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North Atlantic versus transcontinental air transport passenger services : cost analysis Vondracek, George Joseph

Abstract

The purpose of this study is twofold: first, to determine whether the level of passenger fares effective on the North Atlantic routes bears close relationship to the cost of operating these routes; and, second, to test a hypothesis that rate making under the International Air Transport Association regulations on the North Atlantic results in a passenger fare/ cost spread in excess of that existing in the Canadian transcontinental commercial air service. While these objectives are intended to reflect general relationships which have existed for some time in both of these markets, only recent statistics are employed to exemplify them. The 1966 data are used throughout the study supplemented by 1965 and 1967 information where deemed necessary. The assumption is made that the aircraft operating costs, or direct costs, incurred in airline operations on the North Atlantic in 1966 were similar to those experienced in providing the Canadian transcontinental service as the aircraft used (DC-8 category) and the average stage length of the routes were similar in both markets. However, as demonstrated through the study, there are differences in the regulatory and economic conditions between the two markets which might have influenced development of these markets, resulting in different application of pricing principles in each. The cost and performance data for selected types of turbo-jet and turbo-fan powered aircraft operated by U.S. carriers on International/ Territorial routes in 1966 are tabulated and analyzed by individual cost category. The analysis progresses from general grouping to specific types of DC-8 equipment and to cost analysis of Pan American World Airways Inc. flying DC-8 aircraft on Atlantic routes in that year. A comparative analysis is first performed on statistics relating U.S. international and Canadian North Atlantic cost experience in 1966. The second part is concerned with comparison of cost levels between Canadian North Atlantic and transcontinental services. In the final phase, various cost concepts are introduced and the available data grouped according to criteria of direct and indirect costs, out-of-pocket and fully allocated cost categories. The fully allocated costs of the North Atlantic and transcontinental Canadian services are compared with passenger fares effective in each market in 1966. It is concluded that the level of passenger fares effective on the North Atlantic routes in 1966 bore very little relationship to the cost of airline operations in that market in the same year. An example presented in the thesis indicates that one-way economy passenger fare between Montreal and London was set at 140 per cent of fully allocated cost of operating this route, at the average load factor of 60.3 per cent. The cost/fare spread in the North Atlantic services, at 40 per cent over fully allocated cost of operation, is much higher than that experienced in the Canadian transcontinental service, at 15 per cent over fully allocated cost. While the conclusions might be valid for other IATA carriers operating on the North Atlantic, it must be borne in mind that only Canadian and U.S. carriers’ cost and performance data were analyzed in the thesis.

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