Airline Industry Background

 

Since the Paris Convention of 1919 a state has had an internationally recognized right to govern the airspace above its territory.  In the past national authorities set or approved fares, routes, and schedules for regularly scheduled domestic service.  Charter flights developed as a form of air transport outside these economic regulations.  An increasing number of governments are moving to eliminate economic regulation of domestic airline services under policies known as "open skies" policies.  However, even states that have deregulated the airline industry have been reluctant to allow foreign airlines to provide domestic services.

International services are generally provided under bilateral agreements within the framework of the Chicago Conference of 1944.  This conference defined five freedoms:

In addition to the above five freedoms, several other types of rights are sometimes referred to as higher numbered "freedoms" In contrast to trade negotiations under GATT or GATS, international air services is liberalized through bilateral agreements involving an exchange of "freedoms".  The fifth, sixth, and seventh freedoms, because they involve more than two states, are more difficult to negotiate.  Some multilateral initiatives have taken place at a regional level.  The European Union, for example, has enacted a phased approach to liberalizing, for member countries, aviation markets within and between member states.

While costs vary significantly among airlines, there are some common cost characteristics.  Labor is typically the largest component of operating costs and generally amounts to about one-third of operating costs.  Fuel is the next largest component, typically amounting to 10-20% of operating costs.  Because there are significant ground costs, unit operating costs general fall as flight length increases.  Airplane size and loading are also important cost drivers, while aircraft leasing arrangements are an important tool for managing capital requirements.

The main components of demand for airline services are business travelers, tourism, freight transport, and mail transport.  Flight schedules tend to be the crucial competitive issues for business travelers, while tourists and personal travel is much more price sensitive.  Freight and mail services account for about 15% of airlines total overall revenue, while international freight and mail is closer to one-third of airlines' international revenue.  Airline services enable access to other goods, such as vacations, business meetings, or foreign-sourced products.  Thus the demand for airline services is closely linked to the demand for these other goods.

While industry analysts expect continued long term growth in the demand for air travel, airline industry profitability has been volatile.  High airline fixed costs, significant operating cost sensitivity to fuel prices, and the sensitivity of international travel to business and political conditions make airline profitability depend significantly on macroeconomic factors. Deregulation and increasing competition, while bringing considerable benefits to consumers, have put additional pressure on airline companies profits.  In 1993, only 3 of the top 25 airlines were profitable, and 1990-1993 industry losses were greater than accumulated profits over the previous 50 years.  Airlines have responded to these financial pressures in a variety of ways: liquidating, seeking government subsidies, improving operating efficiency, privatization, and forming alliances with other airlines.

The Web provides some valuable resources for learning about the airline industry.  The  Air Transport Action Group (ATAG),  an international industry association that includes airplane manufacturers as well as airline operators, offers some statistics and reports on demand and infrastructure for air travel.   The Air Transport Association of America, a US airline trade association, offers US air travel statistics and much material on airline economics.  In additional, a commercial information service provider has gathered some information on the African air transport industry.   A list of conventionally published articles and books on privatization and the airline industry is also available on this site.
 

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