Air Transport Industry


Air Transport Industry, the area of commerce in which aircraft are employed to carry passengers, freight, and mail. Air transport companies operate scheduled airlines and non-scheduled, or charter, services over local, regional, national, and international routes. The aircraft operated by these companies range from small single-engine aeroplanes to large multi-engine jet transports.

General and business aviation is not usually included as part of the air transport industry. Its activities range from recreational flying with non-powered aircraft to the complex operation of high-performance business jets and specialized aerial work. As of 2007, there were up to 50,000 motor-powered general and business aviation aircraft in Europe. In addition, about 180,000 to 200,000 microlight and nonmotor-powered aircraft are used for sport and recreation. In 2006 nearly 10 per cent of all aircraft movements in the European air traffic control area could be attributed to this sector.

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The first air passenger services began in 1910 when Zeppelin dirigibles began operating between several German cities. The first scheduled aeroplane service to carry passengers began in the United States in 1914. Several experimental airmail flights took place in India, Europe, and the United States before World War I, but sustained air transport services were not firmly established until after the war.

In 1918 the US Post Office Department began the first American scheduled air service, using planes and pilots furnished by the US War Department. In 1919 a daily passenger service between London and Paris was started. By the mid-1920s there were regularly scheduled airmail flights from coast to coast in the United States. On night flights pilots were guided by a string of flashing beacons at ground stations along the flight path.

With the passage of the Air Mail (Kelly) Act in 1925, private lines began carrying mail under contract in single-engine, open-cockpit planes. Another US federal law, the Air Commerce Act of 1926, established government agencies for the development of airports, radio navigation, and other services. Although several independent companies had begun passenger service early in the 1920s, none had succeeded. With subsidies from the Air Mail Act, however, new airlines like American, Delta, and United began to see their operations become profitable. These airlines were soon flying larger monoplanes with enclosed cabins, such as the Ford Trimotor, which carried up to 15 passengers.

In Europe, many governments developed an extensive airline system. Although early airmail routes there compared unfavourably with American round-the-clock deliveries, European passenger operations became much more sophisticated. By 1929 the British airline Imperial Airways was operating a commercial air route to India, and within a few years, other nations began combined mail, freight, and passenger service to distant countries and dependencies.

The era between 1919 and the outbreak of World War II in 1939 included significant advances in weather forecasting, navigation equipment, aerodynamics, and innovative management. Symbolizing these trends were airline specifications for modern equipment such as the DC-3 of the 1930s, a monoplane constructed of metal, carefully streamlined, with reliable and efficient radial engines, retractable landing gear, variable-pitch propellers, and many other refinements. Big flying boats, such as the Short “Empire” craft, began to link Europe with Asia, Africa, and the United States.

During World War II, intercontinental air transport became firmly established. After the war the new long-range four-engine transports with fully pressurized cabins and advanced instrumentation were increasingly able to avoid storms and turbulent winds, enhancing passenger comfort and making operations more economical and consistent. These new planes and the jet airliners, first introduced in 1952 with the De Havilland Comet, replaced ocean liners as the primary mode of long-distance travel. A new generation of wide-bodied, jumbo-jet transports began operations in 1970, and the supersonic Anglo-French Concorde entered passenger service in 1976.

Air transport operations are monitored and regulated by several national and international bodies. The International Civil Aviation Organization (ICAO) was created as a permanent body of the UN in 1947. Since then it has facilitated the establishment of worldwide standards for safety, reliability, and navigation; it also assists in resolving legal issues. In the United Kingdom, the responsibility rests with the Civil Aviation Authority (CAA), which works in conjunction with the Joint European Aviation Authority (JAA).

Modern airline operations include a significant effort in ancillary services, such as airframe and engine maintenance, personnel training (pilots, cabin attendants, ticket agents, ground crews), maintenance of computerized reservation and accounting equipment, food preparation, and the operation of hotels and resorts around the world. To meet standards for training and flight proficiency requirements, airlines rely heavily on computerized simulators because exclusive training in complex jet transports is far too costly and time-consuming.


A United States

The US domestic market was deregulated in October 1978. As a result, many American airlines began to abandon less profitable services to smaller cities, which formerly were required by law. The intense competition began in high-density passenger markets and new carriers began flying. The major airlines adopted a hub-and-spoke system, in which each carrier funnels its traffic into two or three major hub airports. This scheme allows smaller cities to be connected via the hub at the reasonable frequency of service, but it also eliminated scores of non-stop flights. Fare wars that at first benefited passengers also created a profit squeeze for a number of carriers hard hit by rising costs. The “essential air service” provision in the 1978 Act ensured that air services to smaller cities were maintained by means of subsidies.

B Europe

Prior to 1987, the intra-European market for air services was governed by a patchwork of bilateral agreements, some liberal but others restrictive. In order to create a single market for air transport, the European Union liberalized its air transport sector in three stages.

The first package of measures adopted in December 1987 started to relax the established rules. For intra-EU traffic, it limited the right of governments to object to the introduction of new fares. It gave some flexibility to airlines concerning seat-sharing capacity. The second package in 1990 opened up the market further, allowing greater flexibility over the setting of fares and capacity sharing. It also gave the EU carriers the right to carry an unlimited number of passengers or cargo between their home country and another EU country.

The third stage of the liberalization of air transport in the EU was applied from January 1993. This third package introduced freedom to provide services within the EU and, in April 1997, the freedom for an EU airline from one member state to operate a route within another member state. The single market has since been extended to the non-EU members Norway, Iceland, and Switzerland. The EU legislation includes the requirement for member states to apply common criteria for subsidizing air services to small communities (the “public service obligation” rules).

C Other World Regions

The liberalization of air services has spread to Central and South America, Australasia, and some parts of Asia, albeit mainly through the relaxation of bilateral air services agreements. More modest relaxations of restrictions have been achieved on a multilateral basis through ASEAN in Asia and Mercosur in South America.

D Airline Privatization

The trend towards the privatization of government-owned airlines gathered pace during the 1980s, as part of overall economic programmes introduced by governments of all political persuasions. This was encouraged by aid agencies such as the World Bank, the Asian Development Bank, and the European Bank for Reconstruction and Development.

The justification for privatization was both strategic and financial, with many governments focusing on the reduction of their budget deficits. The average government stake in the largest 25 international airlines was 28 percent in 1996, 19 percent in 2001, and 16 per cent in 2005 (ranked and weighted by international tonne-km performed in each year). From the mid-1980s the major flag carrier was privatized in the UK, Japan, the Netherlands, Australia, Malaysia, and Canada. This was followed from around the mid-1990s by the governments of Germany, France, Italy, Spain, and the Netherlands all reducing significantly their shareholdings, offset to a small extent by the Malaysian government renationalizing Malaysia Airlines.


The chart below shows the almost continual increase in air passenger traffic over almost 40 years. This can be expressed in passenger numbers, which advanced from 380 million in 1970 to 2.2 billion in 2007 (preliminary data from ICAO) on both domestic and international services. This growth averaged 5.0 percent a year over the period. In terms of passenger-km higher average annual growth of 6.3 per cent was recorded, accompanied by an increase in the average sector length travelled of 1.2 percent a year from 1,202 km in 1970 to 1,871 km in 2007.
Of the total world passenger-km traffic in 2006, 34.7 percent was accounted for by airlines registered in North America, 27.5 percent in Europe, 26.5 percent in Asia and Australasia, 4.9 percent in the Middle East, 4.0 percent in Latin America, and 2.3 percent in Africa.

Liberalization of air services has been combined with high economic growth rates in certain countries to generate growth in air passengers and cargo well above average. For example, China and India have experienced double-digit growth rates for some years, resulting in large investment requirements for airport and air traffic control infrastructure.

Growth has also been fuelled by the emergence of so-called “low-cost” airlines, first in the US from the 1980s, in Europe from the mid-1990s, and in other world regions from the 2000s. The two key aspects that differentiate the low-cost airlines from the network carriers are point-to-point services (with no interlining or transfers between flights provided) and single class flights with the cost of few service elements provided in the ticket price. Some services, such as in-flight snacks or meals (and more recently others such as checked baggage and priority boarding) are charged for separately. Many of their productivity advantages flow from these characteristics. They also had advantages of lower input prices, for example for aircraft and labour. In 2006 the European low-cost carrier Ryanair was the world’s largest in terms of international passengers carried, and the US low-cost carrier, Southwest, carried the highest number of domestic passengers worldwide.

By the mid-1990s about 1,000 scheduled airlines operated some 17,000 aircraft worldwide. By 2006, this number had increased to just under 23,000 aircraft, of which 82.7 percent were powered by turbojet or turbofan engines, 16.6 percent by turboprop engines, and only 0.5 percent by piston-engines (aircraft of fewer than 9 tonnes were excluded). Leasing has become more popular since the 1980s, especially shorter-term operating leases, which by 2005 accounted for around 25 percent of all jet aircraft in operation.

The average number of seats offered per flight increased from 105 in 1970 to 162 in 2005, although it rose sharply to 175 seats in 1983 with the introduction of wide-bodied jets. However, it has fallen back somewhat since then as airlines started competing more vigorously using smaller aircraft and higher frequencies of service.


The airline industry has over the years been buffeted by both economic cycles and threats from terrorism and epidemics, such as SARS. Following seven years of good profitability that stemmed from a relatively long world economic upswing between 1994 and 2000, it suffered a severe setback in the 2000s with the post “the year 2000” downturn and the aftermath of the terrorist attacks on the US on September 11, 2001. Cumulative net losses of the world’s scheduled airlines amounted to US$20.3 billion between 1990 and 1993, but this was followed by almost $40 billion in net profits between 1995 and 2000. This highlights the cyclical nature of the industry, and the need to treat with caution doubts expressed after the Gulf War, recession, and September 11 about the continued ability of the industry to finance expansion. Since 2001 profitability has improved considerably, in spite of having to cope with much higher oil prices, allowing airlines to strengthen their balance sheets.

The average revenue from each passenger-km transported fell by 0.7 percent a year from 1990 to 2005. This covers world scheduled services and is expressed in US cents. Relative to the US Consumer Price Index this average yield from air passengers has declined by 3.3 percent a year. The trend has been possible by reduced unit costs and improved load factors. World passenger load factors have risen from 68 per cent on average in 1990 to 76 percent in 2006, with an even steeper rise from 65 per cent in 1993.

Unit costs have declined in spite of an increase in the price of jet kerosene (the Rotterdam spot market price) by around 2.8 times from 76 US cents at the beginning of 1990 to US$2.70-2.80 during the last two months of 2007. Productivity increases have played a key role in reduced costs, with the more widespread adoption of the low-cost airline business model for short- to medium-haul flights and more efficient aircraft on long-haul flights.

A major area of cost reduction for airlines has been distribution. Scheduled airlines gradually reduced the commissions paid to travel agents to zero, first in North America and then Europe. Agents in those regions now mark up a net fare to replace their lost commission income. Airlines also increased the share of sales made directly with the customer using their own websites and channelled some sales via electronic travel agents (see E-Commerce). Start-up airlines, especially those offering a low-cost business model, restricted sales to those via their own websites, with considerable distribution cost savings.

Productivity increases have made the gradual reduction in unit costs possible. The average speed recorded for scheduled flights increased from 469 kph in 1965 to 635 kph in 2002. The average number of hours that aircraft are utilized has grown from 1,678 hours in 1965 to just over 3,000 hours today. The fuel efficiency of aircraft rose by 125 per cent between 1965 and 2002. Finally, labour productivity, expressed in tonne-km traffic carried per airline employee increased at an average annual rate of 5 percent between 1980 and 1990, falling to 4.4 per cent a year between 1990 and 2000.


Along with airmail service, the shipping of commodities by air began in the 1920s. The air cargo business in the 1930s expanded as larger airliners came into service, but air cargo still lagged far behind passengers and mail as a source of revenue. Nonetheless, for certain categories of compact, lightweight, and high-value items, air transport proved highly useful. Typical air cargo in the pre-World War II era included jewellery, cut flowers, high-fashion clothing, film reels, pharmaceuticals, and high-priority replacement and repair parts for machinery. Even some live animals were carried. Aircraft were also used to carry substantial items of machinery to remote areas.

After World War II, when larger, more efficient planes became available, airlines increased their cargo operations, and several all-cargo companies were formed. Post-war freight was likely to include almost anything that would fit inside the fuselage of a plane. During the Berlin blockade (1948-1949), military aircraft carried not only food but also tonnes of coal and construction equipment. With increasing frequency, all kinds of livestock—from thoroughbred horses to exotic zoo animals—travelled in pressurized cargo planes. Perishable produce, frozen foods, heavy machinery, car parts, and even complete cars, were also characteristic of air cargo. Smaller shipments were usually packed in large containers, to make for easy handling and to cut down on pilfering. In the 1970s another kind of air cargo—the overnight delivery of letters, packages, and even larger items—took on increasing importance, first within the United States and then internationally.

Compared with truck, rail, and water transport, air cargo costs are still high in cost per mile, and air cargo still commands only a small share of total intercity tonnage moved by all forms of transport. Nevertheless, many shippers still find that air transport reduces inventories, warehouse requirements, and handling charges.

World scheduled air freight traffic increased at an average rate of 7.4 per cent a year between 1970 and 2007 to reach 155 billion freight tonne-km (according to preliminary data from the ICAO). This growth rate was around 1 percent a year higher than the growth in air passengers. The largest share of this traffic is carried by airlines based in the Asia-Pacific region (35 percent in 2006) followed by 28 percent for North America and 27 percent for Europe.


The environmental impact of air transport in terms of noise has been the focus of a gradual tightening of standards for new aircraft through the ICAO. The latest “Chapter 4” standard was agreed in 2006. Noise affects certain airports more than others, and some airports have introduced their own operational measures to mitigate the effects of noise (such as night curfews) as well as introduce noise landing surcharges and discounts.

Following the Kyoto Protocol and increasing scientific consensus on climate change, there has been a growing interest in aircraft engine emissions. These have both local airport and climate change implications. The pollutants considered as the main ones emitted from aircraft movements are carbon dioxide (CO2), particulate matter (PM)—smoke and dust—, sulphur dioxide (SO2), nitrous oxide (NOx), and hydrocarbons (HC), including methane. The first, CO2, has lower unit social cost than the others, but the total amount emitted is far larger (especially for the cruise part of the flight). The others account for a lower weight of emissions but have higher unit social costs. CO2 is estimated to have the longest life (50 to 100 years) followed by methane with 8-10 years and NOx of days or weeks.

At the international level, the standing Committee on Aviation Environmental Protection (CAEP) of the ICAO was asked to investigate proposals for emissions trading, in addition to ICAO’s role in setting international standards for engine emissions. Little has been agreed in relation to the former, while the latter has focused on NOx emissions in the landing and take-off phase of flights with standards criticized by some as being too lax.

At the regional level, the European Commission is intending to incorporate aircraft emissions into its existing emissions trading system (ETS) from 2012. This is proposed to apply to all flights arriving at or departing from EU airports, including those to/from non-EU countries. It has also introduced a directive that sets limits on local air quality that affects levels around airports and is studying policy instruments to deal with emissions of NOx during the cruise part of flights.

Reviewed By:
Sidney Dunn
Peter S. Morrell

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