Systems in Transportation: the case of the airline industry

1. Systems in Transportation:the case of the airline industry by Pedro Ferreira for ESD.83 November 27th, 2001

2. Outline • Early History • Deregulation • Structure • Economics • Engineering • Safety • Environment • University-based R&D • Conclusion

3. Early History • 1903 – Orville and Wilbur Wright, in NC, first flight with powered machine heavier than air (before only balloons and gliders) • 1908 – Charles Furnas, first American airplane passenger (flew with Orville Wright in NC) • 1914 – First scheduled air service, in FL, plane that could take off and land in water, designed by Glenn Curtiss • WWI – Increased demand for aircrafts, more powerful motors, larger aircrafts, but military focused (on the civil side, competition from railroads) • Airmail – Congress appropriated $100000 for experimental airmail service in 1917, conducted by the Army and the Post Office (DC-NYC) • Beacons – Night flights possible in Ohio with beacons visible at 10-second intervals

4. Early History • Contract Act of 1925 (Kelly Act) – Government moved airmail traffic to the private sector, using competitive bids, 5 contracts were granted • Morrow Board – Board to recommend a national aviation policy, chaired by Dwight Morrow, senior partner in JP Morgan. Government should set standards for civil aviation outside the military • Air Commerce Act of 1926 – Recommendations accepted and implemented by the Secretary of Commerce: designate air routes, develop navigation systems, license pilots and aircrafts, investigate accidents • Tin Goose – Henry Ford bid for airmail contracts, in 1925 and developed the first duralumin aircraft, designed primarily for passengers • Charles Lindberg – First flight across the Atlantic ocean (NYC-Paris) in 1927, the Spirit of St. Louis, aviation became a more established industry

5. Early History • Watres Act – Designed by Postmaster General Walter Brown, allowed the Post Office to enter long-term contracts with rates based on volume • Air Mail Act of 1934 – Return of the airmail service again to the private sector after scandals in attributing routes under the Watres Act, also, the government forced dismantling vertical holding companies • Aircraft Innovations – Air-cooled engines, reduced weight, larger and faster planes, better altimeters, airspeed indicators, rate-of-climb indicators, compasses, artificial horizon, radio beacons • Modern Airlines – Boeing 247 (1933, 10 passengers at 155 mph), United Airlines bought 60 in 1933. DC-3, first passenger aircraft yielding profit (21 seats, 16 hours C2C) • Pressurized Cabins – introduced by Boeing in the Stratoliner, deriving from the B-17, could fly at 20000 feet and reach 200 mph

6. Early History • Civil Aeronautics Act of 1938 – Creation of an independent agency, the Civil Aeronautics Authority (CAA), to regulate fares, mergers and routes. • WWII – In the US, mass production of planes (50000/year); Innovations: Jet Engine (theorized by Newton, designed application by Whittle in 1930, built by von Ohain in 1939) and Radar (British scientists in 1940) • Cold War – Fueled funding to develop jets, from military to commercial sector: swept-back wing, kerosene; Boeing 707, technology transfer from the KC-135 (jet tanker) • Federal Aviation Act of 1958 – Accidents; Results in the creation of FAA in 1967 (along with the DOT) to run a broad air traffic control system, certification of aircraft designs, airline training and maintenance • Wide-bodies and Supersonics – Boeing 747 (1969, 2 aisles, 4 engines, 450 passengers); DC-10 and L1011, 250 passengers; Tupolev 144 (1968) and Concord two months later

7. Deregulation • The airline industry is a SYSTEM – it has inputs, serves a purpose and has acquired technological maturity; it needs specific policy for development, design and management of dependencies and interactions among firms • Wide-bodies boosted airline capacity; oil embargo of 1973 skyrocketed prices • CAB report of 1975: “industry is competitive, not monopolistic” • Air Cargo Deregulation: 1977, cargo carriers freedom to operate on any domestic route and charge whatever the market would bear • Express Packet Delivery: 1970s, express carriers allowed to operate overnight and according to demand for high-quality services • Passenger Deregulation: complete elimination of restrictions on routes and services by December 1981, end of all rate regulation in January 1983. CAB ceased in 1985, some functions shifted to the DOT

8. Effects of Deregulation • The airline industry is a SYSTEM – it is organized as a network and the hub and spoke system proves to be the most efficient/profitable configuration • Hubs: strategically located airports used as transfer points for cargo and passengers, airlines schedule banks (dozens of planes within minutes) of flights in and out hubs per day. Hubs allow to serve far more markets with the same size fleet, relative to P2P service, hundreds of connecting flights, easier for an airline to keep passengers end-to-end and to achieve higher load factors • New carriers (43 in 1978, doubled today) lead to increased competition (85% of the passengers have a choice of 2 or more carriers) and growth in air travel (240 million in 1977 to 640 million in 1999, 80% of the US population has flown at least once) • Fares have declined 35% since 1978, traveling public save $20 billion/year (55% due to discount fares, 45% increased service frequency) • Other innovations: frequent flyer programs, computer reservations, codesharing

9. Structure of the Industry • The airline industry is a COMPLEX SYSTEM – it has elements and it is organized into scales and levels of airlines • What is an airline? Two certificates: fitness (issued by the DOT, financing and management in place to provide scheduled service) and operation (issued by the FAA, requirements for operating aircrafts with 10 or more seats) • Types of airlines: Majors (+$1000 m/year), nationwide and worldwide service (12 US majors for passengers and 3 for cargo); Nationals ($100-$1000 m/y), particular regions and long-haul service, using medium and large-sized jets; Regionals ($20-$100 m/y), within a region, planes up to 60 passengers • Cargo Carriers follow the same revenue based taxonomy, with a different certificate from the DOT

10. Structure of an Airline • Each airline is itself a SYSTEM – it’s organic picture reflects the combination of functions assembled together to produce a final unique output Line personnel Sales and marketing Operations Sub-contractors Maintenance Reservations and ticketing Staff personnel • Line Personnel – mechanics, pilots, flight attendants, reservation clerks, airport and gate personnel, ramp-service agents, security guards, … • Sub-contractors – cleaning, fueling, security, food, maintenance (acknowledges the existence of a system surrounding the industry and inter-industry interactions)

11. Economics & Management • The airline system has very particular economics and therefore specific management concepts, tools and practices • Airlines provide a service: transport a passenger between two points at an agreed price. There is no physical product given, nor inventory created and stored • Capital and Labor Intensive: huge setup cost, needs airplanes, hangars, flight simulators. Most capital is financed through loans; many employees also involved (from pilots to baggage handlers, from cooks to lawyers) take 1/3 of revenues • Thin Seasonal Profit Margins: net profit of 1-2 %, increases in the summer, as people take vacations, decreases in winter (expect for holidays), demand presents peaks and valleys, shift between through discounts and promotions • Revenues: 75% passengers, 15% cargo shippers; 80% of passengers revenues come from domestic travel, less than 10% pay full fares. Travel agencies, with computer-based systems are paramount in ticket sales (80%) • Costs: operations, maintenance, traffic service, promotions, passenger service, administrative and amortization

12. Management Tools • Break-even load factors: % of seats the airline has in service that it must sell at a given price in order to cover its costs. Usually around 66%. Airlines operate near this margin (1-2 more seats on each flight make the difference between profit and loss) • Seat-configurations: more seats, more revenue at the same price, however less comfort. Analyze target market: low price? many seats; business community? fewer and larger seats with workspace at higher price • Overbooking: book more passengers for a flight than they have seats available; rational is that people sometimes do not travel and unused seats cannot be returned to inventory for future use, analysis use historical flight data (overbooking = no-shows) • Pricing: purely competitive, price changes according to the value given by different users to seats; the airline goal is to maximize revenue in each flight offering the best menu of tickets (mix of full-fare, discount, upgrades). Complex optimization process, computer software, learning application • Scheduling: free since 1978, very complex procedure, also done using computer software, takes into account demand, crew availability, maintenance, airport restrictions, aircrafts

13. Engineering - Aircraft • The aircraft is itself a (mechanical) SYSTEM – engineering analysis, primarily based on Systems Dynamics, is largely used to improve flight conditions • Bernoulli Principle: airplanes fly when the movement of air across their wings creates an upward force on the plane that is greater than the force of the gravity (Daniel Bernoulli, 187th century Swiss mathematician studying fluids: pressure exerted by a moving fluid is inversely proportional to its speed)

14. Engineering - Flight • The flight can itself be seen as a SYSTEM – it is sequence of phases with interfaces among them, computer simulation is used to estimate behavior, simulate flight, train people • Push-back and Taxi-out: doors closed, push aircraft (tug or power back) after clearance from the ATC • Takeoff and climb: release break, advance throttle, steering with pedals, rotate nose upward to leave the ground (after reaching VR), retract wheels • Cruise: reduce power after reaching cruising altitude (approved by the ATC) and follow airways, steering with pedals and using, for example, GPS • Descent and landing: keep reducing speed after entering the final approach area, lower land gear, land, pull back throttles, raise spoilers to disrupt airflow, brake • Taxi-in and parking: after controlling speed move plane to gate with own power

15. Safety and Assessment • Accident analysis provide closed loop feedback control to the industry and the agencies enforcing safety are the mechanism to make it work • Accidents are investigated by the National Transportation Safety Board (NTSB). In 1999, average of 0.3 (2 in 1978) fatal accidents per 1 billion miles flown. • In a typical three-month period, more people die on the nation’s highways than have died in all airline accidents since the advent of commercial aviation • Major safety responsibility is granted to the FAA since 1967. It issues aircraft certification, operation certification (for an airline), certification of airline personnel and airports and develops and maintains the nation’s ATC system Passengers and cargo Transportation service Airline industry Design Accidents Safety Policy

16. Relation to the Environment • Environmental concerns acknowledge a boundary between the airline industry and the remaining of the society and 2-way interactions across it that need to follow certain standards • Fuel efficiency: fuel is 10% of operating costs, constant research to develop more efficient engines and to find ways to use them just when needed • Aircraft emissions: 1960s, development of cleaner-burning combustion chambers; 1970s, fuel price increased leading to more efficient engines, NOx emissions are now at 2-4 % of total manmade, CO2 emissions around 3% • Aircraft noise: major pollution challenge to the industry, dealt with design changes, reduction of the velocity of the engine exhaust (in parallel, the FAA has been providing grants to airports for soundproofing homes, schools and churches) • Recycling, fuel management, de-icing management

17. Current University-based R&D • MIT (a good place to look at, given the strong relationship to the industry in wartime and throughout the cold war period): • AERO/ASTRO Department, created in 1939, after the establishment of the Laboratory of Aeronautical Engineering in 1913 • Changed name in 1959to Department of Aeronautics and Astronautics • In 1963 The Center for Space Research was created joining the Experimental Astronomy Laboratory and the Space Propulsion and Man-Vehicle Laboratories • In 1990s, the Cold War is over, focus is shifted to transportation, commerce and communications. The Cold War period lasted one academic generation. New faculty is eager to investigate in new areas for aerospace: information engineering, vehicle engineering, systems architecture and engineering: “To provide students with a deep working knowledge of the technical fundamentals; To educate engineers to be leaders in the creation and operation of new products and systems; To instill in researchers an understanding of the importance and strategic value of their work”

18. Current University-based R&D • It has not only laboratories in Materials (AMSL) and in Fluid Dynamics, but also structures as the Center for Information and Control Engineering, the Lean Aerospace Initiative, the Software Engineering Research Lab and the Center for Sports Innovation • Exit analysis: • 1998-1999 • Further Study 4 • Industry 13: Aerospace Engineering Firms 7 ; Government 1; Consulting 4; Other 1 • Military 5 • 1999-2000 • Further Study 10 • Industry 24: Aerospace Engineering Firms 8; Government 2; Consulting 5; Other 9 • Military 3 • New courses: • 16.355J Advanced Software Engineering • 16.36 Communication Systems Engineering • 16.71J The Airline Industry • 16.89 Space Systems Engineering (Dan Hastings)

19. Conclusion • The airline industry is a network-based industry that lives from the interaction among the various parts of the system: aircrafts, airports, passengers, aviation policy • The airline industry and an airline are complex systems that require proper management concepts, tools and practices • The aircraft is the result of understanding the dynamics of a system of air fluids and of designing and implementing a machine capable of taking advantage of that dynamic behavior to fulfill a purpose: transport people • The airline industry has set structures to analyze its behavior, particularly accidents, and retrofits that information into the design of the system and its components • The airline industry takes into account the interactions to other industries, and particularly, to the environment, thus becoming part of a larger system • R&D moved from military focused (World Wars), to space (Cold Ward) and then to commercial transportation (1990s)