Industry Profiles: Air Transportation, Scheduled, and Courier Services
Industry Profiles: Air Transportation, Scheduled, and Courier Services
The scheduled passenger airline segment of the air transportation industry grew out of the U.S. airmail services into a multi-billion dollar industry. According to the December 2001 edition of Standard & Poor's Industry Surveys, revenues for the 10 largest airlines reached $98.8 billion in 2000, resulting in operating profits of $5.8 billion. However, profits fell 10 percent from 1999 levels due to increased operating expenses, including higher fuel prices. The air travel industry experienced renewed growth in the mid- to late 1990s, stemming from the country's economic prosperity. However, by the summer of 2001, the nation's leading airlines were losing money. Airline Business revealed that collective net losses for the leading carriers amounted to approximately $1 billion in the first half of 2001.
On September 11, 2001, terrorists hijacked four commercial jets and used them to attack the Pentagon and New York's World Trade Center towers. The attacks shut down all U.S. air traffic for nearly one week, caused devastating human and financial losses, and increased existing concerns about safety and security. According to Airline Business, the nation's leading airlines lost more than $2 billion in the fourth quarter of 2001. Signs of improvement were evident in March of 2002 when air travel began to increase and stock prices for several leading U.S. airlines finally reached or exceeded pre-September 11 closing prices.
The air courier industry 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 (FedEx) 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 and Northwest 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. Several factors, including competition from trucking companies and integrators, economic factors, and the terrorist attacks of September 2001, caused some passenger airlines to scale back or eliminate certain cargo services in the early 2000s.
The Federal Aviation Administration (FAA) reported that domestic freight and express services reached 12.1 billion revenue ton-miles (RTMs) in 2000, an increase of 5.3 percent over 1999. Domestic mail RTMs totaled 2.5 billion in 2000, an increase of 3.2 percent. A revenue ton-mile (RTM) equals one ton of revenue traffic transported one mile. Domestically and internationally, cargo RTMs grew an average of 3.4 percent and 7.2 percent, respectively, from 1995 to 2000.
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, United Aircraft and Transportation Corporation, was created by Boeing and its air transport division. 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 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.
By the late 1990s, leading industry concerns 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, which occurred in the Florida Everglades, first set the stage. 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.
Significant Events Affecting the Industry
Labor problems, increasing fuel costs, and a sluggish economy were beginning to impact the air transportation industry in the early 2000s. However, the terrorist attacks that took place on September 11, 2001, turned the industry completely upside down. The attacks brought all U.S. air traffic to a complete halt for four days and then resulted in significant decreases in flights, passengers, and freight. In its December 2001 Transportation Indicators report, the U.S. Department of Transportation's Bureau of Transportation Statistics revealed the tragedy's immediate effects on the nation's transportation system. Revenue passenger miles (one fee-paying passenger transported one mile) for domestic flights in September 2001 were 32 percent below levels for September 2000. Rates for international flights were down 29 percent. During the same time period, revenue ton-miles for domestic flights and international flights dropped 24 percent and 31 percent, respectively.
These conditions took an immediate financial toll on the industry. Costs quickly began to exceed revenues and airlines soon began to lose millions of dollars each day. By January of 2002, fourth quarter losses for the leading passenger airlines totaled more than $2 billion, according to Airline Business. Some airlines, including Swissair, went bankrupt. For the entire year 2001, United Airlines' parent, UAL Corporation, lost $2.14 billion. American Airlines' parent, AMR Corporation, lost $1.76 billion. In its February 21, 2002 issue, Purchasing reported that according to the Air Cargo Management Group, worldwide freight traffic was approximately eight to ten percent lower in 2001 than in 2000.
The federal government eventually authorized grants totaling $5 billion to help air transportation companies compensate for the mandatory four-day shutdown. According to Air Transport World, by February 2002 the U.S. Department of Transportation had received more than 300 applications for financial assistance and had paid more than $3.8 billion to 131 of the applicants. In addition to the grants, President George W. Bush signed the Air Transportation Safety and System Stabilization Act on September 22, 2001, in order to guarantee loans for air carriers affected by the attacks.
After September 11, more stringent security measures were implemented for both passenger airlines and air freight companies. These measures included an FAA rule that required indirect air carriers to verify the credibility and identity of shippers based on specific criteria. Security also was bolstered at the nation's airports, resulting in longer lines and more thorough searches. At one point, National Guard troops were on hand to provide added security. On the recommendation of President Bush, leading airlines, including United and American, began installing steel bars on cockpit doors shortly after the attacks. Additionally, United announced that it would place stun guns in the cockpits of its planes for pilots to use in case of future emergencies.
In the late 1990s, airlines around the world started to establish alliances in an effort to help the industry balance its transportation capacity with the country's demand for services. By reducing some global competition, alliances can reduce the need for larger fleets. In 2002, the leading alliance was the Star Alliance. Formed by Lufthansa, it involved 15 airlines including Air Canada, Thai Airways, Air New Zealand, United, and Varig. Other alliances included oneworld, involving American and British Airways, and SkyTeam, involving Delta Airlines and Air France. Alliances also existed in the cargo industry.
In addition to alliances, airlines came together in other ways. For example, in the early 2000s, Delta, Continental, United, Northwest, and American partnered to form an online travel site called Orbitz, and American and United combined their electronic ticketing systems to simplify travel for customers who utilized both airlines. There also were initiatives such as the U.S. "open skies" agreements to open up foreign markets to competition. The United States negotiated its first such agreement in 1992 with the Netherlands and, by the year 2000, had entered into agreements with 52 nations.
In the passenger air transportation segment, AMR Corporation, the parent company of American Airlines, ranked number one with 2001 sales of $18.9 billion. This represented a 3.8 percent decrease from 2000. After the events of September 11, AMR reported a net loss of $1.7 billion. American Airlines resulted from the consolidation of companies owned by the Aviation Corporation (AVCO). Formed in 1929, AVCO 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. American absorbed competitor TWA in 2001 after that airline went bankrupt. In the early 2000s, American served approximately 160 destinations in North America, South America, the Pacific Rim, and Europe.
United Airlines (a subsidiary of the UAL Corporation) ranked second in the industry with 2001 sales of $16.1 billion. However, it posted an industry record loss of $2.1 billion. Headquartered in Chicago, Illinois, United in 2001 serviced approximately 130 destinations in 28 countries and employed 84,000 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 formed as a management company for Boeing's airline division, but became an independent business when the Boeing Air Transport combination was dissolved. United had planned to enter into a $4.3 billion merger with US Airways in 2001, but the deal never materialized due to regulatory problems.
FDX Corporation, the outcome of Federal Express's purchase of Caliber System, was the world's largest express transportation company in the early 2000s. Each day, Federal Express (FedEx) delivers approximately 3 million items in 211 countries via its fleet of 642 aircraft and more than 45,000 vehicles. The company began operations in 1973 and is known as the creator of the hub system of distribution. In 2001, FedEx reached an agreement with the U.S. Postal Service (USPS) allowing it to place drop boxes outside of USPS locations. The company also entered into a major transportation agreement with the USPS and began transporting USPS Express Mail and Priority Mail between airports. By 2002, Federal Express had 143,500 employees worldwide. The company's FedEx Express Web site automated transactions for more than 2.5 million customers. David J. Bronczek was president and chief executive officer of the company. Worldwide headquarters of Federal Express are located in Memphis, Tennessee. The company posted sales of $19.6 billion in 2001.
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 88,000 vehicles, including package cars, vans, tractors, and motorcycles. The company operates 253 jets and utilizes 346 chartered aircraft. In the early 2000s, UPS had 1,748 operating facilities. As of 2002, Michael L. Eskew was the company's chairman and chief executive officer. In 2001, UPS had sales of $30.6 billion on a volume of 3.4 billion packages and documents. In the early 2000s, the company was involved in e-commerce through its e-Ventures unit and in corporate supply chain management.
According to the Air Transport Association of America's (ATA) 2002 State of the U.S. Airline Industry Report, net profits for U.S. scheduled airlines amounted to about $2.6 billion in 2000, a significant drop from 1999 levels of $5.3 billion. Passenger volumes, which remained relatively steady throughout 1999 and 2000, began to decline along with the slumping economy into mid-2001. The attacks of September 11 caused a significant drop in both air traffic and earnings. ATA figures indicate that net income for U.S. scheduled airlines fluctuated around $5 billion from 1997 to 1999 and then dropped below $3 billion in 2000. Because of worsening economic factors, a $3 billion loss was expected in 2001. The events of September 11 brought this figure closer to $7 billion. Because the terrorist attacks were unprecedented and no basis of comparison existed, estimating their impact on many facets of the industry was extremely difficult for analysts. However, in its report the ATA estimated that the industry would return to profitability in late 2003. In March 2002, the FAA forecast airline passenger traffic would return "to more normal levels of growth by Fiscal Year (FY) 2004." The FAA further forecast that traffic would grow an average of four percent through 2013, eventually reaching one billion passengers.
In 2001, the air freight industry was in fine shape, having benefited from a 10-year period of economic prosperity. All of the major air express carriers experienced growth through the late 1990s. Cargo revenues for the 10 largest U.S. airlines, which reached $3.61 billion in 1999 and was estimated at $3.97 billion the following year, were expected to be $4.20 billion in 2001 according to estimates from Standard & Poor's. However, by the third quarter of 2001, the worsening economy and terrorist attacks of September 11 had a worldwide impact on the air freight industry. In November, Air Cargo World reported that growth had ceased or begun to decline for express carriers in the United States. This was an unprecedented occurrence. The publication revealed that worldwide air freight traffic, which achieved growth of six percent in 2000, had declined by approximately five percent midway through 2001.
Considering the events of September 11, Air Cargo World indicated that industry conditions might not improve until the third quarter of 2002 or sometime later. Prior to September 11, The Colography Group indicated that based on 4.4 percent growth in domestic air shipments, the overall volume of expedited shipments would increase 3.2 percent from 2001 to 2002, reaching 6.9 billion shipments, and The MergeGlobal 2001 World Air Freight Forecast reported that world air freight volume would grow through 2005 at an annual rate of 5.2 percent, eventually reaching 38 million tons.
Courier-only services, or integrators, control most of the domestic market for envelopes, packages, and freight. The leading companies in this segment include FedEx, UPS, and Airborne Express. At the end of 2001, FedEx was the industry leader with more than 39 percent of the air courier market, according to Valanium Associates. Next in line were UPS (30 percent), the U.S. Postal Service (19 percent), and Airborne Express (11 percent).
As home to the world's top two airlines, American and United, the United States had the largest air transportation market in the early 2000s. In terms of revenue passenger kilometers, the country was the leader among the world's airlines with 35.5 percent of the market, according to Air Transport World. Europe ranked second with 31.1 percent, followed by Asia/Pacific with 22.5 percent, Latin America/Caribbean with 4.2 percent, the Middle East with 2.7 percent, Canada with 2.3 percent, and Africa with 1.7 percent.
U.S. cargo air transportation services also rank among the world's leaders. According to the Boeing Company's World Air Cargo Forecast for 2001, world air freight is expected to grow 6.5 percent annually through 2019, exceeding the growth rate of mail. Boeing estimates that U.S. world market share will decrease from 31.5 percent through 2019. The strongest growth prospects are expected in markets linked to Asia. At the end of 2001, Valanium Associates reported that United States-based DHL International, the longest established operator in the international market, held the largest market share in Asia (20 percent). DHL operates the world's largest air express network, reaching approximately 228 countries via 36 hubs and more than 250 aircraft.
Employment in the Industry
In 2002, total employment by the major carriers was approximately 463,400 workers. Despite layoffs and salary cuts, airline employees remain one of the best paid workforces in the United States, with the average wage and compensation package exceeding $73,000 per year. This was significantly higher than the national average due to the strong presence of labor unions. The Air Transport Association estimated this figure would surpass $76,000 in 2002. Although many air courier companies operate in the United States, the three leading firms—FedEx, UPS, and Airborne, Inc.—employed 536,027 employees worldwide in 2002. According to the U.S. Department of Labor, from 2000 to 2010, 25 percent growth is expected in the air transportation industry, both cargo and passenger traffic, in both wage and salary jobs.
Sources for Further Study
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