Industry Profiles: Air Transportation, Scheduled and Courier Services

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Industry Profiles: Air Transportation, Scheduled and Courier Services

Overview

The scheduled passenger airline segment of the air transportation industry grew out of the U.S. airmail services into a multi-billion dollar industry in its own right. According to Fortune, total revenues for the 10 largest U.S. airlines reached $86 billion and total profits climbed to $5 billion in 1997. Air travel continued to increase in the late 1990s as the industry experienced renewed growth stemming from the country's economic prosperity in the mid- to late 1990s. As the industry approached the end of the century, it benefited from international "open skies" agreements as well as from international airline alliances. However, safety and security concerns continued to pester the industry after two major crashes in 1996.

The air courier segment includes services that ship freight (generally under 100 pounds) and express mail. Two kinds of companies provide air courier services in the United States. These include integrators or all-cargo companies such as Federal Express and DHL. Integrators have a fleet of planes, carry cargo only, usually fly at night, and have ground transportation and personnel for door-to-door pick up and delivery. On the other hand, some passenger airlines, such as American Airlines, also provide air courier services. These companies transport cargo (freight, express, and mail) in the holds of their passenger aircraft. They fly during the day since passenger traffic is their first priority. Passenger airlines have provided service similar to integrators, except most airlines have to subcontract ground transportation.

The Federal Aviation Administration (FAA) reports that freight and express mail (air courier) services reached 14 billion revenue ton miles (RTMs) annually by the late 1990s. A revenue ton mile (RTM) equals one ton of revenue traffic transported one mile. Both domestic and international RTMs for freight/express have been approximately 7 billion RTMs annually. Industry analysts have predicted that the international division will continue to grow in the late 1990s.


History of the Industry

The passenger and courier air transportation industry resulted from the development of the aviation industry, which began with the first successful sustained flight by Wilbur and Orville Wright in Kitty Hawk, North Carolina, in 1903. The popularity of air travel exploded with the successful overseas flight of Charles Lindbergh on May 20,1927. Various air transport holding companies were created, such as Aviation Corporation, launched by financiers W. Averill Harriman and Robert Lehman. The air transport division of this company was called American Airways. In 1928, another holding company was created by Boeing and its air transport division—United Aircraft and Transportation Corporation. By 1931, United Air Lines was created as the management company for United Aircraft's four transport companies.

The passenger industry remained heavily regulated by the government until 1978 when the Carter Administration brought free market conditions to the industry. As a result, route structures and price setting became the decisions of the domestic carriers, not the U.S. government. A "hub and spoke" route system was quickly created and airlines had the right to expand internationally as they saw fit.

The U.S. airmail system was the forerunner to the air courier industry (or express mail industry). Yet the air courier industry and the time-sensitive delivery of letters and parcels remained dormant until the late 1970s. Following deregulation, the air cargo industry underwent dramatic changes as air forwarders and ground transportation operators acquired their own aircraft and became integrators. Several passenger airlines also began to pick up some market share, but it was the all-cargo carriers that created the express delivery service that has been most commonly known as air courier service.

The rapid growth of the air courier industry during the 1980s was primarily due to the success of express delivery service. This particular service has been dominated by the integrators. From 1982 to 1990, the domestic air express market grew at an annual rate of nearly 19 percent. In 1996, the air express industry continued to grow, along with air cargo. According to a recent report issued by the Boeing Company, an annual growth rate of 6.6 percent is predicted for air cargo, including air courier services.


Significant Events Affecting the Industry

Some of the key concerns the industry grappled with in the late 1990s included safety, security, and competition, according to Air Transport World. Two crashes thrust the first two issues directly into the country's view. The 1996 ValuJet flight 592 crash first set the stage. The disaster occurred in the Florida Everglades and led to closer attention by the U.S. regulatory agency, the Federal Aviation Administration (FAA). Consequently, the FAA increased inspection of small airlines, created new regulations for outsourcing maintenance, and ordered the industry to install smoke detectors and fire extinguishers in cargo compartments.

Later, the TWA 800 crash spawned anti-terrorist panic and brought about a number of expensive and time-consuming preventative measures. However, after examining the evidence experts believed a mechanical failure caused the crash, not terrorism. Nonetheless, the fallout from the disaster forced airlines to run luggage through costly and sophisticated explosives detectors and eventually it will require them to match all baggage on domestic flights with ticket holders. In spite of this bad publicity, calls for more competition and new entrants rang out again in the late 1990s. Members of Congress and the U.S. Department of Transportation suggested that the industry needs more competition from new airlines. However, small U.S. airlines such as ValuJet, Air South, and Vanguard remained unprofitable in the mid- to late 1990s.

Airlines around the world started to establish alliances, which should help the industry balance its transportation capacity with the country's demand for its services. By reducing some of the global competition, alliances can reduce the need for larger fleets. In 1997, the Star Alliance formed as United, Lufthansa, SAS, Air Canada, Thai Airways, and Varig decided to work cooperatively. Other alliances include: Delta, Swissair, Sabena World Airlines, and Austrian Airlines; and American Airlines and British Airways. In addition, initiatives such as the U.S. "open skies" agreements strengthen and promote global airline alliances. The United States negotiated a number of "open skies" agreements in the midto late 1990s. These agreements allowed for air traffic between the United States and Asia and Oceania, South America, and between Europe. The United States provided an antitrust exemption and a code-sharing clause in the agreements to make it palatable to other nations.


Key Competitors

In the passenger air transportation segment, AMR Corporation, the parent company of American Airlines, ranked number one in terms of sales with 1997 revenues of $18.5 billion. The company reported over $1.0 billion in profit in 1996 and over $900 million in profit in 1997. American Airlines resulted from the consolidation of companies owned by the Aviation Corporation (AVCO). AVCO, formed in 1929, acquired enough small transportation companies by 1930 to form a coast-to-coast network called American Airways. In 1934, American Airways developed a more integrated route system and became American Airlines. By the late 1930s, American passed United and became the leading U.S. airline. On May 19, 1982, a plan for reorganization under the newly established AMR Corporation was approved at the American Airlines annual meeting. In the late 1990s, the company served approximately 160 destinations in North America, South America, and Europe.

United Airlines (a subsidiary of the UAL Corporation) ranked second in the industry, with $17.3 billion in revenues in 1997. Headquartered in Chicago, Illinois, United services 140 destinations in 28 countries and employs 91,700 workers. On July 12, 1994, the airline's plan to turn over 53 percent of the company's ownership to its employees—in exchange for wage concessions—was finally approved by United stockholders. United began in 1926 as Varney Airlines, the nation's first scheduled service. Varney, along with Pacific Air Transport and National Air Transport, eventually merged with Boeing Air Transport (including Boeing Airplane Company and Pratt and Whitney). United Airlines was created as a management company for Boeing's airline division, but became an independent business when the Boeing Air Transport combine was dissolved.

FDX Corporation, the outcome of Federal Express's purchase of Caliber System, remained the largest courier service in the country with 26 percent of the market share overall and 45 to 50 percent market share in the air express service division in the late 1990s. Each day, Federal Express delivers approximately 2.7 million items. The company began operations in 1973, and is known as the creator of the hub system of distribution. By 1997, Federal Express had 107,800 employees worldwide and served 185 countries. It operated 584 aircraft and 38,500 vehicles and had 550,000 Powership and FedEx automated systems in its integrated network. Frederick Smith was chairman, president, and chief executive officer of the company. Federal Express's headquarters are located in Memphis, Tennessee. The company posted sales of $11.5 billion in 1997.

United Parcel Service of America, Inc. (UPS), headquartered in Atlanta, Georgia, is the second largest express courier in the United States and the world's largest package delivery company. UPS operates 147,000 vehicles, including package cars, vans, tractors, and trailers; and 500 jet aircraft. In the mid-1990s the company had 2,400 hubs and other operating centers. As of 1996, James P. Kelly was president and chief executive officer of UPS. In 1997, the company had sales of $22.4 billion on a volume of 3.1 billion packages. The company plans to expand to South America.


Industry Projections

According to industry reports, airline revenues amounted to about $90 billion in 1997 with profits of over $5 billion. Business and vacation travel remained strong in the mid- to late 1990s, causing a turnaround in airline capacity. Unlike the mid- to late 1980s, capacity grew more slowly than traffic, as some airlines eliminated routes, disposed of aircraft, and slowly grew their fleets. In 1996, the available seat miles in the United States grew slowly by 3.5 percent, allowing airlines to sell a greater percentage of their seats.

Consolidation in the industry was forecast to pick up again. In late 1996, American Airlines and British Airways, Continental and Delta, and USAir and United toyed with the idea of joining forces. However, none of these happened by 1997, but Wall Street sources indicate it is likely in 1998 that attempts will be made again. On the other hand, pilots, unions, and government anti-trust sentiments hamper these merger prospects.

Overall, traffic on U.S. airlines was estimated to increase 4.7 percent annually from 1996 to 2002. This continual industry growth is based on assumptions of higher load factors, larger seating capacities on aircraft, and longer passenger trip lengths. Figures projected to the year 2000 have suggested boardings on major carriers will reach 573 million annually. The FAA has also predicted that aircraft fleet will total nearly 6,000 jets and that the industry will reach 8.2 million departures annually.

In 1996 air courier traffic reached a 10-year high. Total air cargo was up 30.5 percent from September 1995 to September 1996. All of the major air express carriers experienced growth in the late 1990s. Cargo revenues accounted for 16.0 percent of total airline revenue in 1996, although for some carriers it was as high as 30.0 percent. In 1997 the market value for air courier services reached $20.3 billion, a 4.5-percent increase from 1996.

Distribution reports that courier-only services or integrators control about 90 percent of the domestic market for envelopes, packages, and freight. The leading companies in this segment include Federal Express, Airborne, Burlington, Air Express, DHL, Emery Worldwide, and United Parcel Service (UPS). Federal Express has been the industry leader with more than 26 percent of the air courier market. In 1997, these companies accounted for more than 90 percent of the total revenue from air courier services.


Global Presence

As the home of the world's top two airlines—American and United, the United States had the largest air transportation market in the late 1990s. In 1996, the country accounted for 43.2 percent of the world's passengers. Europe ranked second with 25.2 percent, followed by Asia with 22.1 percent, South America and Mexico with 3.9 percent, the Middle East with 2.4 percent, Canada with 1.5 percent, and Africa with 1.4 percent.

Furthermore, U.S. cargo air transportation services also rank among the world's leaders. According to Boeing Company, the world air cargo market will post an average annual gain of 6.3 percent from 1990 to 2005, which would expand the total market 2.5 times during a 15-year period. United States-based DHL International, the longest established operator in the international market, accounts for more than 41 percent of the international courier traffic, followed by Australia-based TNT International with about 18 percent. United Parcel Services was the world's third leading international air courier and the world's largest package-delivery service.


Employment in the Industry

In 1997 total employment by the 10 major carriers was 450,753 workers. Despite layoffs and salary cuts, airline employees remain one of the best paid work forces in the United States, with the average wage and compensation package exceeding $51,000 per year, nearly twice the national average, because of the strong presence of labor unions. A popular way to reduce wages in the mid- to late 1990s was the use of employee stock payments.

More than 33 air courier companies operated in the United States, employing approximately 167,000 workers in the United States. In spite of the recession during the early 1990s, the express service of the air cargo industry grew along with career opportunities within the industry. Employment opportunities in the industry have been greatest in major metropolitan areas. In 1997, Federal Express had to advertise nationally for employment in Indianapolis because there was a lack of qualified applicants to fill the job openings locally.


Bibliography

"air transport industry." valueline, march 1997.

airports council international. "the economic benefits of air transport," may 1997.

"consolidation trend." travel weekly, 16 june 1997.

dinell, david. "cargo traffic at 10-year high." wichita business journal, 8 november 1996.

henderson, danna k., and lisa h. ray. "the world airline report: 1997 edition." air transport world, july 1997.

henterly, meghan. "dhl bracing for competition on its overseas turf." gannett news service, 11 june 1996.

u.s. department of transportation. federal aviation administration forecasts, fiscal years 1991-2002. washington, d.c., gpo.

walker, karen. "us alliance opens the floodgates." airline business, march 1998.

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