ABSTRACT
The discussion so far has concentrated to a great extent on supply aspects of international air transport. There is a tendency among airline managers to concentrate on supply considerations at the expense of demand factors. Within many airlines great emphasis is placed on operational safety and efficiency and on reducing costs of production. A large range of performance indicators are produced to enable the airlines to monitor various aspects of supply: engine shutdown rates per 1,000 hours, punctuality, annual utilization of aircraft and crews, maintenance man-hours per aircraft, and unit costs per tonne-kilometre are just a few of the indicators used to monitor supply conditions. By contrast, performance indicators on the demand or revenue side are relatively few and often less importance is attached to them. Too many airlines, among them smaller international carriers, assume that if their supply of services is efficient and low cost that is enough; profitability should follow. The international regulation of fares through the International Air Transport Association (IATA) and widespread use of airline pooling agreements may have blunted initiative with regard to understanding and stimulating demand. Yet airline management is about matching the supply of air services, which management can largely control, with the demand for such services, over which management has much less influence. To be successful in this an airline can be a low-cost operator or a high-cost operator. What determines profitability is the airline’s ability to produce unit revenues which are higher than its unit costs. Low unit costs are no guarantees of profit if an airline is unable to generate even the low unit revenues necessary to cover such costs. Pan American, one of the lower-cost international carriers, in 1988 was losing $2 million a week before interest, while Wardair, a Canadian charter airline that had expanded rapidly into scheduled services and was the world leader in terms of cost, also made a substantial loss (Table 8.1). VARIG, South America’s largest airline, also lost heavily despite its low costs.
