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

From 1972 to 2001, intermediate purchase costs averaged 48 percent of the total cost of inputs (see chart 3), the largest share of the three inputs for the air transportation industry. Among intermediates, fuel is the largest component. "The major U.S. airlines spend more than $10 billion a year on fuel, which is approximately 10 percent of total operating expenses." (41) Fuel costs fluctuated greatly over the 1972-2001 period. Although fuel's share in the total cost of intermediate purchases increased only slightly, from 30 percent in 1972 to 31 percent in 2001, the small rise obscures enormous fluctuation in the interim years. Fuel's share in the total cost of intermediate purchases rose from 29 percent in 1973 to 50 percent in 1979, spurred by huge increases in the cost of fuel. The start of the enormous increases in the price of fuel coincided with CPEC's (Organization of Petroleum Exporting Countries) oil embargo that began in October of 1973. (42) By 1979, fuel made up one-half of the total cost of intermediate purchases in the air transportation industry, and almost one-fourth of total input costs; these numbers peaked in 1981 at 56 percent and 31 percent, respectively, as fuel prices continued to rise during the 1979-81 period.

As a result of the increases in fuel prices, the airline industry began to take measures such as lowering cruise speeds, using computers to determine the optimum fuel loads, and using flight simulators instead of aircraft to train pilots, among other things. In addition, the industry began to invest "... billions of dollars in new aircraft and engines that are far more efficient than the models they replace." (43) By 1989, fuel's share in the total cost of intermediate purchases had dropped to 28 percent; it then jumped again to 34 percent in 1990, when the Persian Gulf crisis began, and dropped to a low of 23 percent in 1998. Lately, some of the airlines have also begun to hedge their fuel costs by entering into agreements with their suppliers or by participating in the futures market.

Travel agent commissions, which have declined in recent years, are another type of intermediate purchase. Until recently, travel agents distributed 70 percent to 80 percent of tickets in the air transportation industry. This proportion has been declining, however, due to a changing operating environment in which air carriers are reducing commissions while Internet competition is growing. (44) Commissions paid out by establishments to travel agents followed an upward trend from 1972 to 1993. Travel agent commissions rose 6.0 percent in 1993, when their share in the total cost of intermediate purchases peaked at 22 percent. At one point, the airlines even began to offer "override" commissions in addition to the standard commission rate. Overrides are bonuses over and above the regular commission if a travel agent sends extra travelers on a particular airline. (45) For years, the airlines have been trying to reduce the travel agent commission, one of the easiest operating costs to control in the air transportation industry. The airlines have been reducing base commissions and capping dollar amounts paid out to travel agents. (26)