AE 413 Module No. 03

PHILIPPINE STATE COLLEGE OF AERONAUTICS
INSTITUTE OF ENGINEERING AND TECHNOLOGY

AERONAUTICAL ENGINEERING – AIR TRANSPORTATION DEPARTMENT
Learning Module 03: Economic Characteristics of the Air Transportation
LEARNING
MODULE 03:
Economic Characteristics
of the Air Transportation
Air Transport Economics and

Management
Prepared by:
AERO-AT FACULTY
1
TABLE OF CONTENTS
TIME
TOPIC -
ALLOTMENT
THE AIRLINES AS OLIGOPOLISTS 6

OTHER UNIQUES ECONOMIC CHARACTERISTICS 9
THE SIGNIFICANCE OF AIRLINE PASSENGER LOAD
12 1.5 hours
FACTORS
FUEL CONSUMPTION OPTIMIZATION 13
AIRLINE OUTSOURCING 17
TIME
ACTIVITY PAGE
ALLOTMENT
ENRICHMENT ACTIVITY 3.1 21 1.5 hours
HONESTY CLAUSE
As an institution of higher learning, students are expected to display highest degree

of honesty and professionalism in their class work, requirements, and activities; thus,
in no case that cheating—or any form of it, may it be plagiarism, copying other
students' works, and fabrication of materials—shall be tolerated. The college
assumes as a simple and minimal preferred of habits in academic matters that
students be truthful and that they publish for deposit solely the merchandise of their
personal efforts.
2
REFERENCES
Brenner, M. & Leet, J. & Elihu S. (1985). Airline Deregulation. Westport, Conn.: ENO
Foundation for Transportation.
Civil Aeronautics Board, Office of Economic Analysis. (1979). Aircraft Size, Load Factor,
and On-Demand Service. Washington, D.C.: CAB.
Frederick, J. (1961). Commercial Air Transportation. Homewood, Ill.: Irwin.
Fruhan, W. (1972). The Fight for Competitive Advantage: A Study of the United States
Domestic Trunk Air Carriers. Cambridge, Mass.: Harvard University Press.
Gill, F. & and Bates, G. (1949). Airline Competition. Cambridge, Mass.: Harvard University
Press.
Holloway, S. (1982). Straight and Level: Practical Airline Economics. Aldershot, UK:
Ashgate.
James, G. (1982). Airline Economics. Lexington, Mass.: Heath.
Jenkins, D. (1995). Handbook of Airline Economics. New York: McGraw-Hill.
Kneafsey, J. (1974). The Economics of the Transportation Firm: Market Structure and
Economic Performance in the Transportation Industries. Lexington, Mass.:
Lexington Books/Heath.
Kneafsey, J. (1975). Transportation Economics Analysis. Lexington, Mass.: Lexington
Books/Heath.
Morrison, S. & Winston, C. (1986). The Economic Effects of Airline Deregulation.
Washington, D.C.: The Brookings Institution.
Morrison, S. & Winston, C. & MacLaury, B. (1994). The Evolution of the Airline Industry.
Washington, D.C.: The Brookings Institution.
O’Connor, W. (2000). An Introduction to Airline Economics (6th ed.). New York: Praeger.
Ogur, J. & Wagner, C. & Vita, M. (1988). The Deregulated Airline Industry: A Review of the
Evidence. Washington, D.C.: Bureau of Economics, Federal Trade Commission.
Radnoti, G. (2002). Profit Strategies for Air Transportation. New York: McGraw-Hill.
Fouris, T. (2010). Rationalizing Aircraft Performance Dynamic Modeling in Airplane Fleet
Planning Decisions. Macrothink Institute.
Air Transport Action Group. (2006). Analysis of Air Transportation Systems.
Zeinali, M & Rutherford, D. (n.d.). Trends in Aircraft Efficiency and Design Parameters.
International Coucil on Clean Transportation (ICCT).
Yutko, B. & Hansman, J. (2011). Approaches to Representing Aircraft Fuel Efficiency
Performance for the Purpose of a Commercial Aircraft Certification Standard. MIT
International Center for Air Transportation (ICAT).
Climate and Environmental Responsibility. (2012). Fuel Efficiency at the Lufthansa Group
– Cutting Cost & Protecting the Environment.
Polek, G. (2012). New Airline Demands for Range and Payload Prompt Boeing to Optimize
Fleet. Aviation International News.
Singh, V. & Sharma, S. (2015). Fuel Consumption Optimization in Air Transport. European
Transport Research Review.
Nygren, E. & Aleklett, K. (2009). Aviation fuel and future oil production scenarios. Energy
Policy 37(10):4003–4010.
Mazraati, M. (2010). World aviation fuel demand outlook. OPEC Energy Rev 34:42–72.
Schlumberger, CE. & Wang, D. (2012). Air transport and energy efficiency. The
International Bank for Reconstruction and Development. The World Bank.
Henderson, RP. & Martins, JRRA. & Perez, RE. (2012). Aircraft conceptual design for
optimal environmental performance.
3
Green, JE. (2009). The potential for reducing the impact of aviation on climate. Tech Anal
Strat Manag 21(1):39–59.
Grote, M. & Williams, I. & Preston, J. (2014). Direct carbon dioxide emissions from civil
aircraft. Atmos Environ 95:214–224.
Lee, JJ. & Lukachko, SP. & Waitz, IA. & Schäfer, A. (2001). Historical and future trends in
aircraft performance, cost and emission.
Graham, W. & Hall, C. & Vera Morales, M. (2014). The potential of future aircraft technology
for noise and pollutant emissions reduction. Transp Policy.
Rutner, S. & Brown, J. (1999). Outsourcing as an Airline Strategy. Journal of Air
Transportation World Wide. Nebraska: Aviation Institute.
Polat, G. (2018). Outsourcing in Aviation: Contracts and Current Situation.
Durmaz, V. (2010). Outsourcing in Air Transportation Industry: The Case of Turkish Airline.
Wakelee Smith, T. (1995). Don't Just Talk; Airlines Turn To Outsourcing of Services. Airline
Business.
Feldman, J. (1992). Airlines Lighten the Load. Air Transport World.
Leenders, M. & Nollett, J. (1984). The Gray Zone in Make or Buy. Journal of Purchasing
and Materials Management.
Gillentt, J. (1994). The Cost Benefit of Outsourcing: Assessing the True Cost of Your
Outsourcing Strategy. European Journal of Purchasing and Supply Management 1.
Condom, P. (1994). Is Outsourcing the Winning Solution?. Interavia Business &
Technology.
4
LEARNING OUTCOMES
Course Learning Outcomes [CLO]
Module Learning Outcomes [MLO]

CLO 2. Explain the different
processes and functions of the
aviation industry by mapping the MLO 1. Explain the structure of air Topic Learning Outcomes [TLO]
structure of factors that affects the transport industry through interpreting
performance of the producers and the total performance system TLO 5. Identify the factors that affect
consumers in air transport industry. structure. the performance of the air transport
industry by interpreting the total
CLO 3. Distinguish approaches to MLO 2. Explain the oligopolistic performance system structure of air
economic studies mostly used in an air approach of the air transport industry transportation.
transport industry by explaining the by listing the economic characteristics
economic characteristics of the air of air transportation and included TLO 6. Explain the oligopolistic market
transport industry and its included organizations. structure of the aviation industry by
organizations. determining the economic
characteristics of air transportation and
CLO 4. Identify the ideal structure of included organizations.
an air transport industry by illustrating
and reviewing management and
organizational structure and explain
the functions they play in the industry.
CLO 6. Explain the economic and
financial concepts relevant and related
to air transport industry by identifying
the factors that affects the economy
and financial status of air transport
industry.
CLO 9. Display professional
commitment by complying with the
academic requirements such as
problem sets, research papers, and
other modular activities.
This module discusses the total performance system structure; it discusses the
oligopolistic approach of the air transport industry and the different economic
characteristics of air transportation and included organizations; identifies other unique
characteristics of the air transportation and included organizations; discusses the
system and consumption of fuel and oil in the aviation industry; and explains the
principles and fundamental concepts of airline outsourcing.
5
THE AIRLINES AS OLIGOPOLISTS
Economists usually describe the certificated airline industry as closely approximating

an oligopolistic market structure. An oligopoly is an industry composed of a few firms
producing either similar or differentiated products.
Fig. 3-1. Total Performance System Structure.
Source: Adopted from the IPO Chart of the ACE Handbook of Philippine Airlines.
Number of Carriers and Market Share
With the easing of the deregulations and passage of the airline liberalization, the
industry entered an era of intense competition. Major airlines and the former local-
service carriers began competing with one another; the established major airlines, with
the exception of those that were failing, shared in the traffic growth, but the new
entrants made substantial inroads into market share.
Unfortunately, instead of the industry expanding, as many proponents of deregulation

visualized, some of the carriers either were merged, liquidated, or decertified or were
not operating or never did operate under a certificate. The total number of carriers has
increased in recent years with the addition of smaller certificated carriers and the
demise of some of the larger airlines, the shrinking number of larger carriers has
improved the market share of the remaining major carriers, such that the largest
carriers now have a somewhat greater market share than before deregulation.
Unquestionably, the airline industry, with its small number of companies and
concentration of market share, meets the first characteristic of oligopolist firms.
6
High Barriers to Entry
Oligopolistic industries typically are characterized by high barriers to entry. One

expectation in air transport industry was that carriers would have relatively free access
to markets because of the mobility of the airlines’ chief assets—aircraft. Carriers
dominating individual markets would not charge monopolistic fares, according to this
theory, because of the ease with which a competitor could enter the market and
compete with the incumbent carrier by charging reduced fares. Thus, the mere threat
of entry was expected to discipline pricing.
Access to markets has become extremely difficult in recent years because of the
difficulty of obtaining terminal space at many hub airports and the risk associated with
competing with an airline at one of its hubs. A competitor that wishes to challenge
another carrier at its hub faces considerable financial outlays. The cost of providing a
competitive level of service at a hub is substantial: expenditures for advertising,
personnel, and aircraft operations are crucial during start-up, when the competitor
attempts to win business away from the major carrier. The risk of being unable to
recover these outlays is the largest single deterrent to entry at hub airports.
Airport terminal capacity can also be a barrier to entry for new and existing carriers
seeking to enter new markets. Entering a market requires the ability to lease or
develop gates, baggage handling and airport maintenance facilities, and ticketing and
passenger waiting areas. Little underused gate capacity and related terminal space is
available at major airports in the short term. Over the longer term, it is possible for
carriers to enter many markets, but the experience of recent years indicates that such
entry is neither easy nor inexpensive.
Another barrier to entry has become the dominated hubs. As carriers build the
connection banks required to make a hub work, their presence in the local market can
become so pervasive as to approach being a monopoly. Airlines use hubs to shield
some of their output from competition. As more flights are connected to a hub, the
number of passengers available to support additional flights grows. Making the
connecting banks work for these flights requires many gates because of the desire to
minimize the delay between connections. Because few airports have excess capacity
in the short run, hubs tend to become dominated by one or two major carriers who use
up the existing capacity.
Economies of Scale
Oligopolistic industries may be characterized by economy of scale; economists mean

decreases in a firm’s long-term average costs as the size of its operations increases.
Firms in oligopolistic industries typically require large-scale production to obtain low
unit costs. Large-scale production is afforded by intensive labor and management
specialization of job responsibilities, utilization of the most efficient technology
available, and effective use of by-products. If total market demand for the product or
service is sufficient to support only a few large firms of optimum size, competition
generally ensures that only a few such firms will survive.
7
Like all oligopolists, airlines must achieve a large volume of output in order to lower
the cost per unit of output. To achieve economies of scale in production, the carriers,
like other oligopolists, utilize the principle of labor specialization. Because of the
number of workers, jobs can be divided and subdivided. Instead of performing five or
six distinct operations in the production process, each worker may have only one task
to perform. Workers can be used full-time on the particular operations for which they
have special skills. Union rules about what specific workers can and cannot do also
reinforce this principle. Thus, a skilled machinist with a major carrier might spend an
entire career in a particular shop working on one component of the aircraft. If the
volume of output must be reduced because of a falloff in traffic, something has to give,
or else the firm will experience what economists refer to as diseconomy of scale, in
which cost per unit begins to rise. In such a case, airlines are forced to furlough
volume-related workers as well as administrative personnel. The remaining
administrative workers must broaden their responsibilities by taking on new job
assignments.
The established carriers can utilize the latest technology available, which also brings
about economies of scale. Small firms often are unable to utilize the most efficient and
productive equipment. In many cases, the most efficient equipment is available only
in very large and extremely expensive units. Furthermore, effective utilization of this
equipment demands a high volume of output. This means that only larger carriers can
afford and operate efficiently the best available equipment.
Growth through Merger
Another clear characteristic of oligopolists, in general, and airlines, in particular, is

growth through merger. It is a major factor in explaining the small number of firms. The
motivations for mergers are diverse. Many of the oligopolies that exist today have
resulted from mergers of competing firms. The purpose of most mergers is to achieve
greater economies of scale. Another significant motive underlying the urge to merge
is the market power that may accompany a merger. A firm that is larger, both
absolutely and relative to the market, may have greater ability to control the market for
and the price of its service than does a smaller, more competitive producer.
Furthermore, the larger firm may gain leverage as a big purchaser by being able to
demand and obtain lower prices in buying goods and services.
Mutual Dependence
Regardless of the means by which an oligopoly evolves, rivalry among a small number
of firms clearly interjects a new and complicating characteristic: mutual dependence.
Imagine that three carriers—A, B, and C—serve the same route and that each has
about one-third of the market. If A cuts its price, its share of the market will increase,
but B and C will be directly, immediately, and adversely affected by A’s price-cutting.
Thus, we can expect some reaction on the part of B and C to A’s behavior: B and C
may match A’s price cut or even undercut A, thereby starting a price war. This
response suggests that no firm in an oligopolistic industry will dare to alter its price
policies without attempting to calculate the most likely reaction of its rivals. This is
consistent with economic theory and characteristic of pricing at concentrated gate- and
slot-constrained airports where two or three competitors hold the majority market
8
share. However, not enough oligopoly pricing exists to cover the industry’s fixed costs
and offset steep discounting in competitive markets.
The pricing decisions of individual carriers usually make economic sense from the
carrier’s perspective. But for the industry as a whole, these decisions contribute to the
continual price erosion that has restricted the ability of all carriers to increase revenues
to keep up with rising costs.
Price Rigidity and Nonprice Competition
Oligopolistic industries may be characterized by price rigidity and nonprice

competition; firms in oligopolistic industries are much more comfortable maintaining
constant prices than rocking the boat, so to speak, because of mutual dependence
and fear of a price war. The tendency has been to fight it out in the nonprice arena,
using advertising and increased customer services as the major weapons. Price
reductions, when they occur, are sporadic and usually come about only under severe
pressures resulting from weakened demand or excessive capacity. This situation
prevailed in the airline industry before 1978. At that time, however, the door was
opened to new competition, and the airline price wars began. Under the old regulatory
framework, the price of an airline seat was directly related to the cost of producing it.
Prices were simply based on costs, allowing for a given rate of return.
OTHER UNIQUE ECONOMIC CHARACTERISTICS
Government Financial Assistance
Unlike other oligopolistic industries, various government units have played major roles
in financing the growth and development of the Philippine airport-airways system.
High Technological Turnover
Technological advances in flight equipment over the short span have come at an
extremely rapid pace. Airlines have led all other industries in the rate of increase in
capital spending because of technological advancement. Technological advances and
competition have forced the carriers to undertake a re-equipment cycle. Besides
calling for huge amounts of capital spending, these cycles mean heavy expenses in
hiring and training personnel and in modifying facilities to accommodate the new
aircraft and associated equipment.
High Labor and Fuel Expenses
Because an airline’s costs define the limit of how low it can profitably price its service,
and because most airline customers value low prices above all other carrier selection
factors, the carrier with the lowest costs has a powerful competitive advantage. The
fact that most carriers have a difficult time differentiating their products from those of
their competition makes this especially true. Thus, cutting costs to the lowest possible
level has become a key strategic necessity in today’s airline industry. Unfortunately,
reducing costs is easier said than done. In addition to a carrier’s high fixed costs, many
of the so-called variable costs, if not completely out of the airline’s control, are very
difficult to manage. Two of the biggest are labor and fuel expenses.
9
Airline employees are men and women with highly developed skills and with
correspondingly high incomes. The high level of unionization in the airline industry,
particularly among the more established carriers, also reduces the extent to which
labor costs can truly be considered variable. Labor typically represents the largest cost
advantage start-up airlines have over more established carriers. Moreover, despite its
reliance on high technology, the business is very labor intensive. New entrants often
outsource many functions to service providers that pay their employees minimum
market rates and provide few, if any, benefits. Because these providers draw from a
large pool of experienced workers trained by carriers that have failed, new entrants
often offer service that is qualitatively indistinguishable from that offered by long-
established carriers.
In contrast, the older carriers operate under the terms of union contracts that prevent
them from making changes to match the costs of new entrants. These contracts
typically include extraordinarily complex work rules that sharply reduce the carriers’
ability to improve labor productivity. Moreover, the work force of the traditional carrier
typically is much older than that of a start-up airline, creating an even greater disparity
in wage rates, as a 10- or 20-year airline veteran will invariably have achieved a far
higher wage than his or her counterpart at a start-up carrier.
No other industry has been subjected to the severe increases in fuel prices that the air
carriers have experienced. Although an airline can maximize its efficiency by
purchasing aircraft that burn less fuel than others, fuel-efficient airplanes often have
much higher capital costs than do less fuel-efficient aircraft. Moreover, the actual price
of fuel is contingent on factors far outside any airline’s span of control. Thus, fuel costs
are only marginally manageable. Labor and fuel costs typically represent around 60
percent of a carrier’s operating expenses.
The Competitive Advantage of Schedule Frequency
The effect of a slight change in departure time on passenger buying behavior creates
a powerful incentive for carriers to increase flight frequency, even when there are
plenty of seats available on existing flights.
Moreover, when one carrier enjoys a schedule frequency advantage over another on
a particular route, the competitive value of that advantage is more than proportional.
For example, if Carrier A has six daily flights between two points and Carrier B has
only three, the relative strength of Carrier A versus Carrier B is greater than two to
one. The reason for this is that Carrier A’s customers—in addition to having two times
as many chances to match a flight to their needs—will perceive the more frequent
service as offering them more flexibility to change their plans at the last minute.
The fact that customers see the airlines’ product, a seat on an airplane, as a relatively
undifferentiated product notwithstanding, each time a network-based airline offers a
new flight; it commits an additional city to all the others served by the hub, and thus
introduces a number of new products. Additionally, by widening the reach of its
network, it strengthens its entire existing product line.
In most industries, increased production, by itself, does not enhance an individual

competitor’s sales potential or competitive position. However, in the airline industry,
10
the fact that more capacity represents more schedule frequency gives every airline an
incentive to use every airplane as intensively as possible. Although this strategy
makes sense for each individual carrier, it results in a tendency toward perpetual
overcapacity.
Excess Capacity and Low Marginal Costs
The airline industry historically has tended both to produce excess capacity and to
price its product below fully allocated costs. The demand of consumers for schedule
frequency produces tremendous excess capacity with no shelf life, pushing costs up.
The demand of consumers for low prices and the perception that air transportation is
virtually an undifferentiated commodity drive prices down to levels that, too often, fail
to cover fully allocated costs.
Once a scheduled flight pulls away from the gate, any empty seats are lost forever.
Seeking to sell as much of that perishable inventory as possible, carriers offer the
same fares as the lowest-price provider in an effort to grasp an ascending and, too
often, elusive break-even load factor and preserve market share.
Sensitivity to Economic Fluctuations
The susceptibility of air transportation demand to the business cycle was underlined
by the recession happened in the industry. Although the impact of a recession is not
unique to the airline industry, what is different is the fact that as a service industry
(unlike durable goods such as automobiles), it is much slower to recover because
spending on air travel is discretionary. People have to be working again and the
economy has to be well on the way to recovery before spending on air travel starts to
pick up momentum.
The effects of a recession on air travel are obvious. Both pleasure and business travel
are curtailed during periods of sharp and sustained downturn in the general economy.
In a recession, people tend to postpone long-distance travel to save not only on
airfares but also on the expenses associated with the trip. Companies tend to cut back
on business trips or on the number of people sent on a given trip. Travel is one of the
expenses a business can cut immediately during tough economic times. Fewer people
travel first class, so that the dollar yields realized are reduced.
The impact of a recession on the airlines is intensified by the high rate of traffic growth
they experience during periods of prosperity. When the economy moves into a
recessionary period, the carriers find themselves with substantial excess capacity.
Unlike manufacturing industries, they cannot inventory goods or cut back production
until the economy improves. Interest payments to creditors on outstanding debts
(primarily flight equipment) must be paid, and facilities that were geared to handle a
prerecession volume cannot be closed. Although airlines can furlough certain volume-
related employees, they must carefully consider this move because of the extensive
retraining costs involved when personnel are brought back as volumes increase.
11
Close Government Regulation
Unlike other oligopolistic industries, but like other transportation modes, the airlines
have a long history of both support and regulation by government.
THE SIGNIFICANCE OF AIRLINE PASSENGER LOAD FACTORS
One of the most vital statistics in the airline business is load factor. Given the
multimillion-dollar investment represented by the modern jetliner, airlines are naturally
concerned with equipment utilization. One measure of utilization is the revenue
passenger load factor.
Load factor has a critical impact on the cost and quality of air transportation services
offered. Approximately 65 percent of an airline’s costs are directly related to the
operation of aircraft and are independent of the number of passengers on the aircraft.
Therefore, a high load factor will allow the allocation of these costs over a large number
of passengers, resulting in lower costs per passenger, which allows for lower fares.
Traffic Peaks and Valleys
All transportation modes must operate during traffic peaks and valleys in order to meet
the public need. Buses and commuter trains in every major city are full in one direction
during rush hours and virtually empty on the return trip. At midday, in the early morning
and late evening, and on weekends, passenger loads are also light. That’s the nature
of public transportation, whether buses, trains, or planes.
Airline load factors during any one year vary from month to month depending on the
season. Daily and hourly load factors fluctuate even more. Averages for the peak day
of the peak month might be 75 percent, and for the peak hour 80 percent; many flights
in these hours are at or near 100 percent capacity. Furthermore, a nationwide
transportation network requires that some flights with light patronage be operated to
position aircraft for other flights with higher loads.
Sometimes, aircraft must be flown virtually empty from one city to another late at night
or early in the morning to have the plane ready to meet rush-hour demand. These
positioning flights certainly affect the average load factor figure used to describe air
transportation productivity.
Capacity Versus Demand
Demand for air transport services has always been highly cyclical, with greater or
lesser demand depending on time of day, day of week, and season, as well as on
broader market fluctuations from year to year. For example, that discretionary leisure
traffic picks up in the summer, thereby allowing the industry to enjoy higher load factors
for the third quarter.
On a macro level, when the economy is growing and consumer confidence is strong,
demand grows, improving airline load factors and allowing carriers to raise yields and
profitability. When the economy falters, however, unemployment rises, consumer
12
confidence declines, and individuals postpone discretionary travel; as a result, airline

load factors, yields, and profits suffer.
The realities of public transportation, whether bus, train, or plane, result in an

imbalance between the number of seats, or capacity, available and the current
demand for travel by the public. The two simply do not mesh at precisely the same
time, the same place, and the same rate.
Airlines cannot fine-tune capacity to match demand, because capacity can only be
added or taken away in total planeloads. The aircraft unit itself is obviously inflexible.
Within limits, the total number of flight frequencies on a given day can be varied, and
this is done where feasible.
Pricing in Relation to Load Factor
One approach that carriers have used quite extensively over the years to improve load
factors is off-peak pricing. This involves the introduction of a promotional fare designed
to attract passengers during an otherwise slack period. Off-peak pricing dates back to
the earliest days of the airline industry.
It has always been recognized that both the public and the industry benefit if the empty
seats on low-traffic days are filled with passengers who are willing to travel on those
less popular days in exchange for some fare reduction. The additional passengers add
very little to costs (primarily meal service), but they add a great deal to the flight’s total
revenue.
Off-peak pricing has not been without its problems. One problem is the fact that the
timing of the peak has varied from route to route and even from one direction to the
other on the same route. Off-peak pricing, by its nature, injects complications into the
pricing structure. In contrast, some pricing developments in recent years have aimed
for the simplicity of overall fare reductions, applied across the board, without
restrictions. Although such overall fare reductions have the welcome effect of reducing
the complexity of the fare structure, they do require higher load factors to remain
viable, and they cannot themselves channel traffic to off-peak times and days to
achieve optimal load factors. Therefore, this particular pricing trend brings into play
the full force of high load factors on space restrictions without softening the impact of
such restrictions on the normally peak times.
FUEL CONSUMPTION OPTIMIZATION
Air transport industry acts as a catalyst to the economic and social development of a
nation. This industry encompasses all those activities which involve transportation of
goods and people, by air. Air transport connects people, countries and cultures across
the face of the globe. Additionally, it opens up a market to global players, thereby
supporting trade and tourism significantly.
The air transport industry has contributed significantly to the growth of commerce,
communication, trade and tourism globally. In spite of a marked expansion, the air
transport industry is faced with major issues like high fuel consumption, fuel prices, air
traffic growth, competition, economic crisis, aviation emission, safety, design and
13
operational challenges. Fuel consumption has been considered, to be a major

challenge for the air transport industry. Attributable to high oil prices and an escalation
of competition, fuel consumption is rapidly becoming a critical aspect of the air
transport industry. Widespread improvement in the global economy during the past
year has also contributed to the demand of oil, thereby inflating its price.
Fuel consumption is one of major direct operating cost parameter in the air transport
industry. Air transport fuel remains the most significant and variable component of
operating costs and managing this aspect is an increasing challenge for the air
transport sector. The economy of a country largely depends on fuel prices. Increases
in fuel consumption have an influence on the airlines in two ways; direct impact on the
operating cost, and declines the demand for air travel and air cargo. At one time fuel
extraction cost and availability had little impact on the evolution of the air transport
industry. Furthermore, aircraft fuel burn is proportional to CO2 emission. Therefore, as
the fuel consumption increases the aviation emission shall also increase and that is a
big environmental concern today. The higher fuel consumption of aircrafts is one of
the major causes of inefficiency of airlines. Therefore, in such a highly competitive
environment, in order to reduce the direct operating cost of an aircraft the Fuel
Consumption Optimization (FCO) is essential.
FCO in air transport means finding a minimum value of fuel consumption function of
several variables subject to a set of constraints and improving the energy efficiency of
the aircraft system. The researchers, airlines, aircraft manufacturer and regulatory
organizations are continuously trying to reduce the air transport fuel consumption
along with the economic cost of flying an aircraft. Further, this reduction will also lead
to the reduction of the greenhouse gas emission, caused by the air transport.
Aircraft Technology and Design
Today airlines operate in an increasingly competitive environment caused by the

globalization of air transport network worldwide and therefore a necessary condition
for airlines are commercially successful is the reduction of direct operating costs,
which mainly depends on the technological & design characteristics of the aircraft
used. Technology development is going on at a rapid rate and we can effectively make
use of this technological revolution to reduce the fuel consumption of a commercial
aircraft. Moreover, the fuel consumption of air transport can be reduced through the
variety of options such as increased aircraft efficiency, improved operations, use of
alternate fuels, socioeconomic measures, and improved infrastructure, but most of the
gain so far have been resulted from the aircraft technological improvement. Aircraft
technological improvement mainly depends upon the three factors: structural weight,
aircraft aerodynamics, and engine specific fuel efficiency. Moreover, the aircraft
technological efficiency is described by three aircraft performance metrics: engine
efficiencies are expressed in terms of thrust specific fuel consumption (TSFC),
aerodynamic efficiencies are measured in terms of maximum lift over drag ratio and
structural efficiency is quantified using operating empty weight (OEW) divided by
maximum takeoff weight (MTOW). Further, consider the classical range equation in
order to understand how the aircraft technology affects the fuel burn. Fuel
consumption per payload range of idealized cruise, keeping the aircraft operating
parameters fixed are expressed in terms of aerodynamic efficiency, structural
efficiency, engine efficiency, and calorific value of the fuel.
14
In addition, a study explained the fuel burn reduction by considering aircraft technology
& design studied the aircraft design for optimal environmental performance and the
design variables considered in this study for optimization problems were from aircraft
geometry, engine parameters, and cruise setting. This concludes that the aircraft
optimized for minimum fuel burn encompass a high aspect ratio wing with lower
induced drag, high bypass ratio engines and high core pressures and temperatures.
In addition, the mission range and cruise Mach number were also optimized for
maximum payload fuel efficiency. Furthermore, the possibility of designing larger
aircraft for shorter ranges was also examined and result shown that the reduction in
structural weight can be achieved by reducing fuel burn.
Currently the evolutionary developments of engine technology, airframe technology,

and use of advance light weight alloys and composite material, have resulted in a
positive trend of fuel efficiency improvements. The merging technology and optimized
design dimensions finally lead to the fuel consumption optimization. Aircraft
technology and design have the highest potential to optimize the aviation fuel
consumption, and some of their successful applications in the FCO have been
proposed.
Aviation Operations and Infrastructure
The amount of fuel consumed by an aircraft during its operation from start-up through
to taxi and takeoff, to cruise, to approach for landing and taxiing on arrival, depends
upon several factors. Many of the factors can be influenced by airlines with proper
operations planning and strategies. The current operational practices are not always
optimal from the fuel consumption point of view and hence there is need for operational
improvements. Operational improvement can be expressed in term of operational
efficiency, which is the combination of ground and airborne efficiency. In general, the
actual aircraft performance can be determined by how the aircraft is operated subject
to operational constraints and the efficient operational procedures are those, in which
the actual fuel burn used falls close to the theoretical minimum. Furthermore, the
operational efficiency can be expressed in term of operational and payload-fuel energy
intensity, and the payload factor. Also, the operational factors to reduce the fuel
consumption per passenger-km include the increasing load factor, optimizing the
aircraft speed and fuel weight, limiting the use of auxiliary power, eliminating the non-
essential weight, and reducing taxiing. In addition, highly sophisticated flight-planning
system also improves the aircraft fuel efficiency because this allows pilots to exploit
prevailing wind conditions, calculate precise fuel loads & set different flight levels and
speeds for the aircraft to achieve the most economic performance. For a typical flight
there are a number of factors such as cruise altitude and speed, mass, and weather
conditions that affects the fuel consumption. Therefore, by optimizing the aircraft
operations from start-up through to taxi and takeoff, to cruise, to approach for landing
and taxiing on arrival, have the significant to reduce the fuel burn.
Aviation infrastructure also plays an important role in fuel consumption optimization.

Infrastructure improvements present a major opportunity for fuel consumption
reduction in aviation. The design of an airport, including the location of the runways
and taxiways relative to terminal buildings, clearly has an effect on aircraft fuel burn,
because reduction of delays and decreased taxiing time can provide significant aircraft
15
fuel burn reduction. Airport congestion and improper air traffic management increase
the fuel consumption. Airport congestion occurs whenever the actual traffic demand is
greater than what the system can handle without the delay. Air Traffic Management
(ATM) plays an important role in reducing the environmental impacts of air
transportation by reducing the inefficiencies during the operations of an aircraft. In
addition, the better terminal design can also reduce the fuel consumption. There are
a number of ways that airports, airlines and ATM providers can improve the air
transportation system to minimize fuel burn and emissions. These include improving
the use of the airspace, air traffic control and operations and further improving the use
of airspace and air traffic control includes the flexible use of airspace, route redesign,
using the new tools and programs to find most effective route, and reduced separation
between the aircraft.
Socioeconomic and Policy Measures
Aviation is the fastest growing sector of the economy. It provides the number of
socioeconomic benefits. There are many socioeconomic & political factors which affect
the airline fuel consumption optimization. If these factors are carefully managed then
a significant amount of fuel can be saved. Also, the social awareness levels of the
society, regarding the impact of the aviation emission on climate change plays a key
role in fuel consumption reduction. Currently, the scientific knowledge and the social
demand for low-emission aircraft is not strong enough because the general public is
not well aware of the harmful impacts of aviation emissions on the global climate. The
strong social pressure sends the signal to the government and the government takes
the necessary action after scientifically confirming the problem. As in the cases of the
automobile emission and aircraft noise significant technological and operational
improvements have been reported, because the general public was well aware of the
health damages caused by these. Also, the education and awareness are very
important social measure in air transport and there will be many airline customers who
have never thought of aviation emission as an environmental problem. Information
should be widely available regarding the impact of flying, so that airlines have the
background information they need to understand the changing circumstances of
aviation. Informed choice is a key component of the transport demand and
environmental policy implication. Furthermore, the economic/policy measures for
reducing the fuel consumption includes the emission trading, taxes on aviation fuel,
and carbon emission charges. Beside this, there are some constraints on the airline
operations, training, maintenance & reservations, planning & routes, scheduling,
airways, and labor, these constraints should be removed for fuel burn reduction. In
addition, the economic and policy measures should be introduced in an incremental
fashion to give the air transport and consumers time to adjust to the changes. So
therefore, by optimizing the socioeconomic & political factors, we can improve the air
transportations fuel efficiency.
Aviation Alternative Fuels and Fuel Properties
Aviation alternative fuels can also play an important for the optimization of aviation fuel
consumption. Since the energy crises of the 1970s, all the aircraft companies, aviation
sectors, engine companies, and other government organization are working for
practicality of using alternative fuel in aircraft. A viable alternative aviation fuel can
stabilize fuel price fluctuation and reduce the reliance from the crude oil. Economic
16
sustainability, environmental concerns, energy supply diversity, and competition for

energy resources are the main drivers for alternative jet fuels development. The
replacement for current alternative fuels needs no aircraft modifications and can be
used with the current aviation system, encompassing existing distribution and refueling
infrastructure. Therefore, a suitable alternative fuel can be selected on the basis of a
variety of criteria, societal priorities, economic viability, and sustainability
considerations, which will further reduce the aviation fuel consumption.
AIRLINE OUTSOURCING
Today's competitive business environment has forced companies to identify methods

to improve efficiency. A common solution is to outsource certain nonstrategic business
functions. The company thus removes distractions and focuses managerial attention
on operations within the scope of its core competencies.
The airline industry is a prime example of the stiffened competition as a result of

deregulation. Many airlines have used outsourcing as a method to control costs,
improve efficiencies, and hopefully increase profitability. While airlines continue to
outsource, it is unclear what are the appropriate levels of outsourcing, or which
functions should be maintained by the airline.
Outsourcing which is not directly related activities in order to minimize the cost of the
services offered by firms in the form of economic distress are transferred to another
firm. Outsourcing is defined as outsourcing of companies doing their own business to
other companies or companies. In other words, it is the external supply of the goods
or services offered. In order to keep up with the developing technology and competitive
environment, the enterprises are trying to keep up with the market conditions by
transferring other services they offer to other companies as well as their basic
activities.
The most important feature of outsourcing is to increase efficiency and to save time.
In general, the characteristics of outsourcing can be listed as follows:
a. Outsourcing is a technique that ensures that financial resources are used at the
highest level of efficiency.
b. Outsourcing is a long-term management strategy.
c. Outsourcing is the focus on the best-known work.
d. Outsourcing helps many businesses.
e. Outsourcing helps to do many activities with the help of external sources.
Outsourcing Terminology and Strategies
Most business professionals are familiar with the concept of outsourcing, "the decision
to buy goods and services from external sources rather than producing them in-house
when internal provision is not justified in light of existing or anticipated business
conditions." An airline industry definition of outsourcing mirrors the general definition
by stating that outsourcing is "shedding non-core functions or spinning them off into
semi-autonomous subsidiaries or profit centers."
17
A common function outsourced by airlines is maintenance. Maintenance provides a

good example since it is a non-core activity. Non-core activities are items that may
provide critical functions to the running of the business, but are "not a unique ingredient
of the product." Maintenance is a necessity, but it should not be a unique product
ingredient. Every airline must continuously maintain aircraft to provide safe operations,
but maintenance is rarely seen as a unique part of the airline service.
An overall goal of the outsourcing strategy is to form strong relationships between

companies. Outsourcing can help to create strategic alliances between the two firms
creating a stronger relationship base and increasing value throughout an entire supply
chain. The goal of this relationship is to create a source of competitive advantage for
the company that outsources a service or part.
Given these benefits, it would appear that outsourcing strategies ought to dominate
the airline industry. While it is true there are many examples of outsourcing, there are
examples of the opposite behavior as well. The practice of insourcing is gaining
popularity in the airline industry. Insourcing is the process of providing non-core
services or parts for other companies, often competitors, to increase revenue,
minimize labor idle time and offset high domestic labor costs. Insourcing permits
airlines that practice it to achieve economies of scale; i.e. they are able to produce at
a lower cost per unit. This allows both the insourcing firm and the buyers to benefit.
An additional benefit of insourcing is the gains in goodwill with employees.
Airline Operations and Services Typically Outsourced
Like most businesses, airlines are also outsourcing. The airline sector is very sensitive
against developments in technology and changes in the world. For this reason, it has
to keep up with all developments and changes in the global sense and to keep up with
these developments. In doing so, they are trying to do as much as possible without
increasing their costs. At the same time, it is very important for each unit in the
enterprise to focus on their own business and to work in a safe way, with a focus on
their own business.
The competition between the airline companies and the preference of air
transportation, the development of technology and the globalization have increased.
Businesses go to outsourcing in order to maintain their current position and to hold the
market. At the same time, outsourced companies focus on their core capabilities and
transfer the activities outside of these capabilities to subcontractors. Outsourcing is
particularly advantageous for airlines. There are many operating branches in airline
companies. The execution and coordination of these activities harms businesses in
terms of time and cost. In this case, airlines use outsourcing.
The areas where the airline companies go to outsourcing can be listed as ground
handling, catering, social responsibility projects and advertising, banks, fuel, cargo
facilities, and storage.
1. Ground Services. Ground Handling is a unit that provides all kinds of services that
an airline will need at the airport. These services; passenger services, ramp
services, cargo and postal services, flight operations/load control and
communication services, representation and surveillance services.
18
2. Catering Service. Catering is a service provided during the flight. There are many
companies that provide passengers (food and beverage) to passengers during the
flight. These companies are generally referred to as catering companies.
Airline companies are working with the catering companies in the airports they
have agreed to as hubs. But in places where the flight density is high, catering is
done. Especially at long-haul flights, catering companies work intensively.
3. Social Responsibility Projects. Another area of activity for which airlines are
outsourced is social responsibility projects and advertisements.
4. Cargo Facilities and Storage. Airline companies use outsourcing to stock the cargo
they carry. In this way, they minimize the costs and provide advantages because
they save more time in focusing on their own basic capabilities by doing their
storage activities in another business.
Reduced storage costs due to agreements between the continents and the inter-
cities provide great advantages to airlines.
5. Banks. Airlines apply to banks under the name of outsourcing on financial stability,
financial flexibility and ensuring adequate liquidity. In this sense, companies have
to; the commission has to make payments, such as currency translation fees and
interest rates. The use of airline companies from banks can be listed as follows:
a. to fulfill operational cash needs,

b. to provide the necessary liquidity in the short and long term,
c. to carry out bilateral agreements in transactions such as capital cost and
commission, currency translation,
d. to take necessary actions in order to protect against financial risks.
At the same time, the airline is able to make flights to the passengers who want to
buy air tickets via the airline companies' agreement with the cards are carried out.
6. Fuel. Since the fueling process requires a number of procedures, airlines are
outsourcing and take advantage of the time by transferring fuel consumption to the
fuel supplier companies.
Since each oil company cannot establish a fuel station at each airport, an airline
can negotiate with different fuel suppliers for different airports. Certain applied
procedures are available for fueling. The procurement process when performing
these procedures must be at the time of ground time determined by the airlines.
7. Technical Services. Aircrafts are subject to mandatory maintenance by both

international and national organizations. These treatments are daily, weekly and
annual maintenance. At the same time, maintenance is carried out against any
technical problems that may be experienced by air vehicles in the ground or in the
air, or technical services are provided to solve these problems after a technical
problem. The provision of technical services is very important for both airlines and
passengers. The fact that an airplane fails to perform its existing flights due to
19
malfunction causes huge income losses for the airline business. Therefore, the
airline companies that are not able to provide themselves can go to outsourcing.
Factors to be Considered in Outsourcing
Businesses may not always achieve the performance they want. There may be
problems in the outsourcing activities used. In this case, the entity may supply a new
external source or, with the existing outsourcing company, be able to reach a
restorative agreement. Problem-solving issues can be identified and studies can be
done to solve the problem after the source is found. At this point the contracted
supplier should be selected very well.
In order for the supplier to be ideally analyzed, the following questions must be
answered:
a. What is the purpose of outsourcing?

b. What is the reason for these parameters?
c. How will the efficiency in the intended areas be measured?
d. What kind of activities are expected by the intended activity?
e. Is there a list of activities intended for priority activities?
f. Will the targeted activities be carried out?
g. How much of the specified areas can be outsourced?
h. What kind of collaboration is planned?
The basis of the outsourcing practices is based on having some businesses done
outside and within the enterprise’s own control, rather than having them outsourced.
For this reason, there is a sharing relationship between the enterprises that have to
cooperate with each other towards the same target. As a result of these relations, it is
necessary to accept that outsourcing practices can bring with them some dangers.
The main benefits of outsourcing process are; cost savings, focusing on core
competencies, organizational restructuring, flexibility, quality increase and shortening
of the order cycle process, creating new income areas, falling in fixed investments,
maximizing the use of functional experts, gaining competitive advantage, and following
technological developments. To take under several headings:
1. Reducing Costs. The effect of outsourcing on costs is not limited to operating

activities. At the same time, it reduces the cost of establishment and new
investment and brings financial freedom. Thus, the enterprise gains competitive
advantage by using less capital through outsourcing.
2. Quality. The issue of quality should be taken together with the cost factor by both
the client company and the service provider and the sensitive balance between the
relevant factors should be kept as constant as possible. The most important tool in
ensuring quality and cost balance is outsourcing contracts. By clearly determining
the minimum service limits in outsourcing contracts, the company maintains
continuity at the standard service level and is also protected from the negativities
that may arise due to deterioration in service quality.
20
3. Competitive Advantage. Organizations need to provide a competitive advantage

in order to become more profitable than their competitors. To gain and maintain a
competitive advantage, it should be able to show a comparative or different value
than an organization's competitors. They will be able to generate this value in a
shorter time by outsourcing.
Businesses renew their strategic management processes with outsourcing.

Elimination of non-value-added jobs for the enterprise or the use of external resources
in the activities where the basic capabilities of the enterprise are not used, and in this
way, it is possible to ensure activity and efficiency. In addition to the renewed
processes, enterprises that can gain the ability to respond faster to their customers'
requests increase their competitiveness.
ENRICHMENT ACTIVITY 3.1:
Identify and explain, briefly, the following topics based on the module—additional
information is encouraged; you may search the web or other resources for references:
1. Outsourcing
a. airline outsourcing;
b. services typically outsourced in aviation;
c. factors to be considered in outsourcing.
2. Fuel consumption optimization, in terms of (Choose ONLY one (1) of
the following)
a. aircraft technology and design;
b. aviation operations and infrastructure;
c. socioeconomic and policy measures;
d. aviation alternative fuels and fuel properties.
3. Economic characteristics of airlines as oligopolists;
Note: For all the enrichment activities provided in this module: input your work on an
A4-sized paper with your complete name, year, section, course, and signature over
printed name indicating that you are accepting the terms indicated by the honesty
clause; saved as PDF file with file name, “AE 413 Enrichment Activity 3.1 – Surname”;
and submit in the Learning Management System (LMS) platform provided by the
instructor on a designated deadline.
Follow the necessary rubric, “Rubric for Short Answers”, provided at the last page of
the module for pointing system.
21
RUBRIC FOR SHORT ANSWERS
NEEDS
EXCELLENT GOOD FAIR
CRITERIA IMPORVEMENT
(4 POINTS) (3 POINTS) (2 POINTS)
(1 POINT)
Answers are
Answers are Answers are
not
comprehensive, Answers are partial or
comprehensive
accurate, and accurate and incomplete. The
or completely
complete. Key complete. Key key points are not
Content stated. Key
ideas are clearly points are clear. The
points are
stated, explained, stated and question is not
addressed, but
and well supported. adequately
not well
supported. answered.
supported.
Inadequate
The organization or
Well organized,
organization is development. Organization and
coherently
Organization mostly clear The structure structure detract
developed, and
and easy to of the answer from the answer.
easy to follow.
follow. is not easy to
follow.
Displays one to Displays three
Displays no errors Displays over five
three errors in to five errors in
in spelling, errors in spelling,
spelling, spelling,
Writing punctuation, punctuation,
punctuation, punctuation,
Conventions grammar, and grammar, and
grammar, and grammar, and
sentence sentence
sentence sentence
structure. structure.
structure. structure.
Reference: Professor, M. (n.d.). Rubric gallery. Retrieved from

https://www.rcampus.com/rubricshowc.cfm?sp=yes
22

AE 413 Module No. 03

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

AE 413 Module No. 03

Uploaded by

Copyright:

Available Formats

PHILIPPINE STATE COLLEGE OF AERONAUTICS

INSTITUTE OF ENGINEERING AND TECHNOLOGY

Air Transport Economics and

THE AIRLINES AS OLIGOPOLISTS 6

ENRICHMENT ACTIVITY 3.1 21 1.5 hours

As an institution of higher learning, students are expected to display highest degree

Course Learning Outcomes [CLO]

Module Learning Outcomes [MLO]

THE AIRLINES AS OLIGOPOLISTS

Economists usually describe the certificated airline industry as closely approximating

Fig. 3-1. Total Performance System Structure.

Number of Carriers and Market Share

Unfortunately, instead of the industry expanding, as many proponents of deregulation

High Barriers to Entry

Oligopolistic industries typically are characterized by high barriers to entry. One

Oligopolistic industries may be characterized by economy of scale; economists mean

Growth through Merger

Another clear characteristic of oligopolists, in general, and airlines, in particular, is

Price Rigidity and Nonprice Competition

Oligopolistic industries may be characterized by price rigidity and nonprice

OTHER UNIQUE ECONOMIC CHARACTERISTICS

Government Financial Assistance

High Technological Turnover

High Labor and Fuel Expenses

The Competitive Advantage of Schedule Frequency

In most industries, increased production, by itself, does not enhance an individual

Excess Capacity and Low Marginal Costs

Sensitivity to Economic Fluctuations

Close Government Regulation

THE SIGNIFICANCE OF AIRLINE PASSENGER LOAD FACTORS

Traffic Peaks and Valleys

Capacity Versus Demand

confidence declines, and individuals postpone discretionary travel; as a result, airline

The realities of public transportation, whether bus, train, or plane, result in an

Pricing in Relation to Load Factor

FUEL CONSUMPTION OPTIMIZATION

operational challenges. Fuel consumption has been considered, to be a major

Aircraft Technology and Design

Today airlines operate in an increasingly competitive environment caused by the

Currently the evolutionary developments of engine technology, airframe technology,

Aviation Operations and Infrastructure

Aviation infrastructure also plays an important role in fuel consumption optimization.

Socioeconomic and Policy Measures

Aviation Alternative Fuels and Fuel Properties

sustainability, environmental concerns, energy supply diversity, and competition for

Today's competitive business environment has forced companies to identify methods

The airline industry is a prime example of the stiffened competition as a result of

Outsourcing Terminology and Strategies

A common function outsourced by airlines is maintenance. Maintenance provides a

An overall goal of the outsourcing strategy is to form strong relationships between

Airline Operations and Services Typically Outsourced

a. to fulfill operational cash needs,

7. Technical Services. Aircrafts are subject to mandatory maintenance by both

Factors to be Considered in Outsourcing

a. What is the purpose of outsourcing?

1. Reducing Costs. The effect of outsourcing on costs is not limited to operating

3. Competitive Advantage. Organizations need to provide a competitive advantage

Businesses renew their strategic management processes with outsourcing.

ENRICHMENT ACTIVITY 3.1:

RUBRIC FOR SHORT ANSWERS

Reference: Professor, M. (n.d.). Rubric gallery. Retrieved from

You might also like