Air Transportation
SIC 4500
NAICS 481
Air transportation providers include commercial airlines that offer scheduled and non-scheduled domestic and international flights, airfreight transportation (air courier), and the operation of airports and terminals. For further discussion of commercial aircraft, see also Aircraft Manufacturing.
According to the International Air Transport Association (IATA), the worldwide air transportation industry served 1.6 billion passengers annually in 2004, a number that was projected to increase to 2.3 billion by the end of the decade. Likewise, employment levels were projected to increase from 28 million workers to 31 million workers during the same time period. In the freight segment, this industry transported two-fifths of the world's goods by value in the mid-2000s.
The industry staggered under post-September 11 declines in traffic and revenue. Many companies restructured, merged, or went bankrupt. The effects of Severe Acute Respiratory Syndrome (SARS) in Asia and the war in Iraq also caused a slowdown in passenger travel. In 2004, the industry was back up to pre-2001 passenger and cargo levels, with an industry profit of US$3.2 billion reported early in the year, despite soaring fuel costs. By mid-year, passenger traffic increased 20 percent and cargo traffic increased 13 percent. China and India were considered the countries expected to have the highest rates of passenger growth between 2004 and 2008.
Analysts were concerned that high and rising fuel costs would cause the industry to become unprofitable. The top three passenger airlines all reported losses for the year 2004. Air cargo services continued to experience growth, with industry leader FedEx showing a one percent growth in net income.
Growth also continued in the expansion of airports and terminals around the world, with many operating companies exploring the option of privatization.
Most major airlines sell tickets via Internet transactions—directly or through special travel Web sites. Many also use e-ticketing, designed to alleviate the risk for passengers of carrying—and potentially misplacing—a conventional paper ticket. According to Forrester Research, the vast majority of all airline tickets were issued online by 2003, with revenues for this activity totaling billions of dollars. The industry collectively was aiming to achieve total e-ticketing by 2007.
The global air transportation industry includes carriers of passengers, mail, and freight. Whether with single-engine or multi-engine aircraft, companies in this industry operate scheduled and nonscheduled air service over local, regional, national, and international routes. The industry is divided into three sectors: air passenger services, air cargo services, and general aviation.
Air passenger service includes scheduled passenger transportation, as well as support activities such as maintenance of aircraft; training of pilots, flight attendants, ticket agents, and ground crews; maintenance of computerized reservation and accounting equipment; and food preparation.
Air cargo (freight) services include transportation of mail, business and manufacturing commodities, food, and livestock. On a cost-per-mile basis, air cargo transport costs are higher than truck, water, and rail transport. However, sending freight by air allows shippers to reduce product inventories, handling costs, and warehouse expenses.
General aviation is the third segment of the air transport industry. This segment includes non-airline, nonmilitary aviation concerns such as fixed-base operators, flight schools, tour and recreational operators, and corporate flight departments. About half of all hours flown in general aviation are attributed to commercial activities or business aircraft. Such commercial flight activities include chartered passenger and cargo flights, sky advertising, crop dusting, and mapping for geographic information systems.
Business flying includes corporate and individually owned aircraft. Such aircraft account for about one-third of total flying time in general aviation. A variety of aircraft is used for business flying, including helicopters, single and twin engine planes, and jets, ranging in cruising speed from 150 miles per hour to 500 miles per hour. The flexibility of corporate and private aircraft allows salespeople, executives, and others who travel frequently to avoid inconvenient airline schedules and to access areas that are often difficult to reach by commercial flights.
There are three key measures in analyzing an airline's profitability:
passenger revenues per revenue passenger mile, the total seats that are occupied by paying passengers on all flights flown multiplied by the number of total miles flown
load factor realized, a measurement of revenue passenger miles divided by available seat miles
operating costs per available seat mile, all compensation, fuel, and other operating costs divided by the available seat miles
Airline seats are counted among a company's assets. When an airline seat is not filled on a flight, that is unused capacity, and the potential revenue from that seat is lost. The break-even point for an airline is reached when approximately 60 percent of its seats are filled. Airline seats are basically commodity items today, despite companies' attempts to differentiate themselves in terms of on-time service, convenient routes and flight schedules, quality of food, and frequent-flier programs. Thus, price competition can be intense. When it is, airlines are often forced to operate close to, and sometimes below, the break-even point.
Fixed assets are also important to a company's profitability. Large capital investments are made in fixed assets, such as airplanes, computerized reservation systems, and baggage and cargo handling equipment. These investments often account for more than 60 percent of a company's total assets and can be purchased outright with cash, financed with long-term debt, or leased. Because airplanes and equipment are expensive, the importance of leasing for airline companies remained significant through the early 2000s. By leasing, airlines can reduce the cost of obtaining expensive equipment, such as the newest Boeing passenger jets (the 757, 767, and 777). Some leases are operating leases, in which required payments are shown in the notes of a company's financial statements. Others are called capital leases, which appear as both assets and liabilities on a company's balance sheet.
Operating costs per available seat mile also figure into airline profitability. A significant cost to any airline is fuel. A one-cent change in the cost of fuel can increase or decrease consolidated industry operating profits by as much as US$100 million. This is another reason airlines lease newer aircraft: these aircraft are significantly more fuel efficient and thus cheaper to operate. Other costs include salaries (often up to 40 percent of a carrier's costs), property and liability insurance, and swings in the overall economy. When the economy is strong, air traffic usually increases. If an unusually high number of accidents occurs in a year, insurance premiums can go much higher for many airlines.
Germany was the first country to offer air passenger service—doing so with hydrogen-filled dirigibles in 1910. In 1914 the United States became the first country to offer scheduled passenger service. However, it was difficult for airlines to profit by carrying passengers until 1925, when U.S. government subsidies enacted with the Kelly Air Mail Act helped companies like United, American, and Delta make it through tough times. The companies' aircraft of choice, the Ford Trimotor, was a closed-cabin monoplane that could carry up to 15 passengers.
In the 1920s and 1930s, European governments were able to develop an extensive airline system. While airmail delivery was neither as sophisticated nor as efficient as in the United States, passenger services were actually more sophisticated. Great Britain had a commercial air route to India in place by 1929. What soon followed in Great Britain was a well-developed mail, freight, and passenger service to many foreign countries.
Such improvements were attributable, between 1920 and 1939, to significant advances in operations, navigation, weather forecasting, and aerodynamics that helped the air transportation industry grow by leaps and bounds. Europe, Asia, and North America were within reach upon the introduction of the DC-3, the first large modern passenger aircraft. Its significant features included metal construction, dependable and efficient engines, variable-pitch propellers, and a retractable landing gear.
During and after World War II, international passenger flight further developed. Longer-range, four-engine aircraft were built after the war. Passengers were more comfortable in the new planes' fully pressurized cabins. They were put at ease knowing that the airplanes were equipped with advanced instrumentation that usually allowed safe flight through storms and heavy winds.
By 1958, flight by passenger jet had become the most common form of long-distance travel, superseding passage on ocean liners and railroads. In 1970, wide-body jumbo jets began service. Passenger travel at supersonic speeds became available with the introduction of service on the French Concorde...
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