Airline industry, U.S.

Definition: The system of airline carriers and aircraft supplying national and international air travel services for passengers in the United States.
Significance: The U.S. airline industry has evolved to become the most highly developed transportation network in the world, comprising more than 5,000 aircraft valued at more than $65 billion. U.S. airlines schedule more than 12,000 domestic and international flights per day, with more than 200,000 available seats. These flights carry a major portion of the world’s air commerce.

History

Scheduled air transportation actually began in Germany, where, as early as 1910, zeppelins carried 35,000 passengers peryear. The first recognized attempt at establishing a scheduled air passenger service in the United States occurred in 1914, with the short-lived St. Petersburg-Tampa Airboat Line, which consisted of one Benoist Type XIV flying boat. The carrier’s 18-mile route across Tampa Bay was covered in twenty minutes at a price of $5.00 for the one passenger per flight. The airline contracted with the city of St. Petersburg for two daily round trips. This endeavor lasted for four months and carried 496 passengers. There would not be another regularly scheduled airline in the United States until well after the end of World War I.
After World War I, Europe again led the way in developing scheduled airlines. With the advances in design and construction, large military aircraft could be converted for civilian uses. Geographic features such as the English Channel made scheduled flights feasible and flights between London and Paris began while the Treaty of Versailles was still being negotiated. Because most of Europe’s transportation and communications infrastructure had been destroyed by the war, government assistance was available to fledgling airlines of European countries. These airlines would be used to connect the outlying outposts of the various empires.
In contrast, the U.S. transportation systems within the United States had not been damaged by the war. Indeed, the most highly developed railroad system in the world remained intact. The long distances involved in U.S. travel lent themselves more comfortably to Pullman-type sleeper cars and well-stocked dining cars than to open-cockpit biplanes. At the time, trains were as fast as most of the existing airplanes and could continue to travel throughout the night while passengers slept. Unlike the governments of European nations, the U.S. government displayed little inclination to subsidize the development of air transportation.
The next serious attempt to establish a regularly scheduled air service in the United States had more to do with politics than with aeronautics. In 1919, Congress passed the Volstead Act, which made illegal the selling and consumption of alcoholic beverages. However, the institution of Prohibition did not quench the thirst of the American public. Lying conveniently off the coast of Florida were the independent nations of Cuba and the Bahamas, which were beyond the jurisdiction of U.S. laws. In order to meet the demands of American consumers, Aeromarine Airways developed a route that came to be known as the Highball Express. Using fourteen-passenger flying boats, Aeromarine began a scheduled service from New York City to Havana, Cuba. Aeromarine added flights to Nassau in the Bahamas and expanded its service to Cleveland and Detroit. The airline continued to operate until September, 1923, ultimately carrying 17,000 passengers.

The Role of the U.S. Post Office

Although the U.S. government’s official position was that air transportation should be developed without government subsidies or direct government involvement, the U.S. Post Office had begun experimenting with airmail delivery as early as 1911. In 1918, the Post Office began to establish a scheduled airmail delivery system. This activity culminated in the development of a transcontinental route structure with numerous connecting routes. With the passage of the Air Mail Act of 1925, also known as the Kelly Act, the Post Office turned these routes over to private operators through competitive bids. Many, if not most, of the existing airlines in the United States were established with the goal of obtaining a Post Office airmail contract. The airmail contract would ensure that the fledgling airlines could generate enough income to remain in existence. The goal of the contract airmail service was to subsidize the private airlines in order eventually to develop a viable passenger service.

Immediate Impact of the Terrorist Attacks of September 11, 2001, on Major U.S. Carriers

By 1927, the Post Office had contracted all the airmail routes to private companies. The original transcontinental route was eventually awarded to what is today United Air Lines. Mergers forced by the postmaster general resulted in the formation of American Airlines. American received the newly established southern transcontinental route. Transcontinental Air Transport, the company that had pioneered the idea of combining aircraft and passenger trains for transcontinental travel, was forced to merge with Western Air Express. The resulting airline, Transcontinental and Western Air, eventually became Trans World Airlines (TWA). Other airlines were awarded routes in support of the transcontinental routes. Eastern Air Lines received a north-south route along the East Coast; Northwest Airlines received a route northward to Minneapolis. Many other smaller airlines also received contracts, although within a few years most of these companies had been absorbed by the larger operators.
The U.S. Post Office also awarded mail contracts for international airmail. Pan American Airways, under the leadership of Juan Trippe, won the vast majority of these contracts. Although there were accusations of favoritism and unfair practices associated with Pan American’s unparalleled success, these were never proven. Pan American became the chosen instrument of the U.S. State Department and remained virtually the only international airline in the United States until the advent of World War II. Pan American absorbed any potentially competitive company. By the time the United States entered World War II, Pan American had developed into the largest, most successful airline in the world. Not only did the company fly throughout Central and South America and across the Atlantic Ocean to Europe, but it also covered the Pacific Ocean, with service to exotic destinations such as Hong Kong.
Although the efforts of the U.S. Post Office resulted in a strong network of air carriers, not everyone was pleased with its practices. The methods employed by Postmaster Walter Folger Brown had alienated many of the small operators who had not been awarded airmail contracts. With the election of President Franklin D. Roosevelt in 1932, many complaints surfaced. Roosevelt ordered an investigation that led to the ill-fated cancellation of all domestic airmail contracts in 1934. The president ordered the army to carry the mail, but this arrangement proved to be disastrous, as a number of poorly trained and equipped pilots were killed in accidents. The airmail contracts were returned to the original operators shortly thereafter, but the passage of the Air Mail Act of 1934 placed severe restrictions on the airlines. The provisions of this law resulted in large financial losses, and many airlines were on the brink of bankruptcy when Congress passed the Civil Aeronautics Act of 1938, which saved the airline industry.
Although all the domestic airmail contracts had been canceled, none of the international contracts that had been awarded to Pan American were affected. Pan American, with the cooperation of the U.S. Navy, continued to expand its operations. Rates in the Pacific were actually increased above the maximum allowable rate in the name of national security. Pan American continued to operate successfully and profitably as the country prepared for World War II.

World War II

World War II had a tremendous impact on the U.S. airline industry. The United States assumed the role of supplying the worldwide war effort with supplies, material, and human resources. The aircraft manufacturing industry began to mass-produce large, long-range aircraft, operated by airline-trained crews. These crews flew to every corner of the world, establishing routes, airports, and facilities that would be invaluable at war’s end. This effort, which came to be known as airlift, was one of the major military accomplishments of World War II. The experience gained by the airlines and crews, coupled with advancements in aircraft design and technology, catapulted the United States into a dominant position in international air transport. The war destroyed or dispersed the airlines of most of the countries of the world. European aircraft manufacturing was forced to concentrate on building fighters and bombers rather than large transport-type craft. Pilots were engaged in combat flying rather than long-range international flights. U.S. airlines assumed the role of international transportation.
The domestic U.S. transportation system also experienced growth during World War II. Routes were expanded to meet the needs of the government, and the number of passengers exceeded the number of airplane seats available. Although the majority of airlines still utilized the venerable Douglas DC-3 for domestic service, larger and faster airplanes began to appear. Passenger-generated income finally exceeded that generated by airmail delivery, and the structure of a mature industry began to develop. By the end of the war, air travel had become an accepted fact and was no longer considered an unusual extravagance. Industry and government began to rely more heavily on the airplane and its scheduled services.
The war had a significant impact on the structure of international air service. Prior to the war, Pan American had been the so-called chosen instrument of the United States. The demands of war had led to a number of additional airlines being granted international routes. Both American and TWA flew transatlantic routes during the war, and they were allowed to continue with these routes after the war, much to the dismay of Pan American. Political difficulties with the Roosevelt and Truman administrations further weakened Pan American’s dominance as airlines such as Eastern, Braniff International, and Northwest were granted international routes, often into the heart of Pan American’s territory. While Pan American was losing its international monopoly, the airline was simultaneously barred from establishing a domestic network in order to compete with the new international airlines, a prohibition that was eventually to have disastrous consequences for the once-proud Pan American.

Postwar Industry

As a result of World War II, the U.S. airline industry had evolved into a large worldwide operation. Airlines began to become differentiated into passenger airlines, all-cargo airlines, commuter airlines and air taxis. Airlines were divided into categories. Trunk airlines, such as American, Eastern, TWA, and United, were those that operated between nations and crossed oceans. Later this category was changed to include large domestic airlines, and trunk airlines became reclassified as regional airlines, which did not operate international routes and typically served four or five states. Commuter airlines were scheduled airlines that were restricted to aircraft weighing less than 12,500 pounds. This classification system lasted until the passage of the Airline Deregulation Act in 1978.

Industry Growth

Throughout the 1940′s and 1950′s, the Civil Aeronautics Board (CAB) continued to award routes to various airlines in an attempt to expand the transportation network and maintain an environment of controlled competition. The airlines, in turn, competed with each other primarily in terms of service and speed. This competition resulted in performance improvements in the various types of commercial aircraft. Airlines such as American favored the Douglas DC-6/7 series, whereas TWA favored the Lockheed Constellation series. Continual performance increases led to passengers enjoying pressurized comfort while crossing the country in eight hours or less. In addition, pressure from a number of nonscheduled operators charging significantly lower fares forced a number of the domestic trunk airlines to begin offering lower fares. In 1948, Capital Airlines introduced coach-class service and, by 1949, was joined by American and TWA. In May, 1950, United followed suit. The airlines, with the approval of the CAB, agreed to a mutual $99.00 coast-to-coast coach fare in 1952.
In an attempt to guarantee service to smaller communities, the CAB established the classification known as feeder airlines in 1944. Feeder airlines, such as Pioneer, Allegheny, North Central, Piedmont Airlines, and Mohawk Airlines, were heavily subsidized to supply air service to small communities. In 1955, this airline classification was renamed local service carriers. Most of these airlines relied on Douglas DC-3 aircraft that had been retired by the larger trunk carriers. Eventually, local service carriers replaced the DC-3 with more modern aircraft and introduced turboprop aircraft, such as the F-27 Friendship. By the 1960′s, the CAB was coming under increasing pressure to do away with the subsidies and allow the free market to determine success. However, with shorter routes serving small cities, it would be more difficult for these smaller airlines to make a profit.
Recognizing this fact, in 1959, the CAB instigated the so-called “use-it-or-lose-it” policy. Cities were informed that if they did not have a minimum of 1,800 passengers a year, their air service would be terminated.
At the same time, the local service carriers began to pressure the CAB for the right to expand their route structures. They purchased larger aircraft, including jets such as the Douglas DC-9. Airlines such as Frontier grew to challenge the existing trunk airlines. As the expansion of the local service carriers continued, a number of mergers began to occur, with the stronger airlines devouring the weaker ones. The original thirteen local service carriers had been reduced to nine by 1968. At this time, the name of the local service carrier classification was changed to that of regional carrier. Mergers between the regionals continued, with Allegheny, the largest, merging with Mohawk, the third largest, to form what was eventually renamed USAir in 1979. North Central and Southern Airlines also merged to form Republic Airlines. These so-called regionals were now as large as the trunk airlines. As the regionals abandoned their short-haul markets, the third-tier airlines, calling themselves commuters, expanded to fill the void.
The CAB recognized this discrepancy and in 1980 established a new airline classification system. All airlines in the United States were now to be classified based on their revenues as majors, nationals, or regionals. Majors were required to generate $1 billion in annual revenues, and nationals were required to generate $75 million. Regionals were divided into two sub classifications: large, which earned $10 to 75 million in annual revenues, and medium, which earned less than $10 million. Under this new system, former local service carriers Republic and USAir received major airline status.

Large Air Carrier Classifications, 1995-1996

The Jet Age

Perhaps the one event that had the greatest impact on air transportation was the development of the jet engine. From its inauguration in the De Havilland Comet, it was clear that the jet engine would alter the entire industry. U.S. airlines entered the jet age in October, 1958, when Pan American scheduled the first Atlantic jetliner crossing by an American airline. With the establishment of this jet service, Pan American dominated the transatlantic service for American airline. With the establishment of this jet service, Pan American dominated the transatlantic service for a number of years. Other airlines quickly followed Pan American’s lead and introduced jet service. National Airlines was, in 1958, the first airline to introduce domestic jet service. This event marked the eclipse of the large, multi-engine, piston-powered airliners that had been developed since World War II. Aircraft manufacturers continued to manufacture jet-powered aircraft in different sizes to meet the needs of the evolving market. Today, many turboprop commuter aircraft have been replaced with small, fifty- to seventy-seat jet aircraft. A number of commuter airlines plan a transition to all-jet fleets just as their larger counterparts have done.

Deregulation

Claimed by some analysts to be the most important event in air transportation history, the Airline Deregulation Act was passed in 1978. Through this act, the U.S. government reduced its role in the regulation of most of the business and financial aspects of airline operations. The CAB no longer approved a new airline’s entry into the industry. Neither would the CAB approve routes or set fare structures. The airlines entered into an era of virtually unrestrained competition. The immediate effect of deregulation was the appearance of a number of new airlines. Many of these new entrants to the industry were low-cost, no-frills operations. The largest of these airlines was People Express, which rapidly expanded to compete with a number of the major airlines. These new entrants typically had significantly lower operating costs than did existing airlines, due to lower employee seniority, nonunion labor, and older aircraft. Although many of these new airlines were initially very successful, the major airlines reacted to the threat by lowering fares, purchasing the competing operators, and increasing frequency of flights. The major airlines also formed what came to be known as hub-and-spoke route structures, which led to the domination of various geographical markets. Code sharing with, or the outright purchase of, commuter airlines supplied a continuous flow of passengers to the hub airports. Computer reservations systems and complex revenue-management systems allowed the largest airlines to further dominate the market. Of the large number of new airlines that entered interstate or international service immediately after deregulation, only two remain.
Deregulation also had a devastating effect on some of the oldest and largest airlines, a number of which were unable to adjust to the changing demands of a deregulated environment. Giants such as Pan American, Braniff, and Eastern ceased to exist. Others, such as Republic, were forced to merge and ceased to exist.
By 1990,60 percent of the airline business was concentrated in the hands of the big three: American, United, and Delta. Airlines such as TWA, America West, and Continental were forced into Chapter 11 bankruptcy and reorganization. The early 1990′s, in particular, were a disastrous time for the airline industry. All airlines except Southwest lost large amounts of money; some were unable to recover and return to profitability, leading to additional consolidation within the industry.
In response to the crisis of the 1990′s, Northwest and US Airways looked for relief to European partnerships. While the partnership between US Airways and British Airways was less than a complete success, a similar partnership between Northwest and KLM led to a return to profitability for Northwest. Other partnerships, such as United’s Star Alliance have been successful and have strengthened the competitive positions of those airlines involved. Even with such successes, the fact remains that the U.S. airline industry is subject to the fluctuations of the economy. It performs strongly in a strong economy and suffers in a weak economy. It is also very probable that the strong will continue to devour the weak and that the number of major airlines will decrease in the future. For example, in 2001, American Airlines made a proposal to buy TWA; the merger was accepted by the federal government.

September 11

The sudden, tragic events of September 11, 2001—four commercial jets hijacked by Islamic fundamentalists and then crashed, three flown into the World Trade Center’s Twin Towers and the Pentagon, resulting in more than three thousand deaths—had an enormous impact on the U.S. airline industry. The government ordered an immediate national ground stop that morning until the situation could be assessed. Commercial flights resumed a few days later, but passengers and crews alike were understandably reluctant to board airplanes, given the threat of further terrorist acts.
The loss of revenue over the following weeks forced major air carriers and airports to lay off tens of thousands of employees. The longer-term picture was also grim. Tourism and business travel were curtailed. Moreover, the already fragile U.S. economy was placed firmly into recession. A federal bailout plan for the industry was devised. President George W. Bush signed into law an emergency aid package providing five billion dollars in direct federal aid and tenbillion dollars in loan guarantees. The measure also offered federal help with rising insurance costs in the industry sought ways to make flying safer and to reassure the public, but many predicted that the consequences of September 11 would be evident for years to come.