Transportation Deployment Casebook/2015/American Commercial Passenger Aviation

Qualitative Analysis

Mode Description

Passenger aviation consists of private companies that provide travel from one airport to another for any person for a ticketed fare. The airports found in the United States can be broken up into four categories. The categories, as defined by the Federal Aviation Administration, are commercial service, cargo service, reliever, and general aviation airports [Airports]. The commercial service airports are broken up into primary and nonprimary commercial service. The threshold between a nonprimary to a primary airport is achieving more than 10,000 annual passenger boardings. The current American market consists of three large international airlines (United, American, and Delta) and many domestic airlines with occasional international destinations (Southwest, JetBlue, Spirit, and Frontier to name a few).

Passenger aviation allows people to move long distances across the country in a short period of time. Current travel times from Los Angeles, California to New York City, New York are about five hours nonstop [LAtoNYPlane]. Present day travel from coast to coast would either have to occur by train (about 70 hours) [LAtoNYTrain], bus (68 hours) [LAtoNYBus], or personal vehicle (41 hours) [LAtoNYCar]. Additionally, commercial airlines allow passengers to bring some personal luggage for free and extra luggage for varying fees.

The market for commercial airlines centers around hubs, central ports for different airline companies. Hubs are where airline companies store many if not all of their planes that are not in use and are where a majority of their travel connections are located. For example, the Chicago O’Hare airport is a hub for both United Airlines and American Airlines [OHare]. The target market for passengers covers all socio-economic backgrounds. Coach ticket prices can range from $34 at Spirit Airlines [Spirit] to thousands of dollars for first class seats.

Scene Prior to Major Passenger Aviation

Before the advent of commercial plane trips, the main modes of long-distance transportation were personal vehicles, trains, and busses. Driving long distances prior to the 1960s was difficult and cumbersome because the Federal Aid Highway Act was not passed until 1956. The act kick started 41,000 miles of interstate construction over ten years [Interstate]. Prior to the interstates, cars and busses had to use local roads, toll roads, and extant turnpikes to maneuver across long distances. Conversely, trains’ tracks were established, permanent, and led directly from city to city. But, at this time, long-distance train travel was aimed toward the upper echelon of society featuring luxury train cars and multi-day trip schedules.

Interest for passenger airlines was piqued when other modes of transportation were proven non-comparable. Gas rationing as a result of World War II saw vehicle use plummet, which showed the volatility of the car market in respect to the availability of fuel. As the fares of plane trips decreased, the value of the trip became more comparable with passenger airlines. With the increased connectivity of the United States following the Federal Aid Highway Act, more Americans wished to see other parts of the country. This demand preceded the major growth phase of the airline industry.

Invention Description

The first scheduled commercial airline began on January 1st, 1914 connecting St. Petersburg, Florida and Tampa, Florida. Headed by Thomas W. Benoist and P.E. Fansler, the two saw a business opening to use Benoist’s airboats for pay. The route crossed the Tampa Bay in 23 minutes by flying five feet above the surface of the water. This connection was a significant improvement in the travel time between the cities. Previously, it would take passengers as much as two hours on a boat, twelve hours on a train or 20 hours in a car to make the trip. Patrons were charged five dollars for a one way trip with an extra five dollars per hundred pounds of luggage. The planes used, Benoist Type XIV, were open-air, had two wooden seats, and did not have a windshield. A constraint in the beginning was that the planes could only house one passenger other than the pilot. Additionally, the height restriction of the flight was due to the non-guaranteed safety of the plane or passengers as it was only ten years since the Orville brothers achieved winged flight. But, the plane could reach a top speed of 64 miles per hour. The operation had to end only months after its beginning. The customer base dwindled as residents moved back northward to their first homes as Florida was where people vacationed[PeterTampa].

Following the First World War, airplane technology significantly progressed. So much so, that Congress invested in its first air mail route in 1917 between Washington DC, Philadelphia, and New York. Since the first commercial days in Florida, planes could fly higher and at night thanks to land lighthouses stationed along the route. The aerial postal service could ship a letter or package from the Atlantic to the Pacific as fast as 30 hours.

Following the airplane innovation boom of World War II, passenger aircrafts now had the ability to use radar and jet engine technologies. Boeing released their 707 model in 1958 using the new tools available. The 707 could reach speeds of up to 540 miles per hour and could house over 130 passengers. Models like the 707 would be later known as the beginning of the modern era of airplane design.

Early Market Development

Benoist and Fansler had expanded their plane network to include other Floridian cities. Charter flights were extended to Palmetto, Sarasota, and Clearwater among others. The farther non-scheduled trips were three times as expensive ($15) but did offer a higher flying altitude at passengers’ requests. The St. Petersburg-Tampa flights catered to the wealthy, the locals, and the daring. In 2014 dollars, the $15 fare would be the equivalent of paying over $349 for the 20 minute flight. These high initial fares could only be afforded by the rich.

Development during the Mature Phase

After the turn of the millennium, the airline industry saw mass changes in the market. The continuing rise of lower fare airlines such as Southwest or Spirit drove prices of the big three (American, Delta, United) down. It came to a point where the price was not sustainable to receive large enough profits. So, the three major airlines filed for bankruptcy in the 2000s and early 2010s. The bankruptcy allowed the companies to restructure their contracts with workers and other aspects of the business in order to cut costs. United, Delta, and American Airlines filed for bankruptcy in 2002, 2005, and 2010 respectively. The turn of the millennium also brought a wave of mergers that strengthened the networks of the larger companies. From 2000 to 2013, six of the ten major airlines merged into four large airline companies. TWA, America West, and U.S. Airways merged with American Airlines in 2000, 2005, and 2012 respectively. Northwest merged with Delta in 2008, Continental with United in 2010, and AirTran with Southwest in 2010. These mergers were highly contested by the government in order to ensure there was no possibility of a monopoly.

The mature phase has brought out the concept of super-low fare and budget airlines. Example budget airlines include Spirit and Frontier airlines. Since budget airlines run a smaller fleet than the much larger domestic carriers, each company normally originates from one central hub. For example, Spirit airlines runs out of Denver while JetBlue runs out of New York City. The low fares attracted a larger market following the great recession of 2007-2009. The competition is similar to the introduction of MegaBus to the national bus market in competition with Greyhound buses. The fares for all airline companies will most likely decrease until they hit a wall like the wall seen at the end of the 1990s.

Quantitative Analysis

Methods

To show the growth cycle of the commercial passenger aviation market, a mathematical model was constructed. The data used in the mathematical analysis was taken from three different data sets within the United States Department of Transportation (USDoT). The data sets used were from the Bureau of Transportation Statistics (BTS) with the Historical Air Traffic Statistics Annual 1954-1980 [AirStat1], Historical Air Traffic 1981-1995 [AirStat2], and U.S. Air Carrier Traffic Statistics 1996-2015 [AirStat3]. The data from the 1996-2015 was tabulated by month, so the values were summed by year to achieve similar data with the other sets. Links to the data sets can be found in the references. The statistic used to model the growth of passenger aviation was revenue passenger enplanements in thousands. A revenue passenger is a person that paid the operator or company for the scheduled flight taken. Examples of non-revenue passengers are airline employees or small children who do not have an assigned seat. A passenger enplanement is when a person boards the aircraft. Enplanements include connecting, stopover, arriving, and departing passengers. Although the first commercial flight occurred in 1914, the most reliable data goes back as far as 1954.

The yearly revenue passenger enplanements were plotted along with an estimated model found using a three parameter logistic function.

S(t) = K/[1+exp(-b(t-t0)]

Where:

• S(t) is the status measure [revenue passenger enplanements in thousands]
• t is the time [years]
• t0 is the inflection time [years]
• K is the saturation status level [revenue passenger enplanements in thousands]
• b is a coefficient []

Regression Plot

Annual Revenue Passenger Enplanements (BTS) vs. Regression Model Enplanements over Time

Equation: S(t) = 730000/[1+exp(-0.088(t-1985))]

Analysis

The model fits extremely well with the data it was estimated from. An R-squared error analysis was performed and a value of 0.981 for the regression was found. In other words, the regression fits 98% with the data it represents. The inflection time, the year that one half of the saturation status level was reached, was found to be after 1985. This makes sense looking at the plot where 1985 lies in the middle of the growth-development phase.

In regards to the future of passenger aviation, according to the model, it seems that growth will not come quickly as the industry approaches saturation. The saturation status level found in the model is 730,000 enplanements. The last full year value in the data set (2014) is 677,424 enplanements, which is 92.8% of full saturation. The market does not have much farther to expand. According to the model, dates can be set to the birthing, growth, and maturity stages of the passenger aviation industry. By inspection, the date separating the birthing and growth stages falls between 1960 and 1965. This is logical because the industry exploded in growth with the success of Pan American World Airways (Pan Am) in the late 1960s to the 1970s. The date separating the growth and maturity stages falls between 1995 and 2000. This is also logical because after 2000, the major airlines in the United States began to file bankruptcy and merge beginning with the merge of TWA and American Airlines in 2001.