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“Airline Network Analysis in a Changing U.S. Industry”

by Jeffrey W. Stanley (R&A Point-to-Point, May 2012)

The U.S. airline industry continues to undergo a significant transformation, creating uncertainty and challenges for airports. This article discusses how this transformation may affect airports, and offers advice regarding ways to project the infrastructure needs of their airports and maintain a level of airline service that provides sufficient access to the destinations most important to the local economies.

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Significant events during the past decade, including the 2001 terrorist attacks, the financial turmoil and global recession of 2008-2009, and increased volatility and the general upward trend in energy prices since 2008 have accelerated a transformation of the U.S. airline industry – itself troubled by high costs, market fragmentation, and overcapacity. Reorganization under bankruptcy by many of the socalled legacy airlines helped strengthen balance sheets and streamline operations, while the U.S. government’s acceptance of industry consolidation enabled the mergers of Southwest Airlines and AirTran Airways, United Airlines and Continental Airlines, and Northwest Airlines and Delta Air Lines, reducing market fragmentation.

Airlines, which have become committed to profitability and investor returns rather than the pursuit of market share at all costs, continue to “right-size” their route networks. Legacy airlines have sized their domestic operations to primarily feed their more lucrative international networks, which have flourished in recent years as the result of regulatory liberalization and the continued evolution of global alliances. American Airlines, Delta, and United each entered into highly integrated risk/reward-sharing relationships with international partners that have taken the shape of de facto mergers, enabling joint route decision making and capacity planning among those partners.

While resulting in significant improvements in the financial operations of the airlines, downward trends in domestic capacity, reduced competition, and shared decision making among airlines have added uncertainty and concern for airports regarding their ability to properly plan infrastructure projects and ensure sufficient service to accommodate the needs of their passengers and local economies. In the remainder of this article, we discuss the fundamentals of how airline capacity decisions are made, and how this process has evolved in light of recent industry changes. We stress, however, that the fundamentals are still intact and airports, armed with an understanding of these fundamentals and a few simple analyses outlined herein, can more confidently and effectively evaluate the network strengths and weaknesses of their airports, communicate with airline planners, and plan infrastructure projects into the future.

The Fundamentals of How Airlines Measure the Success of a Flight
As the airlines are emphasizing profitability rather than market share when making network decisions, airport managers need to understand how the airlines measure the profitability of a flight and how this process may affect service decisions at their airports. In simple terms, the success and sustainability of a flight is determined by the revenue it generates minus the costs to operate that flight. Revenue is generally determined by the number of passengers onboard and the amount those passengers paid for their tickets and ancillary services. A flight is likely to generate more passengers if it offers opportunities for connections to other flights in an airline’s route network, rather than simply serving passengers traveling between the flight’s origin and destination (O&D) points. Airlines calculate the amount of revenue attributed to a particular flight based on the mix of O&D and connecting passengers onboard. Generally, the fare of an O&D passenger is allocated in full to that flight, whereas the fare of a connecting passenger may be fully allocated to that flight or it may be prorated across all of the flights in the passenger’s journey, usually on a distance basis, depending on the profit measure being analyzed.

Airline Network Analysis in a Changing U.S. Industry
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