Category AVIATION &ТНЕ ROLE OF GOVERNMENT

As mentioned in Chapter 34, an FAA-industry program called Continuous Lower Energy, Emis­sions, and Noise (CLEEN) is underway to reduce aircraft fuel burn by 33 percent and to reduce oxides of nitrogen by 60 percent, while reducing aircraft noise by 32 decibels, all from the cur­rent ICAO standard. CLEEN technologies include alternative fuels, noise reducing engine nozzles, adaptable wing trailing edges, optimized flight trajectories using onboard flight management sys­tems, and open rotor and geared turbofan engines. Target date for beginning implementation is 2015.

NextGen: Tomorrow at a Glance

2012: Issue final investment decision 2015: Initiate revised departure learances

2018: initiate en route capability

• 2012: Publish FAA response to Aviation Rulemaking Committee recommendations

• 2012: issue final investment decision

FIGURE 36-4 Elements of the NextGen program in the works.

Another joint program is in the process of developing the use of “drop-in” alternative jet fuels. While there are several definitions as to what constitutes a “drop-in” alternative jet fuel, one popular one says that it is any renewable fuel which can be blended with petroleum prod­ucts and utilized in the current infrastructure of pumps, pipelines, and other existing equip­ment. They are functionally identical to conven­tional jet fuel and do not differ in performance or operational capability. ASTM International has so far approved two drop-in alternative jet fuels.5

There is no single renewable jet fuel that will meet all of aviation’s needs because of the lack of predictable availability, which is a function of crop availability, climate factors, and related variables. The FAA, therefore, is working to secure ASTM approval for as many
alternative biofuels as possible through the CLEEN program.

The roots of IATA go back to 1919, the year that saw the world’s first scheduled air transport ser­vice, when six “air transport” companies formed the organization known as the International Air Traffic Association. Membership comprised solely European carriers until Pan American joined in 1939. The present organization was founded in Havana, Cuba, in 1945, and was originally composed of 57 airlines mostly operat­ing in Europe and North America. The purposes of the new organization were to promote safe and

economical international air transport, to provide a means for collaboration of airline companies, and to cooperate with the newly formed Inter­national Civil Aviation Organization (ICAO) as the representative of member airlines. As liaison to ICAO, through its members IATA supplied technical input for the Standards and Recom­mended Practices (SARPs) found in the Annexes to the Chicago Convention. IATA contributed to documentation and procedures standardiza­tion that has allowed countries with differing languages and cultures to commercially interact with little difficulty. It also assisted in structuring a sound legal basis for international commercial transactions, meshing treaty law with existing air transport law of the United States. Ongoing work involves revision and modernization of the legal, basis of carriage of persons and cargo in interna­tional aviation, as liability provisions of the War­saw Convention have given way to subsequent amendments and superseding agreements.

After World War II, IATA began develop­ing tariffs containing fares and rates (Traffic Coordination) for international carriage of pas­sengers and cargo at meetings called Traffic Conferences, subject to the approval of the gov­ernments involved. A consistent schedule of rates and fares was also established, allowing airlines to accept each other’s tickets on multisector itin­eraries, which in turn led to interlining between the world’s airlines. It had been argued for years that IATA was, through its Traffic Coordination practices, engaged in price fixing that would normally be in violation of antitrust laws and in derogation of competition. Yet the United States, and other countries having similar laws, routinely granted antitrust exemptions for the activity. The truth was that international air transportation was among the least competitive industries in the world.

With the “father of deregulation,” Alfred Kahn, at the helm of the CAB when deregulation was enacted in 1978, the deregulators turned their attention to international aviation. In 1979, hearings were conducted by the CAB in the United States

to ascertain whether antitrust immunity should be removed from the Traffic Coordination activities of IATA. The world’s airlines lined up in uniform opposition. The hearings concentrated on the North Atlantic routes, which were served by 40 airlines. The Justice Department supported the CAB, but the Department of Transportation urged a “go slow” position. Nevertheless, on May 5, 1981, the CAB issued a “show cause” order that raised the issue of whether antitrust immunity should be removed from IATA Tariff Coordinating Conferences. No decision was reached by the CAB prior to its demise at the end of 1984 pursuant to the “sunset” provisions of the Airline Deregulation Act. The Department of Transportation, having inherited the antitrust responsibilities of the CAB beginning in 1985, terminated the proceeding that year.

IATA, taking its cue, then reorganized itself into two parts, a Trade Association and a volun­tary Traffic Conference, the latter dealing with the controversial issues of fare setting. In this way, IATA members sought to avoid further antitrust scrutiny of the United States antitrust regulators. No further proceedings have been ini­tiated by the United States on this issue. IATA is still an influential trade association.

The organization has also served since the early days as the clearinghouse for interline accounting, and today services the accounts for 240 airlines in over 115 countries. Multilateral Interline Traffic Agreements have been signed by most of the international carriers, which facili­tates the seamless flow of passengers and cargo throughout the world.

On November 15, 2000, agreement was reached between the United States and four of its avia­tion partners for a comprehensive liberalization of aviation services: the first multilateral Open Skies agreement. Brunei, Chile, New Zealand, and Sin­gapore, countries from diverse areas of the globe, agreed with the United States to unrestricted ser­vice by the airlines of each country to, from, and beyond the other’s territory, as well as unrestricted destinations (except cabotage), routes, number of flights, and prices charged. This multilateral accord was finalized in 2001 and it has been sub­sequently joined by Samoa, Tonga, and Mongolia.

Deregulation and the United Kingdom

In contrast to the apparent worldwide move toward liberalization, efforts to secure agree­ment with the U. K. failed, and the restrictions in the current bilateral agreement between the United States and Britain, known as Bermuda 2, are severe. Bermuda 2 was signed 30 years after the original agreement between these countries,6 and while the new agreement relaxed some of the requirements and restrictions of the original pact, air transportation between the two countries remained heavily constrained. This “anachro­nistic agreement,” as labeled by the Secretary of Transportation,7 still limited the number of cities in the two countries that can be served, the num­ber of airlines that can serve the market, the fares that can be charged, and the level of service that can be provided. Under Bermuda 2, for instance, only American Airlines and United Airlines were allowed to serve Heathrow airport.8

According to the DOT, the U. K. position is nothing other than protectionism of British Airways, which opposes entry into the world of free and fair competition. The effect of the British position has created a degree of British isolation in an increas­ingly progressive European aviation community.

The Skylab space station was launched on May 14, 1973 in the program designed for the conduct of scientific experiments in zero gravity, earth resources experiments, and solar observations in long-duration missions. Three separate crews were launched in Apollo-type command modules on May 25, July 28, and November 16, 1973. These crews remained, respectively, for mis­sion periods of 28 days, 59 days, and 84 days. The Skylab mission also proved that humans can remain for extended periods of time in space without adverse health or psychological conse­quences and that resupply of space vehicles is workable.

Skylab’s orbit deteriorated because there were no spacecraft, nor any program ready (the Space Shuttle had been delayed), to boost its orbit. On July 11, 1979, Skylab reentered the earth’s atmosphere and disintegrated over the Indian Ocean and across Western Australia.

Apollo-Soyuz Mission

This mission was the first international manned space flight and had as one of its main goals the proving of the reliability of rescue plans of international crews. The Apollo spacecraft used was essentially the same as that used in the lunar program and the Soviet Soyuz was the same that had been in use since 1967. The flight was conducted between July 15 and July 24, 1975, with launches in the United States and the Soviet Union, docking over a two-day period, and return of the spacecraft to their respective countries after separation.

The return of Apollo marked the beginning of a six-year hiatus in the American manned space flight program. In addition to the human space flight program, NASA also maintained a small aeronautics research program, a space sci­ence program (including deep space and inter­planetary exploration), and an earth observation program.

Ще first person account of the original survey flight from New York to Chicago on Septem­ber 5, 1918, made to determine the feasibility of carrying airmail between those two cities, by Max Miller, Aerial Mail Pilot No. 1. Miller died on September 1, 1920 when his mail plane caught fire in the air and crashed.

Blazing the air trail to Chicago would have been a “cinch” if I had started at 6 a. m. on Sep­tember 5th, as had been planned. This would have enabled me to start one hour ahead of the storm, and I could have reached Chicago by evening without trouble.

I left Belmont Field, Long Island, at 7:08 a. m., with a good wind in back of me, flew over the City of New York, the Hudson River and Hobo­ken, and headed west 284 degrees.

There was a bank of low clouds near the ground and another layer of clouds at a high alti­tude. I kept right between them and flew on my compass course. I could not see the ground, but ran for about two hours and at ten o’clock I came down through the lower strata of clouds and landed one mile from Danville, N. Y., about 155 miles from New York City. There I inquired to find out my bearings and found that I was not more than two miles out of my course. I did not kill the motor, but left it running, and after five minutes started up again and headed for Lock Haven.

I entered the fog which hung low over the ground and over the tops of the mountains, and I
figured that it would take me about three-quarters of an hour to make Lock Haven. I came down and saw the field through a notch in the mountains and made a good landing. My motor was missing, so I changed spark plugs which took me about an hour, filled up with oil and gas, got a couple of sandwiches, and left about 11:45 a. m.

I climbed up through the fog again and went on over the mountains. I sailed on my compass course for an hour, 283 degrees, and I figured I was about 100 miles further on. Then I came down to see where I was and get my bearings, and the first thing I knew I hit the top of a tree. That sure gave me a good scare. I hustled back up again into the fog, determined to get plenty of altitude and keep on going as long as my gas held out.

I went fifty miles, and then I found my radia­tor was leaking and I came down and I saw a town with a fair going on. There was such a mob of people that I did not land there, but went on about twenty miles to a town named Cambridge. I inquired where I was and was told “Jefferson.” On looking on my map I found a town called Jef­ferson lying to the north of my route, so on leav­ing I headed toward the south in order to cross the route again; but I found that it was Jefferson Country, PA, instead of the town of Jefferson, Ohio, and I went about 150 miles out of my way before reaching Cleveland, where I had to remain all night on account of darkness.

The next morning I got my radiator fixed and rested up after being buffeted about by the storm and rain, and got away at 1:35 p. m. for Bryan on the compass course of 275 degrees, a little south of due west about 140 miles. I had to stop sev­eral times to fill up my radiator with water. The weather was very much better, and I was able to make Bryan, where I was received by Postmas­ter Jordan and got away at 4:35 p. m. I skirted the southern shore of Lake Michigan and arrived over Grant Park at an altitude of 5,000 feet at 6:55 p. m.

I circled around and made a good landing and was received by Postmaster Wm. B. Carlile, Mr. Chas. Dickenson, President of the Aero Club of Illinois, Capt. В. B. Lipsner, Superinten­dent of Aerial Mail Service, Mr. Thos. Downey, Assistant Superintendent of Mails, Mr. James O’Conner, Director of the U. S. War Exposition, Mr. James Stevens, Secretary of the Aero Club of Illinois, and Mr. Augustus Post, Secretary of the Aero Club of America, who had come on from New York to witness the inauguration of the first aero mail service between New York and Chicago.

The weather on the return trip was much bet­ter. 1 started from Chicago on September 10, at 6:26 a. m. I carried about three thousand pieces of mail. The weather looked so good that I expected to make a record trip. There was some haze on the ground, but not nearly enough to prevent land­marks being distinct. Just as I was over Cleve­land, I found a broken connection in the radiator and I landed there to get it repaired.

This took some time, but I got away from there by 4:30 p. m., in time to make a pleasant flight to Lock Haven, one of the scheduled stops, before dark, a distance of 210 miles. I stayed at Lock Haven all night, leaving there at 7:20 a. m. As a path finding trip it was an immense success. We gathered a lot of information which will be very valuable in the future trips.

The radiator trouble was the only thing that prevented me from making the trip within the ten hours set. If I had had a spare aeroplane even, I could have done it. We will, of course, have spare machines for the permanent route, so it will not happen again.

The air carrier industry has passed through a series of changes or “waves” since deregulation in 1978.5 The initial wave was the creation of the hub and spoke system. The second wave was the inauguration of low-fare, point-to-point ser­vice, pioneered by Southwest Airlines. The third wave was the entry into the airline fleet of the regional jet. The fourth wave, now in process, is the abandonment of the financial and operational model of the legacy carriers from the period of

CAB regulation, and a process of convergence of practices of legacy carriers and low-cost car­riers (LCCs). This process of convergence has been driven by the reality of all five of the largest legacy carriers having entered Chapter 11 bank­ruptcy as of the end of 2011. The relative success of the low-cost carriers during the same period underscores the bottom-line effects of the differ­ences in the business practices of the two groups. Also underscoring the success of the LCC group is their increase of domestic passenger market share—from 13 percent in 1997 to 28 percent in 2009.

■ Hub and Spoke

Before deregulation, it was said that if you trav­eled in the southeastern part of the United States and you wanted to get to heaven, you would have to go through Atlanta and change planes. Delta Airlines is credited with creation of the hub and spoke concept that it centered in Atlanta, and, as discussed earlier, Delta began this service dur­ing the 1940s at the behest of the CAB in order to bring service to small outlying communities in the Southeast. The other trunk airlines that
operated during regulation, however, were all point-to-point carriers.

After deregulation, the opportunities to serve when and where the airlines wanted, coupled with the economic necessity to fill their airplanes with as many passengers as possible, caused the adoption of the hub and spoke system nation­wide. This system had two main advantages to the traveler:

• The passenger who lived in the hub city gained access to a greatly increased number of destinations directly from the hub airport.

• The passenger who lived in one of the smaller communities at the end of a spoke, who may not have had any service under regula­tion, was offered access to the same greatly increased number of destinations after one stop at the hub airport.

Hub and spoke brought to the airlines a much more efficient use of aircraft by allowing many more destinations to be served using far fewer airplanes. By way of example, if a car­rier had 20 airplanes engaged in point-to-point service between city pairs, as was the case before deregulation, the number of origin and destination operations (O&D) would be limited to 20. In the hub and spoke system, the O&D number would suddenly jump to 400 (20 x 20). The truth is that there will never be nonstop service between most cities. Recognizing this fact, the hub and spoke system should be rec­ognized as a major, positive development of deregulation.

The hub and spoke system has also drawn complaints.

• First, passengers were said to be traveling “around their elbow,” being required to stop at hub aiiports that were considerably distant from a direct line of travel, and losing the main advantage of jet aircraft, which is speed and the efficient use of time. According to this view, these passengers were traveling at the convenience of the airline, not themselves.

• Second, the system produced the natural result that the dominant airline gained tre­mendous market share at the hub city, a potential anticompetitive development. Dom­inated hubs include Atlanta (Delta), Denver (United), Detroit (Northwest), and Chicago (American and United).

• Third, the system required that all aircraft returning to the hub do so at or about the same time in order to make connections with aircraft departing from the hub to new destinations. This confluence of activity placed a huge strain on air traffic control and airport operations.

The introduction of these relatively short – haul operations altered the airlines’ needs as to types of aircraft. Boeing, it is said, was in the process in the late 1970s of phasing out produc­tion of the 737. This decision was reversed after deregulation due to the adoption of the hub and spoke system, and production of 737 aircraft soared. The hub and spoke system also gave rise to an entirely new line of short-range air­craft, like the MD-80, shorter Airbus planes, and regional jets (RJs). Suddenly there was less need for the larger, fuel-hungry 747s, and a general downsizing of aircraft began.

A government study begun in 19907 found that the hub and spoke system, adopted by all major airlines after deregulation, resulted in airlines charging premium prices to local passengers originating from dominated hubs. But it also found that low-cost point-to-point service, such as that developed by Southwest Airlines, pro­vided an effective counter to local hub and spoke market power. Further, DOT concluded that the rapid growth of Southwest and the entry into the market of other low-cost carriers appeared to be correcting the lack of price competition at hubs. Thus, governmental action was not warranted.

By 1995, nearly 40 percent of domestic pas­sengers flew from hubs with low-fare competi­tion, causing some major carriers to emulate the low-cost point-to-point carriers by forming their own low-cost divisions, like Delta Express, United Shuttle, and Metrojet. In 1998, the DOT concluded that the competitive stimulus supplied by new-entrant carriers had decreased, and that the number of new-entrant carriers had signifi­cantly declined. The reason, according to DOT, was because of anticompetitive activity on the part of some major airlines.8

Predatory activity by incumbent airlines his­torically has occurred when other airlines, usu­ally smaller discount airlines, attempted to enter a market already served by the incumbent airline. The incumbent airlines may respond to this new competition by fare cuts, capacity increases by adding aircraft, or capacity increases by add­ing routes. The purpose of the response is to maintain market power and to diminish or elimi­nate competition. Since the cornerstone of a suc­cessful air transport system under deregulation depends on fair competition among the partici­pating air carriers, predatory activity is harmful to the success of the system and to the ultimate interest of the consumer. Maintaining competi­tion requires the assurance that carriers can enter new markets fairly.

It has been argued that the competitive responses of major hub carriers differ depending on which airline is supplying the competition. Major carriers’ responses as to each other reflect a “live and let live” approach, that is, there is an implicit recognition that relatively equal finan­cial strength and market power provide a control mechanism that allows a peaceful coexistence to be maintained in the competitive process.

The competitive response to new entrant airlines, however, is territorial and aggressive, including matching and even undercutting the smaller carrier’s low-cost fares and adding capacity on the routes of the interloper. Histori­cal examples may include United versus Frontier, American versus Vanguard, Delta versus (the former) ValuJet, Northwest versus Sprint and Reno, and Continental versus Kiwi.

In 1998, the DOT said:

m DOT believes that the responses of some large, established major car­riers at their hub cities to service by small, new-entrant airlines have inhib­ited competition, resulting in higher prices for many passengers and pre­venting a large sector of air travel demand from being efficiently served. These responses, which protect major carriers’ ability to charge higher prices in local hub markets, involve tempo­rarily selling such large numbers of seats at low fares, comparable to new-entrant fares, that by sacrificing profits in the short term, they force the new-entrant carriers to exit from the local market» .9

Once the low-cost carrier had been forced out of the market, it was common practice for the incumbent airline to set its fares at least as high as they had been prior to the incursion by the new-entrant airline. It is believed that these anti­competitive practices against low-fare entrants caused new entries to virtually cease, beginning in the middle 1990s.

Having concluded that predatory activity by the incumbent airlines was, indeed, reduc­ing competition, the DOT in 199 810 announced its new enforcement policy directed at curbing predatory activities by the major air carriers. DOT policy regards an incumbent’s competi­tive response to a new entry to be anticompeti­tive and predatory where it initiates fare cuts or capacity increases on the routes served by the new entrant, and where the incumbent’s tac­tics appear to be economically rational only if they force the new entrant to exit the market or reduce service.

Since 2001, however, incumbent airlines have struggled financially. Bankruptcies and mergers of incumbent carriers have been the rule while, at the same time, a new breed of low-cost carrier has entered the market. Low-cost carriers have increased market share significantly, from 5 percent in the 1990s to around 30 percent cur­rently. Incumbents have gone from trying to drive new carriers out of business to attempting to copy their way of doing business. As a result, anticom­petitive practices have markedly declined.

The European Union has passed a law, effective as of January 1, 2012, that would expand its pre­existing cap and trade regimen to foreign airlines, and which would tax all airlines flying into the EU airspace in 2012 and thereafter based on their carbon emissions. The law is referred to as the Emission Trading System (ETS) and requires all airlines to provide to the EU emission data so that a tax can be calculated and collected beginning in 2013. The tax is said to be applicable not only to flight miles within the EU, but also to the dis­tance over their entire flight path. The tax money would go to all 27 members of the EU as well as to Iceland, Liechtenstein, and Norway. (All of the EU, with the possible exception of Germany, is in dire need of additional cash, without question.)

There has been worldwide opposition to the EU action, with United States airlines requesting President Obama to file an Article 84 complaint with ICAO, which would create a global frame­work for dealing with carbon emissions and would provide the appropriate forum for the settlement of the dispute. The United States and Canada filed an action in 2011 with the European Court of Justice to block the tax on grounds of sovereignty and treaty, but they were ruled against in December 2011. The U. S. aviation community is also calling on the federal government to challenge the law in international court. The United States has also taken unofficial action in convening two meetings (in Delhi and in Moscow) of opponents of the law and has invoked a resolution in ICAO declaring the EU law illegal. Russia, China, the United States, and India have formed an anti-carbon tax coalition to oppose the law.

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Consequences, if the EU persists, could include a worldwide embargo on Airbus aircraft and limitations on flights into Europe.

The United States has consistently refused to join what it has considered ineffective world efforts to lessen carbon emissions; it refused to sign the Kyoto Treaty, for instance. The EU ETS system, as well as any ICAO strategy to be put together to control airline engine emissions, seems like just one more global effort along the same lines, in spite of the miniscule contributions attributed to aircraft engines.

Mesaba began operations in 1944 as a feeder route in Minnesota. In 1984, it began flying exclu­sively for Northwest Airlines as a regional carrier. Mesaba depended on Northwest for all of its pas­sengers and its entire schedule. When Northwest filed for bankruptcy protection on September 14, 2005, cash shortages, fleet changes, and other uncertainties were imposed on Mesaba by North­west. It is not surprising, then, that Mesaba fol­lowed Northwest into Chapter 11, which it did on October 13, 2005. Mesaba was owed $30 million by Northwest when Northwest filed in September.

Between 2002 and 2005, eight major carri­ers had entered bankruptcy. By 2007 all major airlines that had entered Chapter 11 post 9/11 had emerged from bankruptcy:

• June 2, 2005: Hawaiian Airlines

• September 27, 2005: US Airways. In Chapter 11, it merged with America West.

• February 1, 2006: United Airlines

• February 17, 2006: Aloha Airlines

• April 30, 2007: Delta Airlines

• May 31, 2007: Northwest Airlines

These transitions through reorganization have been largely at the cost of air industry labor groups and employees, as well as the stockhold­ers of the companies. The one consistent win­ner through the years since deregulation has been the consumer. Domestic airfares had fallen 50.5 percent since 1978, adjusted for inflation. This phenomenon explains, in large part, the explosive growth that has been seen in air travel.

In 2005, the U. S. air carrier industry reported its first operating profit since 2000. Yet interest expense and other nonoperating costs left the airlines with a net loss of $5.7 billion.

By the end of 2006, for the first time since the turn of this century, U. S. air carriers had recorded a net profit. That year the airlines posted net income of $3 billion on $163.8 billion in rev­enues. Although fuel prices continued to increase (see Figure 35-17), fuel efficiency also increased, by 22 percent over the year 2000. Passenger load factor increased to 79 percent. (See Figure 35-18.) The airlines carried 12 percent more passengers in 2006 than in 2000, and they used 719 million fewer gallons of fuel in doing so. And they did it with fewer employees. (See Figure 35-12 and Table 35-1.) The airline fleet continued toward modernization. (See Table 35-2.)

«Since 1978 the record pretty well shows that no start-up airline. . . has really been successful, so the odds of

JetBlue having long-term success are remote. I’m not going to say it can’t happen because stranger things have happened, but I personally believe P T. Barnum was, in that respect, correct.**

(Ed. Note: P. T. Barnum, a 19th century showman and circus owner, is supposed to have famously said, “There is a sucker born every minute.”)

Gordon Bethune, CEO Continental Airlines, commenting on the 70% rise in JetBlue’s stock price in the days after its IPO. Continental’s annual shareholder meeting, 17 April 2002.