Discussion Questions

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You will complete the following content for this lesson topic:

· Read Chapter 12, Airline Pricing, Demand, and Output Determination in the Wensveen text.

· Watch: How Airline Distribution Works (Global Distribution Systems) (6m 43s) and Flight Booking Algorithm (8m57s): https://www.youtube.com/watch?v=kysFEvbzEgA (Links to an external site.) https://www.youtube.com/watch?v=eH0wZloG2cg (Links to an external site.)

· Watch: How Flight Pricing Works (8m18s) and How Airlines Price Flights (11m 58s)):

https://www.youtube.com/watch?v=jxKg65AimSI (Links to an external site.)

https://www.youtube.com/watch?v=72hlr-E7KA0 (Links to an external site.)

Competitive Market Breakeven

In a competitive market firms have no market power, that is they have no control over the products price. Price is determined by market forces, namely the interaction of market demand and market supply. Market demand is the horizontal sum of all individual consumer demands where the consumers are both willing and able to purchase the product. Market supply is the sum of all the individual firm supply curves where the supply curve for a firm is its marginal cost above average variable cost. Market supply and demand interact to establish a market price and the firm observes that price and adjusts its output accordingly. Here there has to be a sufficient number of buyers and sellers of the product so that no one firm or purchaser can influence the market price with their output or purchase decision. That is, they are such a small part of the market that their actions do not have any influence on the market supply for firms or the market demand for consumers. In addition to the large number of buyers and sellers a competitive market requires a homogeneous, undifferentiated product, usually a commodity like integrated circuits or agricultural products where it is difficult or impossible for the consumer to know the origins of the product. Finally to be a competitive market there must be nothing to prevent other firms from entering or existing firms from leaving the market. The lack of barriers to entry and exit means that only normal profits can be earned in the market. If there are economic profits being earned that attracts new entry (competition) and price reductions and similarly for losses and exits.

The implications from the competitive market is that the firm can not choose the point on market demand to operate at; the market finds that point for the firm and the firm takes that market price as a given (the firm is a price taker). This simplifies the revenue side of the market for the firm as now R(q) =pq a linear straight line relationship. That is the sales revenue that the firm gets is is just the market price times the number of units of the product that the firm chooses to produce, the only decision for the firm is how much to produce over a particular time period. If the price that the firm gets was $200 so that its revenue function was R(q)=200q and if the firm produces 10 units its revenue is R(10)=200(10)=2000.

Total Cost (C) depends on output and is the sum of a fixed cost (FC) that does not change with output and a variable cost (vc) that does change with output. For cost to be linear that requires a production process that is not subject to diminishing returns. If we make that assumption then the cost function C(q)=FC+vc(q) is linear just like revenue and they can both be graphed as two straight lines. The revenue function has an intercept of zero and a slope of 200 (p) and the cost function has an intercept of FC and slope of vc. Using some actual values as an example you have C(q)=20000+90q. In general you can develop a profit function given reveue and cost where profit is revenue less cost or PROF=R(q)-C(q) and since R(q)=pq and C(q)=FC-vcq, Profit is then PROF=pq-(FC+cq)=pq-FC-cq. This can be rearranged to PROF= -FC+(p-vc)q. This function is also linear with a vertical (dollar) axis intercept of -FC (if you don’t operate you lose the amount of fixed cost) and a slope of p-vc. The slope, price less variable cost is termed the contribution margin since it tells you what each unit produced contributes to profit; for the example with a price of 200 and a unit variable cost of 90 each unit produced contributes 110 to profit. Since FC is defined to include an opportunity cost or a risk adjusted required rate of return on invested capital, profit here is economic profit and not accounting profit, that is a "normal" profit is included in the fixed cost of doing business. So when we calculate the profit function for a businession it is an economic profit function in that when we calculate breakeven by setting the profit function equal to zero and solving for the q that results in a value of zero that is zero "economic profit" where economic profit is defined as a profit in excess of a normal profit. Remember that if economic profits are being made in an industry with no barriers to entry there will be a flow of resources into that industry because individuals are incentivised to get the most return possible and will shift resources out of normal profit markets and into markets where profits are above normal as long as there are no barriers to entry or exit.

So for the numeric example here the business breaks even PROF=R(q)-C(q)=200q-(20000+90q)=200q-20000-90q=-20000+110q so PROF=-20000+110q now setting that equal to zero has 0=-20000+110q so that q=20000/110=181.8. So we now know that this firm breaks even earning a normal profit when it produces 181.8 units annually or about 15 units per month and we also know the expected breakeven revenue as R(q)=200q so R(182)=36,400.

Looking at the bottom of the Canvas Business Model where we have revenue on one side and cost on the other, profit is the difference. So we are now looking at the canvas business model profitability assessment for the most simple case where we have both linear revenue because of a competitive market and linear cost because the production process and corresponding cost functions represent the constant returns situation. While these assumptions are unrealistic in the actual situations firms face they still are useful in that they approximate what you might expect to find and give you a "ballpark" representation of what you can expect in the real world situation.

Note that the profit function can be solved in general to get the breakeven formula Qbe = FC/(p-vc) notice also the denominator in this formula is the contribution margin so that a firm breakeven point is just fixed cost divided by contribution margin.

Sales Revenue Maximization

You should also remember that it is possible for firms to practice sales revenue maximization rather than profit maximization especially when they have goals like market penetration or in a situation where an influx of cash would help the firm. You can simply develop a statistical model of revenue R(q) and determine the output level (q) where revenue (R) is largest and you do not need to consider the cost side of the scenario. The normal approach to developing a revenue function is to estimate a market demand function where that is a model specification where quantity demanded of a product is modeled as a function of the products own price, the prices of related goods (complements and substitutes), tastes and preferences, advertising, consumer income, price expectations, and anything else that might influence consumer demand. The important point to note is that the the dependent variable here is quantity demanded. For a simple demand curve that everyone is familiar with you have Qd = f(P) and where Qd is the quantity demanded and P is the price. You can develop an "inverse" demand function by expressing the relationship the other way where P=f(Qd), this later specification is what is sometimes referred to as a hedonic pricing model where you express price as a function of the products attributes. For example the price of house is dependent on its size, age, number of bedrooms et cetera or an aircraft is a function of its age, hours on the airframe, hours on the engines, avionics, damage history, et cetera.

A useful development for a linear demand curve is to run through the math, develop a table, and graph a simple linear demand curve (see EconPort (Links to an external site.) for additional examples) an example of this in the Wensveen text is Table 12.3 and Figure 12.1. Suppose you have estimated a demand curve Q=11-P where Q is quantity demanded in units and P is Price in dollars. The equation is a straight line where the slope is -1 and the vertical axis intercept is 11. In economics, after Alfred Marshall, the price variable is usually graphed on the vertical axis and the quantity variable on the horizontal so what is actually graphed is the inverse demand curve: P=11-Q. Develop a demand schedule that shows P, Q, Total Revenue TR=(P times Q) and Marginal Revenue, the change in total revenue per unit change in quantity. That is:

Q P TR MR 1 11 0 0 - 2 10 1 10 10 3 9 2 18 8 4 8 3 24 6 5 7 4 28 4 6 6 5 30 2 7 5 6 30 0 8 4 7 28 -2 9 3 8 24 -4 10 2 9 18 -6 11 1 10 10 -8 12 0 11 0 -10

Note that in general if demand is Q=11-P, then inverse demand is P=11-Q and R(Q)=PQ=(11-Q)Q which is the equal to R(Q)=11Q-Q2

You should plot each point on a graph to get a visual picture and the revenue function R(Q) can be used to compute the revenue column that is: R(8)=11(8) - (8)(8)= 88-64=24

Revenue is a quadratic equation that increases as you move down the demand curve, peaks, then decreases as you continue down the demand curve. Revenue peaks between a Q of 5 and 6 for the exact value compute R(5.5). To actually calculate the maximum revenue you just need to take the first derivative of the revenue function and set that equation equal to zero and solve for the revenue maximizing value of Q. Remember the rules for differentiation, a constant becomes zero and in general to take the derivative of a term in the equation that looks like aXb compute (a)(b)X(b-1) so here you have R'(Q)=(11)(1)Q(1-1) - (1)(2)Q(2-1) = 11 -2Q so that the first derivative of revenue is marginal revenue, here R'(Q), and if you set that equation to zero and solve 11-2Q=0 you get Q=5.5 so that reveue is maximized when Q is 5.5 units. To find P simply substitute 5.5 into the inverse demand curve and compute P. That is P=11-Q so P=11-5.5=5.5. So the point on demand where revenue is a maximum is (5.5, 5.5). Verify all this on your graph where you plot demand, marginal revenue and total revenue. Mark the points on your graph that you use and verify the numerical values from the equations and noting that MR=0 when R is maximum and that is the unitary elastic point on demand. As you may already know and will see later an imperfectly competitive firm with market power (the ability to set price) chooses the point on market demand that it wants to operate at and moves up the demand curve into the elastic segment of demand. Do not worry about the math it is just important for you to see that it is very deductive but the actual equations are estimated using statistical regression models.

You should also be familiar with elasticities or percent change in quantity demanded divided by percent change in the variable of interest, usually own price, price of related goods, and income but an elasticity can be computed for any variable in the demand function. An elasticity can be computed for a range along the demand curve (an arc elasticity) or for a single Q, X location on demand (a point elasticity). When computing an elasticity from a multiple regression you are always computing a point elasticity. The formula for an arc own price elasticity over a range of points is e=[(q2-q1)/(p2_p1)]*[(p1+p2)/(q1+q2)]. The left side ratio of the term is the slope of the demand curve and is always negative (the law of demand) and just says the price and quantity demanded are inversely related. The right hand term just is the average price and quantity over the range. So from the above data consider the p,q points (8,3) and (7,4): e=(4-3)/(7-8)* (7+8)/(4+3)=1/-1*15/7= -15/7=-2.14. Here, again, the negative sign simply says when price goes up quantity goes down and since own price elasticities are always negative the sign is often dropped and just the number is used so here the own price elasticity of demand is 2.14 and for every one percent change in price there is a 2.14 percent change in quantity demanded in the opposite direction. As you should recall this pair of points is on the "elastic" segment of the demand curve and in this range if the firm want to increase revenue it must lower price. So when price is lowered from 8 to 7 you should verify via the revenue function that revenue increases. You should repeat this example on an inelastic segment of demand say for (p,q) (4,7) and (3,8). If you compute the coefficient you should find it to be .47. These elasticities are "averages of the individual consumers that make up the market and in reality each individuals sensitivity to price changes might well be different. Price segmentation or price discrimination makes use of differing sensitives and charges those with smaller elasticities a higher price this is actually accomplished by carving the aircraft cabin into blocks that cater to the preferences that yield to lower price sensitivity (eg. more leg room which is referred to as seat pitch in the airline literature, as seat pitch is reduced more seats can be added), recall the pricing videos at the beginning of this module.

Demand Function Estimation

The Sales Regression Excel spreadsheet downloadcontains the development of a Sales Forecasting Model for an airline route. There is a set of data on economic variables that influence demand as discussed in the text. The data is gathered over time and various statistical procedure available in Excel are used to develop a model. The variables in the dataset are C1, Sales in thousands of dollars; C2, Personal Disposable Income in billions of dollars averaged between the city pairs for the route; C4, Price in dollars; C6, Net Capital Investment in thousands of dollars and C7, Advertising spending in thousands of dollars.

Since C1 is revenue (R), and C4 is price (P) and you know that revenue is the price per unit sold times the number of units sold (P times Q) so that R=PQ, you can calculate quantity sold by dividing revenue by price so that Q=R/P. So in the excel spreadsheet you can create a quantity demanded dependent variable by dividing C1 by C4 and storing the result in a new column, say C10. So that if the regression is repeated this time with Quantity as the dependent variable you are estimating a statistical demand function for that city pair.

Note that you now have the following demand function (aviation_demand _function_regr.xls download) :

C10 = 122.89 - 1.32 C4 + .084 C2 + .117 C7 + .026 C6

I leave it to you in your assignment for this module to assess the descriptive statistics from the model. Now you should see that if we have values for C2, C7, and C6 (suppose 500, 100, and 0 the value for C2 is 42, C7 is 11.7, and C6 is 0 so the the intercept increases about 54 from 123 to 177. So that you now have a statistically estimated demand curve: C10=177-1.32C4 or as above Q=177-1.32P. You should now be able to develop a revenue function and find the revenue maximizing price for Q and P for this aviation firm product. There are several ways to convert the regression coefficients to percent change (elasticity). For a mean response coefficient in excel be sure to have run the descriptive statistics command for each variable then just multiply the regression coefficient times the ratio of the mean value of the dependent variable divided by the mean value of the independent variable of interest. You can also use the most recent values in your data set. Via that method for the problem here and the own price elasticity of demand we would have: -1.32 * (64.08/82.28) =-1.32*.779= 1.03 or elastic.

The cross price elasticity of demand is an important number not only from the firm's perspective but from an antitrust regulatory perspective as well. You will recall from an earlier module that it is important in the definition of a market from the Department of Justice, Federal Trade Commission Horizontal Merger Guidelines.

Profit Maximizing Markup

There are other methods for finding the profit maximizing price and quantity using marginal revenue and marginal costs. If you know the marginal cost, marginal revenue and the price elasticity of demand then you can compute the price that will maximize profit.

P=MC/ [1-(|e|)] or the profit maximizing markup above marginal cost is P=MC(1 + markup) where markup=[|e|/(|e|-1)] where |e| is the absolute value of the own price elasticity of demand. In this last case you can develop a table of optimal percent markup for marginal cost for various own price elasticities (e):

e %markup

-1.2 500

-1.4 250

-1.8 125

-2.5 66.67

-5.0 25

-11.0 10

So if the extra cost of another seat on a route is 1200 and the elasticity for that route is 5.0 then the optimal markup percent is 25% and the fare charged for the flight

is P = MC (1 + markup) so P=1200(1+0.25)=1500

Assignment

Read Chapter 12 in the Wensveen Text

There is not a paper due this week but there will be one due next week. It would be advisable to work the problems and develop text for the material below to include in next weeks required paper and problem set.

1. Develop a summary of the videos that you watched on pricing and the Global Distribution System.

2. What is the own price elasticity of demand and what factors influence it. Using at least 2 different elasticity measures and the example for the optimum markup discussion compute the profit maximizing price and explain how it works.

Airline Markets

3. For this weeks assignment you will be working with the bottom two blocks in the Canvas Business Model downloadfor an airline market. My last airline flight was on Delta in January 2019 and I flew from Pensacola (PNS) to Portland Oregon (PDX) on Delta and actually flew from Pensacola (PNS) to Atlanta (ATL) and then to Portland (PDX). Note that the letters following each city are the three letter airport codes for US cities ( codes (Links to an external site.) ). When examining demand for air travel between cities it is important to just use the beginning and end point or origin and destination. I needed to travel from Pensacola to Portland so the actual city pair market that I was an individual whose demand should be included was from PNS to PDX and not from PNS to ATL and then from ATL to PDX. So in modeling demand between the city pairs Pensacola and Portland I would want to use just those passengers that were flying between those two cities (usually over some period of time). That demand is termed OD (for origin destination). The US DOT uses a ticket sampling process to develop actual OD passenger, see ( OD-DATA (Links to an external site.) ) the link for more info about this and the ability to access data. No need to get data now but later you will be using this to extract data for particular city pairs. For my flight to Portland it was one way as I was picking up an airplane to fly back to Pensacola so my ticket was only in the PNS to PDX and not in the PDX to PNS market. The data can be directional and at times the demand is different in different directions. Airlines develop predictive statistical models for this data for every city pair between which they operate using the methods that you are learning to use.

For this competitive airline city pair market I have estimated a cost function using quarterly data on cost and number of OD passengers on a particular city pair. The quantity and cost data are in the following spreadsheet that you can download and build the models for yourself in Excel if you would like to practice. Cost Regression downloadThe cost data is in thousands of dollars and the quantity data in the number of passengers carried on the route

What you see in the spreadsheet is the estimation of a polynomial regression. The dependent variable (cost) is regressed on a liner output variable (quant), a quadratic term (quant times quant) and a cubic term (quant times quant times quant). The result is a statistically estimated cost function from the spreadsheet you should be bale to pick out the cost function: C(q)=2157.8 -33.4q-7.28q2+1.62q3 but if you examine the p-values you should see that the linear term is not significantly different from zero so that it can be dropped from the regression. The regression was rerun and the final cost function for operating an aircraft between the two cities was C(q)=2081.5-11.q2 +1.76q3.

Given this is a competitive market market supply and demand interact to establish price which is in turn the slope of a linear revenue function. So you now have a linear revenue function for the market and a quadratic (one term has the power two) cost function. Given the total cost function as estimated in the Excel spreadsheet for the route and a market determined price of $350. Develop the revenue function and profit function, calculate how many passengers are needed to maximize profits and what will profits be at that production level. Discuss the nature of normal versus economic profits. Given the profitability and that this is a competitive market what would you expect to happen over a longer period of time?

Here is another situation for a OD passenger market where the estimated cost function is different reflecting different airport access costs, equipment (Airbus vs Boeing), distance, et cetera. The cost function is:

C(q)=0.001q3 - 1.8q2 + 1180q + 134000

And again assuming a competitive market so that revenue is linear and that the current market price for a fare on the route is $600 develop:

· The revenue function

· The profit function

· The value of q that maximizes the profit function

· What are the values of Cost, Revenue and Profit at the profit maximizing quantity value.

· Develop a graphical representation of the problem from both a total and marginal/average perspectives.

· Develop a written discussion of the logic and limitations of this approach to determining the profit maximizing location on demand.

· Is this a sustainable outcome for the airline? Why? Why not?

4. Use the Aviation Demand Function Excel downloadspreadsheet where a multiple regression equation with quantity sold as the dependent variable (sales divided by price) and price, income, advertising and net capital investment as predictor variables was developed. If you can you may want to run the model yourself. Based on the results, answer the following:

1. Interpret each regression coefficient in the problem context.

2. Are the regression coefficients statistically significant at the 5% level? What does this mean?

3. What can you tell about the statistical usefulness of the model.

4 Given the values 82, 475, 90, and 25 for price, income, advertising and capital investment, compute a demand forecast.

5. Compute and interpret a mean response elasticity coefficients for the price variable. What does it tell you about the demand for this route?

6. Suppose the national macroeconomic forecast for income is 475 in the coming period and that management decision variable values for advertising and net capital investment have been determined to be 90 and 125, respectively. Using the preceding values, develop the equation for this products demand curve, its corresponding revenue function and compute the revenue maximizing value of price and quantity.

7. In the early 1960s and before, airlines typically decided to fly additional routes by asking whether the extra revenue from a flight (the Marginal Revenue) was higher than the cost of the flight. This is the rule of thumb Marginal Revenue = Total Cost/quantity

Then Continental Airlines (Links to an external site.) broke from the norm and started running flights even when the added revenues were below average cost. The other airlines thought Continental was making a mistake but Continental made large profits with that decision rule. Eventually, the other carriers followed suit. The flight cost consists of variable costs, including jet fuel and pilot salaries, and those are very relevant to the decision about whether to run another flight. However, the flight cost also includes fixed expenditures like rental of terminal space, general and administrative costs, and so on. These costs do not change with an increase in the number of flights, and therefore are irrelevant to that decision.

In imperfectly competitive markets firm face downsloping demand curves and in the case of monopoly the actual market demand curve confronts the monopolist decision maker who can then choose the point on market demand top operate that. Out of all the p, q combinations available which one should be selected? If the goal is to get the most profit possible then the decision maker wants to find the point on market demand where the difference between cost and revenue is the biggest. That point is the price and quantity combination that results in marginal revenue equal to marginal cost MR = MC.

Consider the following cost and revenue functions for a city pair route that an airline is the single seller for:

C(q) = .001q3 -1.8q2 + 1180q +134000

R(q) = -.859q2 + 1374.4q

Required:

1. Develop a profit function

2. At what value of q are profits at a maximum?

3. What is the revenue maximizing value of q?

4. What are the values of cost, revenue, and profit for the value in (2)?

5. What are the values of cost, revenue, and profit for the value in (3)?

6. What is the profit differential between the two alternative managerial goals of maximizing profit vs maximizing sales revenue?

7. What price should be charged to maximize profits? Sales Revenue?

8. Freehand a graphical representation of the problem from both a total perspective and a marginal perspective.

Read Chapters

· Read Chapters 4 and 5 in the Wensveen text

Chapter Summaries

Chapter 4 : The Department of Transportation , The Federal Aviation Administration, The Transportation Security Administration, The National Transportation Safety Board, and Major Aviation Associations

DOT – Department of Transportation (Links to an external site.)

The DOT commenced operations on April 1, 1967. The objectives that Congress set for the organization were stated in the act that created the DOT and were:

· To assure the coordinated, effective administration of the transportation programs of the Federal government

· To facilitate the development and improvement of coordinated transportation service

· To be provided by private enterprise to the maximum extent feasible

· To encourage cooperation of Federal, State, and local governments, carriers, labor, and other interested parties toward the achievement of national transportation objectives

· To stimulate technological advances in transportation

· To provide general leadership

· To develop and recommend to the President and Congress for approval national transportation policies and programs to accomplish these objectives with full and appropriate consideration of the needs of the public, users, carriers, industry, labor, and the national defense

The secretary of transportation is a cabinet member appointed by the president with the advice and consent of the Senate. The secretary reports directly to Congress and the department has more than 60,000 full-time, permanent employees. The DOT maintains more than 3,000 ﬁeld ofﬁces in the United States and foreign countries. The secretary of transportation oversees and coordinates the activities of 10 administrations within the department. The mission of the U.S. Department of Transportation is to “Serve the United States by ensuring a fast, safe, efficient, accessible and convenient transportation system that meets our vital national interests and enhances the quality of life of the American people, today and into the future." The DOT is also home to the Bureau Of Transportation Statistics ( BTS (Links to an external site.) ) which is the primary source for aviation and air transport research and forecasting

The Main Aviation DOT units include:

FAA- The Federal Aviation Administration (Links to an external site.)

The FAA’s main mission is to promote aviation safety while ensuring efﬁcient use of the nation’s navigable airspace by: Issuing and enforcing safety rules and regulations Certiﬁcating “aviators,” aircraft, aircraft components, air agencies, and airports ; conducting aviation safety-related research and development; and managing and operating the national airspace system. There are over 660,000 active FAA-licensed pilots, including more than 220,,000 student pilots.

The FAA operates and maintains: 22 air route trafﬁc control centers, 684 airport trafﬁc control towers, 135 flight service stations, 3 international flight service stations, 1,041 VHF Omnidirectional Ranges (VOR), 1,344 non-directional beacons, 310 airport surveillance radars, 1,231 instrument landing systems. The FAA has a technical center located in Atlantic City, New Jersey and there is a a training academy in Oklahoma City. The FAA also reviews blueprints and speciﬁcations of all new aircraft designs and certiﬁes their ﬁtness to fly after extensive ground and air tests.

The Federal Aviation Administration traces its ancestry back to the Air Commerce Act of 1926, which led to the establishment of the Aeronautics Branch in the Department of Commerce Aviation continued to grow and expand at a very rapid rate in the decade after Lindbergh’s historic flight in 1927, crossing the North Atlantic. The Civil Aeronautics Act of 1938, which established the independent Civil Aeronautics Authority with responsibilities in both the safety and economic areas and in 1940, the machinery was readjusted, and the powers previously vested in the Civil Aeronautics Authority were assigned to a new Civil Aeronautics Administration. In 1958, Congress passed the Federal Aviation Act, which created the independent Federal Aviation Agency with broad new authority to regulate civil aviation and provide for the safe and efﬁcient utilization of the nation’s airspace In April 1967, the Federal Aviation Agency became the Federal Aviation Administration and was incorporated into the new DOT, which had been established to give unity and direction to a coordinated national transportation system

FAA Major Responsibilities Include:

· Air Traffic Control: One of the FAA’s principal responsibilities is the operation and maintenance of the world’s largest and most advanced air trafﬁc control and air navigation system Only when the aircraft is safely on the ground and has taxied clear of other trafﬁc does the FAA’s responsibility for the safety of the passengers and crew on that particular flight end To keep pace with the rapid growth of aviation, the FAA has implemented a computer-based, semi-automated air trafﬁc control system at all of the 20 en route centers that service the contiguous United States and at all major terminal facilities

· Aircraft and Aviator Certification: The FAA is responsible for establishing and enforcing standards relevant to the training and testing of aviators and the manufacture and continued airworthiness of aircraft The certiﬁcation process may take years The airplane receives a type certificate to show that it meets FAA standards of construction and performance This is followed by the issuance of a production certificate to the manufacturer when its capability of duplicating the type design has been established Finally, each airplane off the line receives an airworthiness certificate attesting to the fact that it conforms to the type certiﬁcate and is safe to fly

· Airport Aid and Certification: One of the FAA’s most signiﬁcant efforts is aimed at expanding and modernizing the nation’s airport facilities to meet projected trafﬁc demands Under the Airport Development Aid Program, the FAA was authorized to allocate funds for airport improvement and construction projects The FAA assists airport owners in designing, constructing, and maintaining airports in keeping with aviation requirements, national safety standards, and state-of-the-art design and engineering technology This is accomplished by the issuance of standards, published in the form of advisory circulars, that are mandatory for grant recipients and have worldwide acceptance as technical advisory documents

· Environmental Protection: In addition to safety, the FAA also has important responsibilities to make airplanes compatible with the environment by controlling noise and engine emissions The FAA also has initiated regulatory action designed to quiet older jets presently in service by requiring that they either be modiﬁed with noise suppression devices or phased out of service In addition, engine noise standards have been developed for the new generation of aircraft and the supersonic transports

· Civil Aviation Security Program: Efforts in this area are aimed at preventing or deterring such criminal acts as air piracy, sabotage, extortion, and other crimes that could adversely affect aviation safety Key elements of the program include required screening of all enplaning airline passengers and a search of their carry-on baggage A law enforcement ofﬁcer also must be present at each screening station during the boarding process In addition, airport operators are required to establish a security system that will keep unauthorized persons from gaining access to air operations areas

· Engineering and Development: The FAA supports all of its safety, security, and environmental programs with extensive engineering and development (E & D) projects A continuing priority of the agency’s E & D work is further automation of the air trafﬁc control system to help controllers keep aircraft safely separated as air trafﬁc increases The FAA has also developed collision avoidance systems that operate independently of the air trafﬁc control system but are compatible with it

NTSB – The National Transportation Safety Board (Links to an external site.)

Created by the Department of Transportation Act of 1966, the NTSB ofﬁcially came into being by executive order on April 1, 1967 Nearly eight years later, the Transportation Safety Act of 1974 established the board as an entirely independent agency and broadened the board’s statutory mandate for investigation of certain surface transportation accidents In 1982, the 1974 legislation was amended to give the NTSB “priority over all other investigations—… by other Federal agencies” in surface transportation cases The board is composed of ﬁve members appointed by the president and conﬁrmed by the Senate, two of whom are designated by the president for two-year terms to serve as chair and vice-chair

NTSB Scope and Responsibilities

· The NTSB is required to determine the probable cause of the following: Civil aviation accidents Highway accidents selected in cooperation with the states All passenger train accidents, any fatal railroad accident, and any railroad accident involving substantial damage Major marine accidents and any marine accident involving a public and a nonpublic vessel Pipeline accidents involving a fatality or substantial property damage

· Under the Transportation Safety Act of 1974, the board is required to take these actions: Conduct special studies on safety problems Evaluate the effectiveness of government agencies involved in transportation safety Evaluate the safeguards used in the transportation of hazardous materials Review appeals from aviators and merchant sailors whose certiﬁcates have been revoked or suspended

· In the event of a major accident, the NTSB follows clearly delineated procedures, as outlined here: Go-team for specific mode of transportation At site investigation Laboratory investigation Issuance of safety recommendations Public hearing Final report

The Transportation Security Administration (Links to an external site.)

On November 19, 2001, President George W. Bush signed into law the Aviation and Transportation Security Act in response to 9/11, which established a new Transportation Security Administration (TSA) within the DOT, which was later moved to the Department of Homeland Security For the ﬁrst time in U.S. aviation history, airport security became a direct federal responsibility The TSA is responsible for Federal security screening operations for passenger air transportation and intelligence information related to transportation security Managing and carrying out program and regulatory activities Discovering, preventing, and dealing with threats to transportation security Research and development activities related to enhancing transportation security Coordinating intermodal transportation security, including aviation, rail, other surface transportation, and maritime transportation Overseeing most transportation-related responsibilities of the federal government during a national emergency

DOT also includes a number of other transportations areas including ground and sea modes including:

· FHA - The Federal Highway Administration

· MARAD - The Maritime Administration

· The St. Lawrence Seaway Development Corporation

· FTA - The Federal Transit Administration

· USCG - The United States Coast Guard

· NHTSA - The National Highway Trafﬁc Safety Administration

· FRA - The Federal Railroad Administration

· RITA - Research and Innovative Technology Administration

· STB - Surface Transportation Board

· FMCSA - Federal Motor Carrier Safety Administration

· PHMSA - Pipeline and Hazardous Materials Safety Administration

Major Aviation Associations

Founded in 1936, the Air Transport Association of America (now named Airlines for America A4A (Links to an external site.) ) is the trade and service organization of the scheduled airlines of the United States. Through the A4A, member airlines pool their technical and operational knowledge to form a single, integrated airline system serving thousands of communities nationwide . The Regional Airline Association ( RAA (Links to an external site.) ), renamed in 1981 (formerly the Commuter Airline Association of America), represents those airlines engaged in the scheduled air transportation of passengers and cargo primarily in local, feeder, and short-haul markets throughout the United States and its territories

The Airline Clearing House ( ACH (Links to an external site.) ) is a corporation, wholly owned by the larger certiﬁcated airlines, through which the interline accounts of airlines, certiﬁcated and regional, are settled on a net basis each month. Regional airlines, by participating as associate members, are able to realize all the billing and clearance beneﬁts without the necessity of purchasing stock in the corporation. The Airline Tariff Publishing Company ( ATPCO (Links to an external site.) ), wholly owned by 35 certiﬁcated air carriers, is employed by the airlines to publish and distribute fares and cargo rates to the travel industry. ATPCO publications list joint fares tariffs, commuter local fares tariffs, commuter airline cargo local rules and rates, small-package rates, and air cargo memorandum tariffs. ATPCO distributes these tariffs to travel agents, airline rate desks, and other companies in the business

The Aerospace Industries Association ( AIA (Links to an external site.) ) is the national trade association that represents U.S. companies engaged in research, development, and manufacture of such aerospace systems as aircraft, missiles, spacecraft, and space-launch vehicles; propulsion, guidance, and control systems for the flight vehicles; and a variety of airborne and ground-based equipment essential to the operation of the flight vehicles.

The General Aviation Manufacturers Association ( GAMA) (Links to an external site.) is an independent trade organization representing 52 U.S. companies that produce over 95 percent of the nation’s general aviation aircraft and equipment

The National Business Aircraft Association ( NBAA (Links to an external site.) ) represents more than 4,000 businesses and corporations that generate more than one-third of the gross national product of the United States. Members fly more than 5,500 aircraft in the conduct of business, from single-engine planes and helicopters to intercontinental jets of airliner size The Aircraft Owners and Pilots Association ( AOPA (Links to an external site.) ) represents more than 265,000 members who own or fly general aviation aircraft and fly for personal and business purposes

ICAO – International Civil Aviation Organization (Links to an external site.)

The principal aim of the International Civil Aviation Organization (ICAO) is to develop the principles and techniques of international air navigation and to foster the planning and development of international air transportation. The speciﬁc goals of the ICAO include the following:

· Ensure the safe and orderly growth of international civil aviation throughout the world Encourage the arts of aircraft design and operation for peaceful purposes

· Encourage the development of airways, airports, and air navigation facilities for international civil aviation

· Meet the needs of the peoples of the world for safe, regular, efﬁcient, and economical air transport

· Prevent economic waste caused by unreasonable competition

· Ensure that the rights of contracting states are fully respected and that every contracting state has a fair opportunity to operate international airlines

· Avoid discrimination between contracting states

· Promote safety of flight in international air navigation

· Promote generally the development of all aspects of international civil aeronautics

Whereas the ICAO’s major focus is on setting standards for the safe and orderly flow of air transportation throughout the world, the International Air Transport Association ( IATA (Links to an external site.) ) is primarily concerned with tariff coordination, including the coordination of fares, rates, charges, and rates and levels of travel agent commissions. The ICAO provides a forum for member states to discuss these matters collectively and to enable them, if they wish, to develop and adopt agreements on fares, rates, and commissions that are submitted to their respective governments for approval

Chapter 5 The General Aviation Industry

The International Civil Aviation Organization ( ICAO (Links to an external site.) ) classifies civil aviation into: commercial air transport services and general aviation. General aviation includes business aviation, aerial work, and instructional flying. Business aviation is defined as "that sector of aviation which concerns the operation or use of aircraft by companies for the carriage of passengers or goods as an aid to the conduct of business, flown for purposes generally considered not for public hire..." This category includes corporate aviation departments and for more detail and information you should take a look at the National Business Aviation Association ( NBAA (Links to an external site.) ). Aerial work includes a number of aviation operations including: agriculture, photography, advertisement (banner towing), fire suppression, and so on. Instructional flying involves pilot training operations and is conducted by organized flying schools and universities and fixed base operators (FBOs) acting as service providers at airports around the country.

An outlook for general aviation along with a wealth of additional information is available from the General Aviation Manufacturers Association ( GAMA (Links to an external site.) ) you can also take a look at some of the career opportunities in that industry by clicking on some of the available short videos.

To get an idea of economic activity from aviation in general and general aviation in particular in Florida read through the Florida DOT 2019 Aviation economic impact study. In that study you will find information about general aviation and the economics associated with various general aviation airports in our region.

FDOT_EIS_Final_Technical_Report (1).pdf

Finally take a look at the flight school segment of the industry, especially those located at a university. The labor market for pilots is currently experiencing a shortage and the demand for flight schools has been increasing nationally. To fly for an airline (CFR part 121) pilots are required to have an Airline Transport Certificate (ATP) and the minimum flight hours for an unrestricted certificate is 1,500. Pilots must also go through a series of licensing requirements including the following certificates: private pilot, instrument rating, commercial pilot. In addition most are also required to get a multi-engine rating and in order to meet the hour requirements they usually get a flight instructor, instrument flight instructor, and multi-engine flight instructor ratings. A good example of a University with an aviation program is Auburn University (Links to an external site.) and a university dedicated to aviation in Florida is Embry Riddle (Links to an external site.) in Daytona. At present UWF is entering the university aviation training market and three degree programs are under development: aviation and airport operations management, professional pilot program, and an unmanned aeronautical vehicle/systems program (drone aircraft).

The General Aviation Industry

General aviation is the largest segment of aviation based on number of aircraft, number of pilots and number of airports and communities served It is a $40 billion industry that generates over $100 billion annually in economic activity The majority of hours flown by general aviation aircraft are for business and commercial purposes There is no legal definition of general aviation, but is usually described as “all civil aviation except that carried out by the commercial airlines.” Before 1978, changes in the GA industry mirrored changes in the economy, Rising fuel prices and issues with product liability drove up prices beginning in the late 1970s and airline deregulation in 1978 caused a decrease in the use of business aircraft. Since the 1990s, fractional ownership models have caused growth in the business aircraft segment

The National Business Aircraft Association (NBAA) deﬁnes business aviation as falling into two categories: business aircraft use and corporate aircraft use:

· Business aircraft use. Any use of an aircraft not for compensation or hire by an individual for the purpose of transportation required by a business in which he or she is engaged (in other words, personally flown)

· Corporate aircraft use. Any use of an aircraft by a corporation, a company, or another organization for the purpose of transporting its employees and/or property not for compensation or hire and employing professional pilots for the operation of their aircraft

All flying that is not common carrier for hire, business flying, or commercial flying, as deﬁned to this point, is personal ﬂying. A number of organizations represent the interests of the business and pleasure flier; by far the most important is the Aircraft Owners and Pilots Association (AOPA) followed closely by the Experimental Aircraft Association (EAA). Instructional flying includes any use of an aircraft for purposes of formal instruction, either with the instructor aboard or when the student is flying solo but is carrying out maneuvers according to the instructor’s speciﬁcations. Most people learn to fly through a local fixed-base operator (FBO); FBOs provide fuel and service, and they also rent and sell airplanes.

Aircraft Use

Commercial and Industrial Aviation: Aerial application. Any use of an aircraft for work purposes related to the production of foods and ﬁbers or to health control measures, in which the aircraft is replacing farm implements or ground vehicles for the particular task accomplished Aerial observation. Any use of an aircraft for aerial mapping or photography, survey, patrol, fish spotting, search and rescue, hunting, or highway traffic advisory not included under FAR Part 135 Aerial other. Approximately 800 aircraft fall into other aerial pursuits such as aerial advertising, weather modiﬁcation, and wildlife conservation

Aircraft Sightseeing, Air Tours, and Air Taxi: Aircraft flown for the purpose of sightseeing and air tours totaled over 900 in 2010. Air taxi or charter ﬁrms serve as on-demand passenger and all-cargo operators Chartering an airplane is similar to hiring a taxi for a single trip; the charterer or air taxi operator provides the aircraft, flight crew, fuel, and all other services for each trip

External Load and Medical:

The majority of aircraft under this category are rotorcraft used for external load operations, such as hoisting heavy loads and hauling logs from remote locations (mostly helicopters). The medical category is also dominated by helicopters, which represent more than 50 percent of the aircraft flown to carry people or donor organs for transplant.

Other Flying:

The ﬁnal category of general aviation craft includes aircraft used for research and development, testing, demonstration, and government purposes. Close to one-third of the aircraft in this category are government aircraft These aircraft, most of which were designed for civilian use, log millions of hours a year on government business.

Airports

All airports are general aviation airports, including those used by the certiﬁcated air carriers, which are sometimes referred to as “air carrier airports” Private-Use Airports. Private-use airports are those that are not open to the general public but are restricted to use by their owners and the invited guests of the owners on an exclusive-use basis Public-Use Publicly Owned Airports. All of these airports may be used by light general aviation aircraft. Fliers intending to use any airport can consult government or industry publications to ascertain its capacity and equipment. Public-Use Privately Owned Airports. It is estimated that close to 40 percent of the public-use privately owned airports in the United States are not permanent; they disappear from the roster of available landing places because of economic, political, or personal reasons

The General Aviation Support Industry

The General Aviation industry depends on a carefully balanced relationship among three players: Manufacturers ,Service Industry, and Users

The Manufacturers: Approximately 15 U.S. airframe manufacturers are involved in designing and constructing light (or small) and large aircraft for the various segments of general aviation. For 16 years, beginning in 1979, general aviation aircraft shipments steadily declined Following passage of the General Aviation Revitalization Act of 1994, manufacturers resumed production of existing popular designs, incorporating upgraded airframe, engine, and avionics technology

Service Industry: Major air carriers have their own maintenance facilities for periodic and progressive maintenance of airframes, engines, and avionics equipment. Local-service carriers, most commuter airlines, and all but a few major general aviation business aircraft operators rely on the services of specialized support business operations or fixed-base operators (FBO). The functions of FBOs include general aviation sales, service, and support operations and are carried out by free-enterprise businesses (mostly operating in monopolistic competition) and their activities include line services (fueling, lubricants), aircraft storage, aircraft maintenance, engine maintenance, avionics (sale, service, and certification), aircraft sales and rentals, flight instruction, part sales and service and specialized commercial functions

There are about 3,500 FBOs of different sizes at public-use airports in the United States; they fall into four categories that include major FBOs that are located at major airports and are fully equipped to handle the servicing and maintenance of all types of aircraft. Medium-size FBOs where the difference between the major and the medium-size FBOs is chiefly the size of the investment, for most medium-size operators are also located at air carrier-served airports. Of the 3,500 FBOs, approximately 2,000 fall into the small FBO category. Many of them are known in the business world as “mom-and-pop shops.” The last category is special FBOs that are extremely specialized aviation operations found at public airports and do not qualify as true FBOs but are nevertheless necessary to aviation.

Users

The Business Market Business aircraft are utilized by all types of people and companies, from individuals who often fly rented single-engine piston-powered airplanes, to sales or management teams from multinational corporations. Business aircraft generally are not flown for hire. Thus, the majority of U.S. registered business aircraft are governed by Part 91 of the Federal Aviation Regulations (FARs). Business aviation will continue to grow because companies recognize the beneﬁts of speed, economy and convenience

The Personal Market As of 2011, the FAA reported 618,660 (664, 565 in 2019) active pilots in the United States, including 196,650 (162,455 in 2017) private pilots, many of whom own, rent, borrow, and lease small aircraft for business and pleasure purposes Thousands of single-engine aircraft are flown within 100 miles of home on nice days—comparable to jaunts in small sailboats or on a pair of skis Many pilots who start off as weekend pilots tend to upgrade into high-performance equipment, to obtain higher ratings and pilot privileges, and eventually to become business as well as pleasure air travelers in light aircraft

Assignment Questions

There is a paper problem set due this module that contains assignments module 5 and module 6 as well.

Note. Solving a quadratic equation (usually taught in 8th grade algebra) of the form aX2 +bX +c generally requires the use of the quadratic formula. You can find many apps that will do this on the web here is one:

Quadratic Formula Calculator (Links to an external site.)

In the early 1960s and before, airlines typically decided to fly additional routes by asking whether the extra revenue from a flight (the Marginal Revenue) was higher than the cost of the flight. This is the rule of thumb Marginal Revenue = Total Cost/quantity

The last problem in the previous module was determining profit maximizing values for a firm with diminishing marginal returns in a competitive market where market forces detremined price which in turn gave the firm a linear revenue function and a constant marginal revenue that was equal to the price. In a competitive market firms face a horizonatl demand curve at the market determined price. In imperfectly competitive markets firm face downsloping demand curves and in the case of monopoly the actual market demand curve confronts the monopolist decision maker who can then choose the point on market demand top operate that. Out of all the p, q combinations available which one should be selected? If the goal is to get the most profit possible then the decision maker wants to find the point on market demand where the difference between cost and revenue is the biggest. That point is the price and quantity combination that results in marginal revenue equal to marginal cost MR = MC.

Consider the following cost and revenue functions for a city pair route that an airline is the single seller for:

C(q) = .001q3 -1.8q2 + 1180q +134000

R(q) = -.859q2 + 1374.4q

Required:

1. Develop a profit function

2. At what value of q are profits at a maximum?

3. What is the revenue maximizing value of q?

4. What are the values of cost, revenue, and profit for the value in (2)?

5. What are the values of cost, revenue, and profit for the value in (3)?

6. What is the profit differential between the two alternative managerial goals of maximizing profit vs maximizing sales revenue?

7. What price should be charged to maximize profits? Sales Revenue?

8. Freehand a graphical representation of the problem from both a total perspective and a marginal perspective.

9. Provide a written discussion of the logic and limitations associated with using statistically estimated revenue and cost functions. Be sure to discuss uncertainty from the statistical results.

e %markup

-1.2 500

-1.4 250

-1.8 125

-2.5 66.67

-5.0 25

-11.0 10

So if the extra cost of another seat on a route is 1200 and the elasticity for that route is 5.0 then the optimal markup percent is 25% and the fare charged for the flight

is P = MC (1 + markup) so P=1200(1+0.25)=1500

Required: Use this method to calculate a range of fares for routes with differing marginal costs and elasticities. Develop a discussion of your findings.

Items to include from Chapter 5

Go to each of the web sites for the major aviation organizations (DOT, FAA, NTSB, TSA) and summarize their air transport activities. Describe information available from each in their reports and publications menus.

The existence of a pilot shortage is often discussed in the media and in response to that shortage UWF is launching aviation programs in 2021. Use the data from the FAA on Airman Statistics (Links to an external site.) and any other sources you can find to discuss the pilot shortage.

Items to include from the General Aviation Chapter

· Develop a general aviation economic outlook over the next several years using information from the Florida DOT report, the NBAA, and GAMA. Also include a summary of the data from the AOPA 2019 State of General Aviation (Links to an external site.) and update it with more recent data if you can. or a newer outlook. Also develop an occupational outlook for pilot jobs in the industry as well.

· Select an aviation operation that takes place in general aviation that could be described as monopolistic competition, a good example would be a fixed base operator at an airport. Describe the economic profitability of operating a business in the FBO industry. No need to include any actual numbers in your analysis just describe the market structure and discuss the potential for economic profits. Use the canvas business model template to identify characteristics for a firm in the industry.

Rubric

Paper Information and Rubric

Discussion Paper Information

The topic for each paper/essay is given in the ELearning Canvas site course content Module Assignments document. Also be aware that students in previous courses submitted similar but not exact essays in digital format and those essays are archived in a searchable database. Each essay currently received is compared with the database and Turnitin and a significant match will result in both the student whose original work it was and the one who submitted the essay being subjected to the university cheating policy. You must also complete the plagiarism training in the course information.

General Paper/Essay Information

1. Your paper should be 15 pages or less of double spaced text in a 12 point font with a ragged right margin. Title page and references , and figures and graphs do not count.

2. Your paper should be a Microsoft Word Document. The filename should be: yourlastname.docx

3. Do not use wikepedia, investepedia, cliff notes, dictionaries, encyclopedias, etc. as sources if you do your grade will be reduced.

4. Your paper should have a title page that, in addition to the title (Use Paper1, Paper 2, etc. as the title), includes your name and email address.

5. Your paper should cite material that you use in your text and have references.

6. The paper should not be copied text from other sources; it should be in your own words. Your report will be run through a plagiarism checker ( http://turnitin.com/static/plagiarism.html (Links to an external site.)Links to an external site. ).

7. If you require guidance on text organization and want a style guide to follow you should use the APA style guide ( http://apastyle.apa.org (Links to an external site.)Links to an external site. ). Please note that there is no need for an abstract or lists of tables and figures or a table of contents.

8. Each essay should be turned into the UWF eLearning assignment folder (dropbox) for that essay by the deadline.

9. Generally I take 10 days to grade your essay (The first grade will be sooner so that you can see that you are meeting expectations).

10. Your grade will be a numeric score. Generally if you get a 95 if everything was fine, that is you answered all the required questions in sufficient detail and correctly so that you get full credit (for an exceptional essay it is possible to earn a 100). If your score is anything less than a 95 then something was lacking: insufficinet detail, errors, no references and citations, required content left out etc. I do not reduce your score for style. If you want info about your score feel free to email me with questions and I will provide you with additional information about your work. You can also check out the rubric I use for grading