5. Deregulation, Cost structure, IATA, Aviation environment footprint

What is deregulation?

-Deregulation is the reduction or elimination of government power in a particular industry, usually enacted to create more competition within the industry. Over the years, the struggle between proponents of regulation and proponents of no government intervention has shifted market conditions.
-The action of removing national or local government controls or rules from a business or other activity.

By what was the CAB established?

Civil Aeronautics Act of 1938

What does CAB stand for?

Civil Aeronautics Board

The CAB has authority over:

• Market entry

• Domestic

• Foreign (from US to foreign destinations)

• Market exit

• Route fares

• Same route, same fare

• Airlines merger

• Interlocking relationships

• Inter-carrier agreements

• Unfair business practices

• Subsidy

• Exemption

• For all above

What did the Federal Aviation Act of 1958 establish?

The FAA (Federal Aviation Agency)

What for did the Federal Aviation Act of 1958 establish the FAA?

to regulate airline operations and safety

Before deregulation, the Department of Transport was regulating Air Transport through:

• FAA covering all technical aspects of aviation.

• CAB covering commercial aspects – mainly routes, capacities and fares.

Deregulation started in ___ in ___, under the ___

1978, USA, Carter

Deregulation started in 1978 in USA, under the Carter Administration, that passed the

Airline Deregulation Act.

Deregulation initially only affected ___, but later had ___

domestic Air Transport within the US, important consequences worldwide

Deregulation started looking forward to ___, and it was expected that this would ___

increasing competition between airlines and different stakeholders, lower down prices and increase offer

CAB was dissolved in the year:

1984

Main characteristics of the Airline Deregulation Act:

• It only affected national US air traffic;

• Control over routes, capacities and prices was removed;

• CAB disappeared;

• FAA (renamed as Federal Aviation Administration) continued being responsible for all technical issues within aviation.

The main consequences that happened after the Airline Deregulation Act was enforced were:

• Competition among airlines increased;

• Number of airlines bidding for international flights increased (bilateral agreements auctioned)

• Fights for slot controls in main airports;

• Regional companies started cooperating with majors under Hub & Spoke implementation techniques;

• FAA had to start subsidizing certain routes (Essential Air Services)

• Guarantee that communities that were served by certificated air carriers prior to passage of the ADA maintain a minimum level of scheduled air service.

• Some airlines did not survive to competency, going into bankruptcy or merger:

• Pan Am, bankruptcy in 1991

• Trans World Airlines, acquired by American Airlines in 2001

• Continental Airlines, acquired by United Airlines in 2012

New trends and techniques appeared and were developed by different airlines, to better compete:

• Radial route systems (Hub & Spoke) maximizing connections while minimizing number of aircraft;

• Intensive use of electronic tools (Computer Reservation Systems, CRS) – Amadeus, Galileo, Sabre...first connecting airlines with travel agents, now directly with customers through the internet;

• Customer loyalty programs started to appear;

• Alliances with European and Middle-East airlines.

US tried to expand its deregulated techniques all over the world signing ___ with several countries

open skies agreements

It took ___ years after the ___ for the European Commission to start talking about Air Transport.

20, Rome Agreements (1957)

First deregulation of traffics was established on the ___ , allowing an important increase of ___

ECAC’s Paris agreements of 1956, South-North flows in Europe that supported tourism in South countries.

Deregulation has been happening slowly, through …

different agreements (different legislative, i.e., aviation packages, measures in the 80s and early 90s)

Phases of liberalization of deregulation?

• Removed all commercial restrictions for European airlines operating within the EU

• Any Community air carrier can freely set fares for passengers and cargo and can access any intra-EU route without any permit or authorisation

• Air carriers:

• Owned and controlled by (nationals of) Member States and located in a Member State.

• Good financial situation to cover potential liabilities (insurance).

• Professional and organisation ability to ensure the safety of operations in accordance with the regulations in force (air operator certificate).

Definition of cabotage

the right to operate a domestic flight, meaning carriage of passengers or cargo between two airports within the borders of one country, by an aircraft registered outside of that country.

When was cabotage finally allowed within the European Union?

1997

Similarly to US, in EU some routes remain ___, 2 destinations

under protective schemes (considering they are routes of public interests).

• Canary islands

• Balearic islands

Complete deregulation in EU within the airline industry allowed …, 3 companies and dates

LCCs to grow and expand, having brought a more connected Europe and cheaper ticket prices.

• RyanAir (1985)

• EasyJet (1995)

• WizzAir (2003)

Deregulation in terms of ___ is trendy, though important issues related to ___ remain as part of the debate

airports and ANSPs, sovereignty and natural monopolies

When happened the EU-US Open Skies Agreement?

2007

EU-US Open Skies Agreement granted…

3rd, 4th and 5th freedoms to any US or EU airline.

Analysing costs is important to determine:

▪ Efficiency of each area;

▪ Detect needs of investment;

▪ Determine prices (income must at least cover costs)

▪ Compare the status of a company with the market.

Accounting can be very creative; ICAO restricts this by proposing…

a single format

Airlines report to ___ about their ___ (___)

ICAO, finantial status, (standarized format)

Cost types

• non-operating costs (cost of capital): money transactions

• operating costs: related to the service provided

non-operating costs (cost of capital, money transactions)

• Interest rates

• Insurances

• Money transactions to other subsidiary companies

• Depreciation of the assets – use, time, technology

operating cost (related to the service provided):

• Direct Operating Costs (DOC) – aircraft

• Leasing or payment of the aircraft – loans, bonds, capital increase

• Crew salaries

• Maintenance

• Per cycles or hours – ABCD system

• Handling • Fuel – Jet A1

• Taxes

• Indirect Operating Costs – non-aircraft

• Commercial & Sales

• Administrative

Types of leasing techniques

• operating leasing: renting the aircraft

• financial leasing: renting + chances of buying the aircraft

types of operating leasing

• Dry leasing: no crew, no fuel, no maintenance, no insurance

• Wet leasing: crew included, no fuel, no maintenance, no insurance

• ACMI leasing: does not include fuel

• Charter leasing: includes everything

companies that make money through leasing:

AerCap

GECAS

Air Lease Corporation

Levers that affect each cost component

• aircraft ownership cost

• fuel costs

• maintenances costs

• crew

• catering

• distribution and sales

Aicraft ownership cost (Levers that affect each cost component)

• Anti-cyclical purchasing

• Optimize owned vs leased mix

• Fleet harmonization

• Reduce turnaround times – maximize flights per day

Fuel costs (Levers that affect each cost component)

• Shorter en-route & approach times

• Fuel hedging techniques; airlines hedge the risk of a possible increase in oil prices by purchasing forward contracts.

• Fuel tankering, a way to lower the fuel cost by buying extra fuel in other countries where the fuel is cheaper.

• Flight re-dispatch, a strategy used on international flights to reduce the initial dispatch fuel requirements.

• Reducing uncertainty associated to mass – estimating better no-show pax.

• Lighten up the aircraft – Electronic Flight Bag, food quantity, seat thickness, etc.

Maintenance costs (Levers that affect each cost component)

• Harmonize fleet.

• Maintenance visit optimization.

• Reduce number of engines (A330 vs A340)

• Balance age of the fleet.

• RYR → 10.8 years

• IBE → 10.2 years

• PUE → 18.0 years

• AAL → 14.3 years

Crew (Levers that affect each cost component)

• Hire young – cheaper personnel

• Improved planning of crew – logistics

• Reduce overnight expenses – hotels + allowances

• Use them to reduce handling costs – cleanliness

Catering (Levers that affect each cost component)

• Simplification of meal choices

• Monitoring number of passengers vs number of meals

Distribution and sales (Levers that affect each cost component)

• Use of internet channels

• Avoid third parties

ICAO focuses on three main areas to reduce the environmental impact of aviation:

• Aircraft noise

• Local air quality

• Climate change

Aircraft noise (aviation environment footprint)

• It is the most significant cause of adverse community reaction related to the operation and expansion of airports.

• ICAO Policy – Balanced Approach to Aircraft Noise Management

• Reduction of noise at source

• Noise provisions appear on Annex 16, Volume I (Environmental Protection)

• Measurement points fir aircraft certification (MTOW depending):

• Lateral full-power

• Flyover

• Approach

• Land-Use Planning and Management

• Noise Abatement Operational Procedures

• Doc 8168 (PANS – Aircraft Operations) → Airport night curfews

• Operating Restrictions

Local air quality (aviation environment footprint)

• Aircraft engine emissions provisions appear on on Annex 16, Volume II

• Liquid fuel venting

• Smoke -- to be superseded by nvPM standard

• Gaseous exhaust emissions:

• Hydrocarbons (HC)

• Oxides of nitrogen (NOx )

• Carbon monoxide (CO)

Climate change (aviation environment footprint), ICAOs dedication of resources to:

• ICAO forecasts an increase of CO2 emissions by a factor of 3 in 2050 if no measures are taken.

• Supporting Paris Agreement’s temperature goal, net-zero emissions by 2050

• With the goal of reducing impact, ICAO agreed to dedicate resources on:

• Aircraft innovations

• Provisions for new aircraft emissions certification at Annex 16, Volume III

• Optimal flight procedures

• Changes to ATM system and improvements to infrastructure and operations aimed at achieving a sustainable and efficient aviation system

• Global Air Navigation Plan (GANP) – Plan to drive the evolution of the global air navigation system

• Aviation System Block Upgrades (ASBUs)

• Sustainable Aviation Fuels (SFAs)

• Produced from feedstock (waste fats, oils/greases, municipal solid waste, agricultural/forestry residues, wet wastes, non-food crops on marginal land).

• Produced synthetically via a process that captures carbon directly from air.

• Carbon Offsetting Reduction Scheme for International Aviation (CORSIA)

• Provisions appear on Annex 16, Volume IV

• Non-CO2 emissions

At the 77th IATA Annual General Meeting in Boston, USA, on October 4th 2021, a resolution was passed by IATA member airlines committing them to

achieving net-zero carbon emissions from their operations by 2050