U.S. COMMERCIAL AIRLINE INDUSTRY:

Transcription

1 ECONOMICS OF THE U.S. COMMERCIAL AIRLINE INDUSTRY: PRODUCTIVITY, TECHNOLOGY AND DEREGULATION

2 Transportation Research, Economics and Policy VOLUME 8 Editorial Board Yossi Berechman Department of Economics & Public Policy, Tel Aviv University, Israel Kenneth Small Department of Economics, University of California at Irvine, U. S.A. The titles published in this series are listed at the end of this volume.

3 ECONOMICS OF THE U.S. COMMERCIAL AIRLINE INDUSTRY: PRODUCTIVITY, TECHNOLOGY AND DEREGULATION by IVANL. prrr Center for Science and Technology Policy Rensselaer Polytechnic Institute Troy, New York JOHN R. NORSWORTHY Lally School of Management and Technology Rensselaer Polytechnic Institute Troy, New Yo", ~. " SPRINGER SCIENCE+BUSINESS MEDIA, LLC

4 Library of Congress Cataloging-in-Publication Data Pitt, Ivan L. Economics of the U.S. commercial airline industry : productivity, technology, and deregulation / by Ivan L. Pitt, John R. Norsworthy. P. cm. -- (Transportation research, economics and policy ; v. 8) Includes bibliographical references and index. ISBN ISBN (ebook) DOI / Aeronautics, Commercial--United States. 2. Aeronautics, Commercial--Deregulation--UnitedStates. 1. Norsworthy, J. R. II. Title. III. Title: Economics of the United States commercial airline industry. IV. Title: Economics of the US commercial airline industry. V. Series. HE9803.A4P '1'0973--dc CIP 1999 by Springer Science+Business Media New York Origina1ly published by Kluwer Academic Publishers in 1999 Softcover reprint ofthe hardcover Ist edition 1999 Ali rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, mechanical, photo-copying, recording, or otherwise, without the prior written permission of the publisher, Springer Science+Business Media, LLC. Printed on acid-free paper.

5 CONTENTS List of Figures List of Tables Acknowledgments ix xi xv 1 PRODUCTMTY, TECHNOLOGY AND EFFICIENCY IN me u.s COMMERCIAL AIRLINE INDUSTRY 1 l.1 Introduction 1 l.2 Motivation for the Study 2 1 ECONOMICS OF COMMERCIAL AIRCRAFT Economics of Commercial Aircraft-Demand Side New Aircraft Orders, Deliveries, Profitability and Business Cycles Complicating Factors in Airline Purchases IS Commonality of Fleet Aircraft Financing Terms and Conditions in Aircraft Sales Agreements Political-Military Considerations Airbus Loan Guarantees and Subsidization Boeing and McDonnell-Douglas Aircraft Manufacturing Industry Consolidation U.S. Government Support in the Industry Cost Structure of Aircraft Manufacturing Economics of Commercial Aircraft-Supply Side Key Elements That Dominate Aircraft Production Fixed Costs Learning Effects Economies of Scale and Scope Aircraft Pricing 35 3 AIRCRAFT CHARACTERISTICS The Early Years of Jet Trnnsport Performance Characteristics and the Technology of Jet Engines Jet Propulsion Turbojet and Turbofan Systems 44

6 vi Pitt and Norsworthy Specific Fuel Consumption (SFC) lbrust Reversers 3.3 Perfonnance Technology of Aircraft Passenger Capacity, Take-Off Weight and Payload Range 3.4 Jet Transport Age and First Generation Transports The Boeing McDonnell-Douglas DC Second Generation Transports The Boeing The Boeing The McDonnell-Douglas DC TheBAC-lll 3.5 Widebody Transports The Boeing The Lockheed LlOll The McDonnell-Douglas DC-lO The Airbus A New Transports Produced in the 1980's and 1990's The Boeing The Boeing McDonnell-Douglas M080 Series The McDonnell-Douglas MOll The Airbus A300/A310 Series The Airbus A Airbus A330 And The Boeing Short Range Aircraft 4 A BRIEF REVIEW OF AIRLINE REGULATION 4.1 Introduction 4.2 The Civil Aeronautics Act of The CAB and Its Regulatory Policies 4.4 Route Regulations 4.5 Fare Regulation 4.6 The Airline Industry 1938 to The Move Towards Deregulation 4.8 The Deregulation Act of The Airline Industry from 1978 to the Present and the Many Effects of Deregulation on Industry Structure 4.10 Changes in Geographic Scope of Individual Airlines 4.11 New Entrants into the Airline Industry 4.12 Problems of New Entrants and Incumbents 4.13 Barriers to Entry in the Industry 4.14 Mergers and Acquisitions 4.15 Hub and Spoke Systems 4.16 Frequent Flyer Programs

7 Contents 4.17 Computer Reservation Systems and Travel Agents 4.18 Yield Management and Pricing Strategies 4.19 Control of Slots 4.20 Control of Gates and Other Allport Physical Facilities 4.21 Limitations to Allport Expansion 4.22 Airport Noise Control Strategies vii THEORIES AND MEASUREMENT OF PRODUCTIVITY AND TECHNOLOGICAL CHANGE 5.1 Introduction 5.2 Productivity Performance in Regulated Industries Supply Side Demand Side 5.3 Theory Review 5.4 Total Factor Productivity 5.5 Total Factor Productivity Indexes 5.6 Growth Accounting Method of TFP 5.7 Measurement oftfp in a Short Run Disequilibrium Framework: Estimation 5.8 Disadvantages of the Growth Accounting Approach 5.9 The Concept and Measurement of Capital TECHNOLOGICAL CHANGE AND INVESTMENT IN COMMERCIAL AIRCRAFT: MODEL SPECIFICATION 6.1 Introduction 6.2 Production of Air Transportation Services 6.3 A Cost Function Model of Production for Air Transport Services 6.4 Performance Envelopes for Aircraft Technology 6.5 Operating Costs and Embodied Technology: A Priori Considerations 6.6 Data Sources, Description and Preparation Methods Prices for Labor Prices for Energy Prices for Materials Prices for Purchased Services Prices Corresponding to Other Expenditures 6.7 Measurement of the Capital Stock Perpetual Inventory Methodology 6.8 Technology Embodied in Aircraft 6.9 Total Output and Total Variable Cost 7 EMPIRICAL ESTIMATION AND QUANTITATIVE ANALYSIS 7.1 Estimates of Restricted Variable Cost Function 7.2 Regression Statistics and Model Fit

8 viii Pitt and Norsworthy 7.3 Model Coefficients Labor Input Energy or Fuel Input Materials Input Services Input Other Expenditures Input Time Period Dummy Variables in the RVCF Model Economies of Scale Shadow Cost of Capital and Capacity Utilization Quality Change Allen Own and Cross Price Elasticities of Substitution Estimates of Own and Cross Price Elasticities of Demand Total Factor Productivity and Marginal Costs CONCLUSIONS 8.1 Conclusions References Author Index Subject Index

9 LIST OF FIGURES Figure 2.1 Figure 2.2 U.S. Airline Acquisition and Evaluation Process Economics of Commercial Aircraft 12 13

10 LIST OF TABLES Table 1.1 Selected International Suppliers of Parts for Boeing Table 2.1 Penetration of Household Air Travel by Income Class in the U.S., Table 2.2 New Orders, Deliveries, and Operating Profits (Loss) for Selected Carriers Table 2.3 Announced Jet Airplane Orders, Deliveries and Backlogs Total Worldwide Table 2.4 Selected U.S. Carriers Owned and Leased Aircraft Table 2.5 Ownership of Airbus Industries Table 2.6 Selected U.S. Defense Mergers and Acquisition since Table 2.7 Aircraft Development Time Comparisons 30 Table 2.8 Delivery History of Commercial Jet Transport Aircraft During the First 10 Years of Deliveries 30 Table 2.9a Jet Airplane Deliveries by Major Manufacturers Table 2.9b Percent Jet Airplance Deliveries 31 Table 2.9c Jet Airplane Orders by Major Manufacturers Table2.9d Table 2.ge Table 2.10 Percentage Share in Jet Airplane Orders by Major Manufacturers Percentage Change in Jet Airplane Orders by Major Manufacturers Market Determined Aircraft Prices (1991) and Years Models Were Produced 35 Table 3.1 Stimulus to Air Travel by Time Period 42 Table 3.2 Selected Aircraft Engines and Applications 45 Table 3.3 Majors and Nationals Fuel Cost Index Table 3.4 Potential Fuel Savings Aimed at Cutting Fuel Consumption of Transports by Significant Margins 49 Table 3.5 Selected Manufacturer's Design Life limits in Flights, Hours and Years and Number of Aircraft Exceeding These Limits 51 Table 3.6 Selected Characteristics of Jet Transports 62 Table 4.1 Selected Mergers and Acquisitions Since Deregulation 71 Table 4.2 Air Carrier Classifications 73 Table 4.3 Form 41 Carriers by Carrier Group Majors and Nationals Table 4.4 New Entrants into Interstate Service (Selected Carriers): Former Intrastates 7S

11 xii Pitt and Norsworthy Table 4.5 FonnerChwrter~en 76 Table 4.6 Consolidations and Failures of New Entrants Post Deregulation 76 Table 4.7 Selected Bankruptcy Filings and Failures of Carrien Post Deregulation 77 Table 4.8 Barrien to EntIy in the Airline IndustIy 78 Table 4.9 Single ~er Concentmtion at Major Airports Pre and Post Deregulation 81 Table 4.10 Airline Hub Market Shares and Price Increases Between 1985 and Table 4.11 Average Number of Enplanements by Carrier (Millions) 83 Table 4.12a CRS Owners and Market Share Data Table 4.12b CRS Marlcet Share Data 1986 in Percentages 84 Table 4.13 Comparative Booking Fees Table 4.14 Airline Market Share and Yields in 1992 at Concentmted Airports 87 Table4.15a Distribution of Domestic Air Carrier Slots Before and After New Entrant Lottery Drawings 90 Table4.15b Distribution of Domestic Air Carrier Slots Before and Table 6.1 After New Entrant Lottery Drawings 91 Selected Characteristics of Passenger Aircraft in Use by Major Airlines, Table 6.2a Weighted Average Technological Parameters-Payload 114 Table6.2b Weighted Average Technological Parameters-Range 115 Table 6.2c Weighted Average Technological Parameters-SFC 115 Table6.2d Weighted Average Technological Parameters-Thrust 115 Table6.2e Weighted Average Technological Parameters-Take-off Weight 115 Table 6.2f Weighted Average Technological Parameten-Thrust to Take-off Weight 116 Table 6.2g Weighted Average Technological Parameters-Passenger Capacity 116 Table 6.3a Average Labor Input Cost Shares by Carrier in Percentages 120 Table6.3b Average Labor Input Prices by Carrier ($) 121 Table6.3c Average Number of Employees 121 Table 6.4a Average Energy Input Cost Shares by Carrier in Percentages 122 Table 6.4b Average Energy Input Prices by Carrier ($) 122 Table6.4c Average Number of Gallons of Jet Fuel by Carrier 122 Table 6.5a Average Materials Input Cost Shares by Carrier in Percentages 123 Table 6.5b Average Materials Input Prices by Carrier ($) 123 Table6.6a Average Services Input Cost Shares by Carrier in Percentages 124 Table6.6b Average Services Input Prices by Carrier ($) 124 Table 6.7a Average Other Expenses Input Cost Shares by Carrier in Percentages 125 Table 6.7b Average Other Expenses Input Prices by Carrier ($) 125

12 List of Tables xiii Table 6.8 Average IndustIy Service Price of Capital 127 Table 6.9 Average Quantity of Capital Stock by Carrier (in millions) 127 Table 6.10 Average Revenue Passenger Miles by Carrier (in billions of miles) 128 Table 6.11 Average Total Variable Cost by Carrier (in $) 128 Table 6.12a Fleet Composition American Airlines 129 Table 6.12b Fleet Composition Continental Airlines 130 Table 6.12c Fleet Composition Delta Airlines 131 Table 6.12d Fleet Composition Northwest Airlines 132 Table 6.12e Fleet Composition TWA 133 Table 6.12f Fleet Composition United Airlines 134 Table 6.12g Fleet Composition USAir 135 Table 7.1 Restricted Variable Cost Function, Input Demand Quantities and Revenue Equations Jointly Estimated 141 Table 7.2a Constant Term and First Order Parameter Estimates for Labor Input by Carrier 142 Table 7.2b First Order Parameter Estimates for Energy Input by Carrier 143 Table 7.2c First Order Parameter Estimates for Materials Input by Carrier 143 Table 7.2d First Order Parameter Estimates for Services Input by Carrier 144 Table 7.2e Parameter Estimates for Selected Shift Years By Input 144 Table 7.2f Capital and Output Parameter Estimates 146 Table 7.2g Second Order Interaction Parameter Estimates by Input (Same for All Carriers) 146 Table 7.3 Average Short Run Economies of Scale by Carrier 148 Table 7.4 Average Shadow Cost of Capital by Carrier 149 Table 7.5 Average Capacity Utilization by Carrier Based on Seat Miles 150 Table 7.6 Technology and Quality Parameter Estimates 151 Table 7.7a Average Allen Own Price Elasticities of Substitution (AES) by Carrier 153 Table 7.7b Average Allen Cross Price Elasticities of Substitution by Carrier 154 Table 7.8a Average Own Price Elasticity of Demand 157 Table 7.8b Average Cross Price Elasticity of Demand by Carrier 158 Table 7.9a Estimates oftfp Levels by Carrier, Annual Averages for Selected Periods, Table 7.9b Estimates oftfp Growth by Carrier, Annual Averages for Selected Periods, Table 7.9c Percentage Change in TFP by Carrier, Before and After Deregulation 161 Table 7.10 Short-run Marginal Cost Estimates by Carrier, Annual Averages for Selected Periods,

13 xiv Pitt and Norsworthy Table 7.11 Change in Short-Run Marginal Cost Estimates by Carrier, Annual Averages for Selected Periods, Table 8.1 Average Age of Aircraft by Carrier 168

14 ACKNOWLEDGMENTS We would like to acknowledge those who have constructively improved this monograph by their suggestions. We are indebted to Professors Daniel Berg, Joseph Morone, James MacDonald and Robert Hawkins for their advice, encouragement and criticism of earlier drafts of the manuscript. Many other individuals were instrumental in helping us to complete the manuscript. We would like to thank Mr. Mark Miller of the Rensselaer Voorhees Computing Center for his generous technical assistance. We gratefully acknowledge the many insights provided by Ms. Simon Sung in her earlier work on the aircraft and aircraft engine industries. The extraordinajy assistance of Mr. William Francoeur of the Boeing Commercial Airplane Group and members of the faculty of the Rensselaer School of Management and Department of Economics are acknowledged. We are also pleased to thank Ms. Yana Lambert for manuscript preparation. This research was partially funded by a GE Foundation grant.