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1. Introduction

Air Transport Economics is a specialized field that examines the economic principles and dynamics of the air transportation industry, focusing on demand and supply, pricing strategies, cost management, market structure, regulation, and the economic impact of air transport. The airline industry is characterized by cyclical demand, financial challenges, and significant impacts from external factors such as economic conditions and geopolitical events. Recent trends indicate a shift in market dominance towards the Asia-Pacific region, driven by economic growth in countries like China and India.

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1. Introduction

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Air Transport Economics

Chapter 1. Introduction of the Air Transport Industry

HOU meng
[email protected]

Air Transport Economics 1

What is Air Transport Economics?
 Passengers are concerned about

Why do prices
change every
day?
为什么每天的价格会有变
化？

Why do ticket If you were the

prices change on passenger, how
the same day? would you
为什么同一天机票价格也有 choose? 如果你是该旅
变化？客，会怎么选？

Air Transport Economics 2

What is Air Transport Economics?
 Airlines/carriers are concerned about

Air Transport Economics 3

What is Air Transport Economics?
 Airports are concerned about

Air Transport Economics 4

What is Air Transport Economics?

 Air Transport Economics is a specialized field

within economics that focuses on the
economic principles, practices, and dynamics
of the air transportation industry. It involves
analyzing how economic factors influence the
operations, management, and policies of
airlines, airports, and the broader aviation
sector.

Air Transport Economics 5

Key Components of Air Transport Economics
 Demand and Supply Analysis （需求供给分析） :
– Passenger Demand: Study of factors affecting air travel demand,
including income levels, ticket prices, and economic conditions.
– Cargo Demand: Examination of the logistics, trade patterns, and
global supply chain needs driving air cargo demand.
– Capacity and Supply: Analysis of airline capacity planning, fleet
management, and route development based on market demand.

 Pricing Strategies （定价策略） :

– Fare Structures: How airlines set prices for tickets, taking into
account factors like competition, cost of service, and customer
segmentation.
– Yield Management: Techniques used by airlines to maximize
revenue from ticket sales, often involving dynamic pricing and
overbooking strategies.

Air Transport Economics 6

Key Components of Air Transport Economics
 Cost Structure and Management （成本结构及管理） :
– Fixed and Variable Costs: Understanding the breakdown of airline
costs, including fuel, labor, aircraft maintenance, airport fees, and
administrative expenses.
– Economies of Scale and Scope: Analyzing how airlines can reduce
costs through larger scale operations and offering multiple services.

 Market Structure and Competition （市场竞争结构） :

– Market Dynamics: The competitive landscape of the airline industry,
including monopolies, oligopolies, and perfect competition.
– Airline Alliances and Mergers: Examination of strategic partnerships,
mergers, and alliances aimed at increasing market share and
reducing costs.

Air Transport Economics 7

Key Components of Air Transport Economics
 Regulation and Policy （规制管制政策） :
– Government Policies: The role of government regulations in shaping
the aviation industry, including safety regulations, environmental
policies, and economic deregulation.
– International Agreements: The impact of bilateral and multilateral air
service agreements on international air travel and trade.
 Economic Impact of Air Transport （航空运输对经济影响） :
– Contribution to GDP: Analysis of how the aviation industry
contributes to national and global economies.
– Employment: The role of the air transport sector in generating direct
and indirect employment opportunities.
– Tourism and Trade: The influence of air transport on promoting
tourism and facilitating international trade.

Air Transport Economics 8

Key Components of Air Transport Economics

 Externalities and Environmental Economics （外部性） :

– Environmental Impact: Study of the environmental consequences of
air transport, such as carbon emissions and noise pollution.
– Sustainability Measures: Economic evaluation of policies and
technologies aimed at reducing the environmental footprint of
aviation.

Air Transport Economics 9

Overview of the Airline Industry
 Cyclical and Seasonal Nature
– The airline industry is highly cyclical, with periods of
growth and decline.
– It is also seasonal, with demand fluctuating throughout
the year.
 Impact of Exogenous Shocks:
– The industry is significantly affected by external shocks
such as the spread of communicable diseases, terrorism,
and economic downturns.

Air Transport Economics 10

Impact of the Global Financial Crisis
 Financial Losses:
– The 2008 global financial crisis resulted in more than $5
billion in losses for the airline industry.
 Pre-2020: A Decade of Profitability:
– The decade leading up to 2020 was the most profitable in
the history of the airline industry.
– Factors Contributing to Profitability:
• Industry consolidation through mergers.
• Lower fuel prices that reduced operational costs.
– This period saw the longest stretch (about 10 years) of
profitability for the airline industry.

Air Transport Economics 11

COVID-19 Pandemic
 Financial Impact on the Industry:
– In 2020, the airline industry incurred losses close
to $140 billion.
– Cumulative Losses (2020–2022):
• Losses over this period could exceed $200 billion.
– Gradual Recovery:
• In 2021, the industry reported a loss of $51.8 billion.
• By 2022, the losses were reduced by 78% to $12
billion, reflecting a slow but steady recovery from the
pandemic.

Air Transport Economics 12

Airline Industry Consolidation
 Response to Financial Challenges
 Key Mergers (2005-2013):
– USAir and America West (2005)
– Delta and Northwest (2008)
– United Airlines and Continental (2010)
– Southwest and AirTran (2011)
– US Airways and American Airlines (2013)
– Result: Four largest U.S. airlines (American,
Delta, United, Southwest) now control 80% of
domestic passenger traffic.

Air Transport Economics 13

Airline Market Concentration
 Market Impact:
– Higher Ticket Prices:
• Consolidation often results in increased prices for
consumers.
 Increased Profitability:
– Airlines benefit from higher profitability due to
less competition.
 Potential Decline in Service Levels:
– Reduced competition may lead to lower service
quality for passengers.

Air Transport Economics 14

Evolution of the Air Transport Industry
 Shift in Market Dominance:
– There has been a gradual shift in passenger
market dominance from North America and
Europe to the Asia-Pacific region.
– Growth in the Asia-Pacific Market:
• Increasing economic strength in populous
countries like China and India is driving this shift.

Air Transport Economics 15

Evolution of the Air Transport Industry
 China’s Air Transport Growth:
– Rapid Expansion:
• Passenger numbers in China rose from 72.7 million in
2001 to 417 million in 2020, reflecting an average annual
growth rate of 10.64%.
– Pandemic Impact:
• In 2021, 440.6 million passengers traveled by air in
China, a 36% decrease from 2019 (660 million), mainly
due to the pandemic.
• China and India:Expected to lead future air transport
markets due to their large populations and improving
economic conditions.

Air Transport Economics 16

Evolution of the Air Transport Industry
 Dependence on Economic Conditions:
– Low profit margins; heavily influenced by global
economic trends
• Average return on invested capital (ROIC) often below
the weighted average cost of capital (WACC), indicating
low returns.

 Demand is seasonal, cyclical, and affected by

external shocks (e.g., natural disasters, terrorism).

Air Transport Economics 17

Introduction
World Airlines Passenger and Cargo Traffic, 2021

 North American Market:

– Largest in aircraft movement (37.99%) but losing share in passengers and
cargo.
 Rise of Asia-Pacific:
– Boeing and Airbus Forecasts: Expected to surpass North America in
the next 20 years. Over half of global air traffic growth will be driven by
travel to, from, or within the Asia-Pacific region.

Air Transport Economics 18

Introduction
International Passengers and Cargo Traffic, 2021

 Asia-Pacific and Europe:

– Surpassed North America in international passengers.
– Asia-Pacific leads with 37.9% of the global market. Growth driven by
China’s expanding economy and rising exports.
 Europe’s Market Characteristics:
– Small domestic markets;
– airlines depend on international travel.
Air Transport Economics 19
Air Cargo Industry
 Role of Air Cargo in Globalization:
– Catalyst for Supply Chains:
• Key driver in the globalization of manufacturing,
especially in the 1990s and 2000s.
• Accelerated by China joining the WTO, enabling just-in-
time manufacturing and assembly.
 Challenges to Air Cargo Growth:
• Growth slowed due to protectionist measures post-
Global Financial Crisis.
• Recent geopolitical conflicts and trade reorientations
negatively affect air cargo, challenging the benefits of
globalization.

Air Transport Economics 20

Global Distribution of In-Service Aircraft
Number of Aircraft in Service

 North America:
– Largest fleet of commercial aircraft.
– High percentage of older aircraft (47% are old or middle-aged).
– Significant replacement demand anticipated, attracting aircraft manufacturers.
 Asia-Pacific:
– High demand for replacing older aircraft, driving growth in new aircraft orders.
– Strong correlation between new aircraft and regional economic growth.
 Europe:
– Lower percentage of older aircraft (27% are old or middle-aged).
– Influenced by strict noise regulations banning older-generation aircraft.

Air Transport Economics 21

Financial Condition of the Airline Industry
 Cost Structure Issues:
– High Fixed Costs: Significant portion of costs are fixed
(e.g., flight schedules set for half-year seasons).
– Low Marginal Costs: Minimal cost for flying an extra
passenger leads to competitive pricing pressures.
– Operational Losses: Intense competition can push prices
below average costs.
 Unique Industry Characteristics:
– Perishable Inventory: Unsold seats/cargo space lose value
after takeoff, driving aggressive pricing to fill capacity.
– Lack of Differentiation: Similar schedules and services lead
to price competition. Airlines use loyalty programs and
ancillary services to create differentiation.