THE BIG PICTURE
In the big intercity travel picture, air travel plays only a minor role. For example in North America automobiles (cars and light trucks) generate over 80% of all intercity trips and airlines only 15%. However the airline mode prevails on longer trips and, in particular, on trips that take longer than a days drive. To whit, airlines handle 85% of intercity trips over 1000 miles.
AIR TRAVEL 
The world’s airline fleet, operating about 17,000 aircraft, carry about 1.5 billion passengers a year. The busiest airline scene is found in the US- Canada region where, with less than 10 % of the world’s population, 40% of all airline passenger traffic is generated. While intercity travel by all modes closely correlates with income growth, air travel is growing at a rate of about twice that of other modes. The key to this faster growth is the decline in the price of air travel For example in real $ terms, the price of the average airline ticket has been cut in half in the last 25 years.
AIRLINE TYPES Although there are several different species of the genus, airline, the dominating breed continues to be the “Network”, “Legacy” or ” MAJOR” carrier . These 25,or so, huge outfits, each with annual revenues of over $1billion (US), in most cases, began life as state enterprises and most have been in business for decades. Like the department stores of old , the Majors continue to serve the marketplace in a monolithic “one size fits all ” fashion wherein market share, not profits, is paramount .
Indeed, never very profitable, for the Majors the last few years have been a commercial disaster . Losses since 2001 have exceeded $10 billion (US) and several outfits , including United Airlines, U S Airways and Air Canada are now in bankruptcy protection.
Largely exempted from this fiscal grief have been two more recent specie of airline , namely the Discounters and the Regionals. Price elastic by nature, air travel can be greatly stimulated by price cuts and,. typically, the DISCOUNTER will enter a market with prices well below those of the Major. Offering no-frills, point-to-point service at lower prices, Discounters have stimulated traffic wherever they have flown. They are not only taken market share from the Majors but have lured traffic off the intercity highways. For example in 2003, the Discounters, led by Southwest made $750 million in profits while the five largest Majors lost over $5 billion. The Discounter’s share of domestic markets is now about one third and will likely grow to more than one half by 2008
In terms of product attributes the Discounter is a very different bird than the Majors as follows:
| Attribute | MAJORS | DISCOUNTERS |
| Route Structure | Hub-Spoke networks ; 1000 mile average trip | Point to Point; 600 miles average trip |
| Passenger Access | Comprehensive networks connecting international, transborder and domestic routes including many small communities. | Service to cities of a half a million or greater popn, Small communities largely excluded. |
| Interline Arrangements | Part of complex world wide multi carrier networks ( i.e. Star Alliance) | Point to point service only with no interline connections |
| Ground Ops (turn times) | interline connections at hubs require 40 + minute turnarounds | Without connections turns are quicker(>20 min) |
| Aircraft Usage (normalized) | ~10 hours per weekday | ~ 12 hours per wkday (quicker turns, more focus) |
| Productivity | +30% more employee per a/c than Discounters. | fewer employees; more flexible work rules |
| Aircraft Commonality | many different types because of many different roles | only one type |
| Ticketing Process | Still operate own ticket offices; over 50% of sales still made by Travel Agents despite lower costs of direct internet sales | Direct sales channels via the internet |
| Fares | Expensive, complex many classes and rules | simple , 40 to 70% lower than Majors |
| Onboard Service | elaborate | minimal |
| Brand Loyalty ( frequent flyer points) | Frequent flyer points very popular with Biz customers | very modest offerings |
| Employee Motivation | Unionized, high wages & fringe benefits, adversarial, negative, many levels of supervision. | low wages & profit sharing, teamwork stressed |
| Unit Cost normalized to a 500 mile trip length) | 11 cents (US) per ASM ( available seat statute mile) | 7 cents (US) per ASM |
| Outlook | dubious | bright |
To defend their traditional markets, the Majors in the early 1980s established a series of protected forts, which they called hubs. A look at the North American airline map illustrates where the various Majors dominate. Only at the highest volume hubs and on the thickest routes (i.e. New York to Chicago) will you find two Majors in direct competition ( United versus American). The various hubs are well established. and until recent years there is little competition However today that has changed dramatically with the Discounters gaining market share from the Majors on most routes. In some urban areas, the Discounter operates from a different airport than the Major. An example is San Francisco where Southwest , operates out of Oakland airport rather than across the bay at SFO airport. Another example is Chicago where the Majors operate from O’Hare while Southwest fly out of nearby Midway airport. As they expand the Discounters tend to avoid the major hub airports if possible. For example in the Boston area Southwest choose to operate from Manchester NH to the north and Providence RI to the south of metro Boston rather than from Logan , the centrally located main Boston airport.
In Canada , the growth of Hamilton airport is a good example of a Discounter’s use of a secondary airport A British example is Luton airport where Easyjet operates well away from the two main London airports of Heathrow and Gatwick. Without doubt the Discounters have made very serious inroads into the traditional overwhelming dominance of Majors and that trend continues apace .
Another distinctive and very successful division of the airline business is the so-called REGIONAL. These airlines emerged in 1970s by operating short flights from the hub to nearby spoke tip communities (normally within 300 air miles of the hub) using smaller, mostly turboprop, aircraft( most often 19 seats or less). Handling mostly business and government traffic, the Regionals were able to charge quite high fares. At the same time, with cost conscious management in charge, handsome profits resulted . Recognizing the market power of the Major, the Regionals, soon allied themselves with the Major and marketed their flights under the Major’s name This is called branding or code sharing.
For the Major, the point of code sharing was to protect their hinterland ( the spoke tip communities) from other Majors. In some regions, the out lying communities have the choice of service from one or more adjacent hubs ( see the map showing Michigan where service from three hubs is provided to the hinterland .i.e. Detroit Cleveland, or Chicago). In the Michigan case, a branded Regional from one hub competes against two other brands serving different hubs. Alas, the Michigan example is the exception to the rule and most spoke tip communities in most hubs find themselves without a choice.
Today in common with the Discounter, the Regional service mode is undergoing fundamental change, For starters most Regionals are now owned outright by Majors and the independent Regional has become the exception.. In most cases, today’s Regionals have nothing to do with the sales and marketing side of the business and simply fly the spoke tip routes and receive a fee for their service from the Major.
Secondly, with the hub-spoke network weakened by competition from the Discounter, many Majors has contracted Regionals to downsize service by using the Regional’s smaller aircraft. In this regard, a key change in the 1990s was the emergence of the so-called “baby jet”. These 50 to 90 seats, fuel-efficient turbojet aircraft have allowed the Regionals to step out of their traditional short haul ( up to 300 miles) role to provide much longer direct flights (up to 1000 miles) into the hinterland of other hubs. Customers much prefer direct service rather than in the hub spoke system it replaced, consequently, we find the scope of the Regional growing at the expense of their oft times owners , the Majors. This has resulted in serious conflict between employee groups of the Majors and the Regionals.
Another aspect of the Major versus the Regional issue , is the growing dissatisfaction among Regionals with the rates that the Major are paying them for their operations. Consequently we are now seeing the emergence of what may become a new breed of airline, namely the Discount-Regional carrier. This hybrid will represent a direct attack on both the Major and the Discounter and may see the return of the independently owned Regional carrier. These newcomers face the very demanding task of providing point to point service at well below typical Regional rates. The prototype of this new variety of airline may be Independence Air ( formerly the United airline code share Regional, Atlantic Coast Air) who plan to provide high frequency baby jet service ( 6 + flights daily) to 36 points at prices in the $60 -$140 range from a main base at Washington Dulles. These very low fares mean that yields will be less than half of that of the typical Regional airline yield . Hence to survive, operating cost must be well below that of the typical Regional costs ( Regionals are averaging about 13 cent range (US$), see table below)
All of which begs many questions , for example with the old hub- spoke strategy in ruins , whither the Majors ? What will the Major’s new strategy look like and what will the fallout be ? Further ,if the hub spoke networks disappear, what is going to happen to small communities that are too small to support either Discounter service or direct Regional baby jet service? How will these massive changes at the Domestic airline level impact on International service ?. What about the changing role of the Regional and does the putative “Discount Regional” have a hope ? Suffice to conclude that currently the airline industry is seized with great uncertainty.
AIRLINE REVENUE 
In the US-Canada market, passenger traffic generates 90% of airline revenue( the rest coming from freight and mail). About 75% of passenger revenue comes from domestic travel with the remainder generated by travel to and from destinations in other countries.
Like all service businesses, the success of an airline rests on its ability to satisfy it’s customers. As noted above, the airline product is often differentiated by price, however service quality and customer satisfaction remains important. Surveys, such as the one illustrated above , paint one picture of customer wishes. On-timetable service, or getting there as advertised, is the single most important wish (22%).Next comes the schedule factor (15%), or how attractive to customers are the scheduled departure and arrival times. Here a “FAT” factor emerges, referring to frequency, availability and timing. If an airline is to succeed, it must have a high FAT content. The third leading factor is the quality of the airport check-in process (15%).
As for trip purpose, about 40 % of trips are for business purposes with the remainder generated by leisure or personal requirements. The business portion of the US-Can market, represents about 160 million of the some 400 million O-D individual trips taken annually. (O-D trip refers to the complete journey from origin to destination ignoring enroute stops). These 160 million business trips are actually flown by less than 15 million individuals. Thus this relatively small group of habitual business travelers account for almost half of all airline revenue and are the backbone of the airline business. These so-called “road warriors” continue to demand convenient times, frequency flights, last minute bookings, wide seats, fancy airport lounges and, of course, the beloved frequent flier points; all at a reasonable price.
Typically discount fares, the sub classes, or cheap seats if you want, require the customer to book well in advance (at least seven days) and stay over Saturday night at their destination before returning home. These restrictions are known in the trade as “fences”. The rate for cheapest sub class is about one-quarter the price of the full or unrestricted fare ( i.e. 14 days in advance and stay over Saturday night).
In the past, the business traveler always paid full fare. However today the road warrior is taking full advantage of discount fares. Consequently, the average fare or revenue yield continues to decline. .
The leisure or personal portion of the US-Can market account for about 240 million trips a year and represent about 150 million individuals who travel once or twice a year. These folks like a nice ride but, above all, they are price sensitive. The various fare class passengers, whether cheap or pricey, travel on the same aircraft and often sit next to one another. For years the Majors were able to sell expensive seats to their best customers (i.e. the road warrior) while filling the rest of the seats with cheaper sub classes. This delicate high wire act was called yield or revenue management. With the onrush of Discounters this act has become very difficult to pull off and , consequently, revenues for the Majors have declined greatly.
AIRLINE COSTS 
To the left is a comparison of typical component unit costs for the three types of airlines . Because of differences in average flight length , a direct comparison is quite misleading hence the illustrated values have been adjusted accordingly. Nonetheless the outcome reveals some important aspects of economics of the three types of airlines. For example, the Regional has much higher aircraft ownership and other (admin & overhead) cost. This is because the Regional has a shorter trip length, or fewer miles to prorate fixed cost. Also noteworthy is that fuel and salary unit costs are about the same for all three types. This means that the chosen aircraft must deliver fuel and crew costs that reflect shorter stage lengths. Hence Regionals trade off less expensive aircraft and lower wages to achieve appropriate unit costs.
As for the Discounter, the key to their lower costs are a combination of greater daily utilization, quicker ground turn around and higher employee productivity plus much cheaper sales costs (i.e. internet).
About a half of all airline costs relate to activities that are not directly associated with flight operations. These non-operational or indirect costs include the cost of sales including commissions and promotion, station operations, airport costs and administration including overhead. These cost are fixed, whereas flight operations cost (crew, fuel, maintenance and user fees) are variable (i.e. so much per hour or per mile etc).
Ownership cost for the aircraft including insurance is actually a fixed cost. However when measuring ownership costs, airlines use a cost per hour factor with the numerator being total ownership cost and the denominator being the number of hours flown. Consequently utilization of aircraft is the key to lower unit costs..
The result is that airline costs are accounted for on a fixed plus variable basis, which means, that as the trip distance and flight time increases, unit costs per mile will decrease. Hence when comparing costs of various carriers , average stage length must taken into account.
Perhaps the most important measure of economic performance is the Break -Even Load Factor. This measure is the product of the unit cost divided by the average revenue yield. If, for example, unit cost per available seat mile is 10 cents and revenue per passenger mile is 20 cents, the BELF would be 50%.