Winds of Change Domestic Air Transport Since Deregulation -- Special Report 230 (1991) / Chapter Skim
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Special Report 230 Winds of Change Domestic Air Transport Since Deregulation TRANSPORTATION RESEARCH BOARD NATIONAL RESEARCH COUNCIL
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1991 TRANSPORTATION RESEARCH BOARD EXECUTIVE COMMITTEE Chairman C Michael Walton, Bess Harris Jones Centennial Professor of Natural Resource Policy Studies and Chairman, Department of Civil Engineering, The University of Texas at Austin Vice Chairman William W
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Special Report 230 Winds of Change Domestic Air Transport Since Deregulation TRANSPORTATION RESEARCH BOARD NATIONAL RESEARCH COUNCIL Washington, D.C.
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Transportation Research Board Special Report 230 Subscriber Categories IA planning and administration V aviation Transportation Research Board publications are available by ordering directly from TRB. They may also be obtained on a regular basis through organizational or individual affiliation with TRB; affiliates or library subscribers are eligible for substantial discounts: For further information, write to the Transportation Research Board, National Research Council, 2101 Constitution Avenue, N.W., Washington, D.C.
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Committee for the Study of Air Passenger Service and Safety Since Deregulation JOEL L FLEISHMAN, Chairman, Duke University, Durham, North Carolina GEORGE J
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Preface A decade after passage of the Airline Deregulation Act of 1978 the Executive Committee of the Transportation Research Board (TRB) concluded that a review was needed of the experience with airline deregulation.
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Whether there are certain factors, working independently or interactively, that affect service, Whether safety has diminished since deregulation, and Whether policy changes by airlines, local agencies that own and operate airports, or the federal government are necessary to improve the quality of air passenger service. The committee defined its charge as an examination of the key issues affecting commercial aviation since deregulation.
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from these studies with empirical analyses of its own. Even with the extensive literature, however, some of the most controversial issues raised during the study could not be completely answered on the basis of empirical analyses alone.
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from creditors while reorganizing under Chapter 11 bankruptcy proceedings, and Eastern Airlines, after being in bankruptcy for 22 months, finally ceased operation. In its examination of the governmental role since deregulation, the committee focused most of its attention on the role of the FAA in providing ainvay and airport capacity and enforcing federal safety regulations.
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Acknowledgments In order to obtain additional views on controversial issues examined during the course of the study, the committee invited presentations by several individuals, whose voluntary contributions to the study committee are gratefully acknowledged.
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air travel since deregulation and provided insight into the probable effects of policy changes on travel agents and consumer information. Many individuals assisted individual committee members and the project staff.
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Contents ExecutiveSummary .................................................. 1 PART I INTRODUCTION Deregulation of Commercial Aviation ..........................21 Brief History of Regulation, 22 Precedent and Rationale for Regulating Airlines, 23 The CAB Regulatory Approach, 26 Impetus for Deregulation, 28 Administrative and Legislative Reform, 29 Competition and Traffic Growth, 30 Effects of Deregulation, 31 Organization of Report, 38 Changes in Airline Operations and Financial Performance, 38 Passenger Fares and Airline Service, 39 Barriers to Competition, 40 Commercial Aviation Safety, 41 Airport and Airway Capacity Limits, 41 Constraints on the Performance of the FAA, 42 Summary, 43 PART II EFFECTS AND RESPONSES IN THE PRIVATE DOMAIN Changes in Airline Operations and Financial Performance ..
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3 Passenger Fares and Airline Service ............................85 Chapter Organization, 86 Data Sources, 86 General Trends, 87 Passenger Traffic, 87 Average Fares, 89 Fare Variety, 92 Fares by Market Distance and Density, 97 Effects of Competition on Fares and Service, 102 Systemwide Benefits, 103 Consequences of Hub Dominance, 107 Rural and Small Communities, 118 Changes in Service, 121 Changes in Fares, 125 Summary, 129 General Trends, 129 Effects of Competition on Fares and Service, 129 Rural and Small Communities, 130 4 Barriers to Competition ........................................ 134 Financial Risks, 135 Airport Capacity Constraints, 136 Terminal and Gate Capacity, 136 Contractual Agreements, 138 Dominated Hubs, 141 Slot-Controlled Airports, 142 Environmental Constraints, 143 Airport Restrictions, 144 Aircraft Availability, 144 Airline Marketing Strategies, 145 CRSs, 146 Travel-Agent Incentives, 152 Frequent Flier Programs, 154 Code Sharing, 155 Mergers and Acquisitions, 157 Summary, 161 PART III EFFECTS AND RESPONSES IN THE PUBLIC DOMAIN Commercial Aviation Safety ....................................
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Methodological Issues, 175 Carrier Finances and Accidents, 177 Maintenance Expenditures and Safety, 177 New Entrants Versus Established Carriers, 178 Pilot Experience, 179 Commuter Substitution, 181 FAA Performance and Safety, 182 Aging Aircraft, 185 Safety Indicators, 191 Near-Midair Collisions, 192 Pilot Performance, 192 Flight Data Recorders for Crew Monitoring, 193 Indicators of Controller Performance, 195 Aircraft Performance and Maintenance, 196 Summary, 197 Airport and Airway Capacity Limits ..........................202 Past and Current Demand for Airports, 203 Airport Use Since Deregulation, 203 Delay as a Measure of Capacity, 210 Projected Increases in Demand, 215 Limited Supply Expansion, 218 Few New Airports Likely, 220 Few New Runways at Existing Airports, 220 Better Use of Existing Capacity, 221 Modifications of ATC Procedures, 221 Replacement of Outmoded ATC Technology, 222 Systems Approach to ATC, 224 Marketplace Strategies, 225 Summary, 233 7 Constraints on the Performance of the Federal Aviation Administration ................................................... 238 Financing, 240 Appropriations, 240 Revenue Sources, 243 Personnel, 244 ATC, 244 Safety Inspections, 253 Shortages in Personnel with Special Skills, 254 Changing the FAA Culture, 255 Summary, 256 Acquisition of Advanced Technology, 257 Inadequate Planning and Management, 257 Complexity of High-Technology Acquisition, 258
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Management, 260 Micromanagement, 261 Stable Leadership, 262 Summary, 263 PART IV SUMMARY 8 Conclusions and Recommendations ............................ 271 Changes in Airline Operations and Financial Performance, 272 Management Innovation, 272 Financial Performance, 273 Passenger Fares and Airline Service, 276 Benefits of Competition, 278 Hub-and-Spoke Networks and Competition, 279 Rural and Small Communities, 280 Barriers to Competition, 282 Risk of Entry, 282 Airport Terminal Capacity Limits, 283 Slot-Controlled Airports, 284 Airline Marketing Strategies, 285 Mergers and Acquisitions, 290 Recommendations to Enhance Competition, 290 Commercial Aviation Safety, 292 Airport and Airway Capacity, 294 Airport Congestion, 295 Airway Capacity, 297 Recommendations for Expansion and Better Use of Airport and Airway Capacity, 299 Constraints on the Performance of the FAA, 299 Institutional Constraints, 301 Unanswered Questions for the Future, 304 Options for Reforming the FAA, 305 APPENDIXES A Measuring Financial Risk in the Airline Industry ...........308 John S
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Executive Summary Commercial aviation was one of the first industries affected by the controversial regulatory reforms that began in the 1970s. Beginning in 1975, administrative reforms of the Civil Aeronautics Board (CAB)
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2 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Past and Current Benefits The emerging industry suggests evolution toward oligopoly, but also displays a substantial amount of competition. At the outset of deregulation only about 20 percent of city-pair markets had three or more competitors; this share has grown to 40 percent.
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Executive Summary3 further reduces competition in regional markets and gives the dominating carriers an opportunity to exercise market power (Chapters 3 and 4)
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4 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION the ease of entry in many markets, and contestability was further diminished by innovative marketing strategies, including computer reservation systems (CRSs) , that were developed and applied by some carriers to establish and build on the competitive advantage that they have at their hubs (Chapter 4)
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Executive Summary 5 Marketing Advantages Through CRSs, incentives to travel agents, frequent flier programs, and other marketing practices, major carriers can influence consumer choices in ways that smaller, new-entrant airlines and larger airlines without these advantages cannot. CRSs, which are used to book more than 90 percent of domestic air travel, combined with volume incentives paid to travel agents, help provide the owners of these systems with extra ticket sales.
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6 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION prospered in some years by finding niche markets. One former intrastate carrier has done well by providing low-fare, short-haul, point-to-point service.
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Executive Summary 7 CRSs CRSs offer considerable competitive advantages to the carriers that own them. These advantages would be reduced by improving the competition between the existing CRSs.
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8 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION rides) that they receive from carriers.
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Executive Summary 9 partly because of more stringent safety regulations applied to those carriers in 1978. By 1990 the fatal accident rate of commuter carriers and jet carriers offering regularly scheduled service was roughly equivalent.
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10 WINOS OP CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION areas to help meet this demand and to reduce congestion do not appear promising in the near term because of competing demands for land use and the opposition to increased noise. Matching Demand and Supply for Airports with Market Mechanisms Because much of the congestion at major airports occurs at peak periods of the day and week, peak-period pricing of runways could be used to allocate scarce capacity more efficiently.
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Executive Summary I I World War II technology, with solid-state systems. During the past decade the NAS Plan has evolved into an ongoing multiyear capital improvement program currently estimated to cost $27 billion; these new technologies, which incorporate the NAS Plan, are not scheduled to be in place for another 15 years or more.
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12 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION ity. The DOT should permit and encourage airports to experiment with congestion pricing and invite evaluation of the effectiveness of these efforts by independent researchers.
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Executive Summary 13 operating agency in the sense that it is responsible for operating the ATC system 24 hours a day, 365 days a year. Its mission includes such important tasks as ensuring passenger safety in aircraft design and in the operations of air carriers.
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14 WINDS OP CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION agency impede progress. The stable, long-term leadership needed to manage this transition to a more complex, more technology-dependent mission is unlikely to be achieved with the frequent turnover of administrators that has been typiéal in the past.
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Executive Summary 15 Return the FAA to its former independent status.
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16 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION require the establishment of a process or an agency to review the rates charged to its customers -- analogous to the Postal Rate Commission. To help address these shortcomings, Option 2(b)
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Executive Summary 17 that focuses on the relative merits and drawbacks of options 2(b)
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18 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION The committee's recommendation for better future air travel capacity and safety is as follows: A publicly mandated study of change in the organization of the FAA should be conducted, the focus of which should be on the choice between a public and private corporate model. A report should be submitted to the President and Congress within 2 years of initiation of the study.
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PART Introduction
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ii Deregulation of Commercial Aviation The commercial aviation industry in the United States has grown at an almost phenomenal rate since the end of World War II. In 1945 the major airlines flew 3.3 billion revenue passenger miles (RPMs)
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22 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION increased financial leverage, and at the time of this writing, the recession and fuel price shocks caused by the 1991 Persian Gulf War. Many changes in aviation, however, are more directly a result of deregulation.
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Deregulation of Commercial Aviation23 offering competitive services on the most profitable routes (the Postmaster General could not regulate entry)
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24 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION one firm to provide service at a lower cost than could two or more firms, and thereby dominate the market. Even the railroad industry, however, does not fit the monopoly model perfectly.
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Deregulation of Commercial Aviation 25 entry can be very large. Airline entry involves substantial pre-operating expenses, which may be only partly recoverable, and may include ever more substantial operating losses while customers are drawn to the new service, much of which cannot be recovered on exit.
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26 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION tation binds the country together and promotes economic development (Fromm 1965)
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Deregulation of Commercial Aviation 27 local service airlines at this time were Allegheny, Airwest, Hughes, Frontier, North Central, Ozark, Piedmont, Texas International, and Southern. The trunk carriers could have provided the same service at a higher subsidy (Morgan 1981)
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28 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION range of fares for a given route (Meyer et al.
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Deregulation of Commercial Aviation 29 Levine (1965) took note of the discount fares available in intrastate markets in California that were not regulated by the CAB and concluded that allowing price competition nationwide would bring lower prices for consumers.
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30 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION fares. In early 1978 the CAB announced that it would no longer review fare reductions of up to 50 percent of the standard industry fare level (SIFL)
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Deregulation of Commercial Aviation 31 that earn less than $1 billion but $100 million or more are called "nationals." Those that earn less than $100 million are called "regionals." This nomenclature is used in this report in reference to the postderegulation industry, except that in some sections regional airlines are included in the same category as commuters. In many respects, particularly in the types of aircraft operated, the regionals and the large commuters (which account for most commuter traffic)
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32 WINOS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION COMMERCIAL AIRLINES OFFERING DOMESTIC SCHEDULED PASSENGER SERVICE AS OF JULY 1991 Majors America West' Pan American" American Southwest" Continental0 Trans World Delta United Northwest USAIr Nationals Air Wisconsin" Markair Alaska Midway°" Aloha Midwest Express" American Trans Air" Towerb Hawaiian Trump Shuttle Horizon"" Westairb Large Regionals Braniff International"' MOM Grand" Carnivalb Reeve Executive Airlines"," Trans States) d 01n Chapter II bankruptcy in 1991.
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Deregulation of Commercial Aviation 33 Billions 350 300 250 200 150 100 50 OL_ 1960 1965 1970 1975 1980 1985 1989 Year FIGURE 1-I Revenue passenger miles, scheduled domestic service of certificated carriers (vertical bars represent, from left to right, administrative deregulation, Deregulation Act, fuel crisis, PATCO strike)
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Thousands 7000 i 6000 5000 4000 3000 2000 1000 0 IIIIIIIIII IIIII IP III I I I 1960 1965 1970 1975 1980 1985 1989 Year FIGURE 1-2 Aircraft departures, scheduled domestic service of certificated air carriers (vertical bars represent, from left to right, administrative deregulation, Deregulation Act, fuel crisis, PATCO strike)
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Deregulation of Commercial Aviation 35 Index, 1972=100 350 300 250 200 150 100 50 0 - 1970 1975 1980 1985 1988 Year Output Cost Index -- ' Input Cost Index FIGURE 1-4 Trends in airline costs and output, 1970-1988 (vertical bars represent, from left to right, administrative deregulation, Deregulation Act, fuel crisis, PATCO strike) [based on work by Meyer and Oster (1987, Figure 6.1)
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36 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Cents per mile 8 OL_ 1960 1965 1970 1975 1980 1985 1988 Year FIGURE 1-5 Average yield (1967$) , scheduled service of domestic certificated carriers (vertical bars represent, from left to right, administrative deregulation, Deregulation Act, fuel crisis, PATCO strike)
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Deregulation of Commercial Aviation 37 The average fuel price per gallon paid by carriers increased from about 35 cents in late 1978 to almost 70 cents by the end of 1979, which helps to explain why fares were increased during this period (Oster 1981, 162)
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38 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION short-term effects using statistical techniques in order to indicate the effects of deregulation during periods when few other influences are highly variable, but separating the effects over the long term depends more on judgment than statistical interpretation. Given the relative consistency of some trends, particularly total RPMs and average yields, it can be argued that deregulation did not cause a decisive change in industry output and average fares (Dempsey 1990; Brenner 1988)
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Deregulation of Commercial Aviation 39 lation made competing in the marketplace, instead of providing a high level of service in a protected environment, the test of managerial success. The freedoms of the market, however, mean that successful top managers not only have to compete with each other, they also have to cope with such things as hostile takeovers and leveraged buy outs.
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40 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION commuter carriers are substantially less extensive than the data collected from major, national, and regional carriers, which limits the analysis. Barriers to Competition As described in Chapters 1, 2, and 3 of this report, the airline industry is much more competitive and efficient than it was under regulation.
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Deregulation of Commercial Aviation 41 cost new entrants to expand. This, combined with the precarious financial position of more than one major airline, makes further industry concentration a legitimate public policy concern.
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42 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION destinations of many travelers include major airports with capacity limits. Delays at these airports can cause ripple effects throughout the entire network.
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Deregulation of Commercial Aviation 43 number of airlines and aircraft was increasing. Although the agency has been replacing air traffic controllers, technicians, and inspectors, a substantial proportion of its personnel will become eligible to retire in the next few years.
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44 WINDS OP CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION certain costs (e.g., administration, advertising, passenger service, and terminal facilities) are relatively fixed.
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Deregulation of Commercial A via t ion 45 DOT (Research and Special Programs Administration)
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46 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Meyer, J., and C Oster.
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PART II Effects and Responses in the Private Domain
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2 Changes in Airline Operations and Financial Performance Deregulation began a transformation in air carrier asset management, labor relations, corporate organization, and airline management that is still occurring. Whereas in some cases air carriers shifted fairly quickly to the competitive environment engendered by deregulation, in other cases the residual effects of the previous regulatory regime, manifested in route structures and aircraft fleets or an inability to adapt to market conditions, have placed some carriers in peril.
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50 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION that the Civil Aeronautics Board (CAB) exercised over routes, prices, and equipment.
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Changes in Airline Operations and Financial Performance51 of deregulation the CAB had granted route authority in 24,000 city-pair markets, the number had increased to 106,000 within 18 months after passage of the 1978 legislation (Bailey et al.
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52 WINOs OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Carriers also withdrew from small markets that were unprofitable to serve with the jet aircraft that had become the industry's perceived standard during the 1960s and 1970s. These moves were hastened by carrier efforts to align service with cost as they eliminated the internal cross subsidies for small community service that had been fostered by the CAB's fare policy.
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Changes in Airline Operations and Financial Performance 53 help fill the seats; fortunately, they became more adept at both (see Figure 1-3 and the following discussion on marketing)
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54 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Many observers have concluded that the fare wars of the early 1980s got out of hand and resulted in below-cost pricing (Meyer and Oster 1987)
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Changes in Airline Operations and Financial Performance 55 opt for the low fares offered by their competitors. The importance of offering frequent flier benefits is heightened by the fact that roughly 5 to 6 percent of fliers account for about 40 percent of all trips taken annually.
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56 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION had an immediate effect on labor costs. From 1972 to 1978 labor costs for major carriers increased at an average annual rate 3.8 percent greater than the consumer price index (CPI)
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Changes in Airline Operations and Financial Performance 57 and in neither case did management stake out dominant positions at major hubs. After the initial wave of mergers and acquisitions, many of the subsequent combinations seemed as much motivated by hopes either to achieve economies of scope or scale or to gain greater control over markets (Levine 1987; Meyer and Oster 1987)
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58 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION mance or from looking at only a few troubled carriers. A comparison of pre- and postderegulation financial performance shows that industry operating margins have weakened and returns on equity have declined.
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Changes in Airline Operations and Financial Performance 59 market share throughout their networks, with profits and returns on invested capital remaining weak. Analysis Methodology Limitations of the Financial Analysis It is important to establish the limitations of this financial analysis before further examination of the industry's financial results.
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60 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION The financial condition of the industry directly affects individual firms' behavior in the short run and, ultimately, their structure and performance in the long run. In the short run, failing firms may resort to less-thancompensatory fares in order to generate sufficient cash to cover their fixed, short-run commitments, but not their long-run costs.
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Changes in Airline Operations and Financial Performance 61 financial averages are calculated for 1955-1975 and 1976-1989 to capture the effects of this administrative deregulation. The effects of recession years must be accounted for in any comparison of results over time, particularly for an industry that is as strongly affected by the business cycle as is the airline industry.
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62 WiNos OP CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION TABLE 2-1 AVERAGE FINANCIAL MEASURES FOR AIR CARRIER INDUSTRY FOR VARIOUS PERIODS Legislative Administrative Deregulation Deregulation Financial 1979- 1955- 1955- 1968- 1976- 1955- Measure 1989 1978 1967 1978 1989 1975 Excluding Recession Years" Operating results Income margin 2.8 6.6 8.0 4.9 3.4 6.9 Profit margin -0.3 4.2 6.0 2.1 0.5 4.5 Net profit margin 1.0 3.3 4.0 2.4 1.8 3.1 Debt and equity Debt/equity ratio 1.24 1.26 1.21 1.31 1.16 1.31 Return on equity (ROE) 4.4 9.3 10.6 7.6 7.0 8.5 ROE, all manufacturingb 13.0 12.0 11.4 12.7 13.4 11.6 Return on investment 8.0 7.4 7.5 7.2 8.8 6.7 All Years Operating results Income margin 1.9 5.8 7.2 4.1 2.5 5.9 Profit margin -1.5 3.4 5.1 1.3 -0.6 3.5 Net profit margin 0.4 2.7 3.4 1.7 1.2 2.5 Debt and equity Debt/equity ratio 1.34 1.30 1.24 1.37 1.26 1.35 Return on equity (ROE)
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Changes in Airline Operations and Financial Performance 63 the results for the major carriers during the last 22 years are examined in addition to the industry averages to illustrate the variability of carrier financial performance. The analysis focuses on the largest carriers that existed before deregulation and how they have fared afterwards.
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64 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION to expand and take on the major airlines in markets other than the niches where it was most competitive has not proved to be a successful strategy for any new-entrant airline. Each of the following sections begins with a discussion of the relevant financial measures for the industry as a whole, followed by a discussion of those measures for individual carriers.
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Changes in Airline Operations and Financial Performance 65 Percent 8i -2 1955 1960 1965 1970 1975 1980 1985 1989 Year FIGURE 2-1 Net profit margin for total certificated air carriers. Although the profit from each dollar of revenue is down, the downward trend began before deregulation.
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66 WINoS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION TABLE 2-2 AVERAGE FINANCIAL MEASURES FOR MAJOR AIR CARRIERS Financial Measure Excluding Recession Years 1968-1978 1979-1989 Including Recession Years" 1968-1978 1979-1989 Operating results Income margin Strong 6.6 4.3 5.8 3.4 Weak 2.4 -0.7 1.7 -1.6 Total 4.7 2.7 3.9 1.7 Profit margin Strong 4.6 2.4 3.8 1.3 Weak -0.9 -5.6 -1.7 -6.3 Total 2.1 -0.2 1.3 -1.3 Net profit margin Strong 3.8 3.1 3.2 2.6 Weak 1.0 -2.9 0.2 -3.1 Total 2.5 1.1 1.8 0.6 Debt and equity Debt/equity ratio Strong 0.88 0.64 0.91 0.72 Weak' 1.96 3.45 2.09 3.28 Total 1.27 1.17 1.33 1.25 Return on equity Strong 9.7 9.8 8.2 8.4 Weakb 4.2 -9.9 0.8 -14.5 Total 7.6 7.8 5.5 5.0 Return on investment Strong 8.3 9.8 7.4 9.3 Weak 5.9 3.7 4.9 3.1 Total 7.1 7.9 6.2 7.2 NOTE: Strong carriers are American, Delta, Northwest, United, USAir, and Piedmont. Weak carriers are Continental, Eastern, Pan American, and Trans World.
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Changes in Airline Operations and Financial Performance 67 Percent 10 -5 -10 15L 68 70 72 74 76 78 80 82 84 86 88 Year - Strong - Weak FIGURE 2-2 Net profit margins for strong and weak caniers. regulation has been accompanied by a less-than-proportionate rise in profits for the industry as a whole.
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68 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION pre- and postderegulation periods are examined. Last, an examination is made of the industry's betas, which are market measures of industry financial risk.
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Changes in Airline Operations and Financial Performance 69 On the positive side, operating leases may provide a method of lowering the air carrier's overall cost of capital. Equity, debt, capital leases, and operating leases all have differing direct costs, risk premiums, depreciation and tax benefits, and degrees of flexibility.
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70 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION to operating leases, another potential source of such understatement, more typical recently, is airline holding companies established for the purposes of diversification, mergers, or buy outs. To the extent that the holding company issues debt to finance operating assets of the air carrier, the book financial results, based on the operating company results only, would understate the debt being used to produce the operating company's net income.
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Changes in Airline Operations and Financial Performance ii Ratio 5 $ Li 68 70 72 74 76 78 80 82 84 86 88 Year - Strong -i -- Weak -41 -- Total FIGURE 2-3 Debt/equity ratios (book basis)
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72 WINOs OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION TABLE 2-3 DEBT/EQUITY RATIOS BASED ON HOLDING COMPANY DEBT AND AVERAGE MARKET VALUES OF EQUITY Carrier 1985 1986 1987 1988 1989 Strong American 0.73 0.81 1.03 0.92 0.46 Delta 0.47 0.40 0.42 0.51 0.36 Northwest 0.72 1.11 0.61 0.67 NA United 1.53 0.82 0.43 0.99 0.31 USAir 0.87 0.61 1.20 0.92 0.52 Subtotal 0.84 0.73 0.67 0.81 0.40 Weak Continental 3.30 4.05 4.53 10.03 7.51 Pan American 0.66 0.89 1.58 2.41 2.11 Trans World 1.68 3.08 3.14 2.91 NA Subtotal 1.91 2.72 3.40 4.88 5.13 Total 1.10 1.13 1.13 1.41 0.76 NOTE: Average market values of equity are the average of the high and low values of the common stock for the year. NA = not applicable.
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Changes in Airline Operations and Financial Performance 73 Ratio 6 r -- o 1985 1986 1987 1988 1989 Year - Strong - Weak - Total FIGURE 2-4 Debt/equity ratios (holding debt/average market equity basis)
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74 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Percent 25 -15 1955 1960 1965 1970 1975 1980 1985 1989 Year ROE ROI FIGURE 2-5 ROE and ROL for tota' certificated air carriers. year of 1978 and the expansion years of the mid-1960s)
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Changes in Airline Operations and Financial Performance 75 Percent 20i 10 0 -10 -20 -30 -40 -50 68 70 72 74 76 78 80 82 84 86 88 Year - Strong -i -- - Weak FIGURE 2-6 ROE for strong and weak carriers. this period.
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76 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Percent 20 % ' I 1 807'27476 78018121818688 Year - Strong - Weak FIGURE 2-7 ROl for strong and weak carriers. in airline service.
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TABLE 2-4 BOOK VALUE OF STOCKHOLDERS' EQUITY AND HIGH AND LOW MARKET VALUES FOR COMMON EQUITY IN EACH YEAR 1985 1986 1987 1988 1989 American" High 3,080 3,650 3,852 3,235 6,687 Book 1,888 2,140 2,252 2,701 3,118 Low 2,030 2,306 1,573 2,735 3,242 Continental" High 1,522 1,635 2,007 673 938 Book 687 1,003 844 168 (713) Low 609 595 351 349 446 De1ta High 2,524 2,523 3,295 2,716 4,660 Book 1,546 2,170 2,057 2,369 2,902 Low 1,590 1,836 1,571 1,774 2,649 Northwest" High 1,703 1,502 2,212 1,671 3,524 Book 1,142 1,881 1,995 2,122 2,453 Low 979 991 892 1,060 1,204 Pan Americane High 1,236 1,306 892 486 757 Book 269 (168)
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From page 91... ...
78 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION TABLE 2-5 ROE ON AN AVERAGE MARKET VALUE BASIS Carrier 1985 1986 1987 1988 1989 Strong American 12.6 8.4 7.7 15.1 8.5 Delta 10.9 9.2 8.9 15.3 12.9 Northwest 18.6 11.0 9.1 11.9 15.0 United -5.1 -3.2 0.8 28.3 8.3 USAir 11.5 9.3 17.5 16.4 0.1 Subtotal 9.6 6.3 6.8 17.6 9.4 Book 9.7 6.9 8.9 15.7 12.4 Weak Continental 6.6 -10.1 -37.3 -127.4 -122.7 Pan American 3.9 -50.6 -43.6 -29.2 -76.2 Trans World -23.6 -17.1 14.2 30.1 NA Subtotal -2.8 -25.8 -23.8 -29.7 -102.2 Book -6.7 -19.3 -24.6 NA NA Market total 6.6 -0.2 1.7 10.6 1.9 Book total 7.1 3.9 4.9 15.7 12.4 Nom: Average market values of equity are the average of the high and low values of the common stock for the year. NA = not applicable.
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From page 92... ...
Changes in Airline Operations and Financial Performance 79 betas rose as a result of increased indebtedness, which caused the riskiness of airline stocks to rise. In 1988 and 1989, both the equity and asset betas rose sharply.
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From page 93... ...
80 WINDs OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION carriers. On the other hand, the weak performance can be viewed as the necessary shaking out of weak carriers, with the result that the industry will emerge with fewer, stronger carriers that are capable of competing vigorously nationwide.
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From page 94... ...
Changes in Airline Operations and Financial Performance 8 add costs from inefficient structures, excessive risks, or costs of adjustment from bankruptcies and disruptions of service cannot be predicted with the available evidence. It is conceivable that some reduction in the number of carriers will reduce excess capacity in the industry and thereby improve the financial performance of the remaining carriers.
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From page 95... ...
82 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION For example, the large price cuts Eastern made to win back traffic after its strike forced all major competitors on its routes to respond. With Eastern's cessation of service, most carriers immediately announced the end of their matching discount fares.
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From page 96... ...
Changes in Airline Operations and Financial Performance 83 identical for the totals in Table 2-2 and the industry averages in Table 2-1. Investment here includes both current and noncurrent long-term debt and capital leases and net stockholders' equity.
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From page 97... ...
84 WINDs OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Morgan, I
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From page 98... ...
Passenger Fares and Airline Service The economic deregulation that swept through the transportation sector in the mid-1970s to early 1980s stemmed in large part from growing evidence that economic regulation had raised prices and limited the goods and services available to consumers. In the case of the airline industry, the removal of economic (fare and route)
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From page 99... ...
86 WINDS OP CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION demand; and the air traffic controllers' strike in 1981. The impact of these events, coinciding with an unsettled transition toward deregulation (characterized by new entry, below-cost pricing, and numerous airline failures)
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From page 100... ...
Passenger Fares and Airline Service87 number of flight changes en route, airline flown, and fare paid. The O&D survey is particularly useful for estimating the number of passengers flying in individual markets, the market share of each carrier, and the average yield (fare per passenger mile)
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From page 101... ...
TABLE 3-1 SUMMARY OF AIRLINE DATA SOURCES FOR FARE AND FLIGHT INFORMATION Source Years Available Carriers Reporting Relevant Data T-3 (RSPA Form 41) 1972 to present Major and national By quarter, carrier, and city domestic Departures Passengers enplaned T-9 (RSPA Form 41)
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From page 102... ...
Passenger Fares and Airline Service 89 Millions 500 400 300 200 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 8384 85 86 87 88 89 Year -* -- Enplanernents - Passenger Trip8 FIGURE 3-1 National trends in passenger traffic, 1968-1989 (FAA forecasts, DOT O&D survey)
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From page 103... ...
90 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Cents per Mile 20 19 18 17 16 15 14 13 12 11 in 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 Year - Industry Yield - Average Trip Yield FIGURE 3-2 National trends in average real yield, 1968 to 1989 (yields inflated to $1989 using the GNP implicit price deflator) (DOT O&D survey; DOT 1990b)
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From page 104... ...
Passenger Fares and Airline Service 91 - 1977.100 I 1 1 1 VV 80 70 60 20 to- 00 77 78 79 80 81 82 83 84 85 86 87 88 89 Year -i -- SIFL -b -- Average Yield -- GNP Price Deflator FIGURE 3-3 Nominal average yield versus SIFL index and GNP price deflator, 1977 to 1989 (DOT 1990; DOT O&D survey)
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From page 105... ...
92 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION by the SIFL index, declined by about 10 percent, which stimulated further reductions in fares (Figure 3-3)
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From page 106... ...
Passenger Fares and Airline Service 93 Percent of Trips 18 16 J 14 50% 150% I2d II 10 -1 R !
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From page 107... ...
94 Wir.ios OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION in 1979, the first year after passage of the deregulation act (but before the widespread proliferation of low-cost airlines and discount fares) 63 percent of all travelers paid yields within this range, which is indicative of the more uniform fare levels found under the old regulatory system that was being phased out at the time.
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From page 108... ...
Passenger Fares and Airline Service 95 larger number of flights that must be scheduled. Providing this type of schedule flexibility often results in more empty seats that must be paid for by charging higher fares to passengers who demand this type of service.
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From page 109... ...
Percent of Trips 50 40 30 20 50% 150% 10 0 0 1-29 30-49 50-69 70-89 90-109 110-29 130-49 150-69 170+ Percent of Market Average Yield 1979 = 1989 FIGURE 3-5 Yield dispersion for short-haul direct flights, 1979 versus 1989 (zero fares not included in calculation of average yield) [DOT O&D survey (third quarters of 1979 and 1989)
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From page 110... ...
Passenger Fares and Airline Service 97 Average Yield (cent8/mile)
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From page 111... ...
98 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Percent Change 20 15 10 -5 -10 -15 -20 -25 -30 -35 -40 1 2 3 4 5 6 7 8 910 14 18 22 28 30 34 38 42 48 50 Length of Trip (hundred8 of miles) FIGURE 3-8 Percent change in average real yield by trip distance, 1979 to 1989 [DOT O&D survey (third quarters of 1979 and 1989)
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From page 112... ...
Percent Change 70 60 50 40 30 20 10 0 1-499 500-749 750-999 1000-1499 1500-1999 2000. Market Dt8tance (mile8)
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From page 113... ...
100 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION 800. 400-799 200-399 100-199 50-99 1-49 Pa88enger8 per Day (Round-Trip Market8)
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From page 114... ...
Passenger Fares and Airline Service 101 TABLE 3-2 CHANGE IN AVERAGE REAL YIELD BY MARKET DISTANCE AND DENSITY, 1979 TO 1989 Change in Real Yield (%) by Market Distance (miles)
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From page 115... ...
102 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION TABLE 3-3 CHANGE IN AVERAGE REAL FARES BY MARKET DISTANCE AND DENSITY, 1979 TO 1989 Change in Average Real Fare (in dollars) by Market Distance (miles)
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From page 116... ...
Passenger Fares and Airline Service 103 carriers greatly enlarged their networks shortly after deregulation, and many new firms entered the marketplace, creating a competitive environment that produced much lower fares during the mid-1980s. Since 1987, however, virtually all these new entrants have either failed or merged with the larger incumbent carriers, whereas passenger fares have coincidentally started to rise.
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From page 117... ...
TABLE 3-4 AVERAGE YIELD BY MARKET DISTANCE, DENSITY, AND COMPETITION FOR CITY-PAIR SAMPLE, 1988- 1989 Market Distance (miles) 100-499 500-999 1,000-1,499 1,500-1,999 2,000 + Passengers Number of Yield (cents Sample Yield (cents Sample Yield (cents Sample Yield (cents Sample Yield (cents Sample Per Daya Competitors per mile)
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From page 118... ...
Passenger Fares and Airline Service 105 more carriers) , whereas 45 percent (92 of 205)
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From page 119... ...
TABLE 3-5 SHARE OF HIGHER-DENSITY CITY PAIRS SAMPLED WITH THREE OR MORE EFFECTIVE COMPETITORS, 1979, 1984, AND 1988-1989 Passengers per Day° Year Percentage of Markets by Distance (miles) 100-499 500-999 1,000-1,499 1,500 -- I ,999 2,000 + Total 800+ 1979 27 (8/30)
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From page 120... ...
Passenger Fares and Airline Service 107 In retrospect, these findings are not surprising. In 1979 -- the year following deregulation -- only a handful of new firms had fully entered the airline business, and most incumbent carriers were just starting to expand their network of routes.
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From page 121... ...
108 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Previous Studies of Hub Pricing The issues associated with hub dominance have been examined in several studies. For example, Levine (1987)
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From page 122... ...
Passenger Fares and Airline Service 109 of most hubs) , and short-distance travel is usually more costly per passenger mile to provide.
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From page 123... ...
110 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION in the metropolitan area. This distinction provides an alternative approach to the DOT study, which emphasized carrier dominance at a single airport market instead of the entire metropolitan market, and the GAO study, which excluded several major cities with more than one airport from its sample of markets.
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From page 124... ...
Passenger Fares and Airline Service TABLE 3-6 SHARE OF CITY PAIRS SAMPLED WITH ONLY ONE EFFECTIVE COMPETITOR BY MARKET DISTANCE, HUBS VERSUS NONHUBS, 1988-1989 Distance (miles) Percentage of City Pairs by Market Type Concentrated Hub Unconcentrated Hub Nonhub Total 100-499 65 (4 1/63)
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From page 125... ...
112 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION TABLE 3-7 DIFFERENCE IN AVERAGE YIELD IN CONCENTRATED-HUB CITY PAIRS VERSUS ALL OTHERS, 1988-1989 Difference in Yield (%) by Distance (miles)
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From page 126... ...
Passenger Fares and Airline Service 113 TABLE 3-8 DIFFERENCE IN AVERAGE YIELD IN CONCENTRATED-HUB CITY PAIRS VERSUS UNCONCENTRATED-HUB CITY PAIRS, 1988-1989 Difference in Yield (%) by Distance (miles)
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From page 127... ...
114 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION TABLE 3-to AVERAGE YIELD BY MARKET TYPE AND PASSENGER TRIP LENGTH, 1988 Average Passenger Trip Length (One Way) (miles)
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From page 128... ...
Passenger Fares and Airline Service 115 TABLE 3-11 AVERAGE YIELD AND PASSENGER TRIP LENGTH BY MARKET TYPE, 1988 Average Average Passenger Yield Trip Length Sample (cents per (One Way) Market Type Size mile)
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From page 129... ...
Share of Local Traffic by Hub Carrier 80% 70% 60% 50% 40% Yield Differential 30% 25% 20% 15% 10% 30% I1 1 1 1 1 I 15% 87/3 87/4 88/1 88/2 88/3 88/4 89/1 89/2 89/3 89/4 90/1 90/2 Year/Quarter -* -- Concentrated-Hub Market Share -- Unconcentrated-Hub Market Share Concentrated-Hub Yield Differential Unconcentrated-Hub Yield Differential FIGURE 3-14 Market concentration and yield differential at hubs (compared with nonhub sample)
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From page 130... ...
Passenger Fares and A jr/inc Service 117 service than travelers in most nonhubs; for instance, travelers in hub cities fly direct on nearly 75 percent of their trips, whereas passengers in nonhubs do so only 60 percent of the time (Table 3-12)
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From page 131... ...
118 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION TABLE 3-13 MARKET DATA FOR LARGE VERSUS MEDIUM HUBS, 1988 Change in Sample Average Yield Average Trip Departures (%) Hub Size Size (cents per mile)
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From page 132... ...
TABLE 3-14 MARKET DATA FOR LARGE VERSUS MEDIUM CITIES BY HUB TYPES, 1988 Average City Size Average Oie-Way Enplanements Share of Local Departures and Market Sample Average Yield Trip Length per Passenger Passengers per Thousand Type Size (cents per mile) (miles)
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From page 133... ...
120 WINOs OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION and indirectly through cross subsidies from profits earned on moderatedensity, monopoly routes. In many ways, the local-service airlines came to resemble the larger trunk airlines they were intended to supplement.
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From page 134... ...
Passenger Fares and Airline Service 121 TABLE 3-15 SHARE OF TOTAL PASSENGER ENPLANEMENTS ON COMMUTER CARRIERS BY CITY SIZE, 1977 AND 1988 Percent Share of Enplanements City Size 1977 1988 Large 1.9 2.8 Medium 1.2 3.6 Small 2.0 10.0 Rural/small 8.0 51.1 NOTE: Large = cities with 2,000,000 or more enplanements in 1977; medium = cities with 500,000 to 2,000,000 enplanements in 1977; small = cities with 100,000 to 500,000 enplanements in 1977; rural/small = cities with fewer than 100,000 enplanements in 1977. SOURCE: DOT RSPA Forms 41 and 298-C.
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From page 135... ...
122 WINOs OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION TABLE 3-16 SHARE OF TOTAL PASSENGER ENPLANEMENTS BY CITY SIZE, 1977 AND 1988 Percent Share of Enplanements City Size 1977 1988 Large 67 69 Medium 16 20 Small 10 7 Rural/small 9 4 Nom: Large = cities with 2,000,000 or more enplanements in 1977; medium = cities with 500,000 to 2,000,000 enplanements in 1977; small = cities with 100,000 to 500,000 enplanements in 1977; rural/small = cities with fewer than 100,000 enplanements in 1977. Columns may not sum to 100 because of rounding errors.
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From page 136... ...
Passenger Fares and Airline Service 123 TABLE 3-17 CHANGE IN PASSENGER ENPLANEMENTS BY CARRIER TYPE AND CITY SIZE, 1977 TO 1988 Percent Change in Enplanements City Size Large Carriers Commuters Total Large +93 +181 . +94 Medium +131 +574 +132 Small +25 +569 +37 Rural/small -- 59 +490 -- 15 Nore: Large = cities with 2,000,000 or more enplanements in 1977; medium = cities with 500,000 to 2,000,000 enplanements in 1977; small = cities with 100,000 to 500,000 enplanements in 1977; rural/small = cities with fewer than 100,000 enplanements in 1977.
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From page 137... ...
124 WINDS OP CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Median change in enplanements in sample Formerly Subsidized Unsubsidized (62/100 communities (46170 communities lost enplanements) lost enplanements)
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From page 138... ...
Passenger Fares and Airline Service 125 Median change in enpianements in sample 25% 20% 15% 10% 5% 0% -5% -10% Within 50-mi radius Within 100-mi radius (55/100 communities (70/100 communities lost enpianements) gained enpianements)
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From page 139... ...
TABLE 3-18 CHANGE IN TOTAL ENPLANEMENTS IN STATES THAT LOST LARGE-CARRIER SERVICE, 1977 TO 1988 State 1977 Enplanements Large Carriers Commuters Total 1988 Enplanements Large Carriers Commuters Total Percent Change in Total Enplanements Iowa 1,132,080 3,551 1,135,631 1,124,340 244,067 1,368,407 +20 Kansas 648,289 0 648,289 602,128 99,493 701,621 +8 Mississippi 601,954 13,321 615,275 491,206 120,750 611,956 0 Montana 787,283 0 787,283 680,949 131,281 812,230 +3 North Dakota 474,999 0 474,999 466,746 33,474 500,220 +5 South Dakota 481,932 0 481,932 362,520 87,168 449,688 -7 West Virginia 509,754 66,300 576,054 310,517 202,590 513,107 - 12 Wyoming 272,981 13,586 286,567 205,419 111,909 317,328 +11 SOURCE: DOT RSPA Forms 41 and 298-C
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From page 140... ...
Passenger Fares and Airline Service 127 Median change in departures in sample 100% 80% 60% 40% 20% 0% In small community Within 50-mi radius Within 100-mi radius (61 /1 00 gained (63/1 00 gained (91/1 00 gained departures) departures)
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From page 141... ...
128 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Dakota, and New York City) , in which virtually all trips were likely to have involved a large carrier for at least part of the journey.
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From page 142... ...
Passenger Fares and Airline Service 129 SUMMARY General Trends Deregulation brought changes to the airline industry that have produced substantial benefits to air travelers. More travelers are flying now than ever before: the number of annual passenger trips (which excludes connecting enplanements)
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From page 143... ...
130 WINDS or CFIANGE: DoMEsTIc AIR TRANSPORT SINCE DEREGULATION markets. In 1979 only 20 percent of markets had three or more competing carriers.
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From page 144... ...
Passenger Fares and Airline Service 131 major-carrier enplanements fell by about 60 percent in cities with fewer than 100,000 enplanements per year. At the same time, however, smaller commuter carriers picked up most of the slack, growing from virtual nonexistence to become the principal provider of most small-community service.
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From page 145... ...
132 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION earlier in this chapter, suggest that markets with two competing carriers will have many characteristics similar to those of monopoly, or single-carrier, markets; therefore, hubs dominated by either one or two carriers were defined as concentrated for the purposes of these analyses. It is possible that a higher proportion of lower market densities in concentratedhub city pairs could have contributed to the larger percentage of one-carrier markets; however, in the city-pair sample, only 42 percent (95 of 226)
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From page 146... ...
Passenger Fares and Airline Service 133 ATA.
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From page 147... ...
rd Barriers to Competition One expectation of deregulation was that allowing low-cost competitors to enter the industry would bring down consumer costs and make the air transportation system more competitive and efficient (MacAvoy and Snow 1977)
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From page 148... ...
Barriers to Competition135 a paradox. Many impediments result from management innovations or marketplace conditions that also serve consumer interests.
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From page 149... ...
136 WINOs OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION substantial levels of service, which at a minimum include dozens of flights a day. It must confront the problems of luring frequent fliers away from an incumbent that offers them more opportunities to earn mileage and the fact that travel agents have preferred-carrier relationships with the incumbent.
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From page 150... ...
Barriers to Competition 137 oped well before deregulation and were financed with 15- to 30-year bonds, which were guaranteed by the airport through long-term leases with the airline or airlines serving the airport. Whereas some of the leases have expired and have been renegotiated, others have several more years to run.
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From page 151... ...
138 WiNos OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION point of a potential new entrant, the short-term prospects of assembling a sufficient number of gates at two or three of these major airports (at times of the day that provide for reasonable connections with other flights) can be daunting.
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From page 152... ...
Barriers to Competition 139 wishes to serve such an airport, it must sublease facilities from the incumbent airline. If the new entrant is a potential competitor, the incumbent is in a position to extract monopoly rents.
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From page 153... ...
140 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION The Air Transport Association of America (ATA) sharply disputes the claim that current airport capacity limits or lease clauses are barriers to competition.
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From page 154... ...
Barriers to Competition 141 'We want you to make a $500 million or $600 million capital investment,' I'm not going to do that in exchange for a 30-day lease" (Airport Magazine, 1989)
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From page 155... ...
142 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION airline profit strategies have concluded that airlines use hubs to shield some of their output from competition (Oum and Tretheway 1990)
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From page 156... ...
Barriers to Competition 143 At Chicago O'Hare, United and American airlines increased their control over the proportion of slots from 65 to 75 percent between 1986 and 1988. Slots at the other slot-controlled airports are much more evenly distributed among the major carriers.
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From page 157... ...
144 WINDs OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION with "hush kits." Hush kits cost from $1 to 3 million per aircraft and some impose payload penalties (FAA 1989)
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From page 158... ...
Barriers to Competition 145 About 2,300 Stage 2 aircraft are currently used by U.S. airlines, accounting for about 60 percent of the total fleet (FAA 1989)
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From page 159... ...
146 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION cost, and convenience in one city-pair market, he or she forms an impression about that carrier's service in other markets. Economies of scope also occur in the generation of information through CRSs, reward structures for travel agents, incentives built into frequent flier programs, and service patterns made possible by hub-and-spoke networks.
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From page 160... ...
Barriers to Competition 147 petitors. In response, the U.S.
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From page 161... ...
148 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINcE DEREGULATION Because almost all carriers list their flights in all CRSs, it would appear that carriers that own a CRS would not want to overprice booking fees to avoid having to pay similarly high prices when their flights are booked through other systems. For American and United airlines, however, this is not the case; bookings on their systems, Sabre and Apollo, account for 70 percent of all booking fee revenues (DOT 1990c, 57)
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From page 162... ...
Barriers to Competition 149 Whatever the cause, halo effects appear to "exert a large influence on travel agency booking patterns" (DOT 1988)
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From page 163... ...
150 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Force on Competition in the U.S. Domestic Airline Industry reviewed the CRS industry and previous DOT studies and concluded that whereas entry into the industry is not precluded, the scale of investment required to compete with existing CRSs and time needed to build up to that scale make entry unlikely (DOT 1990c, 50)
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From page 164... ...
Barriers to Competition 151 TABLE 4-I COMPUTER RESERVATION SYSTEMS (DOT 1990c, Table 4.1; Airline Economics, Inc.
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From page 165... ...
152 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION CRSs. These carriers (except Southwest, which does not participate)
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From page 166... ...
Barriers to Competition 153 is becoming somewhat more concentrated; firms with revenues of $5 million or more grew from 24 to 33 percent of the industry between 1983 and 1987 (DOT 1990c, 11)
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From page 167... ...
154 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Frequent Flier Programs Frequent flier programs have grown in popularity since American Airlines introduced its program in 1981, and every major carrier except Southwest offers one. The DOT, on the basis of conversations with airline executives, estimated that roughly 20 to 25 percent of airline passengers accrue frequent flier mileage (DOT 1990c, 31)
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From page 168... ...
Barriers to Competition 155 naturally have the most attractive systems because they can offer the traveler more trip choices with which to earn mileage and more exotic vacation possibilities as rewards. Cooperative arrangements between small carriers, who are sometimes competitors, tend to be short-lived.
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From page 169... ...
156 WINDS OF CHANCE: DOMESTIC AIR TRANSPORT SINcE DEREGULATION Code-sharing agreements became widespread by 1985, and the relationships between the commuters and major carriers became so important that many commuters were acquired in whole or in part by their affiliates (FAA 1989)
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From page 170... ...
Barriers to Competition 157 omies of scope. Large carriers can exploit advantages of size even when these advantages do not confer lower costs through economies of scale (Andrandi, etal.
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From page 171... ...
158 WiNos OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION service by reducing transaction costs, and apparently accomplished this end without reducing competition. For example, Pan American was allowed to merge with National, and North Central with Southern to become Republic, which then absorbed Hughes Air West.
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From page 172... ...
Barriers to Competition 159 level of competition. Although of the number of firms that are required to ensure adequate competition necessarily involves some speculation, the main criterion for the adequacy of competition nationwide is the level of competition for passenger flows between competing hub systems.
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From page 173... ...
160 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION in Chapter 3, markets dominated by single carriers account for a relatively small share of total trips. A regulatory or legislative remedy for this problem that would not simultaneously undermine the service benefits and the competition in longer distance markets that hub networks provide is not apparent.
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From page 174... ...
Barriers to Competition 161 return to "enlightened" regulation. Neither of these proposals appears promising.
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From page 175... ...
162 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION through economies of scope appear to be contributing to the lack of entry into the airline industry. Corrections for the shortcomings in the competitiveness of deregulated air transportation markets, however, can be difficult to devise.
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From page 176... ...
Barriers to Competition 163 acquisitions, however, may improve competition. Because the largest consumer benefits occur in markets with three or more carriers, the effect that mergers or major acquisitions would have on the ability of three or more carriers to compete in over-hub traffic would serve as a test of the anticompetitive features of proposed mergers and acquisitions.
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From page 177... ...
164 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Bain, J
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From page 178... ...
Barriers to Competition 165 Oum, T., and M Tretheway.
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From page 179... ...
PART HI Effects and Responses in the Public Domain
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From page 180... ...
5 Commercial Aviation Safety Nearly every writer on aviation safety since 1978 has pointed out that the safety of the traveling public was not deregulated. Indeed, the Airline Deregulation Act of 1978 (Public Law 95-504, Sec.
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From page 181... ...
170 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Fatal Accident Rate 0.4 0.3 0.2 0.1 19501955 1960 1965 1970 1975 1980 1985 1990 Year - All Scheduled - Pa8senger Service FIGURE 5-1 Safety record of U.S. airlines, fatal accidents per 100,000 departures, Part 121 scheduled domestic service (data from NTSB and FAA)
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From page 182... ...
Commercial A viation Safety 171 in which individuals were killed; three of these accidents involved allcargo carriers. It is possible to separate the accident and fatal-accident trend involving only regularly scheduled passenger trips from 1962 onward.2 This trend follows the overall Part 121 trend fairly closely but does not increase as sharply in 1989.
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From page 183... ...
172 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Accidents and Fatalities 400 300 200 100 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Year Total Accidents M Fatalities FIGURE 5-2 Accidents and fatalities, Part 121 scheduled domestic service (data from NTSB)
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From page 184... ...
60 50 40 30 20 10 Accidents 70 Commercial A viation Safety 173 1978 1980 1982 1984 1986 1988 1990 Year Accidents M FataIitie FIGURE 5-3 Accidents and fatalities, Part 135 scheduled service (data from NTSB)
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From page 185... ...
174 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Accident Rate 0.5 0.1 1978 1980 1982 1984 1986 1988 1990 Year - Total Accident Rate - Fatal Accident Rate FIGURE 5-4 Accidents per 100,000 departures, Part 121 carriers, Scheduled service (data from NTSB)
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From page 186... ...
Commercial Aviation Safety 175 trips, have increasingly relied on turboprop aircraft instead of piston aircraft. Turboprop engines, which operate with turbines similar to those in jet engines, have fewer parts, operate with greater reliability, and are easier to maintain than piston engines.
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From page 187... ...
176 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION tinguish from random fluctuations, and (b) carrier operations are but one of the major factors that affect safety.
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From page 188... ...
Commercial Aviation Safety 177 A change in any one of these conditions might have been sufficient to avert the crash. In short, accidents and safety-related incidents are complex events in which primary cause is often difficult to determine.
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From page 189... ...
178 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION serious service difficulty reports (SDRs) , which can be interpreted as indicators of maintenance effectiveness.
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From page 190... ...
Commercial Aviation Safety 179 concern, no explanation is given in their work for the remarkable gain in safety operation of the other carriers during the same period. If deregulation is somehow responsible for allowing new-entrant carriers, who provide about 5 percent of departures, to operate at a higher risk, then deregulation must also be given credit for the almost fivefold reduction in risk of the established carriers, who provide 95 percent of departures.
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From page 191... ...
180 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION factors, without necessarily determining the single most important one. Because pilots are involved in virtually all incidents, pilot error almost inevitably is cited as a contributing cause, and when all the causes are summed, pilot error is the most frequently cited.
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From page 192... ...
Commercial Aviation Safety 181 played a major part fell significantly from 1979 to 1985 compared with the number from 1970 to 1978. In contrast, the accident rate for new entrants, though not significantly higher overall, was significantly higher than the rate for previously established airlines for accidents in which pilot error played a major role (Oster and Zorn 1987)
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From page 193... ...
182 WINDs OP CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION on commuter carriers replaces automobile travel, which, in general, is a much higher risk.5 If one compares the average risk of fatality in commuter aircraft with that of automobile trips, data for the top 50 commuter airlines indicate that safety is improved if travel shifts from automobiles to commuter aircraft (Oster et al. in press)
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From page 194... ...
Commercial A viation Safety 183 1988 the Aviation Safety Commission observed that the FAA's own data on the risk of runway accidents indicated a growing problem. The commission urged a review of runway signage, directional indicators, and taxiway and intersection markings.
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From page 195... ...
184 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION The maintenance violations at Eastern would appear to indicate that deregulation may have contributed to reduced safety at this airline because of Eastern's attempts to cut corners on maintenance. Deregulation certainly influenced Eastern's efforts to cut costs, but its effects must be understood in the larger context.
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From page 196... ...
11-15 years, 515 aircraft 16-20 yeal 742 aircr 6-10 years, 74 Commercial Aviation Safety 185 ) -5 years, 07 aircraft ore than 20 years, 960 aircraft FIGURE 5-6 Age of U.S.
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From page 197... ...
186 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINcE DEREGULATION TABLE 5-I DESIGN GOALS OF U.S.DESIGNED TRANSPORT JET AIRCRAFT Aircraft Life Hours Life Flights DC-8 50,000 25,000 DC-9 30,000 40,000 DC-10 60,000 42,000 L-10I1 60,000 36,000 707 60,000 30,000 727 60,000 60,000 737 45,000 75,000 747 60,000 20,000 757 50,000 50,000 767 50,000 50,000 fleets were designed, tested, and FAA-certified to this rule without a specified life limit. The service experience acquired by this fleet by the mid- to late 1970s had generally shown a satisfactory level of structural safety and provided many documented instances of the validity of the failsafe concept.
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From page 198... ...
Commercial Aviation Safety 187 properly, with use as measured by flight hours or flight cycles or both. Fatigue damage to the fuselage is caused primarily by the repeated application of the pressure cycle that occurs during every flight.
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From page 199... ...
188 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION portion of the fuselage. The structural condition previously described, wherein widespread cracking in tear straps and adjacent bays occurs is called multiple site damage (MSD)
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From page 200... ...
Commercial A viation Safety 189 the onset of MSD in these first 291 aircraft may occur at 30,000 flights. Had they not disbonded the splices clearly would not have been the sites for widespread cracking within the projected operational lifetime.
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From page 201... ...
90 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION major airline fleet includes far fewer types of aircraft, manufactured by a handful of companies, and flown by only a few carriers. Many commuter fleets are very small.
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From page 202... ...
Commercial Aviation Safety 191 maintenance and replacement schedules are carried out (Aviation Week and Space Technology 1 990a)
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From page 203... ...
192 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION which are noted in the next section, safety-related data can be used (or improved) to reduce risk in the commercial aviation system.
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From page 204... ...
Commercial Aviation Safety 193 mation is available on the experience and qualifications of the current population of pilots. Extensive detail is available on pilots involved in accidents, but little empirical information with which to make comparisons is available on the general population of pilots.
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From page 205... ...
194 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION be at required settings. DFDR programs provide measures of how closely the crews actually perform to operating standards.
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From page 206... ...
Co,nmercial A viation Safety 195 a DFDR program. The legislation would be patterned on the law protecting cockpit voice recorders from use in civil legal actions.
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From page 207... ...
196 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Aircraft Performance and Maintenance Modem aircraft are increasingly sophisticated and reliable. Nevertheless, since 1979 about one-fifth of accidents involving scheduled flights by Part 121 carriers and about one-third of accidents involving scheduled flights by Part 135 (commuter)
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From page 208... ...
Commercial Aviation Safely 197 SUMMARY Commercial aviation safety has improved during deregulation, roughly in line with long-term trends. Especially noteworthy is the complete absence of fatal accidents involving Part 121 air carriers in regularly scheduled passenger service in two years since 1978 and another year in which only one person was killed.
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From page 209... ...
198 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION analysis and reporting. Whether these data will ultimately be useful as safety indicators, however, remains in doubt.
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From page 210... ...
Commercial A viation Safety 199 meaning in structural analysis: Margin of safety = capability - requirement! requirement.
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From page 212... ...
Commercial A via/ion Safety 201 Murphey, E
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From page 213... ...
31 Airport and Airway Capacity Limits The performance of commercial airlines since deregulation is inter-related with the capacity of airports and the relevant airspace to accommodate the demand for air travel. Air carriers have attempted to serve the changing and accelerating consumer demand for air travel during deregulation by expanding the number of aircraft, increasing aircraft use and flight frequencies, and realigning route networks to take advantage of the service efficiencies made possible by hub-and-spoke networks.
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From page 214... ...
Airport and Airway Capacity Limits 203 summarized in this chapter. (The causes for these problems are taken up in Chapter 7)
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From page 215... ...
TABLE 6-I TOTAL OPERATIONS AT AIRPORTS THAT HAVE FAA TOWERS BY AIRPORT SIZE AND USER TYPE, 1978 AND 1988 Size° and Type of User Operations 1978 1988 Percent of Total by User Type 1978 1988 Percent Change, 1978-1988 Large (n=27) Jet carrier 5,709,435 7,216,905 57 57 26 Commuter/Air Taxi 1,172,232 2,405,059 31 29 105 GA 2,027,962 1,262,116 7 6 -- 38 Military 101,796 109,023 8 8 7 Localt 259,362 73,965 1 I -- 71 Subtotal 9,270,787 11,067,068 19 Medium (n36)
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From page 216... ...
Airport and Airway Capacity Li,nits 205 35 30 25 20 15 10 Millions of Operations Large Medium Small Smallest Jet Carrier Commuter/Air Taxi Generai Aviation Military FIGURE 6-I Air traffic at airports that have FAA towers, 1988 (data from FAA)
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From page 217... ...
206 WINDs OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION 4.) The amount of GA traffic declined at medium-sized airports as well but was more in line with national trends.
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From page 218... ...
Airport and Airway Capacity Limits 207 Total Number 80 1 234567891011121 23456789101112 Hours of the Day - 1980 -i -- 1988 FIGURE 6-2 Raleigh-Durham average daily operations, August 1980 and 1988 (data from OAG data tapes)
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From page 219... ...
208 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Total Number 250 200 150 100 50 04 23456789101112123456789101112 Hour8 of the Day - 1980 -6- 1988 FIGURE 6-3 Atlanta Hartsfield average daily operations, August 1980 and 1988 (data from OAG data tapes)
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From page 220... ...
Airport and Airway Capacity Limits 209 Total Number 140 120 100 80 60 40 20 0 ••••I....___ -.•7••.... ' I I I I 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 Hours of the Day -1980 __11_ 1988 FIGURE 6-4 Boston Logan average daily operations, August 1980 and 1988 (data from OAG data files)
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From page 221... ...
210 WINDs OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION is too simplistic. Hub systems allow carriers to more closely serve consumer demand, both in terms of price and frequency, than do the linear route systems they replaced.
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From page 222... ...
Airport and Airway Capacity Limits 211 DEMAND FIGURE 6-6 Conceptual relationship of capacity, demand, and delay. between optimal and actual travel time.
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From page 223... ...
212 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION ATL BOS ORD CLE DFW DEN DTW FLL IAH MCI LAS LAX MIA MSP LGA JFK EWR PIT PHL STI SF0 DCA - 1988 1989 20 40 60 80 100 120 140 FIGURE 6-7 Delays per 1,000 operations at 22 major airports, 1988-1989 (see Appendix C for airport codes)
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From page 224... ...
Airport and Airway Capacity Limits 213 airports, seven are hubs and four are primarily O&D airports.
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From page 225... ...
TABLE 6-3 DELAYS AT SELECTED AIRPORTS REPORTED TO SDRS, 1976-1988 Location Identifiction City Total Operations (thousands) 1976 1988 Percent Change Average Delay (minutes per operation)
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From page 226... ...
Airport and Airway Capacity Limits 215 TABLE 6-3 (continued) Total Average Delay Operations (minutes per Location (thousands)
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From page 227... ...
216 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION TABLE 6-4 HISTORIC AND PROJECTED AIRCRAFT OPERATIONS (FAA 1989a) Operations by Year Average Annual (millions)
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From page 228... ...
AIRPORTS EXPECTED TO EXCEED 20,000 HOURS OF ANNUAL DELAYS IN 1997 BY REGION Area Airport Northeast Boston Logan New York City: Kennedy, LaGuardia, Newark Pittsburgh Philadelphia South Washington: National, Dulles Charlotte Nashville Memphis Atlanta Orlando Miami Dallas -- Fort Worth Houston: Hobby and Houston Intercontinental Midwest Cleveland Columbus Cincinnati Detroit Chicago O'Hare St. Louis Minneapolis West Salt Lake City Las Vegas Phoenix Seattle-Tacoma San Francisco San Jose Los Angeles: Los Angeles International and Ontario Honolulu
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From page 229... ...
218 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Million8 35 30 25 20 15 10 Actual Projected '1 1970 1975 1980 1985 1990 1995 2000 Year - Air Carrier -- - Air Taxi/Commuter - General Aviation FIGURE 6-8 Trends in aircraft operations and FAA forecasts for the year 2000 (excluding local operations)
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From page 230... ...
TABLE 6-5 FAA AVIATION FORECASTS COMPARED WITH ACTUAL ACTIVITY (FAA 1978-1980, 1990a) Itinerant Operations Commercial Air Taxi!
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From page 231... ...
220 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION some cases because of limited space, but in most cases because of community opposition to noise. Given the difficulty of expanding supply at congested airports, more emphasis will be needed on finding ways to use existing airports more efficiently and encouraging use of currently underused airports with excess capacity.
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From page 232... ...
Airport and Airway Capacity Limits 221 because of community opposition to additional noise (Del Balzo 1990)
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From page 233... ...
222 WINDS OF CHANGE: DOMESTiC AIR TRANSPORT SINCE DEREGULATION One alternative to adding runway capacity is to modify the ATC rules governing approach procedures during inclement weather. The benefits of such modifications would be quite substantial and could drastically reduce delay during poor weather.
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From page 234... ...
Airport and Airway Capacity Limits 223 program (FAA 1989d)
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From page 235... ...
224 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION traffic for the New York area, for example, indicates that in inclement weather, curved approaches could allow from 3 to 20 additional landings per hour (depending on weather conditions) (Aviation Week and Space Technology 1990)
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From page 236... ...
Airport and Airway Capacity Limits 225 increased rate of departures from New York increased delays at Philadelphia because one of the departure paths intersects the Philadelphia airspace, and the north-south traffic along the East Coast (except traffic to and from New York) was delayed because flights had to be routed on a wider path around the New York area.
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From page 237... ...
226 WINDS OF CHANCE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION calculated based on the weight of the aircraft, because the weight of the aircraft approximates the cost of design and construction imposed by users. These fees, however, do not reflect the opportunity cost of using the airport during periods of peak demand.
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From page 238... ...
Airport and Airway Capacity Limits 227 the fee should be allocated on the basis of use of the airport facilities, with an incremental additional cost for weight (Massport 1987)
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From page 239... ...
228 WINDs OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION stacles. Federal aid to airports has long been conditioned on an "open access" basis that prohibits airports from discriminating against classes of users.
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From page 240... ...
Airport and Airway Capacity Limits 229 a much larger fee than the commuter. The effect the fee would have on passenger preferences would depend in large part on the size of the fee.
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From page 241... ...
230 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION next builds on this approach and incorporates features to deal with some of the issues raised previously. One Approach to Congestion Pricing The first step in such an approach would be to define the operational capacity of the airport through an engineering study or based on historic use (a process most airports are already engaged in for other reasons)
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From page 242... ...
Airport and Airway Capacity Limits 231 example of a congestion pricing proposal indicates that it is possible to imagine solutions to many of the potential impediments to congestion pricing. Whether this or other proposals for congestion pricing would actually work in practice deserves to be tested.
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From page 243... ...
232 WINDs OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION year, which represents about a 10 percent expansion of the combined capacity at Newark, LaGuardia, and Kennedy. (Islip has fairly restrictive noise limitations, however.)
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From page 244... ...
Airport and Airway Capacity Limits 233 for many years has supported funding for reliever airports in the hopes of separating GA and commercial traffic, both for efficiency and safety. Most of the funding for GA airports (75 to 80 percent)
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From page 245... ...
234 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION ropolitan areas to alleviate this shortage does not appear promising in the near term. Some efforts are under way to expand capacity.
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From page 246... ...
Airport and Airway Capacity Limits 235 pricing for peak-hour use of congested airports. One of the potential disadvantages of congestion pricing is that the revenues earned may not be reinvested to expand capacity.
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From page 247... ...
236 WINDS or CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION DOT.
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From page 248... ...
Airport and Airway Capacity Limits 237 OTA.
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From page 249... ...
7 Constraints on the Performance of the Federal Aviation Administration From the discussion in Chapters 5 and 6 it is apparent that some safety and capacity issues are affected by the performance of the Federal Aviation Administration (FAA)
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From page 250... ...
Constraints on the Performance of the FAA239 During the mid-1980s some critics became skeptical that the FAA, operating under constraints such as the ones mentioned above, which are typical of federal agencies, would be able to respond quickly enough to the demands being placed on it by a rapidly growing and evolving aviation system. The Air Transport Association of America commissioned a study of the FAA's ATC service by the National Academy of Public Administration (NAPA)
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From page 251... ...
240 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION FINANCING Appropriations Despite the austerity in the federal budget during the last decade; the FAA's overall budget appropriations have increased in current dollars almost every year since 1971 (Table 7-1)
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From page 252... ...
TABLE 7-1 HISTORY OF FAA APPROPRIATIONS Year Airport Improvement Program Facilities and Equipment Research, Engineering, and Development Trust Fund Operations and Maintenance Trust Fund° Total General Tax Revenue Operations and Maintenance Total FAA" Appropriations 1971 260 48 24 34 366 1,223 1,589 1972 295 302 63 989 1,649 252 1,901 1973 295 303 66 0 664 1,098 1,762 1974 300 250 62 0 612 1,322 1,934 1975 355 227 58 0 640 1,438 2,078 1976 441 246 85 0 772 2,031 2,803 1977 545 200 74 250 1,069 1,530 2,599 1978 555 200 81 275 1,111 1,659 2,770 1979 629 291 - 75 300 1,295 1,834 3,129 1980 640 293 75 325 1,333 1,899 3,232 1981 450 350 85 525 1,410 1,882 3,292 1982 450 261 72 810 1,593 1,538 3,131 1983 804 625 103 1,277 2,809 1,466 4,275 1984 800 750 263 0 1,813 2,644 4,457 1985 925 1,358 265 1,110 3,658 1,649 5,307 1986 885 895 237 427 2,444 2,381 4,825 1987 1,025 805 142 621 2,593 2,361 4,954 1988 1,269 1,108 153 826 3,356 2,368 5,724 1989 1,400 1,384 160 471 3,415 2,976 6,391 1990 1,425 1,721 170 807 4,123 3,017 7,140 1991 1,500 2,500 190 2,846 7,036 1,242 8,278 (requested) NoTE: Data were provided by FAA and are in millions of current dollars.
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From page 253... ...
242 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION BiIIion8 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 Year - Airport Improvement Program -- e -- Operations and Maintenance -- 4 -- Facllftles and EquIpment -- -- Total -- 4' -- Research, Engineering, and Development FIGURE 7-1 FAA appropriations in constant 1982 dollars, 1971-1989.
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From page 254... ...
Constrainis on the Performance of the FAA 243 FAA's investment in developing the NAS Plan and related technology. Throughout much of deregulation, funding for R&D has remained fairly constant, if not below historic levels.
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From page 255... ...
244 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION changes, a considerable share of the FAA's budget (25 percent) will continue to be dependent on general tax revenues.
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From page 256... ...
Constraints on the Performance of the FAA 245 task of hiring and training several thousand persons to replace the fired controllers and has made efforts to improve communications and relations between managers and employees. In 1980, before the strike, the FAA had about 16,250 controllers, of whom about 81 percent (about 13,200)
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From page 257... ...
246 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION had fewer FPLs in part because of the time it takes to recruit, hire, and train an air traffic controller. It takes about 3 to 5 years for a controller to reach the FPL designation once accepted into the training program, but few applicants make it to the FAA Academy (GAO 1988b)
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From page 258... ...
Constraints on the Performance of the FAA 247 Rigidities of Civil Service Pay Part of the problem in high-cost areas is that the FAA has been unable, under civil service regulations, to pay sufficient wages to attract and retain employees.3 Given the approximate equality in pay across the nation, controllers have naturally wanted to move to less stressful areas where the cost of living is lower and the pay is roughly the same. Congress has responded to this problem by authorizing an experimental program to pay controllers and some technicians wage differentials of up to 20 percent to attract them to high-cost cities that have staffing shortages.
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From page 259... ...
248 WiNos OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION classified as FPL)
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From page 260... ...
Constraints on the Performance of the FAA 249 Total No. in 1990 2500 2000 1500 1000 500 Le88 than 10 10-19 20-29 30.
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From page 261... ...
250 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Thus, the number of actual retirements could be a greater proportion of those eligible than estimated in Figure 7-2. Although the FAA was aware of the pending staff shortages in earlier years and requested more positions, the Reagan administration did not support the request (GAO 1987a)
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From page 262... ...
Constraints on the Performance of the FAA 251 the FAA is required to operate within a civil service system that does not provide adequate flexibility in pay for the technical and managerial expertise that the agency needs. As discussed in the next section, one of the FAA's principal strategies for dealing with shortages in its maintenance work force is to rely more heavily on outside contractors to perform maintenance on the new ATC technology.
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From page 263... ...
252 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION development that agency staff believe will address these concerns; the plan is expected to be released in 1991.) In addition to acquiring new technology that will have less laborintensive maintenance requirements, one of the FAA's primary strategies for handling future maintenance and repair is to rely more heavily on contractors.
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From page 264... ...
Constraints on the Peiforinance of the FAA 253 plans (K. Mead, testimony before Subcommittee on Aviation, House Committee on Public Works and Transportation, May 9, 1989)
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From page 265... ...
254 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION throughout the work force, much of it caused by retirements. Roughly 30 percent of the current work force is likely to retire in the next decade.
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From page 266... ...
Constraints on the Performance of the FAA 255 of new aircraft was resulting in increasingly superficial technical review (NAS 1980)
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From page 267... ...
256 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION en route centers. (Results from the 1988 survey were not available in the same format as previous surveys, which did not allow for comparisons over time.)
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From page 268... ...
Constraints on the Performance of the FAA 257 mental program to offer wage differentials of up to 20 percent to attract more personnel to these locations that are difficult to staff may help, but early returns are mixed. Whether the increased support the FAA has found in responding to its personnel needs will be adequate without being accompanied by fundamental institutional changes is brought into question by a variety of complex and interconnected issues reviewed in this section.
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From page 269... ...
258 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION of some of the systems and made overly optimistic forecasts about delivery dates (GAO 1988a)
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From page 270... ...
Constraints on the Performance of the FAA 259 convince Congress to spend billions of dollars in an era of constrained resources. The initial NAS Plan depended, however, on several emerging technologies that had not been fully proven and which no one had tried to put together into a single integrated system.
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From page 271... ...
260 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION the typical controller can safely manage. In the past controller limitations resulting in reduced system capacity could be overcome by reducing the size of the sectors of airspace that controllers manage.
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From page 272... ...
Constraints on the Peiformance of the FAA 261 Whereas these diffused lines of authority and control are typical of federal agencies, the FAA, unlike most agencies, is in many respects an operating entity. Apart from its regulatory duties, which mirror those of many other agencies, the FAA is responsible for operating the ATC system, which is not unlike a public utility that must operate in an efficient, businesslike fashion to supply the demand placed on it.
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From page 273... ...
262 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION about technical personnel matters that were two and three levels below that of the Administrator. Micromanagement during this period appears to have been the most pervasive since the FAA was incorporated into the DOT.
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From page 274... ...
Constraints on the Peiformance of the FAA 263 most Administrators need their first year or more just to learn the ropes. The FAA's top managers have come from outside the agency, often from the military, and enter the job without a full appreciation of the agency's extensive role in civil aviation.
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From page 275... ...
264 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION With the increased future reliance of the FAA on advanced technology in the provision of ATC, will it be able to maintain the current high level of safety as its mission becomes more sophisticated and complex? Given that FAA salaries are not competitive with the private sector and a shortage of expertise in technical fields is projected in the years ahead, will the FAA be able to attract and retain the personnel it needs?
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From page 276... ...
Constraints on the Performance of the FAA 265 provided to aircraft -- to avoid overstressing points in the network where traffic from alternate routes converge)
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From page 277... ...
266 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINcE DEREGULATION agement (NAPA 1986; ASC 1988a, OTA 1988)
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From page 278... ...
Constraints on the Performance of the FAA 267 REFERENCES ABBREVIATIONS ASC Aviation Safety Commission CBO Congressional Budget Office DOT U.S. Department of Transportation FAA Federal Aviation Administration GAO General Accounting Office NAPA National Academy of Public Administration NAS National Academy of Sciences OTA Office of Technology Assessment ASC.
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From page 280... ...
PART IV Summary
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From page 281... ...
Conclusions and Recommendations G overnment economic regulation of private enterprise has grown during most of this century. Although such regulation was justified initially because it was believed to be in the public interest, subsequent studies by economists and political scientists found that regulation of many industries actually raised prices and limited choices for consumers.
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From page 282... ...
272 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION CHANGES IN AIRLINE OPERATIONS AND FINANCIAL PERFORMANCE Deregulation transformed the management of commercial airlines. During the 40-year period in which commercial carriers were regulated by the Civil Aeronautics Board (CAB)
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From page 283... ...
Conclusions and Recommendations273 this competitive struggle. Other management innovations that are less visible to consumers include extra bonuses given to travel agents to influence their recommendations of airlines to consumers and closer affiliations between carriers that serve national or regional markets and small carriers that serve a few cities.
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From page 284... ...
274 WINOS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION The measures themselves have become increasingly difficult to interpret with the more sophisticated asset management practices that have developed. The important issue is the ability of individual airlines to attract sufficient capital, not how well aggregate measures of net profits compare with those of other industries.
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From page 285... ...
Conclusions and Recommendations 275 how this debt burden might make carriers increasingly vulnerable during an economic downturn. The increased debt, and the revenues required to finance it, reduces capital available for reinvestment and contributes to lower net income margins.
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From page 286... ...
276 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Standard and Poor's 500 Industrials, apparently because of concern about the increased debt taken on to finance a major aircraft reequipment cycle and concern about increased debt to finance mergers. These market perceptions of increased risk, followed in late 1990 by a run-up in fuel prices and a downturn in the economy, have heightened concern about the financial posture of the industry, suggesting that more than just the weakest carriers will have trouble attracting investment.
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From page 287... ...
Conclusions and Reconunendations 277 of the increase in cost through increased productivity and, perhaps to a lesser extent, through reduced profits. The SIFL is useful as an indicator of how yields might have changed under continued regulation.
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From page 288... ...
278 WINDs OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION but for other short-haul markets, yields have increased about 20 to 30 percent. Most passengers have benefited because the densest short-haul markets alone account for 28 percent of all trips, whereas the short-haul markets that show substantial increases account for only about 3 percent of total trips (Table 3-2)
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From page 289... ...
Conclusions and Recommendations 279 deregulation. Most other short-haul markets, however, are served by only one or two carriers, and yields in these markets have tended to increase the most.
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From page 290... ...
280 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION connect markets in coastal cities that are likely to have a larger share of discretionary tourist travel and hence more discounted air fares, than the typical hub city pair. In addition, hub city pairs have considerably more frequent nonstop service than nonhub city pairs.
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From page 291... ...
Conclusions and Recommendations 281 The smallest communities, though many in number, account for about 4 percent of total passenger enpianements. After deregulation, the smallest communities that had been receiving scheduled commercial traffic did tend to lose service provided by jet carriers, but this service was replaced typically by fast-growing commuter airlines.
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From page 292... ...
282 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION service. The EAS program also sets specific criteria for service, including more direct service to nearby hubs, whereas under the previous subsidy system carriers were required to serve the smallest communities but had considerable latitude in how they would be connected to their route system.
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From page 293... ...
Conclusions and Recommendations 283 bility of airlines' chief assets -- aircraft. Carriers dominating individual markets would not charge monopoly fares, according to this theory, because of the ease with which a competitor could enter at reduced prices and contest the incumbent carrier (hence the name contestability theory)
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From page 294... ...
284 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION with a substantial presence in airports that were important traffic generators or that would become hubs and carriers that gained control of unused airport capacity early in the deregulated period gained a competitive advantage that was often, in effect, a residual effect of the regulated period. Air carriers that have excess gates are in a position to charge lease costs for them that reduces the marketing advantage of low-cost carriers.
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From page 295... ...
Conclusions and Recorn,nendaiions 285 be made by auction. As a result, the slots have been traded privately, often without the knowledge of some potential bidders, and, more recently, have been leased for short terms to smaller carriers that are not in direct competition with the slot holder.
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From page 296... ...
286 WINDS OF CHANGE: DoMEsTIc AIR TRANSPORT SINCE DEREGULATION is owned by the company that owns United Airlines) handle 70 percent of all bookings.
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From page 297... ...
Conclusions and Recommendations 287 on top of the standard commission when they book a certain number or share of passengers on the carrier. The bonuses are typically about 2 percent of ticket revenue; the average agent commission for booking a ticket is 8 to 10 percent.
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From page 298... ...
288 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION grams give major airlines with large national networks an advantage over smaller competitors or new entrants. Major carriers structure rewards on a nonlinear basis to induce travelers to concentrate their flights on a single airline.
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From page 299... ...
Conclusions and Reco,nrnendaiions 289 to consumers. The coordination of schedules and baggage handling and the extension of discounts through joint fares meet consumer preferences for single-carrier service and help integrate travelers from small communities into the national system.
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From page 300... ...
290 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION fares. As indicated in the committee's recommendations (presented below)
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From page 301... ...
Conclusions and Recommendations 291 Antitrust Policy A more forthright federal antitrust policy is required than has been practiced during much of the 1980s. The DOJ has been more active on antitrust issues than was the DOT.
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From page 302... ...
292 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION the latest fares and seat availability (assuming that the existing prohibition on bias would be extended to others as it became possible to access CRSs through other software)
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From page 303... ...
Conclusions and Recommendations 293 entrant airlines. Studies in which various dimensions of these concerns were examined, however, have not established any statistically significant relationship between carrier actions as a result of these concerns and accident and fatal-accident rates.
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From page 304... ...
294 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION been the case. The stringent maintenance and inspection schedules for aging aircraft suggested by an industry task force and incorporated by the FAA into regulation, however, appear to reduce concerns about the risk of catastrophic accidents caused by the failure of aged airframes.
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From page 305... ...
Conclusions and Recommendations 295 supply of airports and controlled airspace. As a result, congestion and delay have increased.
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From page 306... ...
296 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION already exists that has adequate runways and the potential to relieve some of the connecting traffic. With the increased discretion provided to carriers to enter and exit markets since deregulation, air carriers have already developed several small hubs, partly to bypass congested hubs.
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From page 307... ...
Conclusions and Recommendations 297 Peak-period pricing, however, does entail some problems. Most notably, it would provide airports, already in a monopoly position, with the ability to earn substantial revenues and, without other provisions for use of the funds earned, would not necessarily lead to additional investments in capacity.
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From page 308... ...
298 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION delays. Full implementation and costs have escalated, partly because of cumbersome federal procurement regulations and insufficient numbers of managers in the FAA with the technical expertise needed to oversee the contracts, but delays are also attributable to the increased technical demands being placed on the system.
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From page 309... ...
Conclusions and Recommendations 299 ments, operations and maintenance, training and procedures, and technology acquisition. Recommendations for Expansion and Better Use of Airport and Airway Capacity Congestion Pricing Congestion pricing of runways could reduce congestion, encourage the use of underused airports, and provide additional revenues for enhancing capacity.
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From page 310... ...
300 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION and provide a safe level of ATC has been outpaced by the demand for air travel since deregulation, and despite renewed support in the President's budget proposals in recent years, a number of questions raise concerns about how well the agency will meet the challenges of the future. Much of the FAA's struggle in the past has been over hiring and training replacements for the several thousand air traffic controllers fired in 1981, a process that is only now nearing completion.
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From page 311... ...
Conclusions and Recom,nendaiions 301 and retaining adequate expertise in these areas because government salaries are not competitive with those of the private sector. The FAA, despite considerable challenges, has managed to maintain a safe level of ATC since deregulation and, after years of political and administrative disputes, is rebuilding its work force of controllers, maintenance technicians, safety inspectors, engineers, and test pilots.
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From page 312... ...
302 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION problems can be summarized as falling into four areas -- funding, personnel, procurement, and management -- they are all tightly interrelated. Funding Despite the federal deficit, the FAA's annual appropriations tend to increase each year, but when these funds have been adjusted for inflation and compared with the increased demand for FAA service, the increased funding has not been sufficient.
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From page 313... ...
Conclusions and Recommendations 303 several reforms to improve the process and has received support for increasing the number of managers needed; the committee questions, however, whether the FAA can attract and retain adequate expertise given the private-sector salaries that such individuals can earn. In addition to concern about staffing, adaptations to the NAS Plan that could be made to provide more capacity are hamstrung by the rigidities of the federal procurement process.
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From page 314... ...
304 WINDs OF CHANGE: DONIEsTIc AIR TRANSPORT SINCE DEREGULATION posing cutbacks on FAA staffing and funding that weakened the FAA's abilities to carry out its mission. Unanswered Questions for the Future The concern about the future performance of the FAA in ATC and safety oversight of carriers and aircraft emerges from several unanswered questions, many of which will be difficult to address because of the FAA's structural impediments: Given the projections of a continued budget deficit for many more years, will the FAA obtain the funding it needs for personnel and equipment?
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From page 315... ...
Conclusions and Recommendations 305 and frequent changes in leadership will considerably hamper the ability of the FAA to respond to these concerns. Options for Reforming the FAA Three basic choices are available for institutional reform, and the options range from fully public to private models: Return the FAA to its former independent status.
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From page 316... ...
306 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION by keeping the separate functions of the FAA in one entity [Option 2(b)
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From page 317... ...
Conclusions and Recommendations 307 and total number) , which the committee believes deserve most emphasis.
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From page 318... ...
Appendix A Measuring Financial Risk in the Airline Industry John S Strong College of William and Mary Financial markets provide one means of evaluating changes in the relative risk of the airline industry during the past two decades.
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From page 319... ...
Appendir A.• Measuring Financial Risk 309 500 index during the 1980s was roughly 0.75, having risen from approximately 0.64 in the 1970s. ESTIMATING TECHNIQUE The estimation of equity betas and asset betas done here is consistent with standard asset pricing theories of finance.
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From page 320... ...
310 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION (Because interest on debt is tax-deductible the after-tax cost of debt is relevant.) This is equivalent to saying that the business risk of a firm is composed of the riskiness of the debt weighted by the percentage of debt and the riskiness of equity weighted by the percentage of equity.
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From page 321... ...
Appendix A: Measuring Financial Risk 311 TABLE A-I EQUITY AND ASSET BETAS OF THE U.S. AIRLINE INDUSTRY, 1973-1989 Year Equity Beta Asset Beta U.S.
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From page 322... ...
312 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION that the relative business risk of the industry became more like that of the economy as a whole. However, equity betas rose, compared with the late 1970s, as a result of the increasing amount of debt in the airline industry.
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From page 323... ...
Appendix B Organizational Options for the Federal Aviation Administration PREFACE To assist the committee in evaluating previous proposals for reform of the Federal Aviation Administration (FAA) , as well as previous studies on this topic, Herbert N
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From page 324... ...
314 WINOS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION ANNOTATED TABLE OF CONTENTS The FAA's Mission and Status, 316 States where responsibility for provisions of the Federal Aviation Act of 1958 now resides. Organizational History, 318 Gives reasons for each reorganization since 1926.
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From page 325... ...
Appendix B: Organizational Options for the FAA315 Some Possible Configurations for an FAA Corporation, 359 Based on both desirability and feasibility, outlines what proposed features might result in legislation to produce a corporation which could function far more effectively than does the the FAA. Summary, 363 Recaps reasons for choice of institutional form in relation to principal problems to be overcome.
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From page 326... ...
316 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Organizational Options for the Federal Aviation Administration Herbert N Jasper As described in this appendix, the FAA and its predecessors since 1938 have been in a number of organizational locations.
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From page 327... ...
Appendix B: Organizational Options for the FAA 317 The FAA's authorities and responsibilities are derived from the Federal Aviation Act of 1958. The act creating the DOT in 1966 transferred most of those functions to the DOT Secretary, except for promotion functions (see below)
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From page 328... ...
318 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION ferred the airports responsibility to an Assistant Administrator reporting directly to him. ORGANIZATIONAL HISTORY The precursors to the FAA date from the Air Commerce Act of 1926.
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From page 329... ...
Appendix B: Organizational Options for the FAA 319 do its job if it had a cabinet secretary to represent its interests within the executive branch and before Congress. It was he who recommended to President Johnson the creation of the DOT, and the President then proposed legislation to do so.
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From page 330... ...
320 WINDs OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION sures, or through legislation, including appropriations, the accompanying committee reports, or appropriations riders. Political When one or both houses of Congress are not under the control of the President's political party (as has been the case since the FAA's status began to cause concern)
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From page 331... ...
Appendix B: Organizational Options for the FAA 321 PROBLEMS CONFRONTING THE FAA The problems mentioned below have been described in a number of earlier studies or proposals. The principal ones are those by the Air Transport Association of America (AlA)
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From page 332... ...
322 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Secretary is a Level II, and the Administrator of the FAA is also a Level II, which now pays $125,100. All of them are appointed for indefinite terms; that is, they serve at the pleasure of the President.
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From page 333... ...
Appendix B: Organizational Options for the FAA 323 resistance on the part of the bureaucracy to respond to new directions because it is expected that the Administrator won't be around long enough to follow through (ASC 1988, 22)
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From page 334... ...
324 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION There is another aspect of the issue of departmental intervention. Former Chairman Burnett of the National Transportation Safety Board (NTSB)
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From page 335... ...
Appendix B: Organizational Options for the FAA 325 prohibit the imposition of a head tax on passengers, which could provide a significant source of revenues to finance badly needed airport construction or improvement. (Legislation enacted in 1990 would expressly permit the imposition of passenger facility charges by airport operators.)
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From page 336... ...
326 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION U.S. Postal Service to defer about $1 billion in capital expenditures, and to pay more than $400 million to the treasury for employee benefits, during fiscal years 1987 and 1988.
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From page 337... ...
Appendix B: Organizational Options for the FAA 327 Delayed Funding Other problems inherent in the shared powers system have been exacerbated by the deficit and by the split in party control. For example, policy differences between the two branches have caused serious delays in the passage of appropriations bills.
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From page 338... ...
328 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION and safely separated with some of the work force in furlough status. In order to mitigate such possible problems, the FAA announced plans to require drastic reductions in operations at about 40 airports if the furloughs were to become effective.
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From page 339... ...
Appendix B: Organizational Options for the FAA 329 acted by the time of the proposed cut-off date for retiring under the previous law, a number of senior managers (including three of the five Executive Directors) and other FAA employees elected to retire suddenly, before that date, so as not to risk the loss of the lump-sum option.
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From page 340... ...
330 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Inspectors General who naturally search hard for errors of judgment as well as process, these laws have made agency procurement officers virtual procurement "czars." These officials zealously protect the system even against worthy objectives like efficient, effective, and economical discharge of an agency's programmatic responsibilities. Procurement officers' emphasis on awarding a contract to the lowest bidder, despite significant quality advantages with other bidders, is one example of how procurement and program objectives often clash.
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From page 341... ...
Appendix B: Organizational Options for the FAA 331 reorganization designed to alleviate the FAA's management difficulties does not unintentionally impair its ability to continue to perform reliably its uninterruptable and highly critical operational and safety regulatory functions. On the other hand, the FAA has not demonstrated the capacity to anticipate or respond to rapid changes in technology or the industry that it serves.
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From page 342... ...
332 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Response to Industry Changes Virtually all of the problems discussed in the foregoing sections probably contributed in some way to what has been perceived as the FAA's slow response to dramatic changes in the industry. Certainly, funding limits, personnel ceilings, and difficulty in reassigning controllers were important factors.
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From page 343... ...
Appendix B: Organizational Options for the FAA 333 Nonetheless, the process within the FAA has been criticized as being too protracted. The ASC observed that "more than 200 separate steps must be taken when all parties agree on the rule, it typically takes more than 2 years to get a final rule, and some issues [are]
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From page 344... ...
334 WINOS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION ALLEVIATION OF PROBLEMS WITHOUT REORGANIZATION The preceding section reflects broad agreement that there are serious problems both in the FAA's performance (such as in regulatory delays and in responding to industry changes) and the statutory and political constraints that impair its response to the needs of a dynamic industry and the opportunities of new technology.
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From page 345... ...
Appendix B: Organizational Options for the FAA 335 their jobs to do and, under the most supportive Secretaries of Transportation, the FAA has been subjected to a good deal of interference by such staffs that goes beyond responsible oversight. Micromanagement, thus, is likely to remain a problem so long as the FAA is a full-blown constituent agency of the department.
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From page 346... ...
336 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Furloughs Stability in staffing levels will not be achieved as long as the FAA is subject to the budget and personnel ceiling controls administered by the 0MB. Only as a self-financed entity can the FAA expect to have control over its staffing level.
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From page 347... ...
Appendix B: Organizational Options for the FAA 337 specification of follow-on procurements; and complex, time-consuming procedural requirements, including those affording allegedly aggrieved, unsuccessful bidders the right to multiple and protracted appeals. Culture Change Changes in organization culture are very slow.
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From page 348... ...
338 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Conflict of Roles Removal of the alleged conflict between promotion and regulation requires legislation. The conflict between the FAA's operational and regulatory roles can best be addressed by administrative action rather than by legislation.
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From page 349... ...
Appendix B: Organizational Options for the FAA 339 other federal agency has the responsibility to operate a large-scale, nationwide, complex system in a hazardous environment 24 hours a day throughout the year. The examples should be helpful in predicting whether the kinds of freedom from constraints are more likely, or likely at all, to be given to the FAA or to ATC (a)
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From page 350... ...
340 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION TABLE B-I EXEMPTIONS FROM SELECTED MANAGEMENT STATUTES Statutes Agency Personnel'4 Procurement Appropriations0 Independent CIA x Federal Reserve Board x x x GAO x Nuclear Regulatory Com- mission (some) Smithsonian Institution (some)
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From page 351... ...
Appendix B: Organizational Options for the FAA 341 Procurement Neither an independent agency nor an agency within a department is likely to be freed from the procurement statutes that cover almost all such agencies. While federal corporations are far more likely to be exempted, such action cannot be confidently predicted for such an FAA corporation.
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From page 352... ...
342 WINDS OF CHANGE: DoMEsTIC AIR TRANSPORT SINCE DEREGULATION TABLE B-2 PROBABLE EFFECTIVENESS IN CORRECTING OR PREVENTING PROBLEMS (ASSUMING ENACTMENT OF PROPOSAL) Status Independent FAA ATC Corporation Problems Quo Agency Corporation Public Private Financial independence Poor Poor Excellent Excellent Excellent (with right to borrow)
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From page 353... ...
Appendix B: Organizational Options for the FAA 343 the changes that may be reasonably anticipated in the character and complexity of the FAA's future operations. Leave In the DOT But Address Most Serious Difficulties A report by OTA, Safe Skies for Tomorrow, is perhaps the fullest exposition of the contention that the FAA should remain in the DOT and retain its current status there, although the report does not contain an explicit recommendation to that effect (OTA 1988)
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From page 354... ...
344 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION an independent agency, it is likely to have less clout, and probably be subject to greater control by the 0MB or the Domestic Council. The FAA has recently undergone a number of internal reorganizations (and may have undergone another, as the Administrator has elected, for now, not to fill three vacant Executive Director positions)
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From page 355... ...
Appendix B: Organizational Options for the FAA 345 and safety. As mentioned earlier, legislation has been introduced to achieve the second change.
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From page 356... ...
346 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEEGULATION Advantages It would free the FAA from micromanagement by the DOT. Its Administrator would have more visibility and freedom to argue the case for its programs with Congress and the public.
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From page 357... ...
Appendix B: Organizational Options for the FAA 347 It would not likely accelerate the kinds of cultural change that seem to be desirable. It would greatly weaken the DOT as an important major-purpose department; it could encourage efforts to remove the Coast Guard as well.
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From page 358... ...
348 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION detail how that coordination would be achieved, except as to reliance on the notice and hearings requirements of the Administrative Procedure Act. The ATA requested that a NAPA panel study the desirability and feasibility of its ATC corporation proposal.
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From page 359... ...
Appendix B: Organizational Options for the FAA 349 Leaving regulatory and other functions in the FAA would permit them to be effectively coordinated with other transportation policies and programs. Disadvantages Safety functions were once split between the CAA and the CAB and were combined in the FAA, in part to remedy coordination problems.
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From page 360... ...
350 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION derscored by the testimony of OTA's project director that existing coordination within the FAA is not satisfactory (U.S. Congress 1988, 44)
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From page 361... ...
Appendix B: Organizational Options for the FAA 351 There are a number of precedents for private operation of ATC, often by nonprofit, user-owned companies. Aeronautical Radio, Inc.
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From page 362... ...
352 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION such as that by the Federal Railroad Administration and the U.S. Coast Guard.
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From page 363... ...
Appendix B: Organizational Options for the FAA 353 borrowing, it could leverage the funds which it would raise from user fees. A private corporation would be free from both executive and legislative micromanagement.
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From page 364... ...
354 WINOS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION tionship. In that case, the so-far unresolved problems of how to assure coordination between the safety and operational functions of the public entity and those of the private corporation would have to be confronted.
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From page 365... ...
Appendix B: Organizational Opt ions for the FAA 355 directors. Further, the corporation president would be subject to the supervision and direction of the Secretary of Transportation.
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From page 366... ...
356 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Advantages The self-supporting criterion for corporate status advanced by the 1981 NAPA panel was deemed to be suitable for the whole of the FAA by the 1986 NAPA panel. A user-financed government corporation would offer the maximum prospect for changing the reward and incentive systems and, therefore, the organizational culture of the whole of the FAA.
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From page 367... ...
Appendix B: Organizational Options for the FAA 357 patronage purposes and also expect to see significant gaps in filling vacancies. A substantially autonomous corporation, with a single head and no board of directors, could be a problem in the event of a poor choice of Administrator.
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From page 368... ...
358 WINDs OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION since the DOT was established. It does not seem to be a vexing problem at this time.
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From page 369... ...
Appendix B: Organizational Options for the FAA 359 would one exempt from the GCCA. It would also have better prospects of acceptance by the Congress.
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From page 370... ...
360 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION sibility that an appointee as Administrator might also turn out to be a mistake. There is no way to ensure good appointments in either position.
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From page 371... ...
Appendix B: Organizational Options for the FAA 361 ATA's proposed ATC corporation led the ATA to suggest that, existing shares of the tax burden be "grandfathered." That would mean continuation of the cross subsidy from commercial airlines and their passengers to GA, which apparently now exists. An alternative would be for Congress to appropriate funds to the FAA corporation to pay for such subsidies without charging the other users to do so.
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From page 372... ...
362 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION collections, provision could be made to require that fees be paid in advance, based on estimated usage. Charges for the ensuing period could adjust for actual usage.)
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From page 373... ...
Appendix B: Organizational Options for the FAA 363 and procurement laws, and so forth. General policy provisions might be endorsed, such as those favoring pay comparability with the private sector and competition in procurement to the degree practicable.
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From page 374... ...
364 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Longer tenure for the Administrator requires legislation and would be relatively easy to accomplish. Micromanagement by the DOT, the 0MB, and Congress can not be significantly reduced unless FAA is given a far more autonomous structure and method of financing.
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From page 375... ...
Appendix B: Organizational Options for the FAA 365 hoped that the Secretary of Transportation will see the advantages of the recommended structure and, with the approval of the White House, will work with Congress to develop legislation that will equip the FAA to cope with the ever-growing problems of managing one of the most complex and vital programs in the nation.
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From page 376... ...
366 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Exhibit 1: How Other Federal Agencies or Corporations are Equipped to Cope With Problems Like Those Confronting FAA The organizations discussed in this exhibit are grouped under three categories: (a) independent agencies, including independent regulatory boards or commissions, (b)
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From page 377... ...
Appendix B: Organizational Options for the FAA 367 President. Their supervision comes, in effect, from White House staff, the 0MB, and cabinet councils.
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From page 378... ...
368 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Reporting Relationships Most agencies are subject to oversight from one or more Executive Office of the President agencies, such as the 0MB and the Office of Science and Technology Policy, and one or more cabinet councils. Special statutory or administrative arrangements exist regarding: The Director of Central Intelligence, who operates under the direction of the President and of the statutory National Security Council, which is chaired by the President.
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From page 379... ...
Appendix B: Organizational Options for the FAA 369 H Truly's comments to the Advisory Committee on the Future of the U.S.
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From page 380... ...
370 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION proposed elevation of the Environmental Protection Agency has not yet occurred. The FAA (from 1958 to 1966)
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From page 381... ...
Appendix B: Organizational Options for the FAA 371 Did the lack of stability in Presidential or congressional commitment to the space program and its funding erode the agency's ability to maintain monientum and direction? Did NASA prosper at a time when the competitive procurement system was not so constraining as it is now?
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From page 382... ...
372 WiNos OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION than 9 years before accepting appointment as the Director of Central Intelligence. The Administrator of the St.
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From page 383... ...
Appendix B: Organizational Options for the FAA 373 three military departments are all exempt from the classification and pay statutes. Department of Justice: Employees of the FBI are not covered by the appointments and appeals provisions of the Civil Service laws, but they are subject to the pay and classification provisions.
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From page 384... ...
374 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION statutes do provide a number of grounds for exceptions, including for national security reasons. Corporations or Authorities In contrast to the two categories of agency discussed above, where only a small number in each class have any special flexibility, all of the members of this group of corporations or authorities have one or more dimensions of flexibility in personnel, budget or procurement authority.
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From page 385... ...
Appendix B: Organizational Options for the FAA 375 Other Supervisory Arrangements In a few cases the corporation is single-headed and there is no board: St. Lawrence Seaway Development Corporation (Seaway Corporation)
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From page 386... ...
376 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Federal Savings and Loan Insurance Corporation (FSLIC) (terminated)
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From page 387... ...
Appendix B: Organizational Options for the FAA 377 Independent Corporations The following corporations have the same status as independent agencies, except for their corporate form: Export-Import Bank of the United States (Ex-Im) , Federal Deposit Insurance Corporation (FDIC)
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From page 388... ...
378 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION emment in the sunshine" laws apply to meetings of corporate boards but, of course, not to single administrators. Financing Budget Status The following corporations were on budget in 1988, even though some are self-financing and received no appropriations: Commodity Credit Corporation, Ex-Im Bank, FCIC, FDIC, FHA, Federal Prison Industries, Inc., FSLIC, GNMA, Inter-American Foundation, OPIC, PADC, PBGC, Rural Telephone Bank, Seaway Corporation, TVA, and USPS (now off budget once more)
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From page 389... ...
Appendix B: Organizational Options for the FAA 379 necessity for its expenditures, and the manner in which they shall be incurred, allowed and paid." What that is intended to mean, and has in fact meant, is that the corporation is not subject to detailed, periodic, line-item financial reviews, either by the 0MB or Congress. The stated purpose of GCCA was "to bring Government corporations and their transactions and operations under annual scrutiny by the Congress and provide current financial control thereof." Toward that end, the act provided for audits by the GAO and, with respect to wholly owned corporations, it provided for the annual preparation and submission of a "business-type budget." Although the business-type budget was subject to changes by the President, and therefore by the then Budget Bureau, the intent was that there be a program review, rather than a line item review, and no appropriations.
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From page 390... ...
380 WINDs OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION corporations in the same manner as Federal departments for budgetary purposes." All of the wholly owned corporations, except USPS and FDIC (which is incorrectly classified as mixed ownership) , are subject to the GCCA.
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From page 391... ...
Appendix B: Organizational Options for the FAA 381 originally proposed rates into effect, notwithstanding the PRC's disap- proval, but only by unanimous vote. The USPS is exempt from a number of government-wide management statutes, including the budget and procurement statutes.
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From page 392... ...
382 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION FCIC is exempt from the pay statutes, but applies them anyway. FDIC is exempt from the classification system, but applies it anyway.
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From page 393... ...
Appendix B: Organizational Options for the FAA 383 Journal of the Air Traffic Control Association.
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From page 394... ...
Appendix C Airport Identification Codes U.S. commercial service airports are identified by a three-letter code assigned by the International Air Transport Association.
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From page 395... ...
Appendix C: Airport Identification Codes 385 CLT Charlotte/Douglas International Airport, Charlotte, North Carolina CMH Columbus International Airport, Columbus, Ohio COS Colorado Springs Municipal Airport, Colorado Springs, Colorado' CRP Corpus Christi International Airport, Corpus Christi, Texas CVG Cincinnati International Airport, Covington, Kentucky DAL Dallas Love Field, Dallas, Texas DAY Dayton (James M
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From page 396... ...
386 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION LAX Los Angeles International Airport, Los Angeles, California LBB Lubbock International Airport, Lubbock, Texas LGA New York LaGuardia Airport, Flushing, New York LGB Long Beach Airport (Daugherty Field) , Long Beach, California LIH Lihue Airport, Lihue, Hawaii LIT Little Rock Regional Airport, Little Rock, Arkansas MAF Midland International Airport, Midland, Texas MCI Kansas City International Airport, Kansas City, Missouri MCO Orlando International Airport, Orlando, Florida MDW Chicago Midway Airport, Chicago, Illinois MEM Memphis International Airport, Memphis, Tennessee MIA Miami International Airport, Miami, Florida MKE Milwaukee General Mitchell International Airport, Milwaukee, Wisconsin MSN Madison (Dane County)
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From page 397... ...
Appendix C: Airport identification Codes 387 SAT San Antonio International Airport, San Antonio, Texas SAV Savannah International Airport, Savannah, Georgia SDF Louisville Standiford Field, Louisville, Kentucky SEA Seattle-Tacoma International Airport, Seattle, Washington SF0 San Francisco International Airport, San Francisco, California SJC San Jose International Airport, San Jose, California SJU San Juan Luis Munoz Mann International Airport, San Juan, Puerto Rico SLC Salt Lake City International Airport, Salt Lake City, Utah SMF Sacramento Metropolitan Airport, Sacramento, California SNA Santa Ana (Orange County) John Wayne Airport, Santa Ana, California SRQ Sarasota-Bradenton Airport, Sarasota, Florida STL St.
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From page 398... ...
Appendix D Dissenting Statement Melvin A Brenner Ibelieve that some parts of the committee's report help to clarify im-portant issues regarding the present status of the airline industry.
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From page 399... ...
Appendix D: Dissenting Statement 389 I submit that the industry's evolution to its present degree of increased concentration has been the result of a series of carrier mergers and failures, which are traceable to a variety of marketplace or managerial causes totally unrelated to the so-called barriers to entry. The CRS issue in particular has become a "strawman," with no evidence of any connection between ownership of such systems and airline success or failure.
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From page 400... ...
390 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION since 1984. The biased display of flight listings on CRS screens was eliminated in November of that year -- more than 6 years ago.
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From page 401... ...
Appendix D: Dissenting Statement 391 projected in one of the studies cited by the committee's report, in support of this concept (i.e., the Morrison and Winston study of 1989)
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From page 402... ...
392 WINDs OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION The problem of airport congestion is serious, and certainly calls for urgent attention. But more harm than benefit can result from recommending a "solution" that oversimplifies the problem and leaves many serious questions unresolved.
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From page 403... ...
Study Committee Biographical Information Joel L Fleishman, Chairman, is Senior Vice President of Duke University and Professor of Law and Policy Sciences.
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From page 404... ...
394 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Mr. Bean is a past member of the Executive Committee of the Transportation Research Board (TRB)
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From page 405... ...
Study Committee Biographical Information 395 the positions of Deputy Under Secretary, Chief Scientist, Acting Assistant Secretary for Policy, and Acting Administrator of the Research and Special Programs Administration. From 1968 to 1972 he served on the technical staffs of Bell Telephone Laboratories and Bellcomm, Inc., where he specialized in the application of mathematical systems theory to investment decision, traffic management, and spacecraft altitude control systems problems.
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From page 406... ...
396 WINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Todd R La Porte is Professor of Public Administration in the Department of Political Science at the University of California, Berkeley.
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From page 407... ...
Study Committee Biographical Information 397 ulatory Policy" in The Yale Law Journal and his 1987 article, "Airline Competition in Deregulated Markets: Theory, Firm Strategy, and Public Policy" in The Yale Law Journal on Regulation. He served as a member of the President's Aviation Safety Commission in 1987-1988.
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From page 408... ...
398 IVINDS OF CHANGE: DOMESTIC AIR TRANSPORT SINCE DEREGULATION Fellow of the American Academy of Arts and Sciences, the Econometric Society, the American Economic Association, the American Statistical Association, the Council on Foreign Relations, and the Economic History Association. Robert P
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From page 409... ...
The Transportation Research Board is a unit of the National Research Council, which serves the National Academy of Sciences and the National Academy of Engineering. The Board's purpose is to stimulate research concerning the nature and performance of transportation systems, to disseminate the information produced by the research, and to encourage the application of appropriate research findings.
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From page 410... ...
Transportation Research Board National Research Council 2101 Constitution Avenue, N.W. Washington, D.C.
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Key Terms
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