Airlines
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Industry Overview
The US airline industry consists of about 3,000 companies, with combined annual revenue of $120 billion. Major airlines include American, United, and Delta, and the air operations of cargo and courier companies, such as FedEx and UPS. The industry is highly concentrated: almost 90 percent of revenue comes from the top 12 companies.
The government classifies airlines as "major," "national," "regional," and various others. About 40 national airlines have annual revenue between $100 million and $1 billion, and 90 regional airlines have annual revenue under $100 million. The remainder of the industry consists of small air companies that generally have annual revenue between $5 and $50 million.
Competitive Landscape
Airlines depend highly on the health of the US economy, which affects air travel by business and consumer passengers. Because many costs are fixed, the profitability of individual companies is determined by efficient operations and on favorable fuel and labor costs. Small airlines can compete by servicing local or regional routes. The industry is highly capital-intensive: average annual revenue per employee is about $200,000.
Products, Operations & Technology
Airlines carry passengers, cargo, and mail, or have specialized functions, such as medical air transport or oil platform servicing. Flights may be scheduled or nonscheduled (charter). About 70 percent of industry revenue comes from scheduled passenger traffic, 10 percent from carrying cargo and express mail, 4 percent from charter flights, and 1 percent from hauling US mail. Other revenue comes from providing maintenance, servicing, training, and reservations. Some airlines carry only cargo, using specially equipped planes. Some major airlines, including United, Northwest, and American, have large cargo operations that contribute 5 to 10 percent of revenue. For smaller passenger airlines, cargo may contribute more than 10 percent of revenue.
The basic operations of airlines include acquiring and maintaining airplanes, acquiring and operating airport facilities, acquiring passengers or freight, managing staff, and operating flights.
The flight equipment (airplanes) that an airline uses is crucial to efficient operations. The cost, capacity, and fuel efficiency of airplanes vary substantially. The major airlines operate about 20 types of aircraft with a total of about 4,700 planes; of these, around 600 were made by Airbus and around 4,000 by Boeing. Manufacturers of smaller aircraft for regional airlines, with seating capacities of 30 to 90, include Bombardier, Fokker, Embraer, and Saab. The largest aircraft can hold 360 passengers or 70 tons of cargo, and are used for long flights with a "stage length" of more than 3,000 miles, but the major carriers operate mainly planes that hold from 130 to 175 passengers.
A large plane like the Boeing 747 consumes 3,500 gallons of fuel per hour, while a midsize one like the Boeing 737 consumes about 800 gallons. Larger planes require a larger crew. The operating cost of an airplane is often expressed in cents per seat mile, with typical values between 3 and 7 cents. The list price for a new Boeing 737-700 is close to $50 million. A Boeing 747-400 lists for $200 million. The actual price airlines pay for new planes can be substantially lower than the list price, especially if they place big orders. A large market exists for used aircraft, which can have a useful life of 20 years or more.
Airlines lease terminals; ticket counters; gates (sometimes called "slots"); cargo facilities; and maintenance facilities from airports, which are usually owned by local government authorities. In some cases, airlines can sublease their facilities to other airlines. About 640 airports have regular airline service in the US; close to 220 are served by the large carriers. American and Delta have service to virtually all 220, while Southwest serves about 60. In addition to paying for airport facilities, airlines pay landing fees for each flight, which are $1 per 1,000 pounds of landing weight at a regional airport, or about $100 for a Boeing 737. Landing fees at major airports can be more than twice as high. Routine aircraft maintenance is done at local airports, but the big carriers typically have one or several large central maintenance facilities for major overhauls. Many smaller airlines contract maintenance out to the major carriers.
Because of the large number of flight departures - American, Delta, and Southwest each handle 1 million departures annually - scheduling staff and equipment is a major logistics problem. Southwest operates its million departures with 365 aircraft and 30,000 employees; 10,000 are flight crew and 15,000 ground crew. Airlines measure in terms of departures, rather than flights, because a single flight may have several stops. Each airplane makes an average of 2,700 departures, about eight per day.
Airlines measure their performance using a number of metrics. Southwest carried 78 million revenue passengers in a recent year, about 75 per flight, and flew 60 billion revenue passenger miles (RPM). The average flight segment stage length was 600 miles. The full capacity of its flights in a recent year was 85 billion available seat miles (ASM). The load factor of its flights was 71 percent; that is, the average flight was 71 percent full (divide RPM by ASM). Operating revenue per ASM was 9 cents, while operating expense per ASM was 8 cents. The average passenger fare was $94, which translates into average revenue of about $7,000 per flight for this discount carrier.