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California Air Transport: Boom And Bust  
User currently offlineSFOintern From United States of America, joined Oct 2001, 770 posts, RR: 5
Posted (12 years 7 months 4 weeks 1 day 6 hours ago) and read 1324 times:

Hello,
Here is the rought draft of a short term paper I am writing for an Economic Globalization course. I'd appreciate any input or corrections. Thx!

  • SFO


    ***** ********
    ********

    Air transport is one of the most crucial enablers of the process that is Globalization. The technological marvel of multi-ton metal airplanes lifting off into the sky with loads of passengers in the hundreds serves to deliver passengers and goods at the speed of business to destinations worldwide. They are pinnacles of modern achievement. Of the many labels, the “Global Dreams”, of the twentieth century, we refer to the heightened state of economic, sociopolitical, and technological development entailed by the rise of free-market capitalism after World War II as “the jet age”.

    Air transport is crucial because of the multiplier effects it produces. One United Airlines flight to Asia from the US carries 32000 lbs. of cargo, cargo like electronics, fish, and goods originating from China, and whatever other high demand products, including US exports. This does not factor in the effects of carrying passengers, whose total contribution to the world economy is much, much more than the fare they paid to fly; they could be on crucial business trips. On the basis of cargo alone, it is estimated that with just two daily flights from the US to China, Federal Express cargo planes will generate $6 billion dollars of economic benefit and 48,000 new jobs over a two year period . It is a staggering effect, and it underscores the point that much of the flow of international business is routed through airlines, directly and indirectly. Affordable, high speed transport has accelerated the pace of global trade.

    However, even as key as air transport is to driving globalization, it has been slow to adapt, “owing to the peculiarities of its organization and the embedded weight of a half-century of national and international regulation .” Air transport volume is dictated by external demand, and given the barriers to entry of air transport (high and time-intensive capital requirements), it is hard for airlines to allocate the right capacity to each market. It is very difficult to run an airline based on simple economic projections, let alone embrace the forces of globalization as swiftly and successfully as other industries.

    In specific, the crutches facing airlines in adjusting to worldwide competitive realities include even more intense domestic competition, an unproductive regulatory environment, and volatility of investment in terms of both travel demand and the consequent demand for their stocks. Inasmuch as the airlines fuel the processes of globalization, from serving as communication networks for corporations to arrange deals and inspect future business sites, to physically transporting world workers and serving as the symbolic means of the hyper mobility of capital and labor, they are the first to feel the slightest effects of economic boons or crises. And despite the existence of seemingly “domestic-only” air routes, the demand for intra and interstate travel is equally affected.

    California provides an excellent example of how globalization is affecting the business prospects of what were thought to be sheltered, domestic markets in the airline industry. In the days of regulation by the CAB , the government told the airlines which routes they could fly and what prices they could charge; the government oversaw their books and made sure they ran profitably. The problem was that, unlike everything else in the free-market US economy from the 1950s onward, the air transport’s “product” was not as affordable and as efficiently “produced” as it needed to be. Because airlines had no incentive to put expensive, new jet aircraft except on guaranteed high-fare transcontinental routes, California remained a market underserved. The CAB did not have the reasonable ability to assess what the right supply was for the California air travel market, and indeed any air travel market, regional or national. The airlines could not adjust their California offerings to efficiently match the economic demand.

    Then came airline deregulation. Much like any industry deregulation, the inefficient firms were weeded out. In California, airlines with the lowest cost structures moved in to fly people and cargo between the state’s economic centers, and from nationwide points, for the first time at market price. As demand for air travel finally caught up with demand for goods and services that flowed to or originated in the state, three major California carriers emerged: United Airlines , PSA, and Western Airlines. United was a national carrier at the time, and served the California market with both passengers that were traveling intrastate and those that came from all over the nation. PSA and Western were regional carriers who served the Californian market mainly with interior flights and limited flights to other western states.

    The 1980s were the toughest times in US airline industry due to the drastic change of regulatory environment in conjunction with real global competition. Actual global competition for US carriers occurred after 1979, when the international US airlines (e.g. Pan Am and TWA) had to compete on costs with foreign-national airlines (e.g. British Airways). The US flag carriers, whose business procedures were still inextricably linked to a regulated environment, were not able to compete. As they failed, national US carriers like United and American acquired their assets, and were able to use them much more productively due to their success in the (then) much more sheltered deregulated domestic landscape. And as rapid advances in the technology of important factors of production enabled and encouraged more international business, the now major US carriers were growing more rapidly. In the late 1980s, the airlines started to recognize the boon of California’s industry. In addition to a rapidly developing technology industry, California was a burgeoning economy of scope for exports, both for manufactured products and farming.

    As nationwide and global investment flocked to California, so did air travel demand from more varied geographical areas, domestically and internationally. The major carriers sought to have a piece of the California pie, and like a gold rush, snapped up the now three regional Californian airlines. US Airways purchased PSA. Delta acquired Western. American bought out the successful startup AirCal, who rode high on the booming California economy. Unfortunately, an economic recession was just around the corner. From 1989-1993, the airlines suffered again. Those three said carriers pulled out of the market, paving the (run)way for United to strengthen its position, and more significantly, for wildly successful low-fare competitor extraordinaire Southwest to seize the day.

    Because travel demand became low on intra-California routes, the only way to keep passengers flying was by offering ultra low airfares. Southwest, with an extremely low cost structure, was able to do just that. Suddenly, United found itself confronted by a growing Southwest. To protect its market, it launched a low-fare arm of its own airline, dubbed United Shuttle. Luckily for both airlines, the greatest global economic boom times, characterized by dotcom capitalism, were to follow from 1994-2000. United Shuttle and Southwest thrived in California, as evidenced by economic data . From 1994-1999, total gross state product increased from 6,930,791,000,000 to 9,308,983,000,000. California-generated air travel grew from 62,454,000,000 to 94,996,000,000 – a higher growth rate than the GDP increase.

    In the last two years, labor at United began clamoring for more money as a result of the good times the last half decade had seen. Nowhere would this impact be more felt than in California, as we see now. A great deal of United’s growth in California resulted from growth of its western hub at San Francisco, and the establishment of a new hub at Los Angeles. For the sake of globalization, an airline hub is an economy of scope in the air transport world. They are developed to feed traffic in and out of destinations offering strategic location advantages. For United, SFO and LAX were economies of scope because of their booming industries: the high-tech clustering in the Bay Area, and the mass exportation in the LA Basin. They also offered a locational advantage in being the two largest US gateways for Pacific Rim travel, the metropolises themselves harboring many Pacific Rim expatriates.

    During this period, United grew to offer as many as 285 and 195 departures in any given day from SFO and LAX, respectively. Many of these flights were intra-California shuttle routes. Between Los Angeles and San Francisco alone, there were 38 daily flights on United Shuttle. That is more than 3 flights per business hour, and existed alongside Southwest’s 25 daily flights from Oakland to LAX. The corridor between SFO and LAX contained the highest volume of flights than any other market in the world at the time. Clearly, this was the effect of a boom-time, global expansionary economy.

    When the world economy started to lose its luster was exactly when United finally granted its workers higher wages. Between the summer of 2000 and 2001 United became the victim of expansionary wage premiums in a rapidly declining market. The new wages were based on a forecast for continuing high-dollar value in an expanding world market. In reality, the California economy plummeted. California exports plunged nearly 20% in August even before the tragic events . The airline started to suffer huge losses. Other airlines serving intra-California routes pulled back as the state economy, both in real terms of exports and high-tech business, shriveled. United scaled back its SFO/LAX operations to 219/177 flights, respectively, before September 11th. After the terrorist attacks, as the airlines suffered their worst losses in history, United cut back its SFO/LAX flights to 160/104, respectively, contributing to a total system wide furlough of 20,000 employees. In totality, the airlines laid off more than 100,000 workers.

    Despite the continuing high-value of the dollar as a result of our position in this new war, California’s economy will keep shrinking. Other country’s exports to us will shrink, and so it follows their ability to by our exports will shrink. California’s exports are higher than any other state and account for as much as 15% of its economy . As a result, global trade dries up, and demand for air travel sharply drops. With many of the 20,000 furloughed from California, United has decreased its contribution to the state dramatically. California was United’s region of growth, and that growth has been pulled back. As a result, even though United has farmed out some of its routes to regional airlines with much cheaper cost structures (much like farming out labor to workers with less expectations), travelers will have less choice in California. Southwest remains, but will it want to fill the gap United has left? The dramatic growth and shrinkage of the air traffic within California only proves more how globalization can make good times great by multiplying economic activity around the world, but by the same token also make rough times even harsher. Who knows if California air travelers will ever have the same choice?

    *Footnotes:
    Department of Transportation Docket Document OST-1999-5539-2
    Department of Transportation Docket Document OST-1999-5671-1
    Fettered Flight: Globalization and the Airline Industry
    Civil Aeronautics Board: the regulatory agency of the airlines until the Airline Deregulation Act of 1979
    United’s historically strong western presence was the result of its initial focus on coast-to-coast routes.
    Provided by Bureau of Economic Analysis
    Source: California Chief Economist
    Sacramento Bee

  • 13 replies: All unread, jump to last
     
    User currently offlineLindy field From United States of America, joined Mar 2001, 3116 posts, RR: 14
    Reply 1, posted (12 years 7 months 4 weeks 1 day 6 hours ago) and read 1258 times:
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    Expand on role of Air California/AirCal and perhaps Hughes Airwest. I also think you should consider adding a few additional lines about Southwest and their enormous growth in California in the 1980s and 1990s. Refer to the airlines the first time by their full names, for example: Pacific Southwest Airlines (PSA) and use the abbreviation thereafter. Nice paper. Good luck with it.

    User currently offlineSccutler From United States of America, joined Jan 2000, 5486 posts, RR: 28
    Reply 2, posted (12 years 7 months 4 weeks 1 day 5 hours ago) and read 1248 times:

    I'll echo Lindy's comments, and also add that Western was (at the time of its acquisition by Delta) much more than a "California" regional carrier, with its own substantial hub at Salt Lake City, Utah. You may want to emphasize AirCal a bit more up front, as their entry into and impact upon the market was earlier than you seem to imply.

    Good work!



    ...three miles from BRONS, clear for the ILS one five approach...
    User currently offlineSFOintern From United States of America, joined Oct 2001, 770 posts, RR: 5
    Reply 3, posted (12 years 7 months 4 weeks 1 day 5 hours ago) and read 1241 times:

    Thanks for the advice guys, I'll work on that!  Smile

  • SFO

  • User currently offlineFATFlyer From United States of America, joined May 2001, 5790 posts, RR: 15
    Reply 4, posted (12 years 7 months 4 weeks 1 day 1 hour ago) and read 1228 times:

    Nice paper.

    I'd just be careful about characterizing the entire state as benefiting from Deregulation. Many of the second and third level airports in the state, serving a sizeable portion of population, lost some or all of their service and saw an increase in ticket prices. For the most part, those that kept some service now see fewer passengers than they did prior to 1978.

    The shift of service meant a better use of assets by the airlines, but the reduction of air transport access in other areas can also be a contributing factor in the lack of economic growth in the Central Valley and Northern California.



    "Travel is fatal to prejudice, bigotry, and narrow-mindedness." - Mark Twain
    User currently offlineDeltaflyertoo From United States of America, joined Nov 2000, 1642 posts, RR: 1
    Reply 5, posted (12 years 7 months 4 weeks 1 day 1 hour ago) and read 1225 times:

    Nice paper, in addition to what the above posters said, my 2 cents is this: Expand more on why the majors left CA to SW. It was more than just a slow down in travel. Had USAir and American adopted a lowfare approach from the begining, they would have been the ones still dominate in California today. Unfortunately, USAir bought PSA and AA bought Air Cal, there was some arrogance in the management side of both these carriers that people in California would pay out the butt to go from LA to SF and that they could support these high fares with a hodge podge of a/c (Bae146, 737-300/200s, MD-80s, 757s...etc).

    You address CA's exports a lot and how that began to boom and in turn drove air travel up. However, IMO the bulk of the paper centers around CA's past and present itra California struggle for airlne dominance. Kind of a seperate topic than the struggle to expand air service to and from CA. You might want to back your original thesis up with how USAir, American, United, DL and even NW at some point had aspirations of running LAX, SFO, SNA and SJC as major hubs for flights going across the continent as well as to Europe and Asia.


    User currently offlineSFOintern From United States of America, joined Oct 2001, 770 posts, RR: 5
    Reply 6, posted (12 years 7 months 4 weeks 10 hours ago) and read 1202 times:

    Thanx for the additional heads up.

    FATFlyer, your last point rings very true. Off the top of my head, I can think of cities like Monterey and Santa Rosa that sadly don't ahve service from SFO anymore.

  • SFO

  • User currently offlineOH-LGA From Denmark, joined Oct 1999, 1436 posts, RR: 19
    Reply 7, posted (12 years 7 months 4 weeks 10 hours ago) and read 1198 times:

    SFOintern, shame on you!

    Monterey is still served by United Express from SFO... although you are correct in that there is no more STS service (period). Being as we have a good 10 flights a day to MRY, there must be some sort of demand for that market  Smile

    Kai



    Head in the clouds... yet feet planted firmly on the ground.
    User currently offlineSFOintern From United States of America, joined Oct 2001, 770 posts, RR: 5
    Reply 8, posted (12 years 7 months 4 weeks 10 hours ago) and read 1192 times:

    Whoops! Mah bad!

    But MRY used to have mainline  Sad... Oh well, SkyWest gives better service anyway! I sent my app 2d.  Smile

  • SFO

  • User currently offlineDeltaflyertoo From United States of America, joined Nov 2000, 1642 posts, RR: 1
    Reply 9, posted (12 years 7 months 4 weeks 10 hours ago) and read 1182 times:

    MRY does not have mainline anymore? That is a shame. I remember when United used to fly A320s AND 757s into there from SFO. The good ole days!

    User currently offlineScottB From United States of America, joined Jul 2000, 6707 posts, RR: 32
    Reply 10, posted (12 years 7 months 4 weeks 9 hours ago) and read 1178 times:

    You might also want to revise the historical background you give regarding PSA; they had been a significant presence in the intra-California markets for decades prior to deregulation; intra-state flights were *not* regulated by the CAB (Civil Aeronautics Board - you need to refer to it by its full name at least once in your paper). AirCal had also been around for quite a while before deregulation, operating from its base at SNA. Remember that Southwest's initial intra-state operation (in its case, Texas) was in large part modeled on PSA. It's also important to be mindful of America West's post-deregulation growth at Phoenix and Las Vegas, and how that has affected the market for air travel to and from California. The entry of Reno Air into the California markets (in large part replacing AA at SJC) is also not mentioned.

    United's low-cost carrier-within-a-carrier was originally called "Shuttle by United" -- the "United Shuttle" moniker came later.

    The 1980's were both boom and bust times for the industry. While some carriers disappeared, others (like Piedmont or American) grew quite rapidly, new carriers appeared, and a number of established carriers grew through consolidation. I'd also argue that the domestic market was *far less* sheltered than the international markets in the 1980's - most international routes were still governed by restrictive bilateral treaties which minimized potential competition on those routes.


    User currently offlineSFOintern From United States of America, joined Oct 2001, 770 posts, RR: 5
    Reply 11, posted (12 years 7 months 4 weeks 7 hours ago) and read 1163 times:

    Hmmm... maybe I should have specified my paper topic even more. Problem is, I have to cram all this in 4 pages.

    I meant to convey that I was restricting my scope to:

  • Intra-California travel (ie the isolated California corridor market). That means no mention of traffic to/from other states, other than that traffic feeding intra-CA traffic.

    I know there are some good PSA "in memoriam" sites out there, but are there any Western or AirCal history resources?

    ScottB--

    I am a United freak. You'll notice my narrow emphasis of United Shuttle in particular for my mini case study. I did not want to include the original moniker because that would have taken extraneous space.

    In any case, paper length restrictions SUCK. I'm going to have to butcher this sucker, chop off the fat, and add a lot more meat. Can't forget about QQ...

  • SFO

  • User currently offlineDeltaflyertoo From United States of America, joined Nov 2000, 1642 posts, RR: 1
    Reply 12, posted (12 years 7 months 4 weeks 7 hours ago) and read 1156 times:

    I'm not sure how your class operates or what the professor is looking for. Is "economic globalization" just a fancy name for an advance economic class that covers firms and their operating efficiencies (micro) or...is it truley a class discussing the globalization of the marketplace in terms of economics? If it is the latter, your paper is in 2 different directions, California and the world.

    If you are writing about deregulation and the effects it had on CA, you may want to try just narrowing the topic of that. Deregulation and its effects on the California economy. The state and its airline history in the past 20 years is more than enough to fill 4 pages. You make your thesis on how the airlines of California at the time represented the ulitmate model of an inefficient firm when facing deregulation.

    Then you could have a paragraph that talks about PSA, one that talks about Air Cal/Western, lead to deregulation and what happened with USAir and AA and then round it out with the growth of WN, Shuttle by United and where we are left in present day.

    If you continue with globalization, I'm not sure if Intra-CA woes of the industry really parallel that. No matter what happened, there was always a player ready to export/import and carry the goods and services of the state, it was just a question of who that would be.


    User currently offlineSFOintern From United States of America, joined Oct 2001, 770 posts, RR: 5
    Reply 13, posted (12 years 7 months 4 weeks 3 hours ago) and read 1148 times:

    Actually, it's a class in the Geography department and has a lot to do with social unrest in response to wordlwide globalization of the marketplace (ie "New International Divionsion of Labor Theory", etc.)

    The prompt called for a specific region (city, state, local industry, but not national) where worldwide globalization is taking a toll. CA is what I chose, and in specific I chose to highlight globalization's effects on CA through the airline industry.

    The problem is, "globalization" is such a broad term, and just a "fancy name", like you said, for a lot of related woldwide economic processes.

    I'm taking Advanced Micro next semester, which should be better than this elevated social scat.  Smile


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