The troubled airline industry: impacts on plane makers and the U.S. economy

Business Economics, Jan, 1994 by Robert D. Shriner

SINCE 1970, the number of passengers handled by the world's airlines has risen more than three-fold, from 383 million in 1970 to more than 1.2 billion in 1992. When the length of each trip is taken into account, the growth in passenger miles flown has been even greater, rising from 286 billion in 1970 to more than 1,200 billion in 1992, a four-fold increase.

To meet this growing volume of air travel, airlines added to their fleets of planes and increased the average size and usage of their planes. Available seat-miles rose from 522 billion in 1970 to over 1,700 billion in 1991, a three-fold increase, while the average occupancy rate or "load factor" for all airlines rose from 55 percent in 1970 to 68 percent in 1991.

Not surprisingly, the rate and nature of this growth has not been uniform everywhere in the world. The U.S., which has the largest and most established air travel system, has grown somewhat less rapidly than areas that until recently have had less-developed air travel systems or have had above-average economic growth, such as Europe and Asia. Other areas, with relatively slower economic growth, have also had less rapid growth in their volume of air travel. The size and prosperity of the U.S., along with its pioneering role in air travel and aircraft manufacturing, have led to its position as the world leader in air travel, with much greater shares of world air travel than either world GNP or population. Its leading airlines, American, United, and Delta, are among the largest and financially strongest in the world. The largest U.S. airline, American, has about as many planes -- about 660 -- as the combined total of the three largest European airlines: Lufthansa, British Air, and Air France. Data compiled by the International Air Transport Association (IATA) indicates that U.S. airlines accounted for approximately 37 percent of world air passenger travel in 1991, little changed from the 38 percent they accounted for in 1970. Domestic air travel within the U.S. accounted for about 35 percent of total world air travel in both 1970 and 1991. The remaining 2 to 3 percent of the U.S. share is due to U.S. airlines' international routes. Some estimates show an even larger share for U.S. airlines.

Improved efficiency, service, and economies of scale, along with deregulation of domestic air fares and a growing U.S. economy, helped reduce the cost and increase the volume of air travel within the U.S. during most of the 1980s. Between 1980 and 1990, U.S. air travel (measured in passenger miles) rose at an average annual rate of about 7 percent. However, affected by the slowing in the U.S. economy, domestic air travel has been sluggish since late 1987. International travel on U.S. airlines declined in 1990 and 1991, affected by economic slowing around the world and by heightened security concerns associated with the conflict with Iraq, but began to recover in 1992.

Europe ranks next after the U.S. as a major air travel market, accounting for about one-fourth the world total in 1990, followed by Asia (including China, India, and Japan) with roughly 15 percent. From 1970 to 1990, passenger-miles on European airlines grew at an average annual rate of about 8 percent, as did those on Japanese airlines, reflecting the strong growth of the major economies of Europe and Japan. However, several areas with lower initial levels of air travel grew even more rapidly during the same period. Airlines in China and the rest of Asia excluding India grew at an annual rate of roughly 20 percent, while airlines in the Middle East grew an estimated 11 percent, and those in Latin America and India grew about 9 percent each. Non-U.S. airlines have been affected by the Persian Gulf conflict and by the world-wide economic slowing in 1991 and 1992 much the same as U.S. airlines.

Historically, air travel has been adversely affected by economic slowing as businesses and consumers tighten their purse strings until economic conditions improve. The pace of air travel then resumes once the economy returns to its normal growth path. Estimates differ about how soon and how much economic conditions in various countries will improve. However, most analysts generally agree that growth in worldwide air travel averages somewhere in the neighborhood of 2-1/2 to 3 percent above the average rate of economic growth. Thus, if the average economic growth rate in the 1990s is on the order of 2 to 2-1/2 percent, the average growth in air travel will be somewhere in the vicinity of 4 to 5 percent. That would be slower than the average rate between 1970 and 1990 but still substantial, requiring more and larger aircraft to be put in service as the decade proceeds.

The greatest increase in air travel is predicted for the Asian region and for air routes linking Asia with Europe and the U.S. Air travel in or linked to Asia is projected to grow an average of 12 percent or more annually in the 1990s and beyond. Transatlantic air travel between North America and Europe is projected to grow on average about 8 percent annually during the same period, while domestic air travel growth within the countries of North America and Europe is projected to be near the world average of 4 to 5 percent. Air travel growth in Latin America and Africa is similarly linked to economic growth rates in those regions.