# Transportation Deployment Casebook/2014/Domestic Airlines
## Introduction
### National Railroads

In 1869 the first Continental Railroad was opened in the United States with the Promise of united the coasts of this great country. The opening of the railroad was considered one of our Country's greatest feats to date and its completion marked the creation of a railroad which was built through largely uninhabitable parts of the country across great natural barriers, which bore little hope of leading to future settlement. To overcome the challenge of high construction costs and low probability of demand faced by the railroad companies the federal government had to heavily subsidies the railroads so President Lincoln and Congress passed the Pacific Railroad Act of 1862 which provided government bonds and land grants to the railroad companies. As part of the Pacific Railroad Act of 1862, the initial continental railroad companies were allowed to be profitable (through continued subsidies), protected from heavy competition, and allowed to operate with little oversight/regulation. As a result of the arrangement and the for cite of the government the United States was able to facilitate the creation of the first railroad of its kind, spanning 2858 kilometer to create a unified national system. With a national transportation the United States was able to rapidly grow throughout the 19th century through which development began to occur throughout the previously believe uninhabitable land around the railroad, creating demand and a financially successful railroad system.

### Domestic Airlines

In the United States our Airlines can trace their origins to similar roots as the Railroads. They were started by pioneers and patriots who believed that aviation held the future growth of this great nation in its hand. With the development of a robust national airline network our country would continue to grow well through the twentieth century. In order to make this dream a reality the airlines would require initial subsidies and protections from the federal government to allow the industry to build up its economic viability. Through actions of different departments of the federal government, airlines received these protections in different forms for 64 years (from 1914-1978). When the protection went away airlines had already developed a national network and had a steadily growing demand but still suffered through many issues adapting to a freer market. However a few years after deregulation as airlines started to adjust to the new market, the intensity of the national airline system exploded and began growing at record paces. Through this explosion the unthinkable happened, the country became connected on levels President Lincoln couldn't have ever imagined, in which the trip of the continental railroad from St. Louis to California can be accomplished in just a few hours creating the opportunity for this country to grow even more throughout the twentieth century.

#### Definition

According to the Merriam Webster dictionary an airline is "a company that owns and operates many airplanes which are used for carrying passengers and goods to different places."
The United States Federal Aviation Administration provides multiple options to form an airline operating flights domestically in the United States. Federal Aviation Regulation (FAR), Part 121 allows airlines to register as either a domestic operation airline which is any pre-scheduled airline which operates either a turbojet powered airplanes, or an airplane with more than 9 passenger seats (this excludes crew seating), or an airplane with the capacity to carry more than 7,500 lb. Under the regulations of domestic operation airlines, they are limited to operating flights between any airports within the United States. An additional option under FAR, Part 121 is to register with a designation as a flag airline which follows the same criteria of a domestic operation airline with the additional ability to fly between the United States and points outside of the United States as well as between any points outside of the United States.

## History
### Birth

The first airline in the United States was the St. Petersburg-Tampa Airboat Line, which operated an 18-mile route between Saint Petersburg, Florida and Tampa, Florida. When the first passengers purchased their tickets for $5 in 1914, there was no government oversight or regulation despite the fact that the Wright brothers had taken flight at Kitty Hawk a mere five years earlier. The first regularly scheduled airmail service began four years after the St. Petersburg-Tampa line, in 1918 with service originating in New York and traveling to Philadelphia, continuing to Washington, D.C. With these initial services the Post Office was able to prove to the country that Post office pilots could maintain regular service through both good and inclement weather. This proof of concept lead to the passage of the Kelly Act of 1925 which approved the privatization of Post office Airmail routes. On February 15, 1926, with the private airline industry struggling to gain traction the U.S. Post Office started to offer the privately operated airmail service authorized in the Kelly Act of 1925. Under the airmail service offering airlines were paid a premium to transport mail on contracted/scheduled routes, often in conjunction with passenger routes. The mail rates were heavily subsidized by the Post office to keep the operation lucrative for airlines. One year later the Post Office had already provided contracts to create a national network.
Although low levels of regulation on airlines were enacted by the Air Commerce Act of 1924, the first heavy attempt to regulate the industry was the Air Mail Act of 1934, which sought to require set passenger loads on airmail routes and protect public subsidies from increasing profit margins. Unfortunately, the act was viewed as being enacted with a large degree of haste, and believed to harm the ability to develop a nationally integrated transportation system. However, as a result of the Air Mail Act of 1934, the Federal Aviation Commission was established, and its members were appointed. The appointment of the Federal Aviation Commission allowed for a long and well thought out conversation on the future of the aviation industry, and after multiple unsuccessful attempts to pass effective and long lasting regulation as well as the publishing of multiple reports the Civil Aeronautics Act of 1938 was passed in January 1938.
The Civil Aeronautics Act of 1938 established an independent regulatory agency, the Civil Aeronautics Board (CAB). The CAB was a five-member group who were authorized to designate which airlines were allowed to operate on which routes, essentially providing the board with the ability to regulate which airlines would be permitted to participate in the system. Once permitted to enter the system airlines were also severely regulated by the CAB in a number of ways including, the ability to stop operating as an airline, the ability to merge with other approved airlines, and the prices charged to passengers. Under this system the CAB fragmented the market into a collection of monopolies in which small/commuter airlines received a monopoly over a small region of the country in which they aggregate passengers to a few large hubs. The CAB would then authorize separate long-haul airlines to move passengers between hubs, with their own monopolies on parts of the system. Under this system airlines maintained a status of financial strength due to their forced monopolies, while passengers were protected by CAB set fares, on scheduled service. Whenever an airline would begin to experience financial difficulties or even face potential bankruptcy the CAB would permit them to merge with a healthier airline to keep the system operating.

### Growth

Airlines had operated with relatively little change to the market under the control of the CAB and the 1938 Civil Aeronautics Act for over forty years. There had been some important advancements in the industries technology however. Through the 1920s and 1930s most aircraft utilized by airlines had been produced by small facilities in which aircraft were manufactured one at a time limiting the speed of technological advancement and the safety/reliability of aircraft. This was all changed during WWII, as aircraft manufacturers were forced to adopt mass-production techniques to meet the war effort. The amount of research and development spending during the war also accelerated the level of innovation occurring in the sector. By the end of the war U.S. manufacturers were now set on a pace of continuous technological advancement and mass production leading to increasingly larger, faster, and safer aircraft with longer ranges than ever before.
Although aircraft manufacturers had entered a new phase of fast pace innovation and advancement, by 1978 many believed the airlines were being held back to the same system they had been operating in since 1938 due to the CAB. There was a large call to disband the CAB and deregulate the airline industry. This cry was only intensified by the competition of airlines like Southwest which maintained operation within the State of Texas to avoid CAB regulations. Southwest was therefore able to offer tickets as low as half the price of CAB regulated operators due in part by their ability to fit more seats on aircraft. There were also calls from freight operators wishing to offer new services such as Federal Express which was looking to create overnight delivery through a dedicated airline. When the Airline Deregulation Act was passed in 1978 to relieve airlines previously suffering from the heavy regulations of the CAB struggled to stay solvent and many declared bankruptcy, in some cases multiple times. Which lead to the recognition that regulation had helped protect airlines through their infancy and led to their success by providing predictable fares.
During this time of change following the deregulation of the industry there was relatively little change in the fares passengers faced from previously CAB regulated airlines but instead saw increased service between airports. Through increased service, more airports saw more direct connections between cities and more frequent service on existing routes. After some time airlines began to struggle to make the increased service levels sustainable and began to alter pricing/booking strategies for passenger traffic. Among these new strategies was a graduated rate, in which early booking offered lower fares while last minute travelers would pay the most. Additionally, airlines began to adopt computer based reservation systems, as it minimized marketing and distribution costs. Eventually ushering in a short era in which airlines operated in a fairly efficient market and were able to continue to grow easily and quickly.

### Maturity

As the market continued to expand airlines previously operating on small/commuter scales began entering longer-haul routes in an attempt to provide their region's passengers direct service into larger markets and stabilizing their earning levels. As the competition of small/commuter airlines was felt heavily by the traditionally long-haul carriers, they reacted. The traditional long-haul carriers began to flood their core markets with capacity/more ton-kilometer capacity and lower rates. The most notable was American Airlines protection of the Dallas-Fort Worth airport, where they were able to force two of three new competitors into bankruptcy. Initially the Department of Justice attempted to intervene under antitrust laws but courts ruled that airlines like American could not be held liable under antitrust laws in cases of bankruptcy. By the 1990s in an effort to protect themselves from the traditional liners, the newly (expanding) operators began either merging with each other or legacy carriers in an attempt to match legacy carriers size and market manipulation abilities. As a result of the mass consolidation of the airlines there was a return to the hub-and-spoke system in which passengers were funneled into major hub airports around the country to be managed more efficiently, this resulted in less frequent service and less direct routes. This trend has continued through the 2000s with mergers as recent and as big as US Airway and American Airlines, Southwest and AirTran, as well as United and Continental.

## Qualitative Analysis

Using revenue-ton statistics from the United States Department of Transportation; I was able to find annual total revenue-ton miles flown on scheduled service from 1954-2013 for both passenger and freight aviation and convert these numbers to revenue-ton kilometers flown. Data from 1954-1995 was estimated by the Bureau of Transportation Statistics from a ten-percent sample of all scheduled traffic (both international and domestic) as recorded from only major, national, Large Regional, and Medium Regional operators while not including statistics for small or commuter air carriers as defined and collected by BTS Form 41A. To correct the 1954-1995 data to remove international traffic the ratio of domestic/total revenue miles flown in 1954 was used to correct all 1954-1995 data. The data collected by the Bureau of Transportation Statistics from 1996-2013 was collected from all operators including small and commuter air carriers, with a 100% sample/from the entire population, and was separated by domestic and international traffic. The 1954-2013 regression was run to model the following logistic equation: S(t)=K/[1+Exp(-b(t-t0)]
Where:
| S(t) | is US domestic revenue-ton kilometers flown |
| t | is time |
| t$_0$ | is the inflection time |
| K | Saturation of Domestic Airline saturation |
* Regression Results
* K = 150000000
* b = 0.100710927
* t$_0$ = 0.970150329
* R Square = 0.970150329

## Future

As the speed of growth in this country slows down due to a dimensioning receipt of advantages from our current jet powered aviation network we must look forward to our future. We may in the next few years find an entirely new mode to transport ourselves around this country, as the airline industry moves closer to its peak, a mode by which we can boost our nation into the next stage of growth through the twenty-first century. Or, we may make the next advancement in aviation and continue with a more advanced vehicles and technologies to revolutionize the current system. Many believe, despite some recent incidents, in the high potential for space travel. With space travel passengers enter the upper atmosphere and move between spaceports instead of airports, there are already 17 operational space ports in the United States with travel times a fraction of current travel. Initial "space" airlines, most notably Virgin Galactic, have been pledging to bring tourists into outer space in a matter of months. These early companies will not be able to deliver shortened travel times or serve as a viable means of transportation, as every trip requires three days of preparation; they do however help fuel future innovation in the industry. This of course raises the question of the potential future of domestic aviation travel with such efficient international alternatives, paired with continued increases in American High Speed Rail, domestic aviation transport may soon become obsolete, especially for short haul routes.

## References

* ↑ Duran, Xavier H. Was the first transcontinental railroad expected to be profitable? Evidence from entrepreneur's declared expectations, an empirical entry decision model, and ex-post information. Diss. LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE (UNITED KINGDOM), 2009.
* ↑ Brown, Jeff. "Uniting The States: The First Transcontinental Railroad." Civil Engineering (08857024) 82.7/8 (2012): 40-42. Academic Search Alumni Edition. Web. 7 Nov. 2014.
* ↑ "Airline." Merriam-Webster.com. Merriam-Webster, n.d. Web. 6 Nov. 2014. <http://www.merriam-webster.com/dictionary/airline>.
* ↑ "Airline Certificate Information - Applicable Definitions." Federal Aviation Administration. U.S. Department of Transportation, n.d. Web. 06 Nov. 2014.
* ↑ Ryan, James. "The Wright Brothers." Wright Brothers (2005): 1. MasterFILE Premier. Web. 7 Nov. 2014.
* ↑ Morrison, Steven, and Clifford Winston. The evolution of the airline industry. Brookings Institution Press, 1995.
* ↑ Westwood, Howard C., and Alexander E. Bennett. "Footnote to the Legislative History of the Civil Aeronautics Act of 1938 and Afterword." Notre Dame L. 42 (1966): 309.
* ↑ Westwood, Howard C., and Alexander E. Bennett. "Footnote to the Legislative History of the Civil Aeronautics Act of 1938 and Afterword." Notre Dame L. 42 (1966): 309.
* ↑ Morrison, Steven, and Clifford Winston. The evolution of the airline industry. Brookings Institution Press, 1995.
* ↑ Westwood, Howard C., and Alexander E. Bennett. "Footnote to the Legislative History of the Civil Aeronautics Act of 1938 and Afterword." Notre Dame L. 42 (1966): 309.
* ↑ Bailey, Elizabeth E. "Aviation Policy: Past and Present." Southern Economic Journal 69.1 (2002): 12-20. JSTOR. Southern Economic Association, July 2002. Web. 06 Nov. 2014.
* ↑ Olienyk, John, and Robert Carbaugh. "Competition in the World Jetliner Industry." Challenge 42.4 (1999): 60-81. JSTOR. Web. 6 Nov. 2014.
* ↑ Bailey, Elizabeth E. "Aviation Policy: Past and Present." Southern Economic Journal 69.1 (2002): 12-20. JSTOR. Southern Economic Association, July 2002. Web. 06 Nov. 2014.
* ↑ Morrison, Steven, and Clifford Winston. The evolution of the airline industry. Brookings Institution Press, 1995.
* ↑ Bailey, Elizabeth E. "Aviation Policy: Past and Present." Southern Economic Journal 69.1 (2002): 12-20. JSTOR. Southern Economic Association, July 2002. Web. 06 Nov. 2014.
* ↑ Bailey, Elizabeth E. "Aviation Policy: Past and Present." Southern Economic Journal 69.1 (2002): 12-20. JSTOR. Southern Economic Association, July 2002. Web. 06 Nov. 2014.
* ↑ "Historical Air Traffic Statistics, Annual 1954-1980 | Bureau of Transportation Statistics." Historical Air Traffic Statistics, Annual 1954-1980 | Bureau of Transportation Statistics. Bureau of Transportation Statistics, n.d. Web. 06 Nov. 2014.
* ↑ "Historical Air Traffic Statistics, Annual 1981-1995 | Bureau of Transportation Statistics." Historical Air Traffic Statistics, Annual 1981-1995 | Bureau of Transportation Statistics. Bureau of Transportation Statistics, n.d. Web. 06 Nov. 2014.
* ↑ Goldfield, Edwin D. Statistical Abstract of the United States 1955. Washington, DC: US Department of Commerce, 1955. Print.
* ↑ "U.S. Air Carrier Traffic Statistics | Bureau of Transportation Statistics, T-100 Market and Segment." U.S. Air Carrier Traffic Statistics | Bureau of Transportation Statistics. Bureau of Transportation Statistics, n.d. Web. 06 Nov. 2014.
* ↑ "U.S. Launch Sites and Spaceports: Commercial/Government/Private Active and Proposed Sites." FAA/AST (2013): n. pag. Federal Aviation Administration, Feb. 2013. Web. 06 Nov. 2014.
* ↑ "VIRGIN GALACTIC AT A GLANCE." VIRGIN GALACTIC (n.d.): n. pag. 31 Oct. 2014. Web. 6 Nov. 2014.