Multifactor productivity change in the air transportation industry: productivity increases in the U.S. airline industry—the Nation's primary intercity mass transportation system—have played a significant role in the industry's cost-containment efforts and its ability to accelerate growth

Monthly Labor Review, March, 2005 by John Duke, Victor Torres

Under regulation, with price competition restricted, airlines often engaged in competition based on the level and quality of service. This resulted in overuse of labor and materials inputs. (16) With the new hub-and-spoke networks, the airlines could achieve higher load factors in the smaller markets, which could result in lower operating costs and lower fares. "According to one respected source, deregulation was responsible for 58 percent of the price cuts from 1978 to 1993 and made fares 22 percent lower than they would have been without deregulation." (17)

From 1979 to 1990, output in the air transportation industry expanded at 4.8 percent per year on average. The overall growth rate in output for this period also obscures some variability in the interim years, although not as pronounced as that during the 1973-79 period. For example, the inflation, soaring fuel prices, and the general economic situation facing the United States from 1979 to 1981 yielded output declines of 3.6 percent and 2.2 percent in 1980 and 1981, respectively. In fact, in 1980 the industry recorded the sharpest drop in traffic in more than 50 years of scheduled air transportation. (18) In 1982, the decline in passenger traffic began to reverse, and output managed to accelerate rapidly to an annual average of 8.0 percent from 1981 to 1986. The commercial airline industry set passenger traffic records, year after year, during the last 4 years of this period (1982 to 1986). (19) The demand for air cargo services also grew significantly from 1981 to 1986, with records set during 3 of the 5 years. In 1987, the demand for commercial air transportation continued its growth, as new records were set for passengers, revenues, employment, and aircraft on order. (20) Overall, output posted a rise of 4.9 percent per year during the 1986-90 period.

For the overall 1990-2000 decade, output grew an average of 4.2 percent per year, climbing by 3.5 percent during the first half of the period (1990-95), and accelerating slightly to 4.9 percent during the second half (1995-2000). Output in the airline industry declined in 2001. Prior to September 11, average domestic airfares had already fallen sharply in response to the weakening economy, reduced business travel, and an increasing proportion of low-margin leisure travelers. (21) The September 11, 2001, terrorist attacks further exacerbated a weakened air transportation industry by forcing it to briefly shut down its operations. The airlines cut capacity over the last 4 months of 2001, although the month-to-month reductions in capacity slowed from a high of 19 percent in September to 10 percent in December. (22) Output for 2002 as a whole declined slightly, by 0.8 percent, from 2001.

Inputs

Labor. Employment in the air transportation industry almost doubled from 294,600 in 1972 to 575,500 in 2001. (23) During the same time period, output almost quadrupled. Between 1973 and 1979, employment increased relatively slowly at an average annual growth rate of 1.9 percent, although output expanded at a rapid 7.6 percent per year. After the Airline Deregulation Act of 1978, however, the industry went through a period of adjustment. By 1984, the number of scheduled interstate carriers had increased from 36 to 123, providing a variety of competitive options to air travelers and shippers. (24) The entry of these new carriers into the industry put downward pressure on fares and strongly contributed to a 3.2-percent average annual employment increase from 1979 to 1990, as output climbed 4.8 percent. During the 1990-2000 decade, employment growth in the air transportation industry slowed markedly to an average 1.8 percent per year. Employment declined by a slight 0.2 percent in 2001, then dropped a substantial 11.6 percent in 2002. Part of the slowdown in the 1990s was spurred by increased customer use of Internet Web sites for air travel planning. These Web pages have grown increasingly more sophisticated, allowing travelers to do almost everything related to their travel, from checking the status of their frequent-flyer accounts, to booking flights and selecting their own seats. With this increased Internet use by customers, airlines have been able to reduce the number of customer service agents needed to handle bookings and flight information questions. In addition to being able to book their own flights, once travelers arrive at the airports across the country, they can take advantage of the self-service kiosks provided by the airlines, which have grown in popularity since their introduction in 1995. These kiosks allow the passengers to get boarding passes for originating or connecting flights; select seats; request to stand by for an upgrade; check baggage; and change flights, among ether things. (25) The increased use of self-service kiosks has given airline carriers the flexibility to lower their costs by using fewer customer service agents at the airports.