THE GLOBALAIRLINE INDUSTRY

Aerospace Series List

The Global Airline Industry, Second Edition Belobaba, Odoni and Barnhart July 2015

Modeling the Effect of Damage in Composite Structures:Simplified Approaches

Kassapoglou March 2015

Introduction to Aircraft Aeroelasticity and Loads, 2nd Edition Wright and Cooper December 2014

Aircraft Aerodynamic Design: Geometry and Optimization Sóbester and Forrester October 2014

Theoretical and Computational Aerodynamics Sengupta September 2014

Aerospace Propulsion Lee October 2013

Aircraft Flight Dynamics and Control Durham August 2013

Civil Avionics Systems, 2nd Edition Moir, Seabridge and Jukes August 2013

Modelling and Managing Airport Performance Zografos, Andreatta and Odoni July 2013

Advanced Aircraft Design: Conceptual Design, Analysis andOptimization of Subsonic Civil Airplanes

Torenbeek June 2013

Design and Analysis of Composite Structures: WithApplications to Aerospace Structures, 2nd Edition

Kassapoglou April 2013

Aircraft Systems Integration of Air-Launched Weapons Rigby April 2013

Design and Development of Aircraft Systems, 2nd Edition Moir and Seabridge November 2012

Understanding Aerodynamics: Arguing from the Real Physics McLean November 2012

Aircraft Design: A Systems Engineering Approach Sadraey October 2012

Introduction to UAV Systems 4e Fahlstrom and Gleason August 2012

Theory of Lift: Introductory Computational Aerodynamics withMATLAB and Octave

McBain August 2012

Sense and Avoid in UAS: Research and Applications Angelov April 2012

Morphing Aerospace Vehicles and Structures Valasek April 2012

Gas Turbine Propulsion Systems MacIsaac and Langton July 2011

Basic Helicopter Aerodynamics, 3rd Edition Seddon and Newman July 2011

Advanced Control of Aircraft, Spacecraft and Rockets Tewari July 2011

Cooperative Path Planning of Unmanned Aerial Vehicles Tsourdos et al November 2010

Principles of Flight for Pilots Swatton October 2010

Air Travel and Health: A Systems Perspective Seabridge et al September 2010

Design and Analysis of Composite Structures: With applicationsto aerospace Structures

Kassapoglou September 2010

Unmanned Aircraft Systems: UAVS Design, Development andDeployment

Austin April 2010

Introduction to Antenna Placement & Installations Macnamara April 2010

Principles of Flight Simulation Allerton October 2009

Aircraft Fuel Systems Langton et al May 2009

The Global Airline Industry Belobaba April 2009

Computational Modelling and Simulation of Aircraft and theEnvironment: Volume 1 - Platform Kinematics and SyntheticEnvironment

Diston April 2009

Handbook of Space Technology Ley, Wittmann Hallmann April 2009

Aircraft Performance Theory and Practice for Pilots Swatton August 2008

Aircraft Systems, 3rd Edition Moir & Seabridge March 2008

Introduction to Aircraft Aeroelasticity And Loads Wright & Cooper December 2007

Stability and Control of Aircraft Systems Langton September 2006

Military Avionics Systems Moir & Seabridge February 2006

Design and Development of Aircraft Systems Moir & Seabridge June 2004

Aircraft Loading and Structural Layout Howe May 2004

Aircraft Display Systems Jukes December 2003

Civil Avionics Systems Moir & Seabridge December 2002

THE GLOBALAIRLINE INDUSTRY

Second Edition

Edited by

Peter BelobabaDepartment of Aeronautics & Astronautics, MIT, USA

Amedeo OdoniDepartments of Aeronautics & Astronautics and Civil & Environmental Engineering,MIT, USA

Cynthia BarnhartDepartment of Civil & Environmental Engineering, MIT, USA

This edition first published 2016 2016, John Wiley & Sons, Ltd

First Edition published in 2009

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ISBN: 9781118881170

Set in 10/12 pt TimesLTStd-Roman by Thomson Digital, Noida, India

1 2016

Contents

Notes on Contributors xiii

List of Contributors xix

Series Preface xxi

Acknowledgments xxiii

1 Introduction and Overview 1Peter P. Belobaba

1.1 Introduction: The Global Airline Industry 11.1.1 Deregulation and Liberalization Worldwide 41.1.2 Industry Evolution Since 2000 6

1.2 Overview of Chapters 13References 17

2 The International Institutional and Regulatory Environment 19Amedeo R. Odoni

2.1 Introduction 192.2 Background on the International Regulatory Environment 20

2.2.1 The Chicago Convention 202.2.2 Freedoms of the Air 21

2.3 Airline Privatization and International Economic Regulation 242.3.1 Airline Privatization 242.3.2 Types and Critical Aspects of Air Service Agreements 252.3.3 Typical Content of Bilateral and Multilateral ASAs 262.3.4 The Unified EU Market and Other Major Developments 292.3.5 The Role of Airline Alliances 32

2.4 Airports 332.4.1 Restrictions on Airport Access 332.4.2 Airport Ownership and Management 36

2.5 Air Traffic Management 392.6 Key Organizations and Their Roles 41

2.6.1 International Organizations 412.6.2 Organizations in the United States 43

2.7 Summary and Conclusions 45References 46

3 Overview of Airline Economics, Markets and Demand 47Peter P. Belobaba

3.1 Airline Terminology and Definitions 473.1.1 Basic Airline Profit Equation 49

3.2 Air Transportation Markets 513.2.1 Typical Air Passenger Trip 513.2.2 Spatial Definitions of Airline Markets 52

3.3 Origin–Destination Market Demand 553.3.1 Dichotomy of Airline Demand and Supply 553.3.2 Factors Affecting Volume of O–D Demand 573.3.3 Quality of Service Factors 573.3.4 Total Trip Time and Frequency 58

3.4 Air Travel Demand Models 603.4.1 Elasticity of Air Travel Demand 603.4.2 Air Travel Demand Segments 623.4.3 O–D Market Demand Functions 64

3.5 Airline Competition and Market Share 673.5.1 Market Share/Frequency Share Model 673.5.2 “S-Curve” Model Formulation 693.5.3 Quality of Service Index (QSI) Models 70

3.6 Summary 71References 72

4 Airline Pricing Theory and Practice 75Peter P. Belobaba

4.1 Airline Prices and O-D Markets 754.1.1 Regulated versus Liberalized Pricing 764.1.2 Theoretical Pricing Strategies 774.1.3 Price Discrimination versus Product Differentiation 79

4.2 Differential Pricing 794.2.1 Market Segmentation 814.2.2 Fare Product Restrictions 824.2.3 Airline Fare Structures 83

4.3 Recent Trends in Airline Pricing 894.3.1 Branded Fare Families 904.3.2 Unbundling and Ancillary Revenues 91

4.4 Airline Pricing Strategies 934.4.1 Factors Affecting Fare Structure in an O-D Market 934.4.2 Competitive Fare Matching 96References 98

vi Contents

5 Airline Revenue Management 99Peter P. Belobaba

5.1 Computerized Revenue Management Systems 1015.2 Flight Overbooking 1035.3 EMSR Model for Flight Leg Revenue Optimization 1085.4 Network Revenue Management 112

5.4.1 O-D Control Mechanisms 1135.4.2 Network RM Optimization Models 1185.4.3 Revenue Benefits of O-D Control 120

5.5 Revenue Management for Less Restricted Fare Structures 1215.5.1 Demand Forecasting by Willingness to Pay 1225.5.2 Marginal Revenue Optimization: Fare Adjustment Theory 123References 125

6 Airline Operating Costs and Measures of Productivity 127Peter P. Belobaba

6.1 Airline Cost Categorization 1276.1.1 Administrative versus Functional Cost Categories 1286.1.2 Cost Drivers by Functional Category 132

6.2 Operating Expense Comparisons 1336.2.1 Percentage Breakdown of Operating Expenses 1336.2.2 Aircraft Operating Cost Comparisons 1346.2.3 Low-Cost Carriers 140

6.3 Comparisons of Airline Unit Costs 1456.3.1 Total Operating Costs versus Unit Costs 1456.3.2 Legacy versus Low-Cost Carrier Unit Costs 148

6.4 Measures of Airline Productivity 1536.4.1 Aircraft Productivity 1536.4.2 Labor Productivity 156References 158

7 The Airline Planning Process 159Peter P. Belobaba

7.1 Fleet Planning 1607.1.1 Airline Fleet Decisions 1617.1.2 Fleet Planning Methods 166

7.2 Route Planning 1707.2.1 Hub Economics and Network Structure 1707.2.2 Route Planning and Evaluation 175

7.3 Airline Schedule Development 1807.3.1 Frequency Planning 1817.3.2 Timetable Development 1827.3.3 Fleet Assignment and Aircraft Rotations 185

7.4 The Future: Integrated Airline Planning 186References 187

Contents vii

8 Airline Schedule Optimization 189Cynthia Barnhart and Vikrant Vaze

8.1 Schedule Optimization Problems 1908.2 Fleet Assignment 191

8.2.1 The Fleet Assignment Model 1958.2.2 Fleet Assignment Solutions/Impacts 1988.2.3 Extending Basic Fleet Assignment Models 198

8.3 Schedule Design Optimization 2038.3.1 Modeling the Optimization of Flight Retiming and Fleet Assignment

Problems 2068.3.2 Importance of Modeling Competition in Schedule Design 207

8.4 Crew Scheduling 2098.4.1 The Crew Pairing Problem 2108.4.2 Crew Scheduling Problem Solutions and Impacts 215

8.5 Aircraft Maintenance Routing and Crew Pairing Optimization 2158.5.1 Modeling and Solving the Extended Crew Pairing Problem 2178.5.2 Modeling and Solving the Restricted Aircraft Maintenance Routing

Problem Based on the Solution to the Extended Crew PairingProblem 218

8.6 Future Directions for Schedule Optimization 219References 221

9 Airline Flight Operations 223Alan H. Midkiff, R. John Hansman, Jr., and Tom G. Reynolds

9.1 Introduction 2239.2 Regulation and Scheduling 224

9.2.1 General Regulatory Requirements 2249.2.2 Flight Crew Regulation and Training 2249.2.3 Flight Crew Scheduling 226

9.3 Flight Crew Activities during a Typical Flight 2279.3.1 Flight Crew Sign-In 2289.3.2 Operations/Planning 2289.3.3 Preflight 2339.3.4 Predeparture 2409.3.5 Gate Departure 2429.3.6 Taxi-Out 2439.3.7 Takeoff 2449.3.8 Terminal Area Departure 2459.3.9 Climb 2469.3.10 Cruise 2479.3.11 Descent 2509.3.12 Terminal Area Arrival 2539.3.13 Final Approach 2549.3.14 Landing and Rollout 2569.3.15 Taxi-In 257

viii Contents

9.3.16 Parking 2589.3.17 Postflight 259

9.4 Summary 259List of Abbreviations 260References 262

10 Irregular Operations: Schedule Recovery and Robustness 263Cynthia Barnhart and Vikrant Vaze

10.1 Introduction 26310.2 Irregular Operations 264

10.2.1 Managing Irregular Operations: Airline Operations ControlCenters 266

10.2.2 Options for Schedule Recovery from Irregular Operations 26710.2.3 Schedule Recovery from Irregular Operations: Objectives and

Process 26910.2.4 Evaluating the Costs of Recovery Options: The Challenges

Imparted by Uncertainty and Downstream Effects 27810.3 Robust Airline Scheduling 279

10.3.1 Robust Schedule Design 28010.3.2 Robust Fleet Assignment 28110.3.3 Robust Aircraft Routing 28110.3.4 Robust Crew Scheduling 283

10.4 Directions for Ongoing and Future Work on Schedule Recovery from IrregularOperations 284References 285

11 Labor Relations and Human Resource Management in the AirlineIndustry 287Jody Hoffer Gittell, Andrew von Nordenflycht, Thomas A. Kochan,Greg J. Bamber, and Robert B. McKersie

11.1 Alternative Strategies for the Employment Relationship 28811.2 Labor Relations in the US Airline Industry 289

11.2.1 Regulatory Framework for US Labor Relations 29111.2.2 US Airline Responses to Cost Pressures Postderegulation 29311.2.3 US Labor Relations Post-September 11, 2001 299

11.3 Labor Relations in the Airline Industry in Other Countries 30211.3.1 The International Regulatory Framework for Labor Relations 30211.3.2 Summary of Airline Labor Relations Strategies: What Works? 310

11.4 Human Resource Management at Airlines 31211.4.1 Hiring and Training for Relational Competence 31611.4.2 Flexible Boundaries between Jobs 31611.4.3 Supervisory Coaching and Feedback 31711.4.4 Performance Measurement at the Process Level 31811.4.5 Conflict Resolution 31811.4.6 Boundary Spanning Roles 319

Contents ix

11.4.7 Partnering with Other Key Players 32011.4.8 Leadership 321

11.5 Conclusions 322References 323

12 Aviation Safety and Security 327Arnold I. Barnett

12.1 Safety 32812.1.1 Safety Is No Accident 32812.1.2 Measuring Air Safety: Some Hazards 32912.1.3 The Q-Statistic 33112.1.4 Some Calculated Q-Values 33212.1.5 Other Approaches to Safety Measurement 33312.1.6 Are Some Airlines Safer Than Others? 33412.1.7 The Last Century 33512.1.8 A Collision Risk Assessment 33712.1.9 Midair Collision Risk 340

12.2 Security 34112.2.1 September 11 in Context 34112.2.2 Some Costs of Aviation Security 34212.2.3 Some Security Procedures 34312.2.4 Is It Worth It? 34912.2.5 Two Economic Paradigms 34912.2.6 A European Dilemma 35112.2.7 More Security Dilemmas 35312.2.8 Final Remarks 358References 359

13 Airports 361Amedeo R. Odoni

13.1 Introduction 36113.2 General Background 36313.3 Physical Characteristics 366

13.3.1 Airside Design Standards 36613.3.2 Geometric Configuration on Airside 36913.3.3 Typology of Passenger Buildings 37213.3.4 Assessing Passenger Building Concepts 37413.3.5 Ground Access 376

13.4 Capacity, Delays, and Demand Management 37713.4.1 Airside Capacity 37713.4.2 Airside Delays and Their Mitigation 37913.4.3 Landside Capacity and Level of Service 381

13.5 Institutional, Organizational, and Economic Characteristics 38413.5.1 Airport Ownership and Management 38413.5.2 Airport User Charges 385

x Contents

13.5.3 Economic Regulation 38913.5.4 Financing Capital Projects 391References 392

14 Air Traffic Control 395R. John Hansman, Jr. and Amedeo Odoni

14.1 Introduction 39514.2 The Generic Elements of an ATC System 396

14.2.1 Communications Systems 39714.2.2 Navigation Systems 39714.2.3 Surveillance Systems 40214.2.4 Flight and Weather Information Systems 404

14.3 Airspace and ATC Structure 40514.4 ATC Operations 40814.5 Standard Operating Procedures 41014.6 Capacity Constraints 41114.7 Congestion and Air Traffic Flow Management 41714.8 Future ATC Systems 420

References 420

15 Air Transport and the Environment 423Karen Marais, Philip J. Wolfe, and Ian A. Waitz

15.1 Introduction 42315.2 Limiting Aviation’s Environmental Impact: The Role of Regulatory Bodies 42515.3 Airport Water Quality Control 426

15.3.1 Effects of Deicing Fluids 42815.3.2 Managing Airport Water Quality 429

15.4 Noise 43015.4.1 Effects 43215.4.2 Noise Measurement 43315.4.3 Noise Trends 43515.4.4 Noise Controls 43615.4.5 Emerging Issues 438

15.5 Air Quality 43915.5.1 Effects 44215.5.2 Emissions Measurement 44315.5.3 Emissions Trends 44315.5.4 Emissions Control 44715.5.5 Emerging Issues 448

15.6 Impact of Aviation on Climate 44915.6.1 Effects 44915.6.2 Measurement 45115.6.3 Greenhouse Emissions Control 452

15.7 Alternative Fuels 453

Contents xi

15.8 Summary and Looking Forward 455References 456

16 Information Technology in Airline Operations, Distributionand Passenger Processing 461Peter P. Belobaba, Cynthia Barnhart, and William S. Swelbar

16.1 Information Technology in Airline Planning and Operations 46116.2 Airline Distribution Systems 464

16.2.1 Evolution of Computer Reservations Systems 46416.2.2 Alternative Airline Distribution Channels 469

16.3 Distribution Costs and e-Commerce Developments 47516.3.1 Internet Distribution Channels 47716.3.2 Electronic Ticketing 48116.3.3 Implications for Airlines and Consumers 481

16.4 Innovations in Passenger Processing 482References 485

17 Critical Issues and Prospects for the Global Airline Industry 487Peter P. Belobaba, William S. Swelbar, and Amedeo R. Odoni

17.1 Evolution of US and Global Airline Markets 48817.1.1 Evolution of US Airline Markets 48817.1.2 Recent Developments in Global Airline Markets 491

17.2 Looking Ahead: Critical Challenges for the Global Airline Industry 49417.2.1 Strategies for Sustained Profitability 49517.2.2 Infrastructure and the Environment 498References 500

Index 501

xii Contents

Notes on Contributors

Editors

Cynthia Barnhart is Chancellor at the Massachusetts Institute of Technology and FordProfessor of Engineering. She has developed and teaches courses including Carrier Systems,Optimization of Large-Scale Transportation Systems, Airline Schedule Planning, and theAirline Industry. Her research activities have focused on the development of optimizationmodels and methods for designing, planning, and operating transportation systems. Shecurrently serves or has served as Area Editor (Transportation) for Operations Research, asAssociate Editor for Operations Research and for Transportation Science, as President of theINFORMS Women in Operations Research/Management Science Forum, as President of theINFORMS Transportation and Logistics Section, and as President of INFORMS. At MIT,Professor Barnhart has served as Associate and Interim Dean of Engineering, as Co-Director ofthe Operations Research Center, and as Co-Director of MIT’s Center for Transportation andLogistics. She is a member of the National Academy of Engineering, and has been awarded theFranz Edelman 2nd Prize for Achievement in Operations and the Management Sciences, theJunior Faculty Career Award from the General Electric Foundation, the Presidential YoungInvestigator Award from the National Science Foundation, the First Prize Award for Best Paperin Transportation Science & Logistics, and the INFORMS award for the Advancement ofWomen in Operations Research and Management Science.

Peter P. Belobaba is Principal Research Scientist at MIT’s International Center for AirTransportation, in the Department of Aeronautics and Astronautics. He holds a Master ofScience in transportation and a Ph.D. in flight transportation systems from the MassachusettsInstitute of Technology. He currently teaches graduate level courses on the Airline Industry,Airline Management, and Air Transportation Operations Research at MIT and is the ProgramManager of the MIT Global Airline Industry Program. He directs the Passenger Origin–Destination Simulator (PODS) MIT Research Consortium funded by 10 international airlinesto explore issues of demand forecasting, seat inventory optimization, and competitive impacts ofrevenue management. Dr. Belobaba has also worked as a consultant to more than 50 airlinesworldwide. He has published articles dealing with airline pricing, revenue management,competition, operating costs, and productivity analysis in Airline Business, OperationsResearch, Transportation Science, Decision Sciences, Journal of Revenue and Pricing Man-agement, Transportation Research, and the Journal of Air Transport Management.

Amedeo R. Odoni is Professor of Aeronautics and Astronautics and of Civil and Environ-mental Engineering at MIT. He has served as Co-Director of the FAA’s National Centerof Excellence in Aviation Education, Co-Director of MIT’s Operations Research Center,Co-Director of the Airline Industry Program at MIT, Editor-in-Chief of TransportationScience, and consultant to numerous international airports and aviation-related organizationsand projects. The author, co-author, or co-editor of 9 books and more than 100 other technicalpublications, he is a member of the National Academy of Engineering, a Fellow of the Institutefor Operations Research and Management Science (INFORMS), and the recipient of severaldistinctions, among them the INFORMS Lifetime Achievement Award for Contributions toTransportation Science, the T. Wilson Endowed Chair at MIT, the U.S. Federal AviationAdministration (FAA)’s National Award for Excellence in Aviation Education, a Honorary Ph.D. from the Athens University of Economics and Business, and four MIT awards for excellencein teaching, mentoring, and advising. His students have also received many prizes for theirresearch and dissertations.

Contributors

Greg J. Bamber is Professor in the Department of Management at Monash University,Melbourne, Australia. His (joint) publications include Up in the Air: How Airlines CanImprove Performance by Engaging Their Employees (Cornell) and International and Com-parative Employment Relations (Sage). He has published many articles and is on the editorialboard of international refereed journals. His research includes outsourcing/shared services,dispute settlement, and workplace change, in industries as diverse as airlines, education,hospitals, manufacturing, public sector, and telecommunications. He researches and consultswith international agencies, governments, companies, and other organizations. He has servedas an arbitrator for the British Advisory, Conciliation and Arbitration Service, President of theAustralian & New Zealand Academy of Management, and President of the InternationalFederation of Scholarly Associations of Management. He was educated at ManchesterUniversity, London School of Economics, and Heriot-Watt University, Edinburgh. He isVisiting Professor, Newcastle University, England and has also been a visitor at Harvard, MIT,and other universities.

Arnold I. Barnett is George Eastman Professor of Management Science at MIT’s Sloan Schoolof Management. He holds a BA in physics from Columbia College and a Ph.D. in mathematicsfrom MIT. His research specialty is applied mathematical modeling on issues of policyimportance; aviation safety is one of his primary areas of emphasis. Professor Barnett hasauthored or co-authored nearly 100 published papers. His research articles about aviation safetyhave been extensively summarized in, among others, The New York Times, The Wall StreetJournal, Scientific American, The Economist, and Newsweek. He has served many times asconsultant to the FAA, TSA, and their contractors, and to 6 airports and 14 airlines. Barnett hasstudied passenger mortality risk in commercial aviation, public perceptions of and reactions to therisks of flying, and such specific safety issues as weather hazards, runway collision risk, adoptionof free flight routings, and the dangers of terrorism. He was chair over 1996–1998 of the FAA’sTechnical Team about Positive Passenger Bag Match, and in 2008–2010 of the North AirfieldSafety Study at Los Angeles International Airport. In 2002, he received the President’s Citationfrom the Flight Safety Foundation for “truly outstanding contributions on behalf of safety.”

xiv Notes on Contributors

Jody Hoffer Gittell is Professor of Management at Brandeis University’s Heller School forSocial Policy and Management, Executive Director of the Relational Coordination ResearchCollaborative, and Chief Scientific Officer for Relational Coordination Analytics, Inc. Herresearch explores how workers contribute to quality and efficiency outcomes through theircoordination with each other, and with their customers and leaders. Her research has beenpublished in a wide range of scientific journals, as well as several books. Her newest book,Transforming Relationships for High Performance (Stanford University Press), offers a multi-interventional model of organizational change. In The Southwest Airlines Way: Using thePower of Relationships to Achieve High Performance (McGraw-Hill) and in High Perform-ance Healthcare: Using the Power of Relationships to Achieve Quality, Efficiency andResilience (McGraw-Hill), she describes how relational coordination works in both airlinesand the healthcare sector. She was co-author of Up in the Air: How the Airlines Can ImprovePerformance by Engaging Their Employees (Cornell), which analyzes the transformation ofthe global airline industry. Gittell received her Ph.D. from the MIT Sloan School ofManagement, and serves on the boards of the Labor and Employment Relations Association,the Endowment for Health, and the Academy of Management Review.

R. John Hansman, Jr. is the T. Wilson Professor of Aeronautics and Astronautics at MITand Director of the MIT International Center for Air Transportation. He conducts research oninformation technologies applied to air transportation in several areas related to flightvehicle operations, air traffic control, and safety. Dr. Hansman holds 6 patents and hasauthored over 250 technical publications. He has over 5900 hours of pilot-in-command timein airplanes, helicopters, and sailplanes, including meteorological, production, and engineer-ing flight test experience. Professor Hansman chairs the FAA Research and DevelopmentAdvisory Committee. He is a member of the National Academy of Engineering and a Fellowof the American Institute of Aeronautics and Astronautics. He received the 1996 FAAExcellence in Aviation Award, the 2004 Dryden Award for Aeronautics Research and the1994 Losey Atmospheric Sciences Award from the American Institute of Aeronautics andAstronautics, and the 2006 Kriske Award for Career Contributions from the Air TrafficControl Association.

Thomas A. Kochan is the George M. Bunker Professor of Management at MIT’s Sloan Schoolof Management. He has done research on a variety of topics related to industrial relations andhuman resource management in the public and private sectors. His recent books includeRestoring the American Dream: A Working Families’ Agenda (2005), Up in the Air: HowAirlines Can Improve Performance by Engaging Their Workforce (2009), and HealingTogether: The Kaiser Permanente Labor Management Partnership (2009). His 1986 bookThe Transformation of American Industrial Relations received the annual award from theAcademy of Management for the best scholarly book on management. Professor Kochan is aPast President of both the International Industrial Relations Association (IIRA) and theIndustrial Relations Research Association (IRRA). In 1996, he received the Heneman CareerAchievement Award from the Human Resources Division of the Academy of Management. Hewas named the Centennial Visiting Professor from The London School of Economics in 1995.From 1993 to 1995, he served as a member of the Clinton Administration’s Commission on theFuture of Worker/Management Relations. From 2009 to 2011, he served as Chair of the MITFaculty.

Notes on Contributors xv

Karen Marais is Assistant Professor in the School of Aeronautics and Astronautics at PurdueUniversity. Her research interests include the environmental impacts of aviation, safetyanalysis and risk assessment of complex sociotechnical systems, general aviation safety,and the development of improved approaches to systems engineering and management. Dr.Marais received her Ph.D. from the Department of Aeronautics and Astronautics at MIT in2005. She also holds a Master’s degree in space-based radar from MIT. Prior to graduateschool, she worked in South Africa as an electronics engineer. She holds a B.Eng. in electricaland electronic engineering from the University of Stellenbosch and a B.Sc. in mathematicsfrom the University of South Africa. She is the author or co-author of some 40 technicalpublications including 14 journal publications and 2 book chapters.

Robert B. McKersie has been at MIT since 1980. Prior to that he served as Dean of the NewYork State School of Industrial and Labor Relations at Cornell University and, prior to that, hewas on the faculty of the Booth School of Business at the University of Chicago. His researchinterests have been in labor management relations with particular focus on bargaining activity.With Richard Walton, he co-authored A Behavioral Theory of Labor Negotiations in 1965.Subsequently, he focused his attention on the subject of productivity (authoring a book withLawrence Hunter entitled Pay, Productivity and Collective Bargaining) and participated in amultiyear project at the Sloan School that resulted in the award-winning book entitled TheTransformation of American Industrial Relations. More recently, he has returned to the subjectof the bargaining process and co-authored a book entitled Strategic Negotiations. ProfessorMcKersie has served on several Presidential Commissions at the national level, is a member ofthe National Academy of Arbitrators, and was President of the National Industrial RelationsResearch Association (now the Labor and Employment Relations Association).

Alan H. Midkiff is currently a B767 captain for a major US airline, where he has beenemployed for the past 28 years. He began flying at age 14 and his civilian backgroundincludes flight experience ranging from light single-engine piston trainers to “steam gauge”three-man crew turbojets and, more recently, modern glass cockpit wide-body aircraft onboth domestic and international routes. He received an S.M. in aeronautics and astronauticsfrom MIT in 1992, and since 1994, has worked at the MIT International Center for AirTransportation as a research engineer. His undergraduate education includes a B.S. inelectrical engineering from Lehigh University, and A.S. in aviation administration fromHawthorne College.

Tom G. Reynolds is the Assistant Leader of the Air Traffic Control Systems Group at MITLincoln Laboratory. He has expertise in air transportation systems engineering, with aparticular focus on air traffic control and its role in mitigating environmental impacts ofaviation. He has worked on the research staff at MIT and the University of Cambridge, as wellas for British Airways Engineering in maintenance and flight operations departments. He has aPh.D. in aerospace systems from the MIT International Center for Air Transportation and isa co-author of the textbook Airport Systems: Planning, Design and Management publishedin 2013.

William S. Swelbar is a Research Engineer in MIT’s International Center for Air Transpor-tation, where he is affiliated with the Global Airline Industry Program and Airline Industry

xvi Notes on Contributors

Consortium. In late 2013, Bill joined InterVISTAS Consulting as an Executive Vice Presidentwhere he runs their Washington office. He also serves as a member of the Board of Directors ofHawaiian (Airlines) Holdings, Inc. Over the past 20 years, he has represented airlines, airports,investors, manufacturers, and labor groups in a consulting role. A significant amount of hiscareer has been spent studying market behavior resulting from structural changes in thecompetitive environment, including mergers, alliances, new entrant carriers, small communityair service, and new aircraft technology. Bill’s work has included competitive assessments,cost–benefit analyses, and other economic and financial advisory services in support ofstrategic planning, corporate communications, and labor negotiations. Bill holds a Bachelorof Science degree with honors from Eastern Michigan University and an MBA from TheGeorge Washington University.

Vikrant Vaze is Assistant Professor of Engineering at Dartmouth College. His researchinterests include applications of optimization, game theory, and statistical modeling tomultiagent complex systems. He teaches courses in operations research and statistics. Heholds a Master of Science in transportation, a Master of Science in operations research, and aPh.D. in transportation systems, all from MIT. He also holds a bachelor’s degree in civilengineering from Indian Institute of Technology (IIT), Mumbai. He has received a number ofhonors including the Pikarsky Best Ph.D. Dissertation Award from the Council of UniversityTransportation Centers, the Best Paper Award from USA/Europe ATM R&D Seminar, AnnaValicek Best Paper Honorable Mention Award from AGIFORS, Graduate Research Awardfrom the Airport Cooperative Research Program of the FAA, MIT Presidential Fellowship,UPS Merit-based Fellowship at MIT, and President of India Gold Medal at IIT. He has co-authored eight peer-reviewed journal articles. He currently serves as the Treasurer andSecretary of the Aviation Applications Section of INFORMS.

Andrew von Nordenflycht is Associate Professor of Strategy at Simon Fraser University inVancouver, Canada. He researches the structure and management of human capital-intensivefirms, with a focus on professional services and airlines. He is the Co-Chair of the AirlineIndustry Council of the Labor and Employment Relations Association. He is the co-author ofUp in the Air: How the Airlines Can Improve Performance by Engaging Their Employees(2009) and has published articles in Industrial and Labor Relations Review, Academy ofManagement Journal, Academy of Management Review, Organization Science, Journal ofProfessions and Organization, and Monthly Labor Review.

Ian A. Waitz is Dean of the School of Engineering and the Jerome C. Hunsaker Professor ofAeronautics and Astronautics at MIT. Waitz has made advances in gas turbine engines, fluidmechanics, combustion, and acoustics. The principal focus of his recent work is on themodeling and evaluation of climate, air quality and noise impacts of aviation, and theassessment of technological, operational, and policy options for mitigating these impacts.In addition to scholarly publications, Waitz has contributed to several influential policydocuments and scientific assessments, including a report to the US Congress on aviation andthe environment. He holds three patents, and has consulted for many organizations. In 2003,Waitz received a NASA Turning Goals into Reality Award for Noise Reduction, and in 2007he was awarded the FAA Excellence in Aviation Research Award. He is a member of theNational Academy of Engineering, a Fellow of the American Institute of Aeronautics and

Notes on Contributors xvii

Astronautics, and an American Society of Mechanical Engineering and American Society ofEngineering Education member.

Philip J.Wolfe is a Research Assistant in MIT’s Laboratory for Aviation and the Environment.His research area is environmental policy analysis with a focus on modeling health and welfareimpacts of aviation noise and emissions and on alternative fuel adoption. He received a B.S.E.in mechanical engineering and materials science from Duke University, an S.M. in aeronauticsand astronautics, and an S.M. in technology and policy from MIT. Previously, he has worked insustainable water technology development and as an engineering consultant for nuclear andconventional power generation.

xviii Notes on Contributors

List of Contributors

Editors

Peter P. BelobabaMIT Department of Aeronautics andAstronauticsRoom 33-31877 Massachusetts AvenueCambridge, MA 02139USA

Amedeo R. OdoniMIT Department of Aeronautics andAstronauticsRoom 33-21977 Massachusetts AvenueCambridge, MA 02139USA

Cynthia BarnhartChancellorMIT Room 10-20077 Massachusetts AvenueCambridge, MA 02139USA

Contributors

Greg J. BamberDepartment of ManagementMonash UniversityPO Box 197, Caulfield EastMelbourne, Victoria 3145Australia

Arnold I. BarnettMIT Sloan School of ManagementRoom E62-56877 Massachusetts AvenueCambridge, MA 02139USA

Jody Hoffer GittellThe Heller School for Social Policy andManagementBrandeis UniversityWaltham, MA 02454USA

R. John Hansman, Jr.MIT Department of Aeronautics andAstronauticsRoom 33-30377 Massachusetts AvenueCambridge, MA 02139USA

Thomas A. KochanMIT Sloan School of ManagementE62-33477 Massachusetts AvenueCambridge, MA 02139USA

Karen MaraisSchool of Aeronautics and AstronauticsPurdue UniversityARMS 3325West Lafayette, IN 47907USA

Robert B. McKersieMIT Sloan School of ManagementRoom E52-50377 Massachusetts AvenueCambridge, MA 02139USA

Alan H. MidkiffMIT Department of Aeronautics andAstronauticsRoom 33-30977 Massachusetts AvenueCambridge, MA 02139USA

Tom G. ReynoldsAir Traffic Control Systems GroupMIT Lincoln Laboratory244 Wood Street, S1-539GLexington MA 02420USA

William S. SwelbarMIT Department of Aeronautics andAstronauticsRoom 33-31877 Massachusetts AvenueCambridge, MA 02139USA

Vikrant VazeThayer School of EngineeringDartmouth College14 Engineering DriveHanover, NH 03755USA

Andrew von NordenflychtBeedie School of BusinessSimon Fraser University500 Granville StreetVancouver, BCCanada V6C 1W6

Ian A. WaitzMIT Department of Aeronautics andAstronauticsRoom 1-20677 Massachusetts AvenueCambridge, MA 02139USA

Philip J. WolfeMIT Department of Aeronautics andAstronauticsRoom 33-11577 Massachusetts AvenueCambridge, MA 02139USA

xx List of Contributors

Series Preface

The global airline industry has matured into a vast and complex system of interrelatedtechnical, economic and organizational components, all of which must work in harmony toensure the safe and reliable operation of air transportation services. Contributing to each ofthese components are numerous stakeholders with diverse perspectives and interests –

industrial, legal, commercial and human entities, including the passengers and freight carriedby airlines to every corner of the globe. The introduction to this book puts the importance of theglobal industry into context: 1,400 commercial airlines operating 25,000 aircraft to over 3,800airports, operating 36 million flights and carrying 3 billion passengers annually. Not only is thisa significant business in its own right, aviation is an important player in world commerce andpolitics, as well as security and environmental policy.

Despite all this complexity, the global airline industry operates continuously – “24/7” inmodern parlance. We have all come to expect nothing less, yet it is difficult for most people tocomprehend the dynamics of the technical, commercial, legal, regulatory, industrial and humansystems, as well as the competitive and political pressures that affect the world’s airlines.Understanding of even the fundamentals of this industry requires an interdisciplinary approachand a wide range of expertise. In this 2nd Edition of The Global Airline Industry, thecontributors are indeed experts in many different facets of global aviation, and they providean updated discussion that includes basic concepts, advanced research, as well as many recentdevelopments.

The Aerospace Series is relevant to a variety of readers involved in all aspects of this industryincluding design, manufacture, operations, maintenance and supporting activities, and this is abook that integrates many of these activities into a thorough examination of global aviation. Itis a great tribute to the contributors that they have not only tackled a multifarious industrialsystem of such complexity but that they have presented it in such a clear and concise manner.

Peter Belobaba, Jonathan Cooper and Allan Seabridge

Acknowledgments

This book is based on materials developed for an introductory-level interdepartmental graduatecourse called “The Airline Industry” that we started teaching at MIT in September 2001.The first edition of the book, published in 2009, has received strong international response,indicating that it filled a gap in the available literature. This motivated the preparation of thissecond edition, which includes thorough updates and revisions of all the chapters of the firstedition, as well as a new chapter on airline revenue management.

The impetus for “The Airline Industry” course was provided by the establishment at MIT ofthe Global Airline Industry Program, an interdisciplinary program of research and educationthat brings together faculty, researchers, and students from the Departments of Aeronautics andAstronautics, Civil and Environmental Engineering, and Economics, and the Sloan Schoolof Management. The Program also includes affiliated faculty and researchers from otheruniversities, several of whom have contributed to this book.

The Global Airline Industry Program was made possible through a generous grant from theIndustry Studies Program of the Alfred P. Sloan Foundation to MIT for the purpose ofdeveloping a center devoted to airlines and the air transportation sector. The fruitful andinnovative collaborations that resulted from the Program, including the ones that led to thepreparation of this book, would not have been possible without this support. We are especiallygrateful to the former President of the Foundation, Dr. Ralph Gomory, and to its ExecutiveDirectors, Dr. Hirsh Cohen and his successor, Dr. Gail Pesyna, for their guidance and wisecounsel over the years.

During the decade of its existence, the Global Airline Industry Program has grownappreciably. It now brings together more than a dozen faculty, research staff, and facultyaffiliates, as well as many graduate students working on airline industry and air transportationresearch projects. It has also become a financially self-sustaining program – very much in linewith what the Foundation and MIT were hoping for. This is largely due to gifts to the Programby major aviation-related companies, as well as the establishment of an Airline IndustryConsortium at MIT, which has attracted a large number of industry and government members.

We acknowledge, in this respect, the financial support to the Program from Air Canada, theAirline Pilots Association (ALPA), Airports Council International – North America (ACI-NA),the Air Transport Association of America (now Airlines for America), Alitalia, Amadeus SA,American Airlines, American Express, Avio Group, the Boeing Commercial AirplaneCompany, Delta Air Lines, EADS – North America, the US Federal Aviation Administration(FAA), HP Travel and Transportation, Jeppesen Systems, JetBlue Airways, Lufthansa German

Airlines, the Massachusetts Port Authority (Massport), the Metropolitan Washington AirportsAuthority, Scandinavian Airlines System (SAS), SITA, and United Airlines.

Finally, the authors and editors of this book are grateful to the roughly 500 very bright MITstudents, mostly at the graduate level, who have taken our course over the past 14 years andcontributed materially to this book through their comments and suggestions concerning thecourse notes and other documents we have been distributing and progressively revising.Despite the economically difficult times it has experienced on several occasions over the pastseveral decades, and especially since 2000, the global airline industry remains a vital anddynamic sector of the economy and continues to present intellectually fascinating issues forstudents, researchers, and practitioners worldwide.

xxiv Acknowledgments

1Introduction and Overview

Peter P. Belobaba

This chapter presents a brief introduction to the global airline industry, its evolution and currentstatus. The major forces shaping the industry are described, including deregulation andliberalization worldwide, along with some important recent industry challenges, such asthe severe financial problems and restructuring of some of the industry’s largest airlines since2000. In 2015, the global airline industry is approaching six consecutive years of aggregateprofitability for the first time since the late 1990s, although there remain large differences infinancial performance among airlines in different regions of the world. The industry still facesmajor challenges, including historically high and volatile fuel prices, a weak economicrecovery from the global financial crisis, and a variety of geopolitical and public healththreats that could soon end this streak of moderate profitability. Infrastructure capacity poses amajor constraint worldwide and threatens continued evolution and long-term profitability. Thefinal section provides a brief overview of Chapters 2–17.

1.1 Introduction: The Global Airline Industry

The global airline industry provides service to virtually every country in the world, and hasplayed an integral role in the creation of a global economy. The airline industry itself is a majoreconomic force, in terms of both its own operations and its impacts on related industries such asaircraft manufacturing and tourism, to name but two. Few other industries generate the amountand intensity of attention given to airlines, not only by those directly engaged in its operationsbut also by government policy makers, the news media, as well as its billions of users, whoalmost to a person have an anecdote to relate about an unusual, good or bad, air travelexperience.

During much of its development, the growth of the global airline industry was enabled bymajor technological innovations such as the introduction of jet airplanes for commercial use inthe 1950s, followed by the development of wide-body “jumbo jets” in the 1970s. At the sametime, airlines were heavily regulated throughout the world, creating an environment in whichtechnological advances and government policy took precedence over profitability and efforts to

The Global Airline Industry, Second Edition. Edited by Peter P. Belobaba, Amedeo R. Odoni, and Cynthia Barnhart.© 2016 John Wiley & Sons, Ltd. Published 2016 by John Wiley & Sons, Ltd.

promote competition in the industry. It has only been in the period since the economicderegulation of airlines, beginning with the United States in 1978, that cost efficiency,operating profitability, and competitive behavior have become the dominant issues facingairline management. Airline deregulation or, at least, “liberalization” has now spread farbeyond the United States to most of the industrialized world, affecting both domestic air travelwithin each country and, perhaps more importantly, the continuing evolution of a highlycompetitive international airline industry.

Today, the global airline industry consists of over 1400 commercial airlines operating morethan 25 000 commercial aircraft and providing service to over 3800 airports (ATAG, 2014). In2013, the world’s airlines flew more than 36 million commercial flights and transportedroughly 3.1 billion passengers (IATA, 2014a). The growth of world air travel has averagedapproximately 5% per year over the past 30 years, with substantial yearly variations due to bothchanging economic conditions and differences in economic growth in different regions of theworld. Historically, the annual growth in air travel has been about twice the annual growth ingross domestic product (GDP), although this relationship has been weakening in advancedeconomies in recent years. Even under relatively conservative assumptions concerningeconomic growth over the next 10–15 years, a continued 4–5% annual growth in globalair travel will lead to a doubling of total air travel during this period.

The annual growth rates in passenger air traffic, measured in revenue passenger kilometers(RPKs) (see Chapter 3 for definitions), are shown in greater detail in Figure 1.1, for the period1984–2013. The principal driver of air travel demand is economic growth: over the periodshown in Figure 1.1, the 5–6% average annual growth in air travel has been fed by an average2–3% annual GDP growth worldwide. However, there has been substantial variability fromyear to year, as well as differences between US and non-US airlines. World passenger air trafficgrowth has been positive in all years shown, with only three exceptions. Traffic declined in

–10%

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Figure 1.1 Annual RPK growth rates 1984–2013. (Data sources: Air Transport Association; ICAO)

2 The Global Airline Industry

1991 due to the first Gulf War and the subsequent fuel crisis and economic recession, in 2001due to the effects of the 9/11 terror attacks in the United States, and then again in 2009 duringthe global financial crisis. Figure 1.1 also shows that the annual growth rates experienced bynon-US airlines have consistently outpaced those of US carriers. As a result, the proportion ofworld passenger traffic carried by US airlines has declined, from approximately 40% in themid-1980s to less than 25% in 2013.

The growth of passenger air traffic by region of the world carried by all airlines (irrespectiveof their nationality) is illustrated in Figure 1.2. North America continues to represent the largestregion in terms of air traffic, followed by Europe and Asia-Pacific. North American air travelwas clearly the most affected by the terror attacks of 9/11, whereas traffic dropped in all three ofthe largest regions during the global financial crisis in 2009. Growth rates in the Asia-Pacificregion during the 1980s and 1990s were substantially higher than those of North America andEurope, with the result that total passenger air traffic in the Asia-Pacific region has been atabout the same level as in Europe for much of the time since 2005. With continued high growthrates expected, the Asia-Pacific region could soon become the second-largest world region forair traffic.

Figure 1.3 provides a similar plot of the growth of air freight by world region since 1971,measured in freight tonne kilometers (FTKs) – defined in Chapter 3. The relative size andgrowth of air freight in each world region differs from that of passenger air traffic, with Europegenerating slightly more air freight than North America in the first part of the period shown inFigure 1.3. However, the growth of air freight in the Asia-Pacific region has surged overthe past three decades and the region has led the world in terms of total air freight volume since1992. The impacts of the global financial crisis on air freight were more dramatic than was thecase for passenger traffic. After a partial recovery in 2010, air freight volumes have stagnated inNorth America and Europe, and have declined in the Asia-Pacific region. In contrast, they haveincreased consistently in the Middle East region. As shown in Figures 1.2 and 1.3, the MiddleEast has experienced rapid growth in both categories since 2000.

Figure 1.2 Growth of airline passenger traffic by world region. (Data sources: ICAO, 1971–2005;IATA, 2006–2013)

Introduction and Overview 3

In the US airline industry, approximately 70 certificated passenger airlines operate close to10 million flight departures per year, and carry approximately one-quarter of the world’s totalair passengers – US airlines enplaned 743 million passengers in 2013. US airlines (both cargoand passenger) reported $200 billion in total operating revenues, with approximately 580 000employees and 6700 aircraft operating over 25 000 flights per day (Airlines for America,2014a). The economic impacts of the airline industry range from its direct effects on airlineemployment, company profitability, and net worth to the less direct but very important effectson the aircraft manufacturing industry, airports, and tourism, not to mention the economicimpact on virtually every other activity that the ability to travel by air generates.

Commercial aviation contributes 5% of the US GDP, according to recent estimates (Airlinesfor America, 2014a). Worldwide, the global economic impact of aviation has been estimated to beabout 3.4% of world GDP or more than US$2.4 trillion in 2012 (ATAG, 2014). These estimatesinclude direct, indirect, induced, and catalytic economic impacts, but do not include additionaleconomic benefits such as employment or business activity made possible by air transportation.

The economic importance of the airline industry, and, in turn, its repercussions on so manyother major industries, makes the volatility of airline profits and their dependence on goodeconomic conditions a serious national and international concern. As shown in Figure 1.4, thetotal net profits of world airlines have been cyclical and extremely variable since the start ofderegulation in 1978. After the world airline industry posted four consecutive years of lossestotaling over $22 billion from 1990 to 1993, as a result of the Gulf War and subsequenteconomic recession, it returned to record profitability in the late 1990s. Even more dramaticwere the industry’s plunges into record losses between 2001 and 2005, and then again in2008–2009. The string of profitable years since 2010 gives the industry its first period ofsustained profitability since the late 1990s.

1.1.1 Deregulation and Liberalization Worldwide

Since the deregulation of US airlines in 1978, the pressure on governments to reduce theirinvolvement in the economic regulation of airlines has spread to most of the rest of the world.

Figure 1.3 Growth of air freight volumes by world region. (Data sources: ICAO, 1971–2005; IATA,2006–2013)

4 The Global Airline Industry