Airline Profitability Research Articles

The Competitive Environment of the US Domestic Airline Industry in 2010

The competitive landscape of the U.S. domestic airlines dramatically changed when the industry was deregulated in 1978. While airline traffic and revenues grew exponentially, aided by unfettered market competition and resulting efficiency, airline profitability had mostly stayed lackluster due to cost pressures, chronic oversupply of seats, and intense price-based rivalry to fill seats. Thirty-two years into deregulation, the major airlines were still searching for the Holy Grail that would defend them against industry threats and deliver sustained profitability. This case describes the evolution of the U.S. domestic airline industry over the years, the cost pressures and revenue uncertainties airlines faced at the beginning of 2010, and the strategic options they were contemplating to effectively deal with these issues. The options ranged from shaping the industry structure to achieving differentiation through service offerings. The exact choices they made would determine their survival and long-term success.

Factors Affecting Airline Profits: Evidence From The Philippines

This article examines the factors that affect the profits of four airlines in the Philippines. The estimated profit equation indicates that an additional passenger contributes PHP 1,989 to profits, while an additional seat reduces profits by PHP 1,312. The findings indicate that airlines have a strong incentive to fill a seat before departure, justifying the practice of heavy discounting to stimulate passenger traffic during periods of low demand. An additional route reduces profits by PHP 107.736 million, which may indicate that new routes have lower-than-expected passenger traffic. This may also suggest that most profitable routes are already served by at least one airline and entry into existing routes may not be profitable. The 1997 Asian financial crisis, the 2001 terror attacks in the United States, and the most recent global financial crisis, collectively result in PHP 1.391 billion reduction in profits, underscoring the vulnerability of the airline industry to unanticipated events.

Perils and Profits

In many industries, for-profit business organizations make decisions that critically impact the safety of their employees and the public. Managers in such organizations often argue that there is no trade-off between profitability and safety because “safety is good business.” However, prior studies examining the profitability–safety relationship report inconsistent and conflicting results. In the present study, the author reexamines this issue, building on insights into managerial risk taking from the behavioral theory of the firm and hypothesizing that the slope of the profitability–safety relationship reaches an inflection point at the organizational profitability aspiration. Using data from the U.S. airline industry, the author finds support for this hypothesis, with results indicating a positive association between airline profitability and airline accident rates for airlines performing below their aspirations but a negative association for airlines performing above their aspirations.

Integrated Robust Airline Schedule Development

In air transportation, airline profitability is influenced by the airline's ability to build flight schedules. In order to generate operational schedules, airlines engage in a complex decision-making process, referred to as airline schedule planning. Up to now, the generation of flight schedules has been separated and optimized sequentially. The schedule design has been traditionally decomposed into two sequential steps. The frequency planning and the timetable development. The purpose of the second problem of schedule development, fleet assignment, is to assign available aircraft types to flight legs such that seating capacity on an assigned aircraft matches closely with flight demand and such that costs are minimized. Our work integrates these planning phases into one single model in order to produce more economical solutions and create fewer incompatibilities between the decisions. We propose an integrated robust approach for the schedule development step. We design the timetable ensuring that enough time is available to perform passengers’ flight connections, making the system robust avoiding misconnected passengers. An application of the model for a simplified IBERIA network is shown.

Modelling the estimation of the airline profit in case of purchasing new slots for increasing flight frequency

To achieve network optimization, most airlines depend on slot allocation process. The secondary slot market enables airlines to get additional slots for improving their networks and flight schedules. The idea of developing the model presented in this paper was not just to help in selecting the flight(s) for new slot(s) that maximizes the airline‟s revenue, but to estimating the number of years necessary for refunding the initial outlay for purchasing that slot. The essence of the model is to help an airline to check if the purchasing of new slot(s) is profitable or not in the case when new slot(s) is used for increasing the flight frequency on existing route.

Air transportation in a carbon constrained world: Long-term dynamics of policies and strategies for mitigating the carbon footprint of commercial aviation

With increasing demand for air transportation worldwide and decreasing marginal fuel efficiency improvements, the contribution of aviation to climate change relative to other sectors is projected to increase in the future. As a result, growing public and political pressures are likely to further target air transportation to reduce its greenhouse gas emissions. The key challenges faced by policy makers and air transportation industry stakeholders is to reduce aviation greenhouse gas emissions while sustaining mobility for passengers and time-sensitive cargo as well as meeting future demand for air transportation in developing and emerging countries. This paper examines five generic policies for reducing the emissions of commercial aviation; (1) technological efficiency improvements, (2) operational efficiency improvements, (3) use of alternative fuels, (4) demand shift and (5) carbon pricing (i.e. market-based incentives). In order to evaluate the impacts of these policies on total emissions, air transport mobility, airfares and airline profitability, a system dynamics modeling approach was used. The Global Aviation Industry Dynamics (GAID) model captures the systemic interactions and the delayed feedbacks in the air transportation system and allows scenarios testing through simulations. For this analysis, a set of 34 scenarios with various levels of aggressiveness along the five generic policies were simulated and tested. It was found that no single policy can maintain emissions levels steady while increasing projected demand for air transportation. Simulation results suggest that a combination of the proposed policies does produce results that are close to a “weak” sustainability definition of increasing supply to meet new demand needs while maintaining constant or increasing slightly emissions levels. A combination of policies that includes aggressive levels of technological and operations efficiency improvements, use of biofuels along with moderate levels of carbon pricing and short-haul demand shifts efforts achieves a 140% increase in capacity in 2024 over 2004 while only increasing emissions by 20% over 2004. In addition, airline profitability is moderately impacted (10% reduction) compared to other scenarios where profitability is reduced by over 50% which pose a threat to necessary investments and the implementation of mitigating measures to reduce CO2 emissions. This study has shown that an approach based on a portfolio of mitigating measures and policies spanning across technology and operational improvements, use of biofuels, demand shift and carbon pricing is required to transition the air transportation industry close to an operating point of environmental and mobility sustainability.

An assessment of Charter airline benefits for Port Elizabeth and the Eastern Cape

Tourism is becoming a vital component for economic development in South Africa. The income generated by the tourism industry is about 6% of the GDP, which is significant but still falls short of the goal set by the White Paper on Tourism in 2000. In the light of South Africa hosting the 2010 Football Wor1d Cup, it is important to identify ways of sustainable tourism development that would continue to increase the benefits to the economy long after the event's over. The main objective of the research was to explore an idea for increasing the level of tourist income generated in the Port Elizabeth (Eastern Cape) area. The idea was researched by means of conducting a cost-benefit analysis of two tourist related projects. These projects would introduce Charter airline services between Europe and Port Elizabeth. A second objective was to identify constraints on the project or market failures which would prevent their implementation. The economic theory behind the operation of an airline showed that lease costs and aeroplane operating costs are the two most important factors determine Charter airline's profitability. In order to offset these costs, airlines must achieve high passenger load factors. Charter airlines have the advantage over scheduled air1ines, in that they will only fly if a minimum level of people has pre-booked seats. Two aeroplanes were chosen for comparison purpose: an Airbus A 340-300 and a Boeing 767-300ER. The private benefits calculated were based on load factors between 80 and 95 percent for ticket prices of USD 667 and USD 773. In addition, to private costs and benefits, social benefits were also estimated in the form of additional secondary revenue generated. With the introduction of net social benefits, both projects become profitable. A 50 percent substitution of revenue generated by the Charter tourists reduces the profits for the both projects drastically. A project based on a Boeing 767-300ER is the most efficient project as it has the highest NPV and BCR values. A reduction in the lease cost of the Airbus 340-300 could make projects based on it more competitive. A few constraints on the establishment of a Charter air1ine operator based in Port Elizabeth are: the lack of adequate runway for the landing of the long-haul carriers and the need of a larger liberalisation of the aviation policy by eliminating protectionism. The cost benefit analysis undertaken in this research does not take into account social costs and benefits to the economy of establishing a Charter airline based in Port Elizabeth, such as an employment, infrastructure development and poverty alleviation. Nevertheless the analysis does suggest that there are strong private and social benefits warranting the establishment of an airline business between Europe and Port Elizabeth. The economic benefits of the tourism industry and its link to airline travel are outlined in section 3. It is shown that the growth of the airline industry is a major component and contributor to tourism growth.

Rivalry between low cost carriers and major carriers: the case in Korean aviation industry

As the wave of liberalization and deregulation have accelerated to relieve rigid controls over airline routes, capacity, and fare setting regimes, Low Cost Carriers (LCCs) have emerged especially in local aviation markets since the 1970s. This paper has studied the effects of LCC's entry into the domestic aviation market which was pre-occupied by two major carriers, Korean Air (KAL) and Asiana Airlines. Through a simple model describing two situations, prior and post to LCC's entry, we analyzed changes and trends of each airline's output and profit based on the Cournot and two-stage Stackelberg game equilibrium. In summary, our conclusion consists of five points: (1) Even though JIN Air's entry reduced KAL's respective output and profit, the more JIN Air produces, the higher the joint-profit of KAL and JIN Air is, (2) From the joint-profit aspect, increasing KAL's output to a level than JIN Air's is more profitable on the Gimpo-Jeju route, on the other hand, increasing JIN Air's output higher than KAL's is more profitable on the Jeju-Busan route, (3) Even though JIN Air's entry increase Asiana Airline's output, the more JIN Air produces, the less Asiana Airlines's profit is, (4) Total output in markets as well as total profits of firms will increase under certain conditions, (5) KAL and JIN Air tend to get caught in an unresolved conflict on level of LCC cost.

Revenue management for the whole aircraft: Coordinating acceptance decisions for passenger and cargo transportation

Recent pressures on airline profitability have increased interest in cargo revenue management (RM). In particular, some industry figures have proposed that passenger and cargo RM should be integrated, either through use of a single revenue management system (RMS) or through a single RM team. This paper argues that these approaches are unlikely to succeed. Instead, it proposes a simple business process framework for coordinating passenger and cargo access to aircraft capacity through the use of displacement-based transfer prices.

Airline Strategies: An Empirical Analysis of Profitability and Market Share

This paper examines the relationship between airline profitability and market share in the context of contemporary strategic business theory. The paper provides a general overview of the business environment in which airlines operate, provides some of the organizational goals airlines pursue, and develops a situation assessment template for the airline industry. Theories of business management are then evaluated with respect to the nature of the airline industry before major elements of market share and profitability are examined. An empirical analysis based on a model of a domestic Australian route is used to draw some conclusions about the impact of different business strategies on airline profitability and market share. This is then broadened through the introduction of a simple network model to examine the potential impact of operating a network of services. The paper reaches the conclusion that the simplistic profitability-market share relationship is not applicable to the airline industry, given that there are a large number of other factors impacting on airline performance.

Statistical Comparison of Passenger Trip Delay and Flight Delay Metrics

The primary objective of the National Airspace System (NAS) is the transportation of passengers and cargo. Since passenger trip time performance is positively correlated with passenger satisfaction, airfare elasticity, and airline profits, it follows that the evaluation of performance and modernization of the NAS, as well as consumer protection, should be based on passenger trip performance (in addition to airline flight performance). Publicly available regulatory measures of NAS performance, however, are based on flight data and not passenger trip data. Researchers have demonstrated that the trip delays experienced by passengers disrupted by missed connections, canceled flights, and diverted flights are not negligible. Further, research demonstrated that flight delays are a poor proxy for measuring passenger trip delays. A comparative statistical analysis is described between flight delay data and estimated passenger trip delay data for 1 year's worth of flights on the 1,030 single-segment routes between the 35 [airports of FAA's Operational Evolution Partnership (OEP)]. The estimated passenger trip data are derived from publicly available databases and account for delays experienced by passengers on single-segment routes because of canceled flights as well as delayed flights. The statistical analysis indicates that (a) the estimated percentage of on-time passengers is equal to the percentage of on-time flights plus the percentage of canceled flights, (b) the estimated average passenger trip delay is 34 min in excess of the average flight delay, and (c) estimated average passenger trip delay for the worst 5% of delayed passengers is 150 min in excess of the flight delay. The implications of these results for consumers, industry performance measures, and FAA modernization efforts are discussed.

Managing valuable Taiwanese airline passengers using knowledge discovery in database techniques

Taiwanese domestic airline passenger loads have declined over the past decade, and the inauguration of the Taiwan high-speed rail service in 2007 has further intensified the competition facing the airlines. Gaining and retaining valuable passengers thus has become essential in maintaining domestic airline profits in the increasingly competitive transportation market. This study develops a knowledge discovery in database process, including the recency, frequency, and monetary model and the C5.0 decision tree. The former is used to assess passenger value, while C5.0 is used to mine demographic, travel behavior, and critical service quality information for valuable passengers. The results identify valuable passenger characteristics that can help Taiwanese airlines maximize their number and retention.

Can the Airline Industry Replicate What Worked for the Automobile Industry?

The U.S. airline industry has been under a long spell of doom. Over the last decade, several airlines have either reorganized under bankruptcy or have shuttered their operations. For long, the airline industry has posed as an insolvable conundrum to the market participants trying to make it economically feasible to operate in the market. Repeated losses have left airline executives puzzled as to how to commercialize the economic potential of their airline. Low-cost airlines have literally eaten away profitability of the legacy airlines. But even they are facing a growing threat from other low-cost airlines as well as new services introduced by legacy entrants. This paper exerts the resemblance of the current situation in the airline industry with the situation in the automobile industry in the early 1920s. The paper identifies the evolution of the automobile industry in that era which may be replicable in the current airline industry. Finally, the paper studies the current situation among the U.S. auto-manufacturers as a non-cooperative game and argues that game theory can be used to predict when market participants would shift their strategy from the status quo.

Air Travel Consumer Protection

The raison d'être for the national air transportation system (ATS) is the movement of passengers and cargo. Thus, passenger trip time performance is positively correlated with passenger satisfaction, airfare elasticity, and airline profits. Regulatory consumer information available to airline passengers provides measures of trip performance by using the percentage of on-time flights or on-time percentage (OTP) (e.g., 15-OTP metric). Researchers have shown that these flight-based metrics are poor proxies for passenger trip time performance. First, these metrics do not include the trip delays accrued by passengers rebooked because of canceled flights (which account for 40% of the overall passenger trip delays). Second, the metrics do not quantify the magnitude of the delay (only the likelihood) and thus fail to provide the consumer with a useful assessment of the impact of a delay (such as missed connections on next mode of transportation). A new consumer protection metric, expected value of passenger trip delay (EV-PTD), is described; it accounts for (a) canceled flights and (b) both the probability of delay and the magnitude of the delay. The EV-PTD for all 1,030 routes between 35 Operational Evolution Plan airports in 2005 ranged from 11.5 min (best) to 155 min (worst). The average route EV-PTD was 35 min. By treating passenger trip delay as a random variable it can be shown that the transportation process is not a fair game and that passengers and service providers (e.g., airlines, air traffic control, airports) cannot beat the system until the variance is significantly reduced. The implications of these results and the use of the EV-PTD metric by consumers for purchasing tickets and for consumer protection are discussed.

The Macroeconomic Environment and Airline Profitability: A Study of us Regional Airlines

In this article, a SARMAX(p,s,q) model is utilized to study the macroeconomic determinants of regional airline profitability in the US. While seasons have an impact on profitability, no season seems to differ from another. Findings indicate that wealth has more relevance than income on the profitability variable. The cost of capital and unemployment negatively affect airlines. Although small, the lagged values of profitability mostly have a perverse effect on the current profitability, indicating the absence of a sustained growth performance in the industry. Even though 9/11 has negatively affected regional airlines, this study fails to find a statistically significant support for that observation. In addition, findings suggest that inflation in general and the real price of oil do not have statistically significant effects.

Flight operations recovery: New approaches considering passenger recovery

The sources of disruption to airline schedules are many, including crew absences, mechanical failures, and bad weather. When these unexpected events occur, airlines recover by replanning their operations. In this paper, we present airline schedule recovery models and algorithms that simultaneously develop recovery plans for aircraft, crews, and passengers by determining which flight leg departures to postpone and which to cancel. The objective is to minimize jointly airline operating costs and estimated passenger delay and disruption costs. This objective works to balance these costs, potentially increasing customer retention and loyalty, and improving airline profitability. Using an Airline Operations Control simulator that we have developed, we simulate several days of operations, using passenger and flight information from a major US airline. We demonstrate that our decision models can be applied in a real-time decision-making environment, and that decisions from our models can potentially reduce passenger arrival delays noticeably, without increasing operating costs.

Frequent Flier Program Partnerships, Substitutability, and Airlines' Profit

This paper offers a first model of parallel frequent flier programs partnerships, rather typical for the US domestic market. We model these partnerships as arrangements which make carriers' services more substitutable, in a setup where consumers value frequency and exhibit varying degrees of brand loyalty. We show that joining frequent flier programs can increase profits of partner airlines, even where no explicit coordination between them is allowed.

Hub-Spoke Network Choice Under Competition with an Application to Western Europe

The aim of this paper is to present a model structure that analyzes the hub-spoke network design issue within a competitive framework. Under deregulation, airlines have developed hub-and-spoke networks, enabling them to increase frequency by aggregating demand and to prevent entry into the marketplace by reducing airfares. While liberalization in the United States and Europe was undertaken to increase competition, the results in this direction are unclear. This research evaluates airline profits based on a microeconomic theory of airline behavior under deregulation and the effect on hub-and-spoke networks. Through a two-stage, Nash best-response game, we search for equilibria in the air transportation industry. The game is applied to Western Europe, where profitable hubs and monopolistic equilibria are clearly identifiable, and duopolistic equilibria are potentially viable, given sufficient demand.

Airline Fuel Hedging: An Overview of Hedging Solutions Available to Airlines

Over the past several years airlines have been struggling to cope with a barrage of challenging economic conditions and have been very creative in reducing cost. In an attempt to produce a profit for their shareholders airlines have slashed cost in many areas and have not willingly left any stone unturned looking for cost savings. There are two ways to make a profit however, either by lowering your cost or by raising your revenue. The revenue increase side of the airline profit equation has been limited by government security taxes, unhealthy competitive practices, and the entrance additional of low cost carriers such as Jet Blue and Air Trans. Airlines have varying degrees of control over cost with fuel being most illusive.

SAB 101 Compliance: Revenue Accrual Management and the Cost of Capital: The Airline Industry

Incorporating the pricing dynamics of external jet fuel markets, this paper investigates the regulatory impact of Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) 101 on discretionary revenue accrual behavior, profitability and the firm's cost of capital in the airline industry. Prior to SAB 101, we posit that airlines could use GAAP flexibility to manage revenues to compensate for fuel price shocks on profitability and the firm's cost of capital. While the regulatory motivation for SAB 101 was to restrain misleading revenue management, we argue that after SAB 101, the potential for additional SEC scrutiny caused airlines to be more conservative in their air traffic liability-revenue accruals leading to increase in airline firms' costs of capital for the airlines making more conservative accruals. First, we find that prior to SAB 101, the air traffic liability account is significantly inversely related to both airline profitability and fuel prices. We then find that an unexpected change in the air traffic revenue liability account affects unexpected profitability. After SAB 101, the relation between profitability and changes in the air traffic revenue liability changed dramatically even after controlling for work disruptions and other economic factors related to the profitability. At the same time, average airlines' cost of capital as measured by bid-ask spreads increased markedly. This increase in the airlines' cost of capital suggests that the SEC intended revenue regulation guidance that did not change GAAP, did impose capital markets consequences on the airline industry.