The Global Airline Industry

Editors Peter Belobaba, Amedeo Odoni and Cynthia Barnhart Massachusetts Institute of Technology (MIT), USA

Notes on Contributors xiii List of Contributors xix Series Preface xxi Acknowledgments xxiii 1 Introduction and Overview 1 Peter P. Belobaba 1.1 Introduction: The Global Airline Industry 1 1.1.1 Deregulation and Liberalization Worldwide 4 1.1.2 Industry Evolution Since 2000 6 1.2 Overview of Chapters 13 References 17 2 The International Institutional and Regulatory Environment 19 Amedeo R. Odoni 2.1 Introduction 19 2.2 Background on the International Regulatory Environment 20 2.2.1 The Chicago Convention 20 2.2.2 Freedoms of the Air 21 2.3 Airline Privatization and International Economic Regulation 24 2.3.1 Airline Privatization 24 2.3.2 Types and Critical Aspects of Air Service Agreements 25 2.3.3 Typical Content of Bilateral and Multilateral ASAs 26 2.3.4 The Unified EU Market and Other Major Developments 29 2.3.5 The Role of Airline Alliances 32 2.4 Airports 33 2.4.1 Restrictions on Airport Access 33 2.4.2 Airport Ownership and Management 36 2.5 Air Traffic Management 39 2.6 Key Organizations and Their Roles 41 2.6.1 International Organizations 41 2.6.2 Organizations in the United States 43 2.7 Summary and Conclusions 45 References 46 3 Overview of Airline Economics, Markets and Demand 47 Peter P. Belobaba 3.1 Airline Terminology and Definitions 47 3.1.1 Basic Airline Profit Equation 49 3.2 Air Transportation Markets 51 3.2.1 Typical Air Passenger Trip 51 3.2.2 Spatial Definitions of Airline Markets 52 3.3 OriginDestination Market Demand 55 3.3.1 Dichotomy of Airline Demand and Supply 55 3.3.2 Factors Affecting Volume of OD Demand 57 3.3.3 Quality of Service Factors 57 3.3.4 Total Trip Time and Frequency 58 3.4 Air Travel Demand Models 60 3.4.1 Elasticity of Air Travel Demand 60 3.4.2 Air Travel Demand Segments 62 3.4.3 OD Market Demand Functions 64 3.5 Airline Competition and Market Share 67 3.5.1 Market Share/Frequency Share Model 67 3.5.2 S-Curve Model Formulation 69 3.5.3 Quality of Service Index (QSI) Models 70 3.6 Summary 71 References 72 4 Airline Pricing Theory and Practice 75 Peter P. Belobaba 4.1 Airline Prices and O-D Markets 75 4.1.1 Regulated versus Liberalized Pricing 76 4.1.2 Theoretical Pricing Strategies 77 4.1.3 Price Discrimination versus Product Differentiation 79 4.2 Differential Pricing 79 4.2.1 Market Segmentation 81 4.2.2 Fare Product Restrictions 82 4.2.3 Airline Fare Structures 83 4.3 Recent Trends in Airline Pricing 89 4.3.1 Branded Fare Families 90 4.3.2 Unbundling and Ancillary Revenues 91 4.4 Airline Pricing Strategies 93 4.4.1 Factors Affecting Fare Structure in an O-D Market 93 4.4.2 Competitive Fare Matching 96 References 98 5 Airline Revenue Management 99 Peter P. Belobaba 5.1 Computerized Revenue Management Systems 101 5.2 Flight Overbooking 103 5.3 EMSR Model for Flight Leg Revenue Optimization 108 5.4 Network Revenue Management 112 5.4.1 O-D Control Mechanisms 113 5.4.2 Network RM Optimization Models 118 5.4.3 Revenue Benefits of O-D Control 120 5.5 Revenue Management for Less Restricted Fare Structures 121 5.5.1 Demand Forecasting by Willingness to Pay 122 5.5.2 Marginal Revenue Optimization: Fare Adjustment Theory 123 References 125 6 Airline Operating Costs and Measures of Productivity 127 Peter P. Belobaba 6.1 Airline Cost Categorization 127 6.1.1 Administrative versus Functional Cost Categories 128 6.1.2 Cost Drivers by Functional Category 132 6.2 Operating Expense Comparisons 133 6.2.1 Percentage Breakdown of Operating Expenses 133 6.2.2 Aircraft Operating Cost Comparisons 134 6.2.3 Low-Cost Carriers 140 6.3 Comparisons of Airline Unit Costs 145 6.3.1 Total Operating Costs versus Unit Costs 145 6.3.2 Legacy versus Low-Cost Carrier Unit Costs 148 6.4 Measures of Airline Productivity 153 6.4.1 Aircraft Productivity 153 6.4.2 Labor Productivity 156 References 158 7 The Airline Planning