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Table of Contents
                            Contents
Figures
Tables
Acknowledgements
Abbreviations
Introduction
1Characteristics and trends in airline operations
	1.1 The paradox
	1.2 The essence of airline planning
	1.3 Rapid technological change
	1.4 The economic impact of new technology
	1.5 Declining yields
	1.6 A cyclical industry
	1.7 International focus shifts to East Asia
	1.8 A passenger and freight business
	1.9 The nature of the airline product
2Traditional bilateralism – the impact of economic regulation
	2.1 Two regulatory regimes
	2.2 Non-economic technical and safety regulations
	2.3 The growth of economic regulation
	2.4 Bilateral air services agreements
	2.5 Purchasing traffic rights
	2.6 Inter-airline pooling agreements
	2.7 The role of IATA
	2.8 Limited regulation of non-scheduled air services
	2.9 Operational constraints imposed by the traditional regulatory framework
3Liberalisation – open markets, open skies and beyond
	3.1 The case for and against regulation
	3.2 Mounting pressures for liberalisation
	3.3 Open market phase of liberalisation: 1978–91
		3.3.1 Renegotiation of US bilaterals
		3.3.2 Focus switches to Europe
		3.3.3 Liberalisation spreads
		3.3.4 The new rules of the game
	3.4 The United States pushes for ‘open skies’: 1992 onwards
	3.5 Creating the European Common Aviation Area
	3.6 Clouds in the ‘open skies’
	3.7 European Court changes the rules
	3.8 Towards a trans-Atlantic common aviation area?
	3.9 Liberalisation spreading worldwide
	3.10 The significance of the regulatory environment
4The structure of airline costs
	4.1 The need for costing
	4.2 The traditional approach to airline costs
	4.3 Direct operating costs
		4.3.1 Cost of flight operations
		4.3.2 Maintenance and overhaul costs
		4.3.3 Depreciation and amortisation
	4.4 Indirect operating costs
		4.4.1 Station and ground expenses
		4.4.2 Costs of passenger services
		4.4.3 Ticketing, sales and promotion costs
		4.4.4 General and administrative costs
	4.5 Trends in airline costs
	4.6 The concept of escapability
		4.6.1 Variable and fixed direct operating costs
	4.7 Allocation of costs for operating decisions
5Determinants of airline costs
	5.1 Management control of costs
	5.2 The influence of demand on costs
	5.3  Externally determined input costs
		5.3.1 Price of aviation fuel
		5.3.2 User charges
		5.3.3 Commission payments for sales and distribution
	5.4 The cost of labour
	5.5 Aircraft type and its characteristics
		5.5.1 Aircraft size
		5.5.2 Aircraft speed
		5.5.3 Take-off performance and range
		5.5.4 Engine performance
		5.5.5 Impact of aircraft type on costs
	5.6 Route structure and network characteristics
		5.6.1 Stage length
		5.6.2 Frequency of services
		5.6.3 Length of passenger haul
	5.7 Airline marketing and product policy
		5.7.1 Product and service features
		5.7.2 Sales, distribution and promotion policies
	5.8 Financial policies
		5.8.1 Financial strategies
		5.8.2 Timing and size of aircraft orders
		5.8.3 Methods of finance
		5.8.4 Depreciation policy
	5.9 Corporate strategy
	5.10 Does airline or fleet size matter?
	5.11 The quality of management
6The low-cost model
	6.1 Emergence of low-cost airlines
	6.2 The essence of the low-cost model
	6.3 More seats and higher aircraft utilisation
	6.4 Cost advantages of LCCs – easyJet versus Bmi
	6.5 The impact of high seat factors
	6.6 Is the LCC’s cost advantage sustainable?
	6.7 Revenue advantages
	6.8 Future trends
7The economics of passenger charters
	7.1 Charters – the first low-cost model
	7.2 The nature of the charter product
	7.3 Adapting to a changing market
	7.4 Vertical integration – horizontal consolidation
	7.5 Cost advantages of charter operations
		7.5.1 Direct operating costs
		7.5.2 Indirect operating costs
		7.5.3 High seating density
		7.5.4 High load factors
	7.6 Planning and financial advantages
	7.7 Do series charters have a future?
8Airline marketing – the role of passenger demand
	8.1 The interaction of supply and demand
	8.2 Key stages of airline marketing
	8.3 The motivation for air travel
	8.4 Socio-economic characteristics of air travellers
	8.5 Market segmentation
	8.6 The seasonality problem
	8.7 Factors affecting passenger demand
	8.8 Income and price elasticities of demand
9Forecasting demand
	9.1 The need for forecasts
	9.2 Qualitative methods
		9.2.1 Executive judgement
		9.2.2 Market research
		9.2.3 Delphi techniques
	9.3 Time-series projections
		9.3.1 Exponential forecasts
			9.3.1.1 Average rate of growth
			9.3.1.2 Moving average growth
			9.3.1.3 Exponential smoothing
		9.3.2 Linear trend projections
			9.3.2.1 Simple trend
			9.3.2.2 Moving average trend
	9.4 Econometric or causal models
		9.4.1 Regression models
		9.4.2 Air freight models
		9.4.3 Gravity models
		9.4.4 Assessment of econometric models
	9.5 Choice of forecasting technique
10Product planning
	10.1 Key product features
	10.2 Schedule-based features
	10.3 Comfort-based product features
	10.4 Convenience features
	10.5 Airline image and branding
	10.6 The ‘hubbing’ concept
	10.7 The economics of hubbing
11Pricing for profit?
	11.1 Objectives of airline pricing policy
	11.2 Three key variables
	11.3 Inherent instability of airline fares
	11.4  Impact of the internet on airline pricing
	11.5 Cost-related or market pricing?
	11.6 Choice of price and product strategies
	11.7 Traditional structure of international passenger fares
		11.7.1 Normal fares: First, Business and Economy
		11.7.2 Preferential fares
		11.7.3 Promotional fares
	11.8 New pricing strategies
	11.9 The importance of revenue management
	11.10 Passenger tariffs and costs
	11.11 Determinants of airline passenger yields
12The economics of air freight
	12.1 Freight traffic trends
	12.2 The key players
	12.3 The demand for air freight services
	12.4 Freight and passenger markets differ
	12.5 The challenge of the integrated carriers
	12.6 Role of freight forwarders or ‘global logistic suppliers’
	12.7 The economics of supply
		12.7.1 Belly-hold capacity
		12.7.2 Combi aircraft
		12.7.3 All-cargo aircraft
	12.8 The pricing of air freight
		12.8.1 Structure of cargo tariffs
		12.8.2 Pricing is market- not cost-based
		12.8.3 Freight yields
	12.9 Marginal profitability?
	12.10 Beyond the crisis – prospects and challenges
13Future prospects – an unstable industry?
Appendix
	Negotiated in bilateral air services agreements
		Supplementary rights
Glossary of common air transport terms
Bibliography
Index
                        
Document Text Contents
Page 2

Flying off Course

The airline industry presents an enigma. High growth rates in recent
decades have produced only marginal profitability. This book sets out
to explain, in clear and simple terms, why this should be so. It
provides a unique insight into the economics and marketing of inter-
national airlines.

Flying off Course has established itself over the years as the indispens-
able guide to the inner workings of this exciting industry. This en-
larged fourth edition, largely re-written and completely updated, takes
into account the sweeping changes which have affected airlines in re-
cent years. It includes much new material on many key topics such as
airline costs, ‘open skies’, air cargo economics, charters and new
trends in airline pricing.

It also contains two exciting new chapters on the economics of the
low-cost no-frills carriers and on the future prospects of the industry.

The book provides a practical insight into key aspects of airline opera-
tions, planning and marketing within the conceptual framework of
economics. It is given added force by the author’s hands-on former ex-
periences as a Chairman and CEO of Olympic Airways and as a non-
executive Director of South African Airways.

Rigas Doganis is a Consultant to airlines and governments, and is a
non-executive director of easyJet and Hyderabad Airport. He is the
author of The Airline Business and The Airport Business, also pub-
lished by Routledge.

Page 367

British Airways 8.4

Charter airlines

Monarch 10.3

My Travel 11.4

First Choice 11.5

Source: Compiled using CAA (2009a) data.

In summary, a charter airline flying on the London–Barcelona market
or on other short-haul markets in the Europe-Mediterranean region
can achieve some limited direct cost economies compared to a sched-
uled operator. Through higher daily aircraft utilisation it can reduce
its hourly depreciation or lease costs. By using fewer cabin crew and
paying them less it can save costs here too, though this is a small cost
item. If it can use cheaper airports at one or both ends of the route it
can reduce the level of airport charges by half or more. Since on short-
haul routes airport charges may represent 8–15 per cent of total costs,
this cost saving can be important. These are the same areas in which
low-cost operators save costs. But overall, the charter airlines’ savings
on direct costs are limited.

367/735

Page 368

7.5.2 Indirect operating costs

The differences in direct operating costs between European network
carriers and charters have been highlighted above. Such differences
are not large. It is in the area of indirect operating costs that the costs
of charter and scheduled services begin to diverge most markedly.
These are station and ground expenses, passenger service costs, ticket-
ing, sales and promotion costs and costs of administration.

Charters’ station costs should be lower. Charter airlines can save
money by sub-contracting out most of the aircraft, passenger and bag-
gage handling activities at their destination airports. The seasonal
nature of their operations means that they have no need for perman-
ent staff or offices or other facilities at most of the out-stations they
serve. At their larger destinations they may base one or a small num-
ber of their own staff to supervise local ground handling agents. Even
where they do need staff dedicated to their operations, they may be in
a better position to use seasonal staff. In contrast, most major sched-
uled airlines with daily or more frequent flights to most of their major
European destinations will employ a station manager, together with
assorted other station and handling staff. Even if they outsource much
of the handling they will keep a small team of their own staff to super-
vise. They will have offices at the airport and perhaps off the airport as
well, with associated rents and other costs. They will have cars and
possibly their own ground handling equipment. Year-round station
costs for scheduled carriers will tend to be higher. In Europe, as in
many parts of the world, scheduled airlines now provide special dedic-
ated lounges at airports for their business or executive club members,
or they may pay for access to other airlines’ business lounges. This is
an additional expense avoided by charter companies. As a result of all
these differences, charter airlines are likely to have lower station and
ground costs.

368/735

Page 734

unit load devices (ULD) 297–8, 310

United Airlines 17–19, 50, 54, 5.1, 93, 100, 5.5, 102, 127, 135, 138, 6.4,
148–9, 239, 242, 10.4, 247, 273, 12.3, 323

United Parcel Service (UPS) 21–2, 127, 288, 290, 12.3, 300–1, 315,
12.7, 318–19

US Airways 17–18, 5.5, 100, 5.6, 138, 6.4, 148–9, 242, 10.4, 247–8,
273, 323

Value Air 6.1

Virgin America 132

Virgin Atlantic 59, 77, 4.4, 93, 113, 118, 168, 235–6

Virgin Blue 6.1, 148

World Airways 157, 171

XL Airways 1

Yammoussoukro Agreement 62

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yield 1.1, 13–14, 1.3;

dilution 152, 250, 276–7

735/735

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