Cost Economics of Aircraft Size

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Cost Economics of Aircraft Size
Article in Journal of Transport Economics and Policy · May 2003

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London School of Economics and University of Bath
London School of Economics

Author(s): Wenbin Wei and Mark Hansen
Source: Journal of Transport Economics and Policy, Vol. 37, No. 2 (May, 2003), pp. 279-296
Published by: University of Bath and The London School of Economics and Political Science
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Journal of Transport Economics and Policy, Volume 37, Part 2, May 2003, pp. 279-296
Wenbin Wei and Mark Hansen
Address for correspondence: Professor Mark Hansen, Institute of Transportation Studies,

National Center of Excellence in Aviation Operations Research, University of
California, Berkeley, California USA. Dr Wenbin Wei is in the Operations Research
and Decision Support Section of American Airlines at Fort Worth, Texas. This research
was partly funded by the Federal Aviation Administration (FAA) through the National
Center of Excellence in Aviation Operations Research (NEXTOR) in the United States.
The authors also appreciate comments and suggestions from two anonymous Referees
and one of the Editors of this Journal.
Abstract
The authors study the relationship between aircraft cost and size for large commercial
passenger jets. Based on a translog model, they develop an econometric cost function for
aircraft operating cost and find that economies of aircraft size and stage length exist at the
sample mean of their data set, and that for any given stage length there is an optimal size,
which increases with stage length. The scale properties of the cost function are changed
considerably if pilot unit cost is treated as endogenous, since it is correlated with size. The
cost-minimising aircraft size is therefore considerably smaller, particularly at short stage
lengths, when pilot cost is treated as endogenous, and this helps to explain why US airlines
expect to accommodate future traffic growth with more flights instead of larger planes.
Date of receipt of final manuscript: December 2002
279
Journal of Transport Economics and Policy Volume 37, Part 2
Introduction
The structural properties of the commercial airline industry have been

widely studied, first in order to guide regulatory policy, and later to
predict, and then analyse, the consequences of deregulation. The focus of
this work has been on airline firms. Economies of scale, scope, density, and
integration at the firm level have been investigated in order to predict the
structure ? and hence the conduct and performance ? of a "free market"
airline industry. "Structure" in this context refers to the number of firms
and their relative market shares, both for the industry as a whole and its
various constituent markets, generally defined at the city-pair or airport
level.
While the firm-level analyses are of great relevance to regulatory policy,
they are less central to the questions that dominate aviation policy making
in the present era, in which economic deregulation is a fait accompli. In
today's environment, the challenge has shifted from regulating airlines to
accommodating rising traffic with an infrastructure that is technically and
politically difficult to expand. In contemporary policy making, therefore,
the number of flights is of as much concern as the number of firms.
Concomitantly, there is a need to understand the scale properties of
aircraft technology as well as airline production.
Commercial airlines generate revenue by operating aircraft and
charging customers for the resulting transport capacity. An airline can
provide more capacity, and thus accommodate increasing traffic, by either
increasing service frequency, or increasing aircraft size, or both. It is very
important for system planners to foresee airlines' choices in this regard,
since the payload capacity of airport runways and other infrastructure
components depend strongly on the size of aircraft used. If airlines use
larger aircraft, then an airport can serve more passengers with the same
number of aircraft landings or departures. Currently, aircraft with fewer
than 150 seats, one-third of the capacity of the largest commercial aircraft,
account for the majority of total operations. This is true even in very high
density markets, such as Los Angeles-San Francisco, which as a result can
have service frequencies exceeding fifty flights a day. And most forecasts,
such as Boeing (1998), FAA (1999), and Boeing (1999), suggest that
aircraft size will increase only slightly in the future with most traffic
growth absorbed by increasing the number of flights.
Thus, while airlines and the general public complain about airport
congestion and demand more runway capacity, they essentially ignore an
alternative growth strategy in which drastically more traffic can be
accommodated with little or no change in the number of aircraft
280
Cost Economics of Aircraft Size Wei and Hansen
operations. Since the chosen growth path will entail billions of dollars in
public investment, it is natural to wonder why this path is being chosen
and what its economic implications are as compared with the alternative
of choosing larger aircraft. An obvious starting point for this line of
enquiry is the relationship between aircraft cost and aircraft size. This
relationship, when combined with analyses of the demand and revenue
side of the problem, should determine the economically optimal aircraft
size as a function of underlying demand, competitive conditions, and other
relevant factors (such as stage length). Moreover, the sensitivity of the
optimal size to various policy levers, such as different landing fee
structures or other infrastructure pricing innovations, could be ascer
tained. It is possible that modest changes in current pricing practices could
drastically change the airlines' preferred growth path, and it is important
to consider such a prospect when planning future investment.
This paper investigates the relationships between aircraft cost and
aircraft size by developing econometric cost functions. Our research
departs from previous airline cost estimation literature by analysing data
at the airline-aircraft level rather than the airline level. It improves upon
previous aircraft cost studies by estimating actual cost functions rather
than merely comparing costs for a small set of models. Moreover, we focus
on current generation aircraft, thus providing up-to-date results in an area
where there has been little recent work. Indeed, it is the wide range of
models used in the present era ? a consequence of the adoption of the
aircraft family concept within the industry ? that makes statistical cost
estimation a logical approach.
The remainder of this paper is arranged as follows: Section 2 reviews
previous work; Section 3 discusses aircraft capital cost; Section 4 discusses
airlines' operating cost data and the specific components of operating cost
considered in this study; Section 5 presents our model estimation results
for aircraft operating cost, and discusses their implications. Section 6
concludes the paper.
Previous Literature
The study on cost economics of aircraft size extends back to the 1970s.
Miller and Sawers (1970) compare both the aircraft capital cost and
operating cost for commercial aircraft up to that time, and find that new
aircraft with larger seat capacity are more cost-efficient (on seat-mile basis)
than the older, smaller, planes they replaced. Keeler (1972) compares the
281
total costs for three types of aircraft, and finds that the cost per seat
minute for the 251-seat DC8-61 is one-third less than that for Boeing 727
200 (158 seats) and DC9-30 (110 seats). Douglas and Miller (1974)
estimate the total airline costs for six types of aircraft, and find that the
cost per seat per mile for the largest ? the Boeing 747 ? is less than the
cost for most smaller aircraft, but is almost the same as that for the DC8
63 and Boeing 727-200, which are half as large as the 747. Bailey et al.
(1985) provide aircraft operating cost estimates for six types of aircraft
over different stage lengths, and conclude that for each aircraft type the
cost per seat per mile decreases with stage length. They also find that the
least-cost aircraft type is different for different stage lengths ? in shorter
markets the smaller aircraft often have lower costs; as market distance
increases, so does the size of the least-cost aircraft. Meyer and Oster (1984)
have done similar research and found that the total costs per seat-mile
generally decrease with flight distance, but are not strongly correlated with
aircraft size. For example, costs per seat-mile are the same for the DC9-30
and the DC9-80 over the whole range of flight lengths, while the DC9-80 is
a larger, newer, and more fuel-efficient aircraft. One of their explanations
for this is that the "technical" operating economies for larger aircraft are
largely captured by aircraft manufacturers in higher purchasing prices and
by pilots in higher salaries. Morrison (1984) presents a unified model,
based on a combination of aerodynamics and economics, to analyse the
tradeoff between aircraft fuel use and trip time, and the tradeoff between
aircraft capital cost and operating cost. He discusses how the airlines, in
the short run, may alter flight speed in response to changes in relative
prices of time and fuel, and how the airlines, in the long run, determine
optimal levels of capital cost and operating cost based on fuel price and
yearly miles of operation. He also compares the fuel consumptions and
maximum speeds for four types of aircraft with different designs and
different passenger capacity.
In addition to these comparative studies on the costs of specific aircraft
types, the literature also includes econometric studies that explore the
relation between aircraft size and cost at the airline level. Douglas and
Miller (1974) and Morrison and Winston (1986) estimate simple, linear,
models relating cost (average cost per available ton-mile in the former
case, and the marginal cost for a passenger trip in the latter) to aircraft
size, among other factors. Both find that costs fall as aircraft size increases.
Hansen and Kanafani (1989) and Kirby (1986) find similar results when
estimating economic cost functions relating airline cost to output, factor
prices, and operational variables (or, in Kirby's terms, "output dimen
sions") that include average trip length (passenger-miles divided by
282
passengers) and average aircraft size (available seat-miles divided by

revenue aircraft miles). Other cost estimation studies, such as Caves et al.
(1984) and McShan and Windle (1989), omit aircraft size but find
significant economies of density ? reduced unit costs from flowing more
traffic over a fixed network ? that they attribute in part to the use of
larger aircraft. More recent work in airline cost analysis, such as Peteraf
and Reed (1998), Reed (1999), and Pitt and Norsworthy (1999), focus on
the roles of input factor prices and operating network characteristics in
airlines' costs, and do not take aircraft size into consideration.
Aircraft Capital Cost

This section considers the relation between aircraft size and capital cost.
The dominant form of capital cost that varies with aircraft size is the cost
of purchasing aircraft. Commercial aircraft purchases are major transac
tions and the terms of purchase, including the price, are individually
negotiated. Data on these prices are not regularly published, as they are in
the case of airline operating cost data. We did, however, find two useful
sources. First, recent editions of Jane's All the World's Aircraft provide
information on recent purchases for some models. Second, a website
created by the Pyramid Media Group, which publishes the Airline
Encyclopedia as well as a variety of other electronic aerospace information
products, gives 1997-2000 "average" prices for most Airbus and Boeing
commercial jets, including 25 all-passenger models. We adopted Jane's as
the primary source because it is better known and available in print form.
We supplemented it with Pyramid data when appropriate. (In most cases
where there is overlap, the two sources are quite consistent.)
Our object is to relate purchase price to seats, and thereby assess scale
properties of the relationship. Before doing this, we must resolve two
issues. The first is to assign the value of seats for each aircraft type. A
given aircraft type may be available in several different configurations with
considerably different numbers of seats. We opted to assign seats based on
the aircraft actually used in the US domestic system, based on the same
aircraft operating data used to estimate the operating cost model discussed
in the next section. The second issue is what other attributes besides seats
to take into account. Noting the apparent effect of range (see Figure 1) we
added this variable (at full passenger load, obtained from either Jane's or
the manufacturers' website) as a second independent variable.
283
Figure 1
Aircraft Purchase Price versus Aircraft Seats, by Range Category
Range < 9000km

Range > 9000km
500
Table 1 and Figure 1 summarise our purchase price data which includes
all aircraft meeting stage III noise emission requirements for which
suitable operation data are available. Purchase price information both
from Jane's and Pyramid is included for purposes of comparison. As
explained above, the number of seats is based on aircraft in US domestic
Table 1
Aircraft Data for Purchase Price Model
Purchase Price ($ millions)
Model Pyramid Jane's Range (KM) Seats
737-300 42 41 3,009 131

737-400 45 44 3,629 143
737-500 37 36 4,481 119
757-300 81 73 6,426 228
777-200 152 137 9,525 290
767-300ER 114 100 11,393 228
747-400 185 170 13,570 420
777-200ER 160 144 14,260 290
MD-80 45 2,897 141
767-200 82 5,852 192
757-200 74 7,240 186
767-200ER 100 12,300 192
284
service; in some cases, particularly the larger wide-bodies, configurations

with considerably more seats are also available.1
Table 2 shows estimation results from a simple log-linear model
relating purchase price and range. The coefficient on seats is somewhat less
than 1, implying that, controlling for range, there are modest economies of
scale in purchase price. This may be misleading, however, because in
today's marketplace large aircraft size comes bundled with long range,
which carries a substantial price premium. To investigate the effect of this
bundling, we re-ran the purchase price regression without range. As Table
2 shows, the result is a seats' coefficient well above 1. Excluding longer
range types such as the 767ER and 777 weakens the effect but still yields
substantial diseconomies of scale.
In sum, airlines will generally incur unit cost penalties, with respect to
purchase price, from upsizing their fleets. These penalties result from the
bundling of size and range. They may also derive from Boeing's monopoly
on the high end of the size range, where Airbus is only now developing a
model ? the A380 ? that can compete with the 747. Unbundling size and
range, if technologically feasible, may lead to modest economies of scale in
aircraft purchase price. The introduction of the A380 may have a similar
effect.
Table 2
Purchase Price Model Estimation Results
Model with Seats Model with Seats Only;

and Range; Model with Seats Only; Without Extended Range
All Models All Models and 777 Models
Estimate t-Statistic Estimate t-Statistic Estimate
Intercept 10.33 19.66 11.04 15.96 11.56 20.74

Seats 0.87 5.23 1.35 10.32 1.23 11.47
Range 0.36 3.39
adj. R2 0.95 0.91 0.95
n 12 12 8
!For example, the 747-
285
Aircraft Operating Cost

Far more complete and reliable data are available for aircraft operating
cost. While these data do not include opportunity costs associated with
aircraft ownership, they do include depreciation and rentals. Since over
half of the aircraft in large airline fleets are leased rather than owned (Pitt
and Norsworthy (1999)), the operating cost data considered in this study
contain a significant proportion of capital costs, but further research is
needed to account fully for them.
We develop cost functions to study the cost economics of aircraft size,
so that we can find out not only the influence of aircraft size on airlines'
costs, but also the interrelationships among aircraft size, market distance,
factor prices, and cost. In particular, we can use the models to investigate
how the influence of aircraft size might change with flight distance or input
factor prices.
In this research, we use the same data source, the US Department of
Transportation Form 41, as used in many previous studies, including most
of those cited previously. In Form 41, the total airline costs are classified
into two main functional groups: direct operating cost, which includes
aircraft operating expenses; and indirect operating cost, which includes all
other expenses. Aircraft operating cost categories include flying operation
cost (such as salary and benefits for pilots and other flight personnel except
flight attendants, aircraft oil, fuel, and aircraft rental cost); flight
equipment maintenance; flight equipment depreciation; expense for
interchange aircraft; and depreciation and amortisation related directly
to flying. Data for these expense items are available by airline and aircraft
type for each quarter. Airline indirect operating cost items include
passenger service expense (such as flight attendant expense, food expense
and other in-flight expense); aircraft servicing expense (such as line service
expense, control expense, and landing fees); traffic servicing expense;
reservation and sales expense; advertising and publicity expense; general
and administrative expense; ground property maintenance and its
depreciation; maintenance equipment depreciation expense; and other
non-flight equipment amortisation. Data on these expenses are available
by airline and quarter, but not by aircraft type.
Since airlines report indirect operating cost (servicing, sales, and
general operating expenses) at the airline level, not at the aircraft-specific
level, it is difficult for us to investigate aircraft size economies in terms of
indirect operating cost. While we made some efforts to do so, the results
proved counter-intuitive. Therefore, we focus on developing a cost model
for airline direct operating cost, which accounts for 40 per cent to 60 per
286
cent of airlines' total cost (based on Form 41), and on which aircraft size is
expected to have a direct influence.
The general aircraft operating cost function is specified as follows, in
which each data point is for aircraft type k, operated by airline /, during
time period t.
DCikt = f(Seatikt, ASLikt, PFuelikt, PPilotikt, A?) (1)
where: DCikt is the average aircraft operating cost per flight for airline /,
aircraft type k, in time period t\ Seatikt is the average seat capacity
(available seat-miles per plane-mile) for aircraft type k, airline i, in time
period t; ASLikt is the average stage length (plane-miles per departure) for
aircraft type k, airline i, in time period t; PFuelikt is the unit fuel price per
gallon for aircraft type k, airline i, in time period t; PPilotikt is the unit
pilot cost per block hour for aircraft type k, airline /, in time period t; A? is
an airline-specific factor capturing characteristics of its individual
production technology and efficiency.
Besides Seatikt, which captures the influence of aircraft size on
operating cost, ASLikt is also used as an independent variable, since
stage length is also likely to influence aircraft operating cost. The unit fuel
price, PFuelikt, and the unit pilot cost, PPilotikt, are included to capture
the effect of input factor prices for oil, fuel and labour directly required for
aircraft operation.
We use a de-mean translog model to specify the cost function. The
general form of this model is:
_ JV _
[\n(DCikt) -
7=1
+ 7=1
E El>j VPn04) - W][ln(*L) - MF)] (2)
Dikt is the average aircraft operating cost per flight for airline /, operated
by aircraft type k, during time period V, \n(DC) is the sample mean of the
log of aircraft operating cost; N is the total number of independent
variables in the model; ^ikt is the value of independent variable j for airline
/, aircraft type k, in time period t\ \n(XJ) is the sample mean of the log of
the independent variable j; Au ?7, A# are coefficients to be estimated.
Since all the dependent and independent variables in the model are in
deviation form, this model is also called a de-mean translog model. It can
be regarded as a second-order Taylor approximation of a general function
about the mean values of the data. Thus it is far more flexible than such
287
models as the Cobb-Douglas model, and has been widely used in cost
estimation studies for airlines as well as other transport industries.
The data for both the dependent and independent variables in the
econometric models above are either directly available or can be obtained
by using simple calculations from the CD-ROM database product, Form
41, distributed by Data Base Products, Incorporated. The data are
available from the first quarter of 1987 until the fourth quarter of 1998.
We focus on "large" American airlines for which more complete cost data
are available. This includes the 10 "Group III" passenger airlines, defined
by Form 41 as those with annual operating revenues over $1 billion. The
10 airlines include American Airlines (AA), Alaska Airlines (AS),
Continental Airlines (CO), Delta Airlines (DL), American West Airlines
(HP), Northwest Airlines (NW), Trans World Airlines (TW), United
Airlines (UA), USAir (US), and Southwest Airlines (WN). These airlines
report their cost and operation data in Form 41 separately for domestic
markets and international markets. In this research, we focus on the
domestic markets, and hence only use the domestic data in modelling.
Aircraft operating cost data are available on an aircraft type basis in
Form 41. The models considered, identified in Table 3, are essentially the
same as those in the purchase price analysis. Several aircraft types for
which purchase price data were not available are also considered, however.
Also, in a few cases, the reported operating data for closely similar types
are consolidated.
Table 3
Aircraft Used in Direct Operating Cost
Analysis
Aircraft Type Average Aircraft Seats*
B-737-500 119
B-737-300 131
MD-80 & DC-9-80 141
B-737-400 143
B-757-200 186
B-767-200/ER 192
DC-8-71 223
B-767-300/ER 228
B-777 290
B-747-200/300 388
B-747-400 420
These are averages reported from the Form 41 data

and thus may differ slightly from the standard two
class configuration values reported in Table 1.
288
After we compiled all the data, we conducted a careful cleaning

process, with the help and support from the CD-ROM provider of Form
41 (Data Base Products, Inc), to exclude the data which are obviously
either mistakenly reported by airlines or wrongly inputted to the database
by the product company. The cleaned data set includes 1608 quarterly
observations from the 10 airlines over 12 years. Also, since our data set
includes such a long time period, we converted all dollar quantities into
constant dollars by using the airline cost index published by the Air
Transport Association (Swierenga, 1998).
The statistical results for the full model are shown in Table 4. The t
statistics for all estimated coefficients are significant except the one on the
Table 4
Statistical Estimation Results for Aircraft Operating Cost Function Based
on Translog Model, with Full Model and Preferred Model Specifications
Full Model Preferred Model
Estimated Estimated
Explanatory Variable Coefficients t-Statistic Coefficients t-Statistic
Seat 0.811 24.34 0.813 24.51

ASL 0.749 34.45 0.748 34.52
Pfuel 0.240 7.21 0.238 7.18
Ppilot 0.423 18.00 0.424 18.06
Seat*seat 0.348 15.10 0.346 15.16
ASL*ASL 0.320 10.55 0.320 10.57
PfuePPfuel 0.122 1.93 0.123 1.96
Ppilot*Ppilot 0.137 13.83 0.137 13.88
Seat*ASL -0.184 -3.16 -0.184 -3.16
Seat*Pfuel -0.632 -5.33 -0.665 -6.14
Seat*Ppilot -0.158 -3.29 -0.160 -3.23
ASL*Pfuel 0.491 5.96 0.504 6.27
ASL*Ppilot 0.073 1.92 0.078 2.10
Pfuel*Ppilot -0.050 -0.68
AA Dummy -0.101 -5.50 -0.100 -5.48
AS Dummy -0.145 -5.14 -0.145 -5.12
CO Dummy -0.056 -2.44 -0.054 -2.37
DL Dummy -0.200 -12.90 -0.200 -12.92
HP Dummy -0.179 -6.28 -0.177 -6.25
NW Dummy -0.120 -5.44 -0.120 -5.43
TW Dummy 0.131 5.52 0.132 5.55
UA Dummy -0.121 -6.65 -0.121 -6.65
US Dummy -0.154 -8.17 -0.154 -8.19
WN Dummy -0.544 -13.24 -0.545 -13.28
Note: All variables measure deviations of their logarithms from their sample mean logarithms. For
example, "Seat" represents Log (Seatikt)-Log(Seat) in equation (2).
289
interaction between fuel price and pilot unit cost. Since the hypothesis that
this coefficient is zero could not be rejected statistically, the model was re
estimated with this coefficient set to zero. The statistical results for this
"preferred model" are also shown in Table 4; we find that the coefficient
estimates for the modified model are quite similar to those for the original
one.
Due to the interaction terms in the above translog cost models
elasticity of direct cost with respect to any independent variable, a
therefore whether there are economies of scale with respect to
variable, depends on the values of all explanatory variables. At
mean values of the data, however, the elasticities are simply the val
of the first order coefficients (the ?ys). The first order coefficien
aircraft size is 0.81, implying that at the mean values, ther
economies of aircraft size, with a 1 per cent increase in size resulti
a 0.81 per cent increase in cost. The second-order coefficient on air
size is 0.35, which implies that the elasticity of direct operating
with respect to aircraft size increases with size. On the other hand,
second-order coefficient on the interaction between size and stage le
is -0.18. This means that as stage length increases cost elast
decreases ? that is, there are stronger scale economies in aircr
operating cost at longer distances.
Figure 2
Aircraft Operating Cost per Seat-Mile for Different Stage Lengths
-400 mi
-600 mi
800 mi
-1000 mi
-1200 mi
-1400 mi
-1600 mi
-1800 mi
-2000 mi
2200 mi
2400 mi
200 250 300

Aircraft Seats
Note: In this and following graphs factor prices are the averages from the
data set.
290
Figure 2 depicts the implications of our translog results in terms of

representative average cost curves for different stage lengths. Notice that
the curves are U-shaped, with the point of minimum cost shifting towards
the right as stage length increases ? from about 200 seats for a 400 mile
stage length to over 300 seats for a 2400 mile route. Strong economies of
stage length are also evident, with costs for a 600 mile stage 25 per cent less
than those for a 400 mile stage. Cost is far less sensitive to stage length at
longer distances, as evidenced by the near overlap of the cost curves for
stages over 1200 miles.
These results have a straightforward engineering interpretation.
Aircraft operating cost occurs at three phases: aircraft departing, cruising
and landing. Generally, there exist diseconomies of aircraft size in the fixed
cost when an aircraft is departing or landing, that is, the cost per seat
increases as aircraft size increases; and there exist economies of aircraft
size in the unit cost per mile when an aircraft is cruising, that is, the cost
per seat-mile decreases as aircraft size increases. Therefore, the least-cost
(aircraft operating cost) aircraft size in the short-haul market is always
smaller than the least-cost aircraft size in the long-haul market. The fixed
costs attached to each departure and landing also result in economies of
stage length, at least up to the point where payload must be reduced
to load more fuel. Beyond that, there can be diseconomies of stage
length, as evidenced by the crossing of the longer distance cost curves in
Figure 2.
It has been suggested in previous studies of cost economics for aircraft
size, such as Meyer and Oster (1984), that pilots flying larger aircraft are
paid more than those flying smaller aircraft, and that these "diseco
nomies" of pilot cost offset the "technical" economies of aircraft size. To
explore whether and how this possible endogeneity of pilot cost may affect
aircraft cost economies, we exclude the pilot factor price variable from the
translog models, and re-estimate the cost functions. The results are shown
in Table 5. The first order coefficient on aircraft size is 1.093, and an F-test
also shows that it is significantly different from 1 at 0.1 per cent level
statistically. Instead of economies of scale, considerable diseconomies of
scale (at the mean values) are found in the translog model. The effect of
endogenising pilot cost is particularly strong on short-haul routes, as
shown in Figure 3. Table 6 compares cost-minimising (in terms of "aircraft
operating cost") aircraft sizes for the models with exogenous and
endogenous pilot cost. At 400 miles the minimum size is about 63 per
cent greater when pilot cost is treated as exogenous, but this difference
shrinks to 23 per cent for a 3000-mile stage. These results suggest that pilot
wage structures are partially responsible for airlines' choice to serve short
291
Table 5
Statistical Estimation Results for Air
craft Operating Cost Function Based
on Translog Model, Taking Pilot Cost
as Endogenous
Estimated
Explanatory Variable Coefficient t-Statistic
Seat 1.093 38.81

ASL 0.727 32.71
Pfuel 0.137 3.40
Seat*Seat 0.563 25.14
ASL*ASL 0.329 9.34
Pfuel*Pfuel 0.250 3.25
Seat*ASL -0.470 -8.28
Seat*Pfuel -0.851 -6.43
ASL*Pfuel 0.583 5.91
AA Dummy -0.072 -3.27
AS Dummy -0.118 -3.42
CO Dummy -0.132 -5.40
DL Dummy -0.129 -6.96
HP Dummy -0.347 -12.20
NW Dummy 0.039 1.53
TW Dummy 0.009 0.34
UA Dummy -0.036 -1.71
US Dummy -0.047 -2.10
WN Dummy -0.570 -12.30
haul, high-density markets with smaller jets.2 On the other hand, the Tabl
also shows that for stages of 800 miles or more, the average aircraft size i
use is smaller than either of the cost (aircraft operating cost) minimising
sizes. This supports the conventional wisdom that airlines incur higher
operating cost in order to provide higher-frequency, and thus more
convenient, service.
2This begs the question of why unit labour cost increases with aircraft size. US commercial pilots have
had strong and effective union representation since the founding of the Air Line Pilots Association in
the early 1930s and the extension of the Railway Labor Act to the airline industry in 1936. Pilots
unions such as ALPA have worked to ensure that pilots share the benefits of productivity increase
from larger, faster planes, and to minimise the amount of resulting "technological unemployment."
Initially, the focus was on incorporating mileage into the pay scale, a principle codified in the famous
Decision 83 of the National Labor Board in 1934. Attention shifted to aircraft capacity with the
introduction of four-engine aircraft after World War II. McNatt (1958) notes that by 1951 "the pay of
pilots was based upon six different factors: (1) base pay; (2) length of service; (3) hourly rate; (4) speed
of the aircraft; (5) mileage flown; (6) gross weight of the aircraft."
292
Figure 3
Comparison of Aircraft Operating Cost per Seat-Mile when Pilot Cost is Taken as
Exogenous and Endogenous Respectively, for Different Stage Lengths
0.14
Table 6
Cost-Minimising (for aircraft operating cost) and Actual Aircraft Sizes, by
Stage Length
Lowest Cost Lowest Cost
Aircraft Size from Aircraft Size from Observed Average
Stage Length Exogenous Pilot Endogenous Pilot Aircraft Size ? US
(statute miles) Cost Model (seats) Cost Model (seats) Domestic System (seats)
400 186 114 133

800 224 152 139
1200 249 180 154
1600 269 203 162
2000 285 223 178
2400 299 241 200
2800 312 257 191
Source: Lowest cost (aircraft operating cost) aircraft size is obtained by minimising estimated cost
functions at specified stage lengths, assuming factor prices at their mean values. Observed size is
calculated by using data for a large sample of flight segments obtained from the US DOT T-100 Flight
Segment Database. Flight segments associated with a given nominal stage length are those whose
actual length is within 10 per cent and 200 miles of the nominal length.
293
Conclusions
The growth path of the US domestic airline industry favours more flights
rather than larger planes, and our results help us to understand this. While
there are clearly opportunities to reduce operating cost by upsizing the
fleet, aircraft operating cost scale economies are not particularly strong
nor do they extend, for most US domestic stages, very far. Moreover,
there are effectively diseconomies of scale in purchase price. Part of the
explanation for these results is technical and related to diseconomies of
scale associated with terminal costs. But institutional factors ? in
particular the incorporation of aircraft size in flight crew pay scales, and
the bundling of aircraft size and range ? weaken the cost advantages of
fleet upsizing still further. In effect, airlines are forced to share the inherent
productivity advantages of large planes with labour, while retaining
exclusive authority on what models to buy. Such an arrangement results in
decisions to buy smaller planes than would be suggested by technical
efficiency criteria alone.
These effects notwithstanding, there is opportunity for airlines to
reduce unit operating cost by upsizing their fleets. As shown in Table 6,
average aircraft sizes are below cost-minimising (in terms of "aircraft
operating cost") sizes on all but the shortest flight segments, even when
endogenous pilot cost is assumed. While the service improvements from
increasing flights cannot be ignored, nor should the cost savings from the
alternative of increasing aircraft size. From the standpoint of airlines
making fleet mix decisions, the cost considerations must be balanced with
the effects of aircraft size and service frequency on market share and
revenue, as well as on indirect costs. In the revenue analysis, it is important
to recognise the "decreasing returns" that derive from the combination of
price dispersion and yield management. When the rear of the plane is filled
with discount fare passengers who are paying barely the cost of the extra
fuel, food, and services they consume, there is an economic case to
"downsize" them. The long-term nature of fleet acquisition decisions, and
the competitive environment in which they are made must be taken into
account. Many of these issues are considered in Wei (2001).
Finally, our analysis must be seen as a snapshot in the technical
development of commercial aircraft technology. Future progress is
expected, as evidenced by the Airbus' claims for cost savings from the
A380 as compared with the 747-400. Moreover, that progress is unlikely to
be either "neutral" or exogenous to industry desires. If there was demand
for a highly efficient, large, short-haul aircraft, it might well be possible to
develop one. But such adaptation is necessarily long term, and in the
294
present climate, unlikely. In the meantime, any fleet up-gauging strategy

will be constrained by what is on the present menu.
References
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