Systems in Transportation: the case of the airline industryOutlineEarly HistorySlide 4Slide 5Slide 6DeregulationEffects of DeregulationStructure of the IndustryStructure of an AirlineEconomics & ManagementManagement ToolsEngineering - AircraftEngineering - FlightSafety and AssessmentRelation to the EnvironmentCurrent University-based R&DSlide 18ConclusionSystems in Transportation:the case of the airline industryby Pedro Ferreirafor ESD.83November 27th, 2001Outline•Early History•Deregulation•Structure•Economics•Engineering•Safety•Environment•University-based R&D•ConclusionEarly History•1903 – Orville and Wilbur Wright, in NC, first flight with powered machine heavier than air (before only balloons and gliders)•1908 – Charles Furnas, first American airplane passenger (flew with Orville Wright in NC)•1914 – First scheduled air service, in FL, plane that could take off and land in water, designed by Glenn Curtiss•WWI – Increased demand for aircrafts, more powerful motors, larger aircrafts, but military focused (on the civil side, competition from railroads)•Airmail – Congress appropriated $100000 for experimental airmail service in 1917, conducted by the Army and the Post Office (DC-NYC)•Beacons – Night flights possible in Ohio with beacons visible at 10-second intervalsEarly History•Contract Act of 1925 (Kelly Act) – Government moved airmail traffic to the private sector, using competitive bids, 5 contracts were granted•Morrow Board – Board to recommend a national aviation policy, chaired by Dwight Morrow, senior partner in JP Morgan. Government should set standards for civil aviation outside the military•Air Commerce Act of 1926 – Recommendations accepted and implemented by the Secretary of Commerce: designate air routes, develop navigation systems, license pilots and aircrafts, investigate accidents•Tin Goose – Henry Ford bid for airmail contracts, in 1925 and developed the first duralumin aircraft, designed primarily for passengers•Charles Lindberg – First flight across the Atlantic ocean (NYC-Paris) in 1927, the Spirit of St. Louis, aviation became a more established industryEarly History•Watres Act – Designed by Postmaster General Walter Brown, allowed the Post Office to enter long-term contracts with rates based on volume•Air Mail Act of 1934 – Return of the airmail service again to the private sector after scandals in attributing routes under the Watres Act, also, the government forced dismantling vertical holding companies•Aircraft Innovations – Air-cooled engines, reduced weight, larger and faster planes, better altimeters, airspeed indicators, rate-of-climb indicators, compasses, artificial horizon, radio beacons•Modern Airlines – Boeing 247 (1933, 10 passengers at 155 mph), United Airlines bought 60 in 1933. DC-3, first passenger aircraft yielding profit (21 seats, 16 hours C2C)•Pressurized Cabins – introduced by Boeing in the Stratoliner, deriving from the B-17, could fly at 20000 feet and reach 200 mphEarly History•Civil Aeronautics Act of 1938 – Creation of an independent agency, the Civil Aeronautics Authority (CAA), to regulate fares, mergers and routes.•WWII – In the US, mass production of planes (50000/year); Innovations: Jet Engine (theorized by Newton, designed application by Whittle in 1930, built by von Ohain in 1939) and Radar (British scientists in 1940)•Cold War – Fueled funding to develop jets, from military to commercial sector: swept-back wing, kerosene; Boeing 707, technology transfer from the KC-135 (jet tanker)•Federal Aviation Act of 1958 – Accidents; Results in the creation of FAA in 1967 (along with the DOT) to run a broad air traffic control system, certification of aircraft designs, airline training and maintenance•Wide-bodies and Supersonics – Boeing 747 (1969, 2 aisles, 4 engines, 450 passengers); DC-10 and L1011, 250 passengers; Tupolev 144 (1968) and Concord two months laterDeregulation•The airline industry is a SYSTEM – it has inputs, serves a purpose and has acquired technological maturity; it needs specific policy for development, design and management of dependencies and interactions among firms•Wide-bodies boosted airline capacity; oil embargo of 1973 skyrocketed prices•CAB report of 1975: “industry is competitive, not monopolistic” •Air Cargo Deregulation: 1977, cargo carriers freedom to operate on any domestic route and charge whatever the market would bear•Express Packet Delivery: 1970s, express carriers allowed to operate overnight and according to demand for high-quality services•Passenger Deregulation: complete elimination of restrictions on routes and services by December 1981, end of all rate regulation in January 1983. CAB ceased in 1985, some functions shifted to the DOTEffects of Deregulation•The airline industry is a SYSTEM – it is organized as a network and the hub and spoke system proves to be the most efficient/profitable configuration•Hubs: strategically located airports used as transfer points for cargo and passengers, airlines schedule banks (dozens of planes within minutes) of flights in and out hubs per day. Hubs allow to serve far more markets with the same size fleet, relative to P2P service, hundreds of connecting flights, easier for an airline to keep passengers end-to-end and to achieve higher load factors•New carriers (43 in 1978, doubled today) lead to increased competition (85% of the passengers have a choice of 2 or more carriers) and growth in air travel (240 million in 1977 to 640 million in 1999, 80% of the US population has flown at least once)•Fares have declined 35% since 1978, traveling public save $20 billion/year (55% due to discount fares, 45% increased service frequency)•Other innovations: frequent flyer programs, computer reservations, codesharingStructure of the Industry•The airline industry is a COMPLEX SYSTEM – it has elements and it is organized into scales and levels of airlines•What is an airline? Two certificates: fitness (issued by the DOT, financing and management in place to provide scheduled service) and operation (issued by the FAA, requirements for operating aircrafts with 10 or more seats)•Types of airlines: Majors (+$1000 m/year), nationwide and worldwide service (12 US majors for passengers and 3 for cargo); Nationals ($100-$1000 m/y), particular regions and long-haul service, using medium and large-sized jets; Regionals ($20-$100 m/y),