Rev.

8/1/96

Kellogg

J.L. Kellogg Graduate School of Management Northwestern University

THE U.S. AIRLINE INDUSTRY IN 1995

There does seem to be something rational investors out of their minds. about airplanes that drives otherwise

Alfred Kahn1

Almost 20 years had passed since the airline industry was deregulated in 1978, yet the industry was still adjusting to its competitive environment. Entry and exit rates in the industry continued to be high, and in 1994 several major carriers, including United Airlines and Continental Airlines, announced new airline-within-an-airline shuttle services a move that called into question the use of the hub-and-spoke system that had formed the basis of most route strategies throughout the first decade of deregulation. The industry continued to suffer from cutthroat price competition, despite attempts by American Airlines in 1993 to impose pricing discipline on the industry through a new simplified fare structure. I NDUSTRY O VERVIEW Market Structure Eight carriers dominated the $49 billion domestic airline industry at the end of 1994, with an aggregate 89.4% share of the U.S. domestic airline market. The two largest carriers were American Airlines with a 18.5% market share and United Airlines with a 17.7% market share (Exhibit 1). There were seven other carriers that the Department of Transportation classified as Major carriers: 2 Delta (16.7%), USAir (9.5%), Northwest (8.9%), Continental (8.2%), Southwest (5.2%), TWA (4.6%), and America West (3.2%). In 1994 there were 19 National airlines. Like the Majors, National airlines fly medium to large-sized jet airplanes; however, they tended to focus more on specific areas of the country. There were also over 50 Regional Airlines operating in the United States, though some of these were wholly owned subsidiaries of the Major carriers and many had code-sharing agreements with the Major carriers. Regional airlines were much more likely to provide service using propeller engine planes, and typically provided commuter service, connecting smaller airports with the airports served by the Major airlines. Delta, American, and United each served at least one airport in each of the largest metropolitan areas of the country, yet the distribution of traffic was extremely different. United traditionally had been stronger in the large West coast corridor markets (Exhibits 2, 3), while American had been stronger in the East. Within particular airports, the differences were even more striking. For example, Delta accounted for over 80% of all the passenger

Copyright 1995 by James D. Dana Jr. and David A. Schmitt. This case was prepared by Professor James Dana and Kellogg Research Assistant David Schmitt. It is intended to be used as a basis for class discussion rather than as an illustration of either effective or ineffective handling of a managerial situation. 1 Smith, T. K., Why Air Travel Doesnt Work, Fortune April 3, 1995, p. 56. 2 The Department of Transportation classified an airline as a Major carrier if its revenues exceed $1 billion. In 1994, two cargo carriers, Federal Express and United Parcel Service, were also classified as Major carriers. Airlines with $100 million to $1 billion of revenue were classified as National carriers, while those with under $100 million were classified as Regional carriers.

2 enplanements (the number of passengers boarding a flight, including local and connecting passengers) in Atlanta (Exhibit 4). Customers Most airline travelers were usually characterized as either business travelers or leisure travelers, although some airlines have recently emphasized that leisure travel included both tourist travel and other types of personal travel. Of these three basic types, business travelers were the least flexible in their travel plans and the least sensitive to price. The typical business traveler did not pay for his or her own ticket, and instead chose the airline and flight on the basis of convenience, services and fringe benefits. Tourist travelers were the most sensitive to price, often changing their travel destination in response to lower prices. They were also more likely to plan their travel in advance and found it easier to take advantage of the advanced purchase discounts offered by all of the major airlines. Personal travelers, like tourist travelers, paid for their own travel, but their reason for traveling, such as travel to visit family or a close friend, was less flexible. Personal travelers were often able to arrange their travel in advance, and may have considered using an alternative airport (sometimes called a reliever or satellite airport) in order to save money. High frequency personal travelers were also the most likely to try to save money through creative ticketing, such as staggering round trip tickets in order to avoid Saturday night stayover requirements. In addition to offering service to a variety of destinations, major carriers competed for passengers on frequency of departures, availability of seats, baggage handling, customer service, on-board meals and entertainment, on-time performance, seating comfort and frequent flyer programs. Exhibits 5 and 6 show the 1994 rankings of the major carriers on service dimensions based on reader surveys from Consumer Reports magazine and Frequent Flier magazine. Industry Performance Since deregulation, the airline industrys profits had been volatile (Exhibit 7). Fluctuations in fuel prices, recessions, and the entry of new airlines all contributed to the problem, though a significant rise in market concentration in the 1980s may have offset some of these other factors. While most of the major carriers profits followed the industry trends, Southwest set its own trend by being the only consistently profitable airline since 1989 (Exhibit 8). Airlines used the available seat mile (ASM) as the standard measure of industry capacity, since this enabled comparison between flights of different lengths and planes of different sizes. ASMs on each flight were calculated as the number of miles flown times the number of seats on the plane. A revenue passenger mile (RPM) was the standard measure of the volume of output and was defined as a paying passenger flown one mile. The capacity utilization rate, called the load factor, was the ratio of RPMs to ASMs. Yield was calculated as passenger revenue per RPM and was often used as a proxy for average price (although airlines earn other revenues, such as cargo, from their airline operations). Unit costs were typically expressed as operating expenses per ASM. Because much of an airlines costs were fixed, profits depended largely on load factor. By increasing load factors, airlines could substantially increase profitability. One benchmark used to measure profitability was the break-even load factor, calculated as:

3 Break-even load factor = Total expenses/Yield ASM

This approximated the load factor that an airline would have to achieve at current yields in order to beak even. Total expenses were calculated net of other revenues, so the calculation assumed that yield, operating expenses, and other revenues were all unaffected by changes in load factor. Airlines with average load factors in excess of their break-even load factor were profitable, while those whose load factors fell below their break-even load factor were losing money. T HE A IRLINE INDUSTRY U NDER R EGULATION : 1930-19783 Airline regulation began in the industrys infancy when the major source of revenue was the U.S. Post Office. The Kelly Airmail Act in 1925 and the Air Commerce Act in 1926 made it possible for almost anyone to enter the industry and offer passenger and airmail service. In an effort to rationalize this fast growing and somewhat disorganized industry, Congress gave the Postmaster General authority to regulate route allocation through the McNary-Waters Act of 1930. Under the Postmaster General Walter Browns control, three airlines emerged with dominant market positions. The industry was divided into territories, largely based on east-west traffic. United Airlines controlled the northernmost routes, TWA the more central routes and American Airlines the southern-most routes. These airlines grew rapidly in the 1930s through mergers and the formation of holding companies, which acquired smaller airlines. However, this system of exclusive territories collapsed because of political protest against the extraordinary fares allowed under Browns tenure. President Franklin Roosevelt intervened and instituted a new system of competitive bidding that largely prohibited former carriers from participating. New carriers, including Delta and Continental, made significant increases in market share, while the three major airlines spun off smaller airlines in order to compete more effectively in the new environment. This rash of new competition dramatically lowered prices for both airmail and passenger service, although none of the airlines were able to make money in the subsequent years. In an effort to stem the losses in the industry and to insulate firms from cutthroat competition, Congress passed the Civil Aeronautics Act in 1938, establishing the Civil Aeronautics Board (CAB) as the regulatory body governing both domestic and interstate passenger traffic, and domestic airmail service. The CAB was given authority over all pricing decisions, entry and exit, mergers and acquisitions, and to some extent over interfirm agreements. The CABs objective was to guarantee service while protecting the airlines from excess competition. Typically two or three carriers were awarded the right to serve each route, though in cases where traffic was light, a single carrier might be allowed exclusive rights. The CAB instituted a system of cost-based pricing, but prices were often set to cross-subsidize smaller routes with profits from an airlines larger routes. On average, rates were set at variable cost plus a markup that allowed firms to earn a reasonable rate of return on capital. Because fares were set by route and were based on the industry wide cost levels, however, variations in airline profits because of differences in firm costs were expected. Although price competition was prohibited, firms could compete on service to create value for the customers. Some of the key dimensions on which airlines competed were the frequency of departures and the number of direct flights. Airlines also prided themselves on the size and comfort of their jet fleets and on their amenities for business travelers. As
3

This history of airline regulation is based in part on Donohue, Nancy and Ghemawat, Pankaj, The U.S. Airline Industry, 1978-1988, Harvard Business School, 1989.

4 long as many of their costs were passed on to customers through regulatory rate hikes, airlines could maintain their cost-is-no-object mentality. D EREGULATION , THE F IRST D ECADE : 1978-1988 The first changes toward deregulation of the domestic airline industry came in 1976 when the CAB permitted airlines to offer price discounts to passengers who met specific purchase requirements. Often called supersaver fares, after the promotional name given to them by American Airlines, these price promotions made it possible for airlines to discriminate in the fares they offered to business and leisure travelers since business travelers were generally less willing to meet requirements such as purchase in advance and stayover on a Saturday night. These fare discounts also set the stage for the development of yield management. This sophisticated set of quantitative tools for allocating the number of available seats between fare categories allowed airlines to increase load factors without significantly reducing the revenues from business travelers. Subsequent CAB regulatory actions included selectively relaxing long standing rules preventing carriers from entering routes already served by other carriers and allowing chartered service greater flexibility to compete with the major carriers. In 1978, as the airlines were preparing to sue the CAB for violating its mandate to protect the industry from increased competition, Congress passed the Airline Deregulation Act, deregulating the industry. Overall, real prices dropped significantly after deregulation (Exhibit 7), even after accounting for cost changes. The average price changes did vary with the route length, however. In particular, routes under 500 miles, many of which had been cross-subsidized under regulation, experienced an average increase in price. The major carriers even abandoned some smaller airports, but in most cases the lost jet service was replaced by propeller service from smaller commuter airlines. The longest routes, those over 1,000 miles, experienced the largest price declines, in part because the hub-and-spoke system fostered an increase in the number of competitors on transcontinental and many other long routes. Entry of New Airlines Perhaps the most significant consequence of deregulation was the wave of new entry. In 1979, 22 new airlines had been formed, and another 43 entered through 1982. New airlines such as Peoples Express, Midway Airlines, America West and New York Air seemed well positioned to flourish in the newly deregulated airline market, while the major airlines, whose labor costs were inflated by years of union negotiations under the protection of regulation, seemed particularly vulnerable to lower cost entrants. Surprisingly, the differences in the costs between airlines remained significant even 17 years after deregulation. The wave of new entry was consistent with many of the studies leading up to deregulation. These studies suggested that economies of scale in the airline industry were small and that the industry could support many new airlines. Some economists in favor of airline deregulation argued that entry would be so easy that the airline market was perfectly contestable. The theory of contestable markets, developed by academic economists in the late 1970s, argued that in markets where costs of entry and exit are extremely low, the mere potential for entry competition would be sufficient to discipline the prices of incumbent firms. Unless firms set prices at or near cost, they would invite opportunistic entry. These experts argued that barriers to entry (or more precisely, barriers to mobility) in the airline industry were low because airlines could easily deploy airplanes and other assets to new routes in response to changes in price and market conditions.

5 Growth of the Hub-and-spoke System Proponents of deregulation largely anticipated the sharp reduction in prices and new entry that accompanied the relaxation of price and entry regulations; however, few industry observers anticipated the rapid development of the hub-and-spoke system (Exhibit 11). The major carriers, including American, Delta, and United, began a rapid shift in their route structures away from the almost ad hoc structures that developed under entry regulation toward a hub-and-spoke pattern. Most carriers dropped nonstop service that did not connect at one of their designated hub airports and added new nonstop service from their hub airports to new destinations. In the wake of these major route structure shifts, many abandoned routes served as entry points for new carriers. Prior to deregulation, airlines could not develop hub-and-spoke route systems because they were not allowed to enter enough routes originating at a particular hub city. Airlines did gain some of the economic advantages of the hub-and-spoke system, however, through interlining, where passengers who could not find nonstop service would often have to change air carriers when taking a connecting flight. The practice of interlining diminished rapidly following deregulation, because of the development of the hub-andspoke system and code-sharing arrangements with smaller regional airlines.4 One measure of the impact of the hub-and-spoke system was the number of passengers who changed planes to complete their flights. The percentage of passengers having to change planes on trips over 1,500 miles rose from 42% in 1978 to 52% in 1990. Over the same time period, however, the percentage of all trips that included a change of airline fell from 11.2% in 1978 to 1.2% in 1990. So, while passengers disliked the increase in the number of trips that required a connection, they had deregulation and the hub-andspoke system to thank for a reduction in the number of times that they needed to change airlines, and the corresponding reduction in the risk of lost or mishandled baggage and missed connections. Frequent Flier Programs First introduced by American Airlines in 1981 and adopted by all major airlines by 1987, frequent flier programs (FFPs) attempted to win customer loyalty and were used to differentiate the Major carriers from the early low-cost startups. Don Burr, former chairman of Peoples Express, called FFPs one of the most compelling competitive disadvantages that we had. FFPs rewarded travelers with free flights based on the amount of travel accumulated with the airline. This essentially resulted in a quantity discount, providing one free trip for every certain number of paid trips. FFPs also provided additional strategic benefit for airlines with significant service in a particular city by offering more destinations from which the traveler could choose for the free flight. This loyalty also was considered important to providing the scale necessary for an efficient hub operation.5 In 1994, 8% of air travelers flew 11 or more trips, accounting for 44% of all air travel. The FFPs were specifically designed to attract these most frequent travelers. In this respect, they were quite successful, becoming so ingrained that business travelers came to see frequent flier miles as compensation for the inconvenience of travel.6 FFPs were designed so that the attractiveness of the rewards improved the more a traveler flew, providing an incentive to business travelers to try to limit their travel to one or two major carriers.
Code-sharing is defined in the section on commuter airlines. Borenstein, Severin, The Evolution of U.S. Airline Competition, Journal of Economic Perspectives, vol. 6, no. 2, pp. 61, 69. 6 Berkowitz, Collier, Johns, Madison, Sachs, and Schmitt, Breaking The Frequent-Flier Barrier, June 8, 1995, p. 12.
4 5

6 Southwest Airlines, despite the belief that they could maintain customer loyalty through friendliness and quality of service, adopted a frequent flier program in 1987. However, many low-cost startups still believed that it was too costly to provide frequent flier programs. In addition to the cost of offering free flights, the cost of tracking frequent flier mileage is substantial. Airlines have tried to keep the cost of free travel to a minimum by placing restrictions on frequent flier awards, making seats available for free travel only at off-peak times when load factors are lowest. Mergers and Consolidation In 1983, after the first wave of new entry into the industry there were 196 carriers operating in the United States, however, by 1993 there were only 130, despite a 140% increase in total passenger enplanements. Only six of the airlines started between 1979 and 1982 survived in 1995; the remainder had been liquidated or financially weakened and then acquired. Many airlines were absorbed through mergers. In a rush to build a national huband-spoke system many major airlines expanded through acquisition. Delta, American, and USAir each acquired a major West Coast airline in the 1980s (Exhibit 10). The merger of Northwest and Republic in 1986 gave Northwest a stronghold in Minneapolis and Detroit, and was viewed by some outsiders as evidence that the DOT was being too liberal in their postderegulation merger policy. Texas Air, which joined together major carriers Eastern and Continental, and acquired startups Peoples Express and New York Air, managed to build a large market share, especially in the East. However, after the bankruptcy and liquidation of Eastern Airlines in the late 1980s, all that remained was Continental. Airport Congestion Although some airports were congested before deregulation, the problem became even more severe in the years following deregulation. Airline travel increased by over 100% in the first decade of deregulation, yet no new airports were built. Hubbing also put a strain on airports, especially since airlines tried to schedule flights so that they would arrive and depart within a short time window. A few particularly congested airports, including OHare in Chicago, La Guardia in New York, and National in Washington, were slot restricted. Airlines at these airports had to purchase a slot the right to land a plane at a particular time of day for each of their daily departures. These landing slots have sold for as much as $1.2 million for a peak time slot. The supply of landing slots and airport gates (the passenger loading areas that that as parking spaces for airplanes) limits the potential for growth and expansion in many airports. Commuter Airlines and Code-sharing The major hub-and-spoke airlines had always relied to some extent on feeder traffic from commuter airlines. An often overlooked consequence of deregulation was that most major airlines built up substantial vertical networks with commuter airlines. Commuter airlines flew passengers from smaller airports, which were typically too small to economically support jet service, to a major airport where they connected with a major carrier. Through vertical mergers and joint marketing agreements major airlines were able to build up their access to this feeder traffic. Such agreements, called code-sharing agreements, meant that commuter airlines timed their flight schedules so that their flights would arrive in time to connect with the flagship carriers jet service and that airline reservation systems would list the connecting service of the commuter airline under the same airline carrier code as its affiliated major carrier. Advantages of code-sharing

7 agreements for the passengers included superior flight scheduling, reduced time waiting for connections, better gate proximity, superior baggage handling, and more valuable frequent flier programs. For the commuter airline, these arrangements meant making a commitment to serving a single major carrier; however, in most cases the difficulty of coordinating flight schedules and the costs of baggage interlining would prevent a commuter airline from trying to offer connecting service with more than one major carrier. I NDUSTRY T RENDS IN T HE 1990 S Airline management in the mid-1990s appeared to be taking the industry in a different direction than their predecessors in the 1980s. Employee ownership, ticketless travel, international code-sharing alliances, and the airline-within-an-airline were the buzzwords of these managers. For many carriers, the trend toward hub-and-spoke route systems had reversed. Some major hub operations were closed and others were turned over to commuter airlines or affiliated low-cost competitors. Airline-within-an-airline The tremendous growth and profitability of Southwest and America West Airlines, the two lowest cost Major airlines, was the stimulus for many cost-cutting efforts by the other Major carriers. Unable to match these carriers low costs systemwide, United and Continental tried to reduce costs on selected routes by creating an airline within an airline. Both airlines cited cutbacks in passenger amenities, a shift in emphasis from hub-and-spoke to point-to-point route strategies and lower labor costs, as benefits of the airline-within-anairline approach. To an extent, USAir and Delta had both been offering airline-within-anairline shuttle service in the major East Coast corridor (Boston-New York-Washington) for some time, though only USAir had ever discussed expanding service outside of that limited corridor. Uniteds Shuttle by United, born of Uniteds employee buyout in the summer of 1994, was started with the specific objective of matching Southwest Airlines lower costs in the California corridor (primarily flights from the San Francisco Bay area to the Los Angeles Basin area). Lower costs were to be achieved by reducing amenities and increasing airplane utilization rates, but the biggest cost savings were reduced labor costs as a result of the buyout. As part of the employee buyout, United pilots and other union workers agreed to lower overall wages as well as to changes in work rules to increase labor productivity. Continental announced its version of an airline-within-an-airline in 1994. Continental Lite, also called CALite, expanded rapidly in the southeastern United States and offered extensive service out of Greensboro, North Carolina. After struggling to earn a profit for less than a year, Continental decided to withdraw its CALite service in early 1995. The failure of CALite was largely attributed to the airlines choice of low traffic markets and to their overly optimistic estimates of the responsiveness of demand to lower fares. Ticketless Travel Ticketing costs, including labor, printing and travel agent commissions, were estimated at $15 to $30 per ticket. In an attempt to reduce these costs, some airlines turned to ticketless travel. In the most extreme version of this system, passengers made reservations via the companys centralized telephone reservation center, bypassing travel agents and thus eliminating commissions. The passengers received no boarding pass or ticket, only a confirmation number. At airport check-in, the passenger were given a reusable laminated numbered card on a first-come, first-served basis. At boarding time, passengers are called by number groups (i.e., 1-10 first, then 11-20, etc.), and then boarded the plane and chose any available seat. ValuJet, a regional airline based in Atlanta, was one of the first airlines to

8 universally implement this system ValuJet passengers did not have the option of printed tickets. Other airlines had employed variants of this system, including keeping travel agents as distributors but eliminating the printed tickets. Under this system passengers were usually given a confirmation number when they made their reservations, and were able to check in and receive their boarding pass at the gate by presenting their confirmation number. On Uniteds Shuttle flights travelers could also use the credit card with which they paid for their flight to obtain a boarding pass from automated-teller-machine-like terminals at the gate. Only two Major carriers, Southwest, which pioneered the laminated boarding pass system, and United, offered the option of ticketless travel on all of their flights, while the other major carriers, many of whom were reluctant to give up assigned seating, continued to experiment with ticketless travel options. Hub Reductions The rapid expansion of the hub-and-spoke system in the 1980s seemed to reach its peak in the early 1990s, but by the mid-1990s, the Major airlines were headed in the opposite direction. In 1992 USAir withdrew from its Dayton hub and United substantially scaled back its operations in Washington, D.C., dropping Dulles airport as one of its major hub and replacing much of its jet service with commuter service by its United Express affiliate Atlantic Coast Airlines. American Airlines had withdrawn or was scheduled to withdraw from its Miami, San Jose and Raleigh/Durham hubs. Many of Americans flights in San Jose were turned over to startup airline Reno Air, while their flights from the Raleigh/Durham hub were to be replaced with new hub service by the recently reborn Midway Airlines. Both Reno Air and Midway Airlines became affiliates of Americans frequent flier program as part of their agreement to take Americans routes. In many cases these routes were no longer flown as part of a hub network, but instead emphasized local traffic. As one airline analyst put it: In the U.S. market the old formula has led to cutthroat competition and staggering losses. Carriers offer half a dozen ways to get from here to there using various routes through different hubs, but none of the megacarriers can figure out how to do that and consistently make a profit.7 Corporate Discounting As the difference between full fares and discount fares increased corporations were looking for innovative ways to reduce travel costs, including providing internal travel agency services, requiring employees to turn over their frequent flier points to the company, and, perhaps the most successful strategy, negotiating discounts directly with the airlines. Although most discounts were confidential, according to one survey 44% of 1,134 large U.S. companies had negotiated some form of discount (e.g., discounts for travel to business meetings, discounts on particular routes, waivers of advance purchase restrictions or discounts on computer reservation equipment). The discounts almost never applied to all of a companys travel, and were often negotiated on the basis of significant advance planning, such as for business meetings and when companies moved their corporate headquarters. The size of the discounts depended on such factors as the anticipated number of travelers, the travel dates, and the airlines demand forecast. Businesses that had accumulated significant specific information about their employees expected travel needs were in the best position to negotiate discounts since airlines valued this information to help them increase load factors.
7

Woods, Wilton, Good-bye Hub and Spoke, Fortune, December 13, 1993.

9 R EVENUE M ANAGEMENT , MARKETING AND D ISTRIBUTION Pricing Prices were constantly adjusting in the industry. Pricing departments devoted a great deal of attention to monitoring competitors prices (using computer reservation systems) and matching any changes. Sometimes very small price cuts were made simply to increase the likelihood that an airlines flights would appear first on the travel agents computer reservation system. Dramatic price changes, however, were usually accompanied by significant advertising. The sheer number of fares each airline set could be overwhelming. For each origin and destination market that an airline served, fares had to be set for first-class, full-fare coach, and a variety of discount fares, all for both round-trip and one-way travel. The typical discount fare offered by a major carrier was for a coach seat when the buyer met certain restrictions, including either a minimum 7-, 14- or 21-day advance purchase, and a Saturday-night stayover. Discount fares were also offered for flying at off-peak times and on off-peak days. Although discounting may have peaked in 1991, when discount fares accounted for almost 95% of all traffic, in 1994 discount fares accounted for 90% of all traffic and the average size of the discount was about 65% (Exhibit 14). In 1992, after a series of price wars initiated by Northwest Airlines, Robert Crandall, president of American Airlines, tried to introduce a new simplified price system called Value Pricing, which was intended to reduce the frequency of price wars. Crandalls plan limited the number of discount fare classes and was designed to reduce the size of the gap between discount fares and full fares. This gap, as shown in Exhibit 14, has grown steadily since Crandall first introduced supersaver fares in 1976. Yield Management Yield management refers to the use of computer optimization techniques to allocate seats to different fare classes and price points. Consider a simple example in which an airline had two announced fares for its New York (JFK) to Dallas-Fort Worth (DFW) flight, a regular full-fare coach fare and a supersaver fare, with restrictions such as a 7-day advance purchase and Saturday night stayover. On a flight with 100 seats the yield management department had to decide how many seats to allocate to the supersaver fare bucket and how many seats to allocate to the full-fare coach bucket. In simplest terms, the airline hoped to sell as many seats as possible at the lower fare without risking that a full-fare customer would be turned away because all of the seats were sold. The exact size of each bucket was determined by weighing the benefit of additional sales at supersaver fares against the uncertain cost, including lost revenue and increased customer dissatisfaction, of potentially turning away full-fare passengers. To make this calculation the yield manager needed estimates of the mean and variance of full-fare demand in order to determine the probability that potential passengers are turned away. In practice this relatively simple calculation was made much more difficult by the sheer number of different fare classes, the number of different connections that a Dallas-Fort Worth bound passenger might take, and the difficulty of forecasting demand. American Airlines, a forerunner in computer reservation systems, was also the leader in developing computerized yield management techniques, and its Management Services Group was a leading source of yield management computer systems and software for other major carriers. USAir and other major carriers estimated that they increased operating revenues between 2% and 4% by adopting computer systems that perform yield management.

10 Travel Agents Travel agents were the major distribution channel for most airlines, accounting for 75% of airline reservations. Travel agents had traditionally received a 10% commission from the airline for providing services, including making the reservations, collecting payments and ticketing. However, in an effort to convince travel agents to direct more business to their firm, individual airlines offered additional financial incentives, called Travel Agent Commission Overrides (TACOs), which increased the agents commissions from an airline when the percentage of reservations made on that particular airline was sufficiently high. The incentive for airlines to reduce the commission paid to travel agents was high, and there had been several attempts to cut commissions. In the late 1980s, United announced a reduction in agent commissions to 5%, expecting other airlines to follow suit. However, while American had internally decided to match the commission cut, they also opted to delay matching United in order to take advantage of the short-term incentives for agents to pull business away from United and toward American and Uniteds other competitors. After the fourth day of seeing its business plunge, United relented and raised commissions back to 10%. In early 1995, Delta lead a successful move to reduce commissions. The decision to cap the 10% commissions at $50 per ticket was quickly matched by Deltas competitors. Despite warnings that many agencies would go bankrupt, few agencies left the business as a result of the commission cut. Computer Reservation Systems Many analysts foresaw streamlined distribution in the wake of deregulation, envisioning customers regularly using automated-teller-like machines for ticketing. However, the advent of the computer reservation system (CRS), which enabled more complex fare structures and frequent price changes, made the expertise of the travel agent even more necessary. Americans Sabre system and Uniteds Apollo system were the first entrants, enlisting most travel agents before competitors could roll out their own systems. Their systems listed the flights of almost every major U.S. airline and coordinated reservations with those made directly with the airline or on other CRS systems. These CRSs allowed airlines to set-up complex fare structures for each flight. By using advance-purchase and other requirements, the airlines were able offer a variety of discounted fares to more flexible travelers while last-minute travelers had no alternative but to pay full fares. This structure of multiple fares for travelers with differing needs gave the airlines the ability to gain additional revenue per flight by attracting the most price sensitive customers without sacrificing revenues from their least price sensitive customers. CRSs are not without their critics, however. One major concern was travel agent bias, also known as the halo effect. There was well documented evidence that travel agents using the Apollo and Sabre CRSs book more flights on United and American, respectively, although the CRS providers were forbidden by law from giving their own flights prominence in the CRS displays. An additional concern was that the ability to transmit fare information at high speeds provides airlines with a method of signaling that could facilitate collusion. For instance, an airline could announce through the CRS a fare increase on a particular route, effective at a future date. The carrier would then wait to see if its competitors matched the fare. If the fare was not matched, the carrier might extend the effective date, or withdraw the fare. Competitors might also counteroffer by announcing a smaller fare increase through the CRS. As market concentration increased, so did the ease of this type of collusion.

11 R OUTE S TRATEGIES The Hub-and-spoke System The economics of the hub-and-spoke system can be described using a simple example (Figure 1). Consider a major carrier serving all of the passengers who want to travel across the country between 10 different East Coast cities and 10 different West Coast cities. Since each departing passenger in the east may wish to go to any of the 10 destinations in the west, and vice versa, there are 100 different origin and destination markets. If the airline wanted to offer two nonstop departures each day for each of these routes, they would have to offer a total of 400 different one-way flight segments (100 citypairs and two flights per day in each direction). Instead of offering nonstop service the airline could set up a hub somewhere in the middle of the country with spoke flights coming and going to each of the 10 east coast cities and each of the 10 West Coast cities. Using a hub-and-spoke system, the airline could offer two daily departures from each spoke airport with a total of 40 one-way flights from the hub to each of the East Coast cities and 40 one-way flights to each of the West Coast cities. Although passengers may dislike having to change planes and wait for connections, by using a hub, the airline can offer the same number of daily departures for all of its 100 different origin and destination markets using only 80 flight segments per day. In addition, the airline can now offer service to passengers traveling between each of the 20 spoke cities it serves and its hub city. If service to the hub city is included in the comparison, then the hub-and-spoke system makes it possible to offer one-stop service to passengers with up to 120 different origin and destination travel requirements using only 80 flights, while the airline would need 440 flights to offer the same frequency of nonstop service. Although the airline is flying many fewer routes, in fact the total amount of traffic has not changed. Under the hub-and-spoke system all of this traffic is routed on a smaller number of flight segments, since all of the passengers originating their travel in the same city share the same outbound leg and all of the passengers ending their travel in the same city share the same connecting leg. Holding total traffic fixed, the traffic on each segment would be roughly six times higher under the hub-and-spoke system (20 segments) as it would be on the nonstop route system (120 flight segments). However, since the airline cannot accommodate all of the additional traffic with 1/6th of the flights, the airline must either add larger planes on its spoke routes or add additional frequencies. While on the one hand costs per ASM are lower for larger planes, on the other hand passengers may be more likely to choose the airlines flights, rather than a competitors, if they offer more frequent service. The ideal hub has virtually 360 degrees of air service. Although the inconvenience of changing flights is one of the main costs of the hub and spoke system, increased travel time because of a poorly located hub is another important consideration for travelers. Shuttle Routes and Point-to-point Service The success of low-cost airlines such as Southwest was often been cited as evidence that the hub-and-spoke system was unworkable. Executives at smaller startups referred to the hub-and-spoke system as a wasteful expenditure of manpower and aircraft and pointed out that to some airline passengers as well, hubs appeared to be simply an inconvenience, an extra stop to a final destination. An alternative to the hub-and-spoke system was point-to-point or shuttle service. By picking high traffic routes and offering high frequencies, a shuttle carrier could achieve significant size advantages. Higher aircraft utilization rates and lower average station costs (gates and aircraft maintenance) were just two of the advantages Southwest was able to exploit.

12 Route Selection, Market Share Models, and the S-Curve One of the most important financial decisions made by airlines was which routes to fly. Although decisions about individual routes had to be made in light of their impact on the entire route system, great attention was paid to measuring and forecasting route profitability. Market share models were typically used to forecast the share of the market that an airline could expect as a function of the number of flights and types of connections that it offered. One characteristic of the frequency of flights sometimes used in these models was the S-curve.8 Common sense suggests that an airline with twice as many flights each day as its competitor would be twice as likely to have the most convenient departure time for any particular customer. However, in practice an airline with twice as many flights was able to attract even more than twice the number of passengers. Adding an additional departure could increase market share directly as well as generate a frequency premium, in which demand for the airlines other flights increases as well. The importance of the S-curve is easier to see in an example. Consider the East Coast shuttle market in 1995 where Delta flew every hour on the half hour and USAir flew every hour on the hour. If Delta offered service every other hour, many customers would prefer to take the next USAir flight rather than to try to remember the departure time of Deltas next departure. And more importantly the security of knowing that they could take a flight an hour later if they miss their scheduled flight was very attractive to business travelers. Many business travelers purchased full-fare tickets on the airline with the most flexible schedule because of the convenience of being able to take the first flight out of town once their meeting was over. While a full-fare tickets would have had scheduled departure times, business travelers often viewed them as a general purpose tickets. Another important factor in these models, after accounting for frequency and convenience of the departure times, was the number and type of connections. When customers were offered similar frequencies of nonstop and one-stop flights at the same prices, they were four times more likely to choose the nonstop. If the choice was between a continuing one-stop flight and one-stop flight that required a change of planes, they were eight times more likely to choose the continuing flight. Aircraft and Crew Scheduling The hub-and-spoke system was complicated from an operations perspective. Consider United Airlines hub at OHare Airport in Chicago. In order to provide service from all of its east coast cities to Seattle through Chicago, every flight from Uniteds East Coast cities had to arrive in OHare shortly before its flight to Seattle departed. Of course, the same was true of departures to Portland and every other west coast city that United served. To make these connections work, United scheduled banks of arrivals and departures so that passengers could all connect as quickly and efficiently as possible. As a consequence, in early 1995 the average amount of time a passenger spent in the airport during a connection was 59 minutes, a 5% increase over the 1990 layover time.9 At a large hub, an airline would schedule anywhere from 5 to 12 banks a day, which created a significant amount of airport landing slot and gate congestion at those bank times. Because of the complexities involved in scheduling banks and connections, airlines used sophisticated computer systems to do aircraft and flight crew scheduling.

The S-curve gets its name from the graph of market share (as measured in revenue passenger miles) against frequency. 9 Wall Street Journal, June 1, 1995, p. A1.

13 P ROFILES OF S ELECTED A IRLINES American Airlines Despite being poorly positioned in the late 70s, with high costs, an old, fuelinefficient fleet and low-growth routes, American Airlines seemed to do everything right in the first decade of deregulation. They were the first airline to introduce computer reservation systems (Sabre System in 1975) and frequent flier programs (American Advantage in 1981), and were the first creator of the restricted discount fare (the American Airlines SuperSaver in 1976). In 1979 the airline moved its headquarters to Dallas where it created its first and largest hub and aggressively pursued a hub-and-spoke strategy for all of its routes. American was also aggressive in negotiating wage concessions from its unions and superior leasing terms from aircraft manufacturers, though they suffered from a severe flight attendants strike in 1993. Both industry insiders and outside observers viewed American as the best-managed U.S. airline in the 1980s. And by the late 1980s Americans market share had grown from 13.8%, seven points behind United, to 19%, the industry leader. Always an advocate of price stability, American had occasionally received close scrutiny from the DOTs and the Department of Justices antitrust departments for potential price-fixing violations and other anti-competitive practices. CEO Robert Crandalls effort to simplify and stabilize fares in 1994 was largely ineffective. Delta Airlines Delta pioneered the hub-and-spoke system with the development of its hub in Atlanta, a strategy that complemented its traditional strengths in the Southeast. In addition to developing other hubs in Dallas-Fort Worth and Cincinnati, Delta acquired Western Airlines in 1986 in order to increase its national presence. Although Delta faced some competition in the East from Eastern Airlines (also in Atlanta), American (in Nashville), and Piedmont (in Charlotte), the acquisition of Western put Delta in head-to-head competition with United and American in the major transcontinental markets. Long known for having strong labor relations and quality service, Delta focused on quality management in the 1990s and shied away from aggressive price competition with low cost carriers, such as Morris Air, which operated out of its Salt Lake City hub before being acquired by Southwest. In 1994 Delta turned down a proposal from Robert Priddy, the former CEO of Atlantic Southeast Airlines, Deltas largest affiliated commuter airline, to develop a low cost subsidiary airline and instead embarked on an aggressive program to reduce costs and increase revenues, named the 7.5 Leadership Program after its goal of reducing systemwide costs to 7.5 cents per ASM. Southwest Airlines As a result of its financial success and tremendous growth since its start as a small regional airline serving only intrastate flights in Texas, Southwests low-cost strategy was widely acclaimed by competitors and industry analysts. According to one analyst, The only moneymaking U.S. airline, Southwest, doesn't follow the usual formula. Southwest has no long flights; it links city-pairs with frequent flights almost like a shuttle, leaving the niceties of first class, advance seat selection, hot meals and baggage transfers to the other airlines. It keeps a tight schedule and a tight budget. Southwests determination to keep costs low sometimes handicapped its marketing efforts. For example, by refusing to pay fees to Americans Sabre and Uniteds Apollo computer reservation systems, the airline eventually gave up all access to these distribution

14 channels. While Southwest adopted a frequent flier program, the lack of program partners and international destinations made their program one of the least desirable. USAir USAir was the highest cost Major carrier in the industry, although part of that cost difference could be explained by the fact that USAirs average flight length was shorter than other Major carriers. Described as having a conservative management, USAir avoided the wave of consolidations in the 1980s and focused on developing its hubs in Pittsburgh and Philadelphia. USAirs stronghold in Pittsburgh continued to grow; in 1993 USAir enplaned 82% of all of Pittsburghs passengers, while all of the other Major carriers combined accounted for less than 10% of the market. One of USAirs more successful operations was the USAir Shuttle, which provides service between Boston, New York and Washington, D.C. Acquired through a contractual arrangement with the Trump Shuttles creditors, the USAir Shuttle had only one major competitor, Delta, and had been able to avoid severe price competition. Although USAir had not formally announced an airline-within-an-airline strategy, it was one of the first airlines to study the proposal and had discussed expanding the USAir Shuttle to other routes in 1996 when it had the option to acquire full control of the operation. In 1995, USAir experimented with their discount fare pricing, eliminating round trip travel and Saturday night stayovers as requirements on many of its East-Coast, 21-day advance purchase discount fares. An airline spokesperson said We thought this structure would create a simpler, easier-to-sell fare menu that would more appropriately meet the needs of both the business and leisure passengers.

Figure 1: Geography of the Hub-and-spoke System

Nonstop Service

Hub-and-spoke Connecting Service

Exhibit 2:

Airline Traffic Ranking By City, 50 Largest Markets, Twelve Months through June 1994. Passengers

Rank
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50
1

City
New York,NY/Newark, NJ Chicago, Illinois Los Angeles, California Dallas/Ft. Worth, Texas San Francisco, California Atlanta, Georgia Washington, D.C. Boston, Massachusetts Phoenix, Arizona Las Vegas, Nevada Houston, Texas Orlando, Florida Denver, Colorado Seattle/Tacoma, Washington Detroit, Michigan Miami, Florida Honolulu, Oahu, Hawaii San Diego, California Philadelphia, PA/Camden, NJ Minneapolis/St. Paul, Minnesota St. Louis, Missouri Tampa, Florida Fort Lauderdale, Florida Baltimore, Maryland Kansas City, Missouri Cleveland, Ohio San Jose, California Oakland, California Portland, Oregon New Orleans, Louisiana Ontario&San Bernardino, California Pittsburgh, Pennsylvania Salt Lake City, Utah San Juan, Puerto Rico Santa Ana, California San Antonio, Texas Indianapolis, Indiana Sacramento, California Albequerque, New Mexico West Palm Beach/Palm Beach, Fla. Austin, Texas Columbus, Ohio Nashville, Tennessee Burbank, California Hartford, Connecticut Cincinnati, Ohio Charlotte, North Carolina Raleigh/Durham, North Carolina Reno, Nevada Milwaukee, Wisconsin

Number1
4462693 3268148 2774320 2190568 1973047 1849097 1831911 1715710 1574056 1570203 1533719 1345810 1285644 1266932 1251031 1233842 1141963 1079889 1037673 989052 920763 916469 773330 747516 727836 672943 655755 648265 644702 640891 600956 588085 580671 579084 565899 519073 506088 502072 495999 474748 452756 447743 447542 443734 411787 411381 401528 392238 390204 386573

Percent of Total
6.80 4.98 4.23 3.34 3.01 2.82 2.79 2.61 2.40 2.39 2.34 2.05 1.96 1.93 1.91 1.88 1.74 1.65 1.58 1.51 1.40 1.40 1.18 1.14 1.11 1.03 1.00 0.99 0.98 0.98 0.92 0.90 0.88 0.88 0.86 0.79 0.77 0.76 0.76 0.72 0.69 0.68 0.68 0.68 0.63 0.63 0.61 0.60 0.59 0.59

The rankings and totals are based on a 10% sample of all travel during the period. The numbers in the table can be multiplied by 10 to yield an estimate of total traffic. The figures include local traffic (origin and destination) and do not include connecting passengers. Source: US Department of Transportation

Exhibit 3:

Airline Traffic Rankings by Route, 50 Largest Origin and Destination Markets, Twelve Months through June 1994. Passengers

Rank
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50
1

City Pair
Los Angeles, California Chicago, Illinois Boston, Massachusetts Miami, Florida Honolulu, Oahu, Hawaii New York, NY/Newark, NJ Dallas/Ft. Worth, Texas Los Angeles, California New York, NY/Newark, NJ New York, NY/Newark, NJ Fort Lauderdale, Florida New York, NY/ Newark, NJ Atlanta, Georgia Las Vegas, Nevada Chicago, Illinois Los Angeles, California Los Angeles, California Honolulu, Oahu, Hawaii Honolulu, Oahu, Hawaii New York, NY/Newark, NJ Honolulu, Oahu, Hawaii Chicago, Illinois Hilo, Hawaii, Hawaii San Diego, California Boston, Massachusetts Chicago, Illinois Dallas/Ft. Worth, Texas Honolulu, Oahu, Hawaii Chicago, Illinois Los Angeles, California NY, NY/Newark, NJ Dallas/Ft. Worth, Texas] Las Vegas, Nevada Los Angeles, California Atlanta, Georgia Chicago, Illinois Phoenix, Arizona Chicago, Illinois Chicago, Illinois Chicago, Illinois Chicago, Illinois Chicago, Illinois Chicago, Illinois Boston, Massachusetts San Francisco, California Houston, Texas Chicago, Illinois Detroit, Michigan San Francisco, California Burbank, California New York, New York New York, New York New York, New York New York, New York Kahului, Maui, Hawaii Washington, D.C. Houston, Texas San Francisco, California San Francisco, California Orlando, Florida New York, New York San Juan, Puerto Rico New York, New York Los Angeles, California Detroit, Michigan Phoenix, Arizona Oakland, California Lihue, Kauai, Hawaii Los Angeles, California West Palm Beach, Florida Kona, Hawaii, Hawaii Los Angeles, California Honolulu, Oahu, Hawaii San Francisco, California Washington, D.C. St. Louis, Missouri New York, New York San Francisco, California Minneapolis, Minnesota Seattle/Tacoma, WA Tampa, Florida San Antonio, Texas Phoenix, Arizona Washington, D.C. Chicago, Illinois Cleveland, Ohio San Diego, California San Francisco, California Kansas City, Missouri Denver, Colorado Phoenix, Arizona Orlando, Florida Washington, D.C. Chicago, Illinois Washington, D.C. New York, New York Dallas/Ft. Worth, Texas New York, New York Seattle/Tacoma, Washington Oakland, California

Number1
276148 254359 248093 244261 232368 223097 221370 210818 193083 187226 178313 166921 165102 153603 135811 133811 127799 127633 126843 123277 116617 114433 107866 106448 106398 101197 98478 98025 92823 92210 91792 91664 87777 87478 86047 85494 83810 83771 83675 81812 81771 81616 80881 80363 80165 78927 78919 78127 77169 76836

Percent of Total
0.86 0.79 0.77 0.76 0.72 0.69 0.69 0.65 0.60 0.58 0.55 0.52 0.51 0.48 0.42 0.41 0.40 0.40 0.39 0.38 0.36 0.35 0.33 0.33 0.33 0.31 0.31 0.30 0.29 0.29 0.28 0.28 0.27 0.27 0.27 0.27 0.26 0.26 0.26 0.25 0.25 0.25 0.25 0.25 0.25 0.24 0.24 0.24 0.24 0.24

The rankings and totals are based on a 10% sample of all travel during the period. The numbers in the table can be multiplied by 10 to yield an estimate of total traffic. Source: US Department of Transportation

Exhibit 5:

Consumer Unions Reader Survey: Ratings of Domestic Airlines on Service Quality, 19941

Southwest

Delta2

TWA

American

Northwest

America West

USAir 2

United 2

Continental

Overall score3 On-time Check-in Seat comfort Crowding Flight attendant Baggage problems

74 4 3 3 1 3 4

72 3 3 3 3 3 3

71 3 3 5 3 3 3

69 3 3 3 3 3 3

68 3 3 3 3 3 3

68 3 3 3 2 3 3

67 3 3 2 3 3 3

67 3 3 2 3 3 3

62 1 3 2 3 2 2

Source: Based on data presented in Consumer Reports, June 1995, pp. 386-387.

Results based on responses to Consumer Unions 1994 Annual Questionnaire. About 120,000 subscribers to Consumer Reports provided data on approximately 189,000 domestic flights they had taken between January 1993 and April 1994. Ratings of specific components of service are based on a 5 point scale: 5 = highest; 1 = lowest rating. Data do not include shuttle flights. Overall score summarizes reader responses to Consumer Reports 1994 Annual Questionnaire concerning airline flights during the preceding 16 months. Consumer Reports used a six-point scale: 100 = excellent, 80 = very good, 60 = good, 40 = fair, 20 = poor, 0 = very poor. The average rating was 70. Slightly over half of respondents rated their flights as very good or excellent. Each airline was judged on at least 472 flights; a flight is defined as a one-way trip on a single airline, including stops and connections. An airlines Rating includes judgments of the commuter carriers that use its name. Differences of less than three points are not meaningful. The survey reflects the experiences of Consumer Reports readers, not necessarily those of airline passengers in general.

2 3

Exhibit 6: Frequent Flier Magazine Airline Rankings 1994

Part 1. Rankings of all Major Airlines Overall Service 1. Delta 2. American 3. United 4. TWA America West Northwest 7. USAir 8. Southwest 9. Continental Short-Haul Service 1. Delta 2. America West 3. America 4. United Northwest 6. TWA 7. USAir 8. Southwest 9. Continental Long-Haul Service 1. Delta 2. American United 4. TWA 5. Northwest 6. America West 7. USAir Southwest 9. Continental

Part 2. The Top Rated Airline in Each of Ten Major Categories of Service Category of Service Schedule/Flight Accommodations Frequent Flier Program Aircraft/Attendants Food Service On Time Performance Seating Comfort In-Flight Amenities Airport Check-In Gate Location Post-Flight Services Top Rated Airline (multiple entries indicates a tie) American United Northwest American Delta American Southwest TWA Delta Delta Delta Southwest

Part 3. Top Rated Airlines in Several More Specific Categories Category of Service Availability of Seat Preference Seating Comfort Keeping Flyers Informed of Delays Overhead Storage Flight Attendants Food Quality On-Time Departure On-Time Arrival Baggage Delivery Speed Fewest Lost Bags Top Rated Airlines (in alphabetical order) American/TWA/United Delta/TWA/United America/Delta/United America West/American/Delta Delta/Southwest/TWA America/TWA/United Southwest Delta/Southwest/United Delta/Southwest/United America/Southwest/United

Source: Frequent Flier, July 1995. Based on a J. D. Powers Survey of the U.S. OAG Pocket Flight Guide subscriber base. Respondents rated many different aspects of the flight experience (for each airline they flew during the first quarter of 1995) and these ratings were consolidated into the ten categories of service criteria listed in part 2 of the table. The mean respondent was 48 years old, flew 25 round trips per year, and earned $137,000. 45% carried a laptop computer when they traveled and 87% were male.

Exhibit 7:

Financial and Traffic Performance, Domestic Airline Industry, 1950-1994

Year

Yield Unit (cents/RPM Revenues ) (cents/ASM) 6.89 7.61 6.92 6.68 6.40 6.62 6.33 6.27 5.85 6.88 6.57 6.24 6.31 6.09 5.95 5.87 5.67 5.49 5.46 5.68 5.79 6.06 6.08 6.34 7.29 7.59 7.97 8.42 8.30 8.71 11.01 12.32 11.78 11.61 12.14 11.65 10.84 11.11 11.88 12.43 12.76 12.74 12.50 13.06 12.49 3.96 4.63 4.57 4.33 4.03 4.09 4.00 3.97 3.58 4.08 4.03 3.46 3.34 3.23 3.28 3.24 3.29 3.10 2.87 2.84 2.88 2.94 3.23 3.31 4.00 4.08 4.42 4.71 5.10 5.48 6.49 7.22 6.95 7.05 7.19 7.15 6.54 6.92 7.43 7.86 7.97 7.98 7.95 8.29 8.27

Consumer Price Index (1982=100) 24.9 26.9 27.5 27.7 27.8 27.7 28.2 29.2 30.0 30.2 30.7 31.0 31.3 31.7 32.1 32.7 33.6 34.6 36.0 38.0 40.2 42.0 43.3 46.0 51.1 55.8 59.0 62.8 67.6 75.2 85.4 94.2 100.0 103.2 107.7 111.5 113.6 117.7 122.6 128.5 135.4 141.1 145.5 149.7 153.6

Yield in 1982 Dollars 27.6 28.3 25.2 24.1 23.0 23.9 22.5 21.5 19.5 22.8 21.4 20.1 20.2 19.2 18.5 18.0 16.9 15.9 15.2 15.0 14.4 14.4 14.0 13.8 14.3 13.6 13.5 13.4 12.3 11.6 12.9 13.1 11.8 11.3 11.3 10.5 9.6 9.4 9.7 9.7 9.4 9.0 8.6 8.7 8.1

Revenue Passenger Miles

Available Seat Miles

Load Factor

1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

8,029,131 10,589,668 12,559,332 14,793,875 16,802,424 19,852,118 22,398,589 25,378,769 25,375,489 29,307,600 30,556,616 31,062,345 33,622,636 38,456,612 44,141,261 51,887,415 60,590,826 75,487,327 87,507,677 95,945,897 104,146,807 106,438,408 118,137,978 126,317,334 129,732,395 131,728,492 145,271,283 156,609,249 182,669,238 208,890,884 200,829,303 198,714,755 210,149,315 226,908,925 243,692,254 270,584,011 302,089,903 324,637,336 329,309,489 329,975,206 340,230,892 332,565,881 347,931,400 354,176,730 378,846,419

13,124,889 15,614,681 19,170,377 23,337,498 26,921,925 31,371,182 35,366,158 41,746,375 42,723,508 48,404,952 52,220,182 56,087,214 63,887,578 72,254,533 80,524,404 94,787,113 104,668,839 133,699,795 166,870,750 194,447,654 213,159,879 221,503,165 226,614,145 244,699,119 233,880,101 241,282,125 261,247,796 280,618,915 299,541,841 332,796,130 346,028,272 346,171,952 359,527,716 379,150,158 422,506,609 445,825,864 497,990,815 526,958,361 536,662,591 530,079,041 563,064,938 543,637,976 557,988,917 571,489,249 585,102,123

61.17 67.82 65.51 63.39 62.41 63.28 63.33 60.79 59.39 60.55 58.51 55.38 52.63 53.22 54.82 54.74 57.89 56.46 52.44 49.34 48.86 48.05 52.13 51.62 55.47 54.60 55.61 55.81 60.98 62.77 58.04 57.40 58.45 59.85 57.68 60.69 60.66 61.61 61.36 62.25 60.42 61.17 62.35 61.97 64.75

Source: Air Transport Association Annual Reports.

Exhibit 9: Analysis of Jet Fleets of U.S. Major Carriers, First Quarter 1994

Airline America West American Continental Delta Federal Express (Cargo) Northwest Southwest TWA United United Parcel Service (Cargo) USAir

Size of Jet Average Age of Jet Fleet Fleet 84 699 297 555 205 369 160 199 573 154 477 8.6 8.3 13.9 9.7 18.4 16.7 7.7 18.7 10.8 20.4 11.3

Source: The Aviation and Aerospace Almanac 1995, McGraw Hill, Inc., 1995.