
Rating: 8.5/10.
Airline Operations and Management: A Management Textbook by Gerald N. Cook and Bruce G. Billig
Textbook on how airlines are managed and operated, including the planning, finances, scheduling, and regulations, is fairly well-written and easily understandable for someone who has not worked in this industry before, and provides many specific details and real-life examples; it has been recently updated to include recent events such as COVID so it is a good read for anybody looking to understand this business in more detail.
Chapter 1. The history of air transportation. The first passenger aviation was in 1914 in Florida, and many airlines were started in the decade following that. Early regulation included the Warsaw Convention, an international agreement concerning the rights of airline passengers in different situations. In the 1920s, it was not economically viable to transport a small number of passengers in aircraft; it was most viable to start with mail delivery before passenger trips became viable or competitive with other services.
The Civil Aeronautics Board (CAB), regulated airfares for several decades in the US. Technological advances during World War II improved airline efficiency and range for passengers, resulting in about a 100-fold improvement in productivity when measured by seat miles per year by around 1970. In 1978, the airline industry was deregulated, along with many other industries in the US, as the period saw a boom in free-market ideas. Similar deregulation occurred in the EU and China, typically leading to lower fares but also resulting in numerous business failures and consolidation.
Overall, the airline industry faces challenges, as economy tickets are essentially a commodity competing only on price, and many inputs, such as airport fees, fuel, and labor costs, are regulated by unions and not directly controllable by the airlines.
Chapter 2. The airline industry is crucial to trade, business, and tourism; thus, a large part of the global economy indirectly depends on it. Many factors affect the supply and demand of airlines: global economics determine who can afford air travel, and demographics influence the people that travel; prices of inputs like fuel are also significant. Many parts of the operations, such as route planning, maintenance rotations, and the production of new aircraft, depend on demand forecasting. Demand in the industry has a high correlation with macroeconomic conditions.
The characteristics of demand vary: leisure travelers prefer lower fares and have more flexibility in timing, whereas business travelers typically have early morning Monday departures and late afternoon or evening returns on Friday, which are the most commonly demanded times and are more sensitive to timing. Demand varies by the time of year and sometimes is directional, eg higher demand for flights to a destination at the beginning of holidays and returning flights at the end. Demand is also affected by natural disasters and other events. Lowering prices will induce more demand, especially among leisure travelers, thus complicating any demand forecasting efforts. Similarly, introducing other transport options, like trains and ferries, will reduce airline demand.
Chapter 3. Several different route structures for airlines. The linear route is historically the first that was used and followed a trend where passengers would stay on as the plane traveled in a linear path between cities. However, this is rare nowadays because it is inconvenient for passengers, and short trips are relatively inefficient. The point-to-point (nonstop) flight is the most convenient, but it is challenging when the demand is not high enough between smaller cities.
The hub-and-spoke system involves incoming flights arriving at the hub, followed by outgoing flights about 45 minutes later (or longer for international flights). There are several waves of this every day to coordinate optimal timings. This system makes it economical to add smaller cities to connect to hubs, but it may result in more indirect routes than point-to-point, especially if the hub is geographically not in the right position. The hub-and-spoke system tends to work best when the hub city is economically important, typically with a 40 to 60 ratio of traffic going to the hub versus through it. Delays in incoming flights may quickly propagate to multiple flights this way, but having multiple hubs can mitigate this. This setup places a lot of burden on the hub airport, which might be constrained by its capacity.
Large airlines usually have multiple hubs. The rolling hub system has flights arriving and departing from the hub throughout the day without the need to precisely coordinate the timing for transit times. This is more flexible for scaling down operations during economic recessions, but the disadvantage is potentially longer transfer times for passengers compared to when flights are coordinated.
Chapter 4. Airlines are a highly competitive industry with a lot of choice in their products, such as geography and service offerings, which determine the optimal aircraft for their routes. Full-service carriers offer a full range of amenities, different fare classes, operate internationally, and have multiple distribution channels and loyalty programs. Regional airlines serve smaller regional cities and often act as subsidiaries to integrate with full-service airlines, but they have separate operations. Low-cost carriers have simple fare pricing, minimal amenities, tend to favor short routes, and have minimal loyalty programs and distribution channels, outsourcing some of their operations to save costs.
Low-cost airlines tend to do shorter flights because for longer flights, passengers are less willing to sacrifice amenities, and low-cost carriers do not have a cost advantage on fuel, which is the dominant cost for longer flights. Low-cost airlines often make over 50% of their revenue from ancillary fees like carry-on bags, assigned seats, food, and beverages, which is much higher than any full-service carriers. Many full-service carriers have tried to expand into the low-cost market, but the operations are very different, and blending them risks confusing the brand identity.
Some other less common attempts at different products include chartered flights to vacation spots as part of an all-inclusive combination or business-only flights, but both of these have been unable to gain economic traction due to poor economies of scale. Cargo airlines are useful for high time-sensitive or high-value items and can be integrated to work door-to-door or with freight forwarders, which handle non-airline tasks like customs and transport to and from the airport. In reality, there is a loose distinction nowadays between full-service and low-cost carriers as they are constantly expanding into each other’s markets.
Chapter 5. In route planning, the longest lead times (2+ years), are for strategic planning, such as expanding to new markets, which requires acquiring new aircraft and new airport facilities. Flight schedule development needs to optimize for matching flights with the expected demand, maximizing aircraft and crew utilization, and having some slack to handle disruptions while satisfying constraints on aircraft characteristics like range. Schedule planning is ultimately a compromise between many factors; after the schedule is made, it is handed to the operations department to run.
Aircraft and crew assignment is usually made four to six weeks before the flight. The plane schedule is represented in a flow chart and must satisfy maintenance requirements. Crew assignment is done by having pairings that begin and end at the crew’s home city but may spend multiple days, sometimes overnight, in a different city. Several of these pairings, together with breaks, are compiled into something called a bid line, and then individuals bid on these bid lines with breaks between them. The most senior crew get the better schedules; however, this system consistently gives the worst and most undesirable schedules to the junior staff. Many airlines instead use a variable scheduling system where everyone occasionally gets some desirable weekends off.
Service disruption may be due to weather, various mechanical issues with the aircraft or airport, crew absence, IT malfunctions, etc. There are lots of options for recovery, like rerouting flights, canceling and rebooking passengers, using reserve aircraft and crew, etc. However, most of these options are expensive for the airlines, so it is a complex decision. Delays are generally preferable to cancellations, although with too long of a delay, the airline can face heavy fines. Sometimes aircraft can be swapped to better react to demand, but there are operational challenges to this, such as respecting first-class seating, flight licenses, maintenance schedules, etc.
Good operations are important to customers, who want to feel that they are getting good service. Therefore, it is good to track metrics like the on-time rate and causes for various types of delays so proactive actions can be taken. In the summer of 2022, many airlines posted overly ambitious schedules that were difficult to upgrade, which led to numerous delays, cancellations, and lost baggage until they were forced to cut back.
Chapter 6. The labor characteristics of airline industry workers are highly skilled, regulated, and unionized. Unlike in a manufacturing operation, there is no possibility of stockpiling labor, so any disruption immediately affects revenue. Airline workers often belong to unions that can collectively strike, although the details of labor laws vary by country. In some countries, airline workers are considered essential and are not allowed to strike.
Airline management negotiates with unions on collective bargaining agreements, which outline conditions such as pay, benefits, and scheduling rules. There is often tension between management and the unions, as labor rules can prevent many plans, such as airline acquisitions or launching new routes, if they conflict with existing labor agreements. Consequently, management may attempt various efforts to circumvent labor laws, such as outsourcing maintenance work to low-wage countries, hiring self-employed contractors without benefits, using COVID-19 as a justification to cut unionized workers, or registering the company in a country with looser regulations, like Ireland. A case study of Ryanair illustrates this point. For some time, Ryanair was able to avoid strikes by spreading unions across multiple countries, but eventually, the unions organized a coordinated strike, and the courts ruled that workers should have the rights of their home country, not those of Ireland.
Chapter 7. Airlines have historically been relatively low-profit and low-margin businesses, with the most profit coming from North America. The industry tends to follow macroeconomic cycles, but the losses in 2020 due to COVID have exceeded anything else in its history. Some commonly used financial metrics include Available Seat Miles (ASM), which measures the seat flown whether it is empty or not, and Revenue per Available Seat Mile (RASM), which measures the amount earned per unit of production. Cost per ASM (CASM) is the cost per unit of production, sometimes calculated excluding fuel costs. The yield is the price that a passenger pays per mile flown, which is different from RASM due to load factor considerations.
Some trends in the industry show that yield has generally been decreasing since the 1960s as more efficient aircraft and increased competition have led to lower ticket prices. The load factor has been increasing thanks to improved scheduling efficiency, and generally, around an 80% load factor is needed to break even. The breakeven point tends to increase during recessions as ticket prices fall. Maximizing profit is not straightforward since each change affects multiple factors, eg, raising prices will increase yield but decrease the load factor. Ancillary fees are a large part of the revenue, especially for low-cost carriers, but they have faced some consumer and regulatory pushback due to perceived deceptive practices.
Labor and fuel are the two biggest costs for airlines. Labor productivity can be improved with automation and scheduling efficiency, while fuel costs can be reduced with more efficient aircraft. Some airlines use financial instruments to hedge against fuel price fluctuations. Capital costs, like the price of aircraft, are generally financed using debt. Taxes added to the base fare, including airport fees and carbon taxes, must be displayed on any marketing material and not just the base fare. Some costs, like aircraft debt payments, are fixed, whereas others like as staffing and fuel, are escapable costs and can be reduced during times of recession. Each recession results in some restructuring of labor arrangements and sometimes the acquisition of airlines; COVID resulted in the most drastic reduction in airline operations in history, with many airlines cutting up to 90% of pre-pandemic schedules. North American airlines received a decent amount of government assistance, but Latin American and Middle Eastern airlines did not.
Chapter 8. In aircraft selection – range and payload are the most important as they define operating costs. The cost per available seat mile decreases with longer flights, and the yield tends to follow the CASM (but may be higher for smaller markets with little competition). The choice between older vs new aircraft involves trade-offs: older aircraft are cheaper to buy but more expensive to operate, and their maintenance costs are higher.
There are advantages to having only one type of aircraft, as crew certification and maintenance are simpler, but full service carriers that serve many different types of routes will need multiple types of aircraft. Comparable options for all classes of aircraft are offered by Boeing and Airbus. In fleet acquisition, airlines may acquire the aircraft through a direct purchase (either financed by equity or debt financing), or lease them from a leasing company. Leasing is similar to leasing a car; it is more expensive in the long term but offers more flexibility to cancel a lease.
Chapter 9. Revenue management aims to maximize total revenue from fares, given that short-term supply is relatively fixed, by exploiting the fact that passengers have different willingness to pay. Overbooking in the industry has a bad reputation, but it is a useful way of dealing with no-shows, which historically account for around 5% of passengers, thereby avoiding situations where flights are fully booked but still have empty seats. You cannot perfectly predict the overbooking rate, so when an airline happens to be overbooked, it tries to offer incentives for volunteers to switch to a different flight. However, this may not always be possible, and as a last resort, the airline may have to remove passengers who have seats, which significantly damages its reputation. Therefore, there is an optimal amount of overbooking that is greater than zero but cannot be too high.
Price discrimination involves segmenting prices based on customers’ willingness to pay. Airlines have different fare classes with various restrictions, such as refundability, required number of days of advanced booking, and minimum stay requirements like over a weekend (which most business passengers will not do), to discriminate between business and leisure travelers. The expected marginal seat revenue (EMSR) is a curve representing the price of the seat times the probability of selling a seat at that price, and managers use it to determine how many seats of a higher fare class to reserve to sell closer to the departure date based on historical sales data. Fares are nested into buckets where each ticket, once sold, is removed from all the higher buckets, and the number of seats in the higher buckets is only limited by the capacity of the aircraft. This method guarantees that the higher price buckets never sell out before the discounted ones, but the seat allocation between buckets is frequently adjusted as seats sell.
With multi-city routes, airlines use virtual buckets where each start and end pair has a bunch of buckets. However, this can lead to situations where the fare for the flight A-B-C is lower than from A to B because the lower fare buckets for A to B have been sold out, and passengers can try to exploit this by purchasing a ticket from A-B-CC when they actually intend to fly to B. This is called hidden city ticketing, and airlines try to disincentivize this, although only partially.
Chapter 10: Distribution. Initially, airlines employed numerous agents to search for flights and then call back the customer to ask if they wanted to purchase the tickets, but as airlines grew, manual work became unmanageable. These initial paper tickets were replaced with electronic tickets in the 1990s, making paper tickets virtually nonexistent today. Early computers were used for automating bookings as early as the 1950s, but these early systems still required a lot of manual work since the technology was limited to inputting the full details of customer information.
A partnership between IBM and American Airlines began in the 1960s, creating Sabre, which improved efficiency by generating tickets for passengers with much less human involvement than previously required. By the 1970s, many airlines installed computer reservation systems (CRS) in travel agents’ offices. Competitors would pay to list their flights in each of these systems, but they would manipulate the rankings to place their own flights above competitors for agents’ attention, which was uncompetitive. CRS eventually evolved into global distribution systems (GDS), managing bookings for multiple airlines. Today, the biggest ones are Sabre and Amadeus, with some others popular in certain regions.
The rise of the Internet in the 2000s made it feasible for airlines to sell tickets on their websites without the need for GDS. However, a compromise was negotiated between the airlines and the GDS companies. As the Internet grew, airlines had less need for agents and reduced their commissions, leading to travel agencies rarely being paid by airlines today, instead being paid directly by the customer. Online travel agencies (OTAs) like Expedia and Booking.com have replaced the role of traditional travel agents. Nowadays, distribution is a mixture of traditional agents using GDS systems, direct bookings on airline websites, and through metasearch engines like Google Flights or Kayak. Additionally, some opaque services offer discounted rates in bundle deals, where it is difficult to determine the exact price of the fare itself.
Chapter 11. There are often international regulations on which airlines can fly and the frequency of flights between countries, these are negotiated between states, including limits on seats and pricing. Sometimes, open skies agreements have eased restrictions somewhat, but generally, foreign airlines are not allowed to operate domestic flights in another country (cabotage). Many airlines started as public or state-owned entities but eventually have been privatized as they are more efficient. Nowadays, most airlines are private, with some exceptions in various regions, (such as most of the airlines in the Middle East are state-owned). Airlines across countries form global alliances, and there are three major ones. They have various agreements to facilitate scheduling, help each other out with maintenance, and code-share agreements so that passengers can easily connect between flights and share frequent flyer reward points. However, the outcome of airline alliances is sometimes mixed, as joint operations require trust and numerous compromises, leading to conflicts of interest.
Chapter 12. Looking ahead, carbon emissions are a growing concern. In the near future, at least, there is little hope that alternatives can replace fossil fuels for the airline industry. If governments proceed with carbon taxes, it is likely that air travel will become much more expensive. Regulatory barriers prevent airlines from becoming truly multinational entities, as there are national ownership requirements for many airlines to operate in different countries. The landscape tends to be unstable as airlines struggle to generate consistent revenues and returns. Many attempts to consolidate airlines aim to improve efficiency, but at the same time, these mergers and bankruptcies leave opportunities for new entrants.