airline costs are also predicted to fall as a result of increased competitiveness and increased cooperation among airlines. In the short period since the implementation of the Agreement, it is relatively easy to assess the supply-side changes that have been made, but more difficult to make wider judgements. For example, can traffic growth be attributed to Open Skies and does airline and alliance market power result in less fare flexibility with consequently less influence on changes in passenger volumes? Have airline costs changed and what has been the source of the savings? This paper offers some insight into the data that will be required to make these and other wider judgements and discusses some methodological difficulties.

An analytic hierarchy process for ranking operating costs of low cost and full service airlines

This paper develops an application of the analytic hierarchy process to rank the operating cost components of full service and low cost airlines. It takes into account the financial balance sheets and answers to a questionnaire submitted to the managers of selected airlines. The results suggest that the analytic hierarchy process can be appropriately used to obtain the ranking of the costs taking into account different views: financial, management and operative. Rental, office equipment and other supplies costs show the highest importance in the cost ranking, both for full services and low cost airlines. The robustness of the results is tested by Monte Carlo analysis.

On the relationship between airport pricing models

Airport pricing papers can be divided into two approaches. In the traditional approach the demand for airport services depends on airport charges and on congestion costs of both passengers and airlines; the airline market is not formally modeled. In the vertical-structure approach instead, airports provide an input for an airline oligopoly and it is the equilibrium of this downstream market which determines the airports’ demand. We prove, analytically, that the traditional approach to airport pricing is valid if air carriers have no market power, i.e. airlines are atomistic or they behave as price takers (perfect competition) and have constant marginal operational costs. When carriers have market power, this approach may result in a surplus measure that falls short of giving a true measure of social surplus. Furthermore, its use prescribes a traffic level that is, for given capacity, smaller than the socially optimal level. When carriers have market power and consequently both airports and airlines behave strategically, a vertical-structure approach appears a more reasonable approach to airport pricing issues.

Regulatory reform and managerial choice: an analysis of the cost savings from airline deregulation

AbstractThis paper explores the question of how the differential exercise of managerial choice can facilitate organizational adaptation and improve efficiency over periods of regulatory change. We address this question in the context of the US airline industry, with a detailed decomposition of an airline cost function. Our findings suggest that managers employ choice in unconstrained domains to counteract the effects of constrained or pre‐determined choices. This is an adaptive mechanism that helps firms adjust to environmental change or maneuver over a rugged landscape. We view this as a type of dynamic managerial capability for achieving dynamic fit under changing conditions. Copyright © 2008 John Wiley & Sons, Ltd.

Airlines and their Focus on Cost Control and Productivity

Airline deregulation is an issue which has been attracting more attention, especially from the media, in recent years. In this paper, we analyze how the deregulation in the European Union has affected the behaviour of carriers, especially regarding the entrance of new Low Cost Carriers. Subsequently, we analyze how the former legacy carriers have reacted to this entrance studying issues such as the new focus on airline costs and productivity. We also present some evidence about the potential role which can be played by other sectors of the industry like airports, Air Traffic Management firms and aircraft manufacturers.

Integrated airline scheduling

Airline scheduling is composed of fleet assignment, aircraft maintenance routing, and crew scheduling optimization subproblems. It is believed that the full optimization problem is computationally intractable, and hence the constituent subproblems are optimized sequentially so that the output of one is the input of the next. The sequential approach, however, provides an overall suboptimal solution and can also fail to satisfy the maintenance constraints of an otherwise feasible full problem. In this paper several integrated models for the optimization of airline scheduling are presented for the first time, and solved by applying an enhanced Benders decomposition method combined with accelerated column generation. Solutions of several realistic data sets are computed using the integrated models, which are compared with solutions of the best known approaches from the literature. As a result, the integrated approach significantly reduces airline costs. Finally, a comparison of alternative formulations has shown that keeping the crew scheduling problem alone in the Benders subproblem is much more efficient than keeping the aircraft routing problem.

Airlines’ competition in aircraft size and service frequency in duopoly markets

We are interested in how airlines make decisions on aircraft size and service frequency in a competitive environment. We apply three game-theoretic models to analyze airlines’ choices in duopoly markets: one short-haul market and one long-haul market. We study how airlines’ choices in a competitive environment may vary with flight distance, and also do sensitivity analysis to explore how the equilibrium results may change when air travel demand is higher, as it may happen in the future. Our research considers the competition factor in airlines’ decisions on both aircraft size and service frequency, and the impact of these decisions on both the cost and demand sides of airlines’ business. Different from previous studies, our research is based on cost, market share and demand models derived from empirical studies.

Impacts of code-share alliances on airline cost structure: A truncated third-order translog estimation

The airline industry has undergone significant changes following deregulation more than a decade ago. A prominent development in recent years has been the proliferation of airline alliances. An important question arises: are alliances cost savings or competition reducing? This paper addresses the first part of the question. However, the answer has bearing on the second part as well, since results in industrial economics suggest that, unless a merger (or alliance) can substantially reduce costs, consumers are unlikely to enjoy lower prices [e.g., Farrell, J. and C. Shapiro (1990), “Horizontal mergers: An equilibrium analysis,” American Economic Review, 80(1), 107–26]. This paper estimates a truncated third-order translog cost function using quarterly firm-level data of 10 airlines for the period 1994QI to 2001QI. Using the estimated function, we assess whether alliances have any impacts on costs, and if so, the extent to which the cost structure of airlines are affected. It is found that the truncated third-order translog is an appropriate specification, and alliances do appear to lower costs. However, while the impacts are statistically significant, in economic terms the magnitude appears to be immaterial.

Modeling the Large Scale Disruptions of an Airline Network

When the large-scale disruptions of airline networks occur, they can cause significant deterioration of the planned schedule. Such deterioration shows up in the form of long delays, rerouting and/or cancellation of flights. This paper presents a model for assessment of the economic consequences of large-scale disruptions of an airline single hub-and-spoke network. These consequences are expressed by the cost of delayed and cancelled complexes of flights. The model is based on the theory of queuing systems with the airline hub airport as a server and the complexes of flights as customers. The difference between the service time of the affected and planned complexes determine their delays caused by a given disruptive event. The cost of delays and revenues of the affected flights, and global airline mitigating strategies are used to determine the total airline cost of delayed and cancelled complexes. The model is applied to the disrupted hub-and-spoke network of a large European airline. The purpose is to il...

New optical airspeed sensor poised to cut airline costs

PurposeTo describe a new laser‐based, optical airspeed sensor development project. Dubbed laser air speed sensor instrument (LASSI), the sensor aims to overcome certain operational limitations of existing devices used on aircraft.Design/methodology/approach – The LASSI system is being developed by a consortium of UK organisations. It relies on Doppler wavelength shifting and involves firing short duration laser pulses from the aircraft into the atmosphere and measuring the velocity‐induced Doppler shift in the reflected (Rayleigh scattered) signal. The source is a diode‐pumped Nd:YAG laser operating at UV wavelengths.Findings – The project has reached the stage where a prototype system test bed is being assembled. Preliminary findings suggest that the system will offer a number of operational and economic benefits over existing devices, notably Pitot tubes.Originality/value – This new optical system is expected to improve helicopter safety during low‐speed activities, yield fuel savings on long‐haul passenger aircraft through a reduction in drag and also reduce the radar cross‐section of military aircraft.

AN AGENT BASED APPROACH TO THE REAL TIME AIR TRAFFIC CONTROL

Congestion in the air traffic network is a problem with an increasing relevance for airlines costs as well as airspace safety. One of the major factors is the limited operative capacity of the air network. In this work an agent based approach to the real time air traffic control is proposed. The air network is considered partitioned in different sectors. Each sector has its own decision agent devoted to the air traffic control involved in. In each of these sectors, in order to guarantee the respect of both delay and capacity constraints, a real time scheduling of the flights is obtained by an iterative procedure based on a specific graph model.

Terrorism-induced structural shifts in financial risk: airline stocks in the aftermath of the September 11th terror attacks

This paper investigates the effects of terror attacks of September 11 on a set of airline stocks listed at various international stock markets. Utilizing the Market Model as the relevant return generating mechanism, we document a structural break in systematic risk (beta) for airline stocks. Moreover, our empirical evidence shows that, apart from the systematic risk, idiosyncratic risk has also substantially increased. In quantitative terms, conditional systematic risk has on average more than doubled, while the percentage it represents over total risk has shown a considerable increase. These results have implications for portfolio diversification and the cost (and ability) of airlines in raising capital.

Terrorism-induced structural shifts in financial risk: airline stocks in the aftermath of the September 11th terror attacks

This paper investigates the effects of terror attacks of September 11 on a set of airline stocks listed at various international stock markets. Utilizing the Market Model as the relevant return generating mechanism, we document a structural break in systematic risk (beta) for airline stocks. Moreover, our empirical evidence shows that, apart from the systematic risk, idiosyncratic risk has also substantially increased. In quantitative terms, conditional systematic risk has on average more than doubled, while the percentage it represents over total risk has shown a considerable increase. These results have implications for portfolio diversification and the cost (and ability) of airlines in raising capital.

Evaluation and implications of environmental charges on commercial flights

Environmental charges are one of the economic instruments for controlling externalities. Their application to commercial flights has become a preferred method of encouraging the sustainable development of the air transport industry. Two kinds of externalities, aircraft noise and engine emissions, both generating profound impacts on human beings and on the environment, are considered here. The hedonic price method is applied to calculate the social cost of aircraft noise during the landing and take-off stages of the flight. The marginal impact of each flight with specific aircraft/engine combinations is derived for the allocation of aggregate noise social costs. In contrast, the dose - response method is applied to estimate the social cost of each engine exhaust pollutant during different flight modes. The combination of aircraft noise and engine emissions social costs is then evaluated on the basis of several environmental charge mechanism scenarios, using Amsterdam Airport Schiphol as a case study. It is shown that the current noise or engine emissions related charges at airports are lower than the actual social costs of their respective externalities. The implications of charge mechanism scenarios are subsequently discussed and evaluated in terms of their impacts on airline costs, airfares and passenger demand.

An introduction to airline economics

This book is an introduction to the economics of the airline services of the United States, both domestic and international, and is geared to the reader whose need is for a simple, yet college-level, text. Remarkable changes continue in the airline industry since the fourth edition was published in 1989 and due to the deregulation movement of the mid-1970s. The industry witnessed a series of mergers and a general trend toward consolidation into fewer but larger airlines. Chapters 1 and 2 are introductory, addressing public interest, governmental goals, and foreign countries' objectives. Chapter 3 covers entry of airlines into and exit from markets. Chapter 4 analyzes airline costs. Chapter 5 discusses demand for airline services. Chapter 6 reports on airline rates. Chapter 7 concerns air cargo and chapter 8 analyzes current problems, such as airports, fuel prices, and the trend toward concentration. Each chapter contains essay type, self-testing questions for students to check their progress or for instructors to use as take-home tests.