History

The commercial airline industry was born almost 100 years ago.  During its first 100 years of service, no one would have guessed at how advanced the industry has become and how much society depends on it as a mode of transportation.  In 1999 alone, over 635 million passengers used commercial travel as their mode of transportation, traveling over 651,596,000,000 miles.(2)  Currently, there are roughly 75 airlines operating either on domestic or international routes.  On average, more than 1.7 million passengers travel on commercial airlines each day.  Over 85 percent of those passengers have a choice of two or more airlines.  Each day, 23,000 domestic and international flights take place, employing over 646,000 people and pumping over $300 billion into our national economy each year. (2)

Domestic passenger traffic in 1999 grew by 5.4 percent.  Real growth for the U.S. economy was 5.7 percent for 1999.  That strong economic growth was an important driver in the demand for air travel.  As the airline industry in the United States matures, the long-term growth rate, calculated on an increasingly larger base, is expected to diminish.  However, the number of new passengers added each year is expected to remain at or above 20 million per year.(2)

International passenger traffic showed good and bad signs.  The number of international passengers decreased slightly, although international revenue passenger miles increased by five percent.  One of the factors contributing to the decline in international passengers was the slumping Asian economy.  Pacific passenger traffic was down for the year.  On the other hand, Atlantic and Latin America/ Caribbean markets showed growth in both passenger traffic and revenue. (2)

Stastics

	1998	1999	Percent Change
Revenue Passengers Enplaned Domestic Service International Service	612.9 559.7 53.2	635.4 582.3 53.1	3.7 4.0 -0.2
Revenue Passenger Miles	618,086	651,597	5.4
Available Seat Miles	874,090	917,849	5.0
Passenger Load Factors (%)	70.7	71.0	0.0
Aircraft Departures in thousands	8,292	8,617	3.9
Cargo Revenue Ton Miles Freight & Express Revnue Ton Miles Mail Revenue Ton Miles	20,496 18,131 2,365	21,641 19,346 2,295	5.6 6.7 -3.0
Total Revnue Ton Miles	82,305	86,801	5.5

Revenue

Total revenue for U.S. scheduled airlines grew by 4.2 percent due to increasing passenger and cargo traffic.  Overall airline prices have fallen 21% since 1990.  Consumers continue to benefit from intense competition and improved airline efficiency – one of the greatest successes of airline deregulation.  (2)

Expenses

The largest single item of expense for the airlines is wages and benefits for employees.  This cost comprises 35 percent of total operating costs.  Airlines require, on average, five cockpit crews per aircraft.  The average salaries and benefits for airline employees increased to $65,300.  (2)

The second largest expense item is jet fuel.  Jet fuel prices decrease in 1998, but increased above previous levels in 1999.  Jet fuel prices increased by 45 percent, from a low in March of 45 cents per gallon to 65 cents in December.  Jet fuel prices continued to rise during first quarter year 2000.  (2)

Other costly expenses are those associated with air traffic control delays.  Delays have increased by more than 52% over the last two years, giving up all the gains that had been achieved during the 1990’s.  The average duration of delays was also increased, so that the amount of time lost was compounded.  Delays in 1999 cost the airlines $3.1 billion, which ultimately is passed on to the passenger or shipper in the form of higher prices.

Capacity

Overall airline capacity grew at five percent to a record 917.8 billion available seat miles.  The pace was slightly below the growth rate for passenger traffic.  Had there been less capacity buildup, prices would likely have risen higher, to offset rising costs (especially rising fuel costs).  Adding more capacity put downward pressures on prices, as airlines attempted to fill empty seats.

One of the fastest growing segments of capacity has been the increase being provided from small regional jets.  The Federal Aviation Administration (FAA) forecasts that the number of regional jets will grow from 7.4 percent of the overall jet fleet to over 19% by 2011.  This increase will benefit small and medium sized communities.  (2)

International Capacity grew at a much smaller pace than domestic capacity, 2.8%, compared to 5.8%.(2)

Load Factors

Load factor is a measure of the percentage of seats filled with passengers, and is one of the most important indicators of asset utilization in the industry.

With capacity increasing less rapidly than the increase in passenger traffic, load factors moved up from 1998 to 1999.  This efficiency improvement was an important factor in the airlines ability to lower overall prices in 1999. (2)

Financial
 

In millions, except when noted	1998	1999	Percent Change
Passenger Revenues Domestic Service International Service	$80,986 $63,991 16,995	$84,167 66,933 17,234	3.9 4.6 1.4
Freight & Express Revenues	10,697	11,239	5.1
Mail Revenues	1,708	1,734	1.5
Total Operating Revenues	113,465	118,245	4.2
Total Operating Expenses	104,138	110,342	6.0
Operating Profit	9,327	5,576	n/a
Net Profit	4,903	5,576	n/a
Return on Investment (%)	12.0	11.5	n/a
Operating Profit Margin	8.2	6.7	n/a
Net Profit margin (%)	4.3	4.7	n/a

Balance Sheets

The airline industry is an asset-intensive industry requiring major investments in aircraft, facilities and equipment.  The total value of these assets amounted to $75 billion out of a total of a total of $133 billon in assets, net depreciation.  The return on investment (ROI) slipped a bit in 1999 to 11.5 percent.  Because earnings in the industry are cyclical and profit margins are small, it is difficult to attract equity investments in the airline industry.(2)  Airlines have to revert to debt financing to survive. This leads to above average debt to equity ratios in the airline industry.  Thus, airlines are more vulnerable when the economy struggles.

The past several years have been rather successful for the airline industry.  They have managed to use some of their profits to pay down debt and restructure their balance sheets.  Airline debt levels that were as high as 68 percent in 1992 fell to 51 percent by 1999.(2)

Operating earnings declined in 1999 to $7.9 billion from 9.3 billion in 1998 and the outlook for 2000 will be challenging.  Fuel expenses should continue to rise in 2000 and the economy, while still growing, will grow at a slower rate.  The FAA predicts that the number of passengers will continue to increase.  Greater and sustained earnings will be needed to fund the airplane, airway and airport infrastructure that will be needed to facilitate the growth into the next decade.

Profit margins in the industry have always been minimal.  Airline prices are closely related to trends in airline costs.  Therefore, the airlines are always searching for new ways to cut costs.

Current Issues in Corporate Air Travel

Corporate Travel traditionally has been conducted through the utilization of travel agencies.  The travel agencies have access to Global Distribution System (GDS) computers or Central Reservation Systems (CRS).  There are five GDS systems around the world such as SABRE, APOLLO, AMADEUS, WORLDSMART, and GALILEO.  These computer systems facilitate all airline travel reservations throughout the world.(4,6)

Several fees are charged to the customer (Corporation) during the travel agent transaction.  Typically, there is a $50 to $75 fixed Corporate fee, the travel agency charges $3 to $15 for CRS access charges and finally there are multiple segment fees, processing fees and commissions for travel agents.(4)  The Company’s Corporate Travel Manager negotiates all contracts with the suppliers (airlines).  Typically, airlines have a Director of Corporate Travel who represents the airline during contract negotiations.

Existing travel management systems limit access to information, require costly time-consuming data synchronization and consolidation, needless re-keying of information, and ultimately prevent corporations from exercising control over spiraling travel costs.(5)

Online travel management tools are the key to cost savings in the future of Corporate Travel.  These tools will reduce costs over time, giving the buyer a new level of information that will empower companies and individual travelers to get better deals and seek better service.  At a recent Association of Corporate Travel Executives (ACTE) conference, surveys showed that half of the respondents have online booking systems in place and slightly less than half had online processing systems in place.(1)  In the short term, the online systems will provide substantial savings in terms of processing costs.  In the long term, as the industry moves towards commoditizing the airline ticket (airlines are moving towards code sharing, one common flight number, one dispenser of boarding passes and one baggage handling operation(1)), the corporate intranet will enable business travelers to have more control over how much their travelers use specific suppliers and at what price.  Rate integrity will improve, customer service will improve and the system will streamline the bidding process.  Corporate travel managers will have real-time access and an unlimited number of ways to view travel management.(3)

Additional statistics about Corporate Travel can be purchased for a small fee at the following website:  www.forrester.com, the title of the report is “Online Business Travels Boost.”  March 2000.