Air transportation industry

• The First Airlines


• The Civil Aeronautics Board Period


• Deregulation


• After September 11, 2001

Definition: Business sector that uses aircraft to transport passengers, cargo, and mail
Significance: One of the leading business sectors in the American economy, the air transportation industry employed nearly half a million people during the early twenty-first century, not including travel agencies, hotels, and car rental companies. In 2004, the average American flew 2.2 times a year.
The Wright brothers flew the first powered airplane in 1903, and World War I demonstrated the airplane’s military potential. In 1919, Deutsche Luft- Reederei (later Lufthansa) began flying passengers between Berlin and Weimar, Germany. The air transportation industry began in the United States in 1925, when Juan T. Trippe and others persuaded Congress to privatize the airmail system. The U.S. Post Office initially granted twelve contracts. Trippe’s company, Colonial Aviation, won the New York-Boston route, but Trippe later lost control of the company. Airplane manufacturer William Boeing received the contract for Chicago-San Francisco and founded the airline that later became United Airlines. Pitcairn Aviation obtained the New York-Atlanta and Atlanta-Miami contracts and later became Eastern Air Lines. A company called Robertson Aviation flew the St. Louis-Chicago route and employed a then-unknown pilot named Charles A. Lindbergh.

The First Airlines

In 1927, Trippe’s new company, Pan American World Airways (Pan Am), received the contract to fly the mail from Key West, Florida, to Havana, Cuba. Trippe felt that he could increase profits by transporting a few passengers along with the mail. One of his first customers was the gangster Al Capone.
In 1930, the U.S. Post Office awarded the following contracts: New York-California via Chicago to United, New York-California via St. Louis to Trans World Airlines (TWA), New York-California via Dallas to American, and several routes along the east coast to Eastern. Two regional airlines that later became international also received routes: Braniff International Airways got the Chicago-Dallas route and Delta Air Lines got Atlanta-Chicago.
The controversial millionaire (later billionaire) Howard Hughes made three important technical innovations during the 1930’s. They were retractable landing gear, flushed rivets, and an oxygen feeder system. The first two streamlined airplane designs and increased their speed. The third allowed planes to fly at higher altitudes and also increased their speed.
Two aircraft, the Douglas DC-3 and the Boeing 315, boosted the air transportation industry during the 1930’s. The Douglas DC-3 had two engines, flew at 180 miles per hour, was easier to fly than previous passenger planes, and was more comfortable for passengers. The Boeing 315, also known as the China Clipper, was a four-engine plane with pontoons as big as fishing boats. It landed and took off from water, so it could land anywhere in the ocean in an emergency, carried seventy-four passengers, had a 175-mile-per-hour cruising speed, and offered a range of 3,500 miles without refueling. As the nickname indicates, it was designed to fly from the United States to China, so Pan Am built refueling stations on islands such as Oahu, Wake, and Guam for its Hong Kong-San Francisco and New Zealand- San Francisco routes. It was the largest passenger plane ever regularly flown until the Boeing 747 came along.

The Civil Aeronautics Board Period

By 1938, there were 250 passenger flights each day in the United States. However, the system was perceived as too chaotic by the administration of Franklin D. Roosevelt, which considered airlines to be a kind of utility. In line with the prevailing pro-regulation ideology, Congress passed the Civil Aeronautics Act of 1938. Not only did it create the Civil Aeronautics Board (CAB) to regulate routes and rates, but it also froze all existing airmail contracts in perpetuity.
Prices for flights were determined by the CAB based on the costs provided by the airlines themselves so that the airlines were guaranteed to make a profit. Eventually airlines made a distinction between first class and coach, but even flying coach was so expensive that Pan Am partnered with the Household Finance Corporation to help middle-class travelers pay for tickets through installments.
Hughes bought a majority of TWA stock in 1939 and worked with the Lockheed Corporation to develop the L-049 Constellation. It had a pressurized cabin that allowed it to fly at high altitudes, four engines that made it twice as fast as the DC-3, and the same range as the China Clipper. In 1955, Pan Am began flying the first passenger jet, the Boeing 707, and flight times were reduced even further. PanAm started flying the Boeing 747, the first jumbo jet, in 1970.
American Airlines developed the first computerized reservation system, Sabre, during the early 1960’s. It enabled American to manage its inventory of planes and seats more efficiently and eventually accumulated reams of data. United build the second system, called Apollo, and other airlines such as Eastern, Delta, and TWA built their own systems as well. In 1976, United offered to place its terminals in the offices of travel agents, although American actually placed more Sabre terminals in those offices than any other airline. By the mid-1980’s, American’s terminals were in 34 percent of the 30,000 travel agencies in the United States, and United’s were in about 25 percent.


In 1969, the CAB allowed the airlines to offer discount fares such as youth and family fares. Two airlines, however, began offering low-price tickets as the norm, not the exception. Pacific Southwest Airlines (PSA) and Southwest Airlines both flew within the borders of just one state, PSA in California and Southwest in Texas. Consequently, they were not subject to CAB regulations and could set their own prices. The volume on PSA’s route between San Francisco and Los Angeles was so high that the airline could sell a one-way ticket for $10. In 1971, Southwest began flying between Houston, San Antonio, and Dallas Love Field Airport and charged $26 for a one-way ticket, except for the last flight of the day, for which it charged $10.
Braniff, also based in Texas, cut ticket prices within Texas even further, to $13 for a one-way ticket. Texas International Airlines received permission from CAB to offer “peanuts fares,” which were 50 percent off their regular rates. Continental Airlines countered with “chickenfeed fares,” and American introduced “super saver” fares that required advance purchase and one-week layovers. A service company, founded in 1971, revolutionized the air cargo business. Originally based in Little Rock, Arkansas, Federal Express (better known as FedEx) moved to Memphis in 1973. Its concept was to guarantee next-day delivery of packages via a central hub. The company started with fourteen airplanes connecting twenty-five cities.

Deregulation

Deregulation began as a post-Watergate affair reform. American and Braniff were caught giving illegal campaign contributions to Richard M. Nixon’s 1972 re-election campaign in return for favorable treatment by the CAB. Also, the 1970’s were the years of the highest inflation in American history, and pro-free-market economists proposed deregulation as a means of lowering airline ticket prices. Deregulation laws were enacted in 1978.
Southwest was the airline best prepared for deregulation because of its low costs. Before deregulation, Southwest had added more cities inTexas to its schedule. However, before it could expand outside the state, it had to deal with one last remnant of regulation. Democrat JimWright represented the congressional district that included the Dallas-Fort Worth International Airport and the headquarters of Braniff and American. In 1979, he introduced a bill to prevent any airline from flying from Dallas Love Field Airport to any airport outside Texas. Fortunately for Southwest, it had enough support in Congress to force a compromise. It was allowed to fly from Love Field to airports in the adjacent states of Louisiana, Arkansas, Oklahoma, and New Mexico. (Wright’s law was repealed in 2006.) Southwest’s first interstate flight went from Dallas to New Orleans. Southwest added Chicago’s Midway Airport in 1985 and Baltimore-Washington International Airport in 1993. With flights to cities in California, it became a national airline, not just a regional one.
Acquisitions were the first result of deregulation. For instance, Pan Am acquired National Airlines, American purchased AirCal, United obtained Air Wisconsin, PSA was taken over by US Airways, FedEx took over the Flying Tiger Line, and even Southwest bought a small airline called Morris Air, based in Salt Lake City.
Texas International Airlines formed a holding company called Texas Air, which acquired Continental, People Express Airlines, and Eastern. It also created a new airline called New York Air. Texas International, People Express, and New York Air were eventually merged into Continental. Eastern continued to operate as a separate company but was forced to sell its computerized reservation system, its gates in Newark, New Jersey, and several widebody jets to Texas Air at bargain prices. Eastern also had to pay Texas Air a management fee and buy its fuel from an affiliated company. Finally, Eastern’s sales department was transferred to Continental. Texas Air allowed Eastern to file bankruptcy in 1989, and it stopped flying.
For the first time since 1938, the airlines had to compete on price, and some never adapted to the new situation. In 1982, Braniff became the first of the old airmail carriers to stop flying. Just before going under, it leased its Latin American routes to Eastern. During liquidation, American bought Braniff’s Dallas to London-Gatwick route. Pan Am survived longer, generating cash by selling its Pacific routes to United in 1985. It kept flying until 1991, when Delta purchased its East Coast and transatlantic routes. United acquired Pan Am’s Latin American routes during liquidation. TWA operated in bankruptcy in 1992 and 1995 before it was finally taken over by American in 2001.
American created the first loyalty program, using its Sabre system, by assigning different numbers to individual passengers. The airline also used Sabre to develop the concept of yield management, by which programmers could develop algorithms to automatically discount and, even more important, to refrain from discounting fares. This enabled American to increase profits even when involved in price wars.
FedEx took advantage of deregulation to expand its fleet of planes and the number of cities it connected. In 1979, the company started using computers to track packages and expanded to Canada in 1981 and Asia in 1984.

Number of Airline Passengers by Route, 2007, in Thousands

After September 11, 2001

Because of the terrorist attacks of September 11, 2001, the entire U.S. air transportation system was shut down for two full days and took months to recover. About 16 percent of flights were eliminated in the process. US Airways took the lead when it cut 24 percent of its flights and laid off roughly the same percentage of employees.
United entered Chapter 11 bankruptcy in 2002 and emerged from it in 2006. Both Northwest and Delta filed for bankruptcy, kept flying, and were in the process of merging in early 2009. Of the old airmail carriers, only American has operated without having to merge or file bankruptcy. In 2008, four smaller airlines—Aloha, Skybus, ATA, and Frontier— filed for bankruptcy, and many others cut costs and capacity in the face of rising fuel prices. However, Southwest and other low-cost carriers have increased their market share. In 2007, Southwest became the number one airline in the world in termsof the number of passengers flown. In 2008, as other airlines experienced trouble, Southwest reported a profit in its second quarter, the sixty-ninth profitable quarter in a row.

Further Reading
Brown, Peter Harry, and Pat H. Broeske. Howard Hughes: The Untold Story. Cambridge, Mass.: Perseus Books, 1996. The story of Hughes, who was an aviation pioneer and controlled TWA from 1940 to 1959.
Gittell, Jody Hoffer. The Southwest AirlinesWay: Using the Power of Relationships to Achieve High Performance. New York: McGraw-Hill, 2003. Analysis of Southwest’s management techniques in comparison with those of American, United, and Continental.
Hengi, B. I. Airlines Remembered: Over Two Hundred Airlines of the Past. Leicester, United Kingdom: Midland, 2000. Brief, illustrated histories of two hundred defunct airlines.
______. Airlines Worldwide. Leicester, United Kingdom: Midland, 2004. Brief, illustrated histories of 360 airlines still flying as of 2004.
Lovegrove, Keith. Airline: Identity, Design, and Culture. New York: teNeues, 2000. Illustrated history of airline uniforms, food, interior design, and logos.
Newhouse, John. Boeing Versus Airbus: The Inside Story of the Greatest International Competition in Business. New York: Vintage Books, 2007. A history of the air transportation business fromthe point of view of the two largest aircraft manufacturers of the early twenty-first century.
Petzinger, Thomas, Jr. Hard Landing: The Epic Contest for Power and Profits That Plunged the Airlines into Chaos. New York: Random House, 1995.Ahistory of the airline industry with emphasis on the period after deregulation.
See also: Air traffic controllers’ strike; Aircraft industry; Airships; DC-3 aircraft; Hotel and motel industry; United States Postal Service; September 11 terrorist attacks; shipping industry; Supersonic jetliners; Tourism industry; U.S. Department of Transportation.