An Analysis of the Dynamics of the US Commercial Air Transportation System

Abstract

Major trends in the airline industry are analyzed to highlight key dynamics that govern the US domestic air transportation system. The hypothesis is that air travel supply and demand equilibriums, a reliance on outside capital, and intra-industry competition are among the most critical forces that are driving the current restructuring of the airline industry. Data on airline operational and financial performance is used to trace these dynamics as the industry evolved through periods of industry deregulation, an economic growth bubble, and the aftermath of the attacks of September 11, 2001. The thesis identifies the post-deregulation development of hub-and-spoke networks and yield management systems as the key forces that would set the stage for a bifurcation of the air travel market during a cycle of economic growth in the late 1990’s. During this bubble economy, the dynamics of supply and demand fundamentally shifted as the major carriers focused on high-revenue, high-cost operations and travelers began to flock to newer low-fare, low-cost carriers. With the end of the economic growth cycle in 2000, the bifurcation of the airline industry began to affect revenues and profits at the major carriers. Massive and unprecedented industry losses would ensue, and would be compounded by the attacks of 9/11. Airline operational strategies in response to 9/11 and longer-term restructuring efforts are discussed in order to further identify the key dynamics affecting the air transportation system. These dynamics are synthesized and then discussed within the broader context of the air transportation system, the impact of air travel on the economy and mobility, and the role of government.

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