Transportation A Supply Chain Perspective by John J. Coyle – Test Bank

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INSTANT DOWNLOAD COMPLETE TEST BANK WITH ANSWERS

 

Transportation A Supply Chain Perspective by John J. Coyle – Test Bank

 

Sample  Questions

 

Chapter 3: Transportation Regulation and Public Policy

 

MULTIPLE CHOICE

 

  1. Which legal system relies upon principles or rules of law that were developed from court decisions?
a. statutory
b. judicial memory
c. common law
d. common market

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               REF:   Pages 57-58

 

  1. The Interstate Commerce Commission (ICC) is usually described as:
a. an arm of the Congress
b. an expert body providing a continuity to regulation that neither the courts or legislature could not do.
c. the reason that the railroad industry was in such poor condition prior to 1980
d. an agency with somewhat limited powers

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Page 58

 

  1. States can regulate:
a. interstate traffic
b. interstate if it terminates in that state
c. certain safety issues that do not create an undue burdon on interstate commerce
d. interstate if it orininates in that state

 

 

ANS:  D                    PTS:   1                    DIF:    Medium         REF:   Page 61

 

  1. Which sentence best describes the current regulation of transportation?
a. The federal government controls all aspects of transportation
b. The federal government has removed most economic control but continues to oversee  aspects of transportation safety
c. The government lets most carriers do what they want
d. The air line industry is free of all regulation but the railroads are still closely regulated

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Pages 62-63

 

  1. What is the federal government’s policy toward transportation?
a. very much a lazes-fair or hands off approach letting the market place control
b. a series of often conflicting programs driven by politics
c. that this is an issue for the states
d. is composite of laws, rules, funding programs and regulatory agencies

 

 

ANS:  D                    PTS:   1                    DIF:    Hard               REF:   Page 66

 

  1. What is the best justification for a national transportation policy?
a. that without one each mode would go its own direction
b. the business community would impose its will on the carriers
c. national dependence upon the transportation systems of other countries and the nation’s ability to be competitive
d. the significance of transportation to commerce and defense

 

 

ANS:  D                    PTS:   1                    DIF:    Medium         REF:   Page 67

 

  1. Which mode is not covered under the National Transportation Policy?
a. Water carries
b. Exempt carriers
c. Air carriers
d. Rail carriers

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               REF:   Page 70

 

  1. What is the formal method used by Congress to influence national transportation?
a. congressional committees
b. appointment of the heads of the STB and FMC
c. formulating laws
d. standing committees

 

 

ANS:  C                    PTS:   1                    DIF:    Medium         REF:   Page 73

 

  1. Industry associations serve two purposes in connection with policy development. They are:
a. lobbying and fund raising for political parties
b. meeting with regulators and state agencies
c. policy and position papers
d. develop proposed legislative and administrative ruling concepts, or serve as a united front to proposals harmful to the group

 

 

ANS:  D                    PTS:   1                    DIF:    Medium         REF:   Page 74

 

  1. Transportation project planning is:
a. a public activity seeking increased trade and lower cost of living
b. best done by the private sector as they recognize return on investment
c. accomplished with little regard to financial return
d. not concerned with congestion

 

 

ANS:  A                    PTS:   1                    DIF:    Hard               REF:   Pages 75-76

 

  1. The benefits of a public planning project could be:
a. facilitation of trade movement
b. increases social cost of delay
c. provides services in competition to those private industry would invest in
d. to create long term entitlements

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               REF:   Pages 76-77

 

  1. Which is a major controversy regarding the Federal Highway Trust Fund?
a. whether the remaining portions of the federal suburban highway system will ever be built
b. whether it is legitimate to collect federal excise taxes on road tires
c. whether taxes should still be collected since the interstate highway system is 96 percent complete and it is doubtful if the remaining 4 percent will be constructed
d. whether states should obtain revenues through vehicle registration fees that are assessed on a vehicle weight basis

 

 

ANS:  C                    PTS:   1                    DIF:    Medium         REF:   Page 79

 

  1. While the motor carrier industry does not receive any direct government promotion, they still benefit from:
a. the oversight provided by the Federal Motor Carrier Safety Administration
b. the highway trust fund
c. research conducted by the National Highway Traffic Safety Administration
d. the fact that most highway projects are done with government funds.

 

 

ANS:  D                    PTS:   1                    DIF:    Hard               REF:   Page 78

 

  1. Amtrak was created to:
a. relieve the railroads of the burden non profitable passenger business
b. allow federal planners to create a balanced system without the profit motive of the private sector
c. as a first step towards nationalization of the modes of transportation
d. relieve the pressure of automobile traffic on the highways by providing an alternate mode of transport.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               REF:   Page 80

 

  1. Some railroads have benefited from:
a. imposition of federal safety regulations relieving the carrier of this task
b. subsidies to operate abandoned rail liens the states and others continue to operate
c. the government operated research facility at Pueblo, Colorado
d. the new hours of service for truck drivers which reduced their productivity

 

 

ANS:  B                    PTS:   1                    DIF:    Hard               REF:   Page 80

 

  1. Domestic water carriers have received two major forms of federal promotion. They are:
a. research that led to bigger and more powerful tugboats
b. subsidies to plants that located on rivers to use barges
c. the work done by the Corp of Engineers and the Coast Guard
d. exempting water carrier from regulation and ice breakers on the Mississippi River

 

 

ANS:  C                    PTS:   1                    DIF:    Medium         REF:   Page 80

 

  1. The Maritime Administration (MARAD) was created to:
a. pay subsidies to U.S. flag carriers who were having difficulty competing against foreign carriers.
b. be certain that there would be employment for U.S. sailors and mariners
c. prevent the economic decline of the U.S. flag ocean carriers
d. in response to ship lines and builders wanting federal aid.

 

 

ANS:  C                    PTS:   1                    DIF:    Hard               REF:   Page 81

 

  1. User fees:
a. do not impact wasteful use
b. designed to discourage use of a facility by private firms
c. may equalize intermodal competition
d. encourage private investment

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               REF:   Page 82

 

  1. Since economic deregulation of the modes, safety regulations:
a. has received greater attention
b. has also be deregulated
c. delegated to the states funded with block grants
d. turned over to the Department of Homeland Security

 

 

ANS:  A                    PTS:   1                    DIF:    Hard               REF:   Page 84

 

  1. What agency was created to secure America from terrorist attacks?
a. Cost Guard
b. Department of Homeland Security
c. The Special Forces
d. Federal Bureau of Investigation

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Page 85

 

  1. Which legal system is based upon the Roman legal system?
a. statutory
b. judicial memory
c. common law
d. common market

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               REF:   Page 58

 

  1. From a market place perspective which of the following is not a key functions of transportation?
a. Create time utility
b. Create place utility
c. Create demand
d. Link production and consumption

 

 

ANS:  C                    PTS:   1                    DIF:    Hard               REF:   Page 67

 

  1. What law allowed collective rate making by the transportation carriers?
a. The Sheman anti-trust act of 1890
b. The Clayton Actt of 1914
c. The Reed-Bulwinke Act of 1948
d. The Robinson-Patman Act of 1936

 

 

ANS:  C                    PTS:   1                    DIF:    Medium         REF:   Page 62

 

SHORT ANSWER

 

  1. What does common law rely upon?

 

ANS:

Common law relies upon judicial precedent, or principles of law developed from former court decisions.

 

PTS:   1                    DIF:    Easy               REF:   Page 57

 

  1. What is statutory law based on?

 

ANS:

Statutory law or civil law is based upon the Roman legal system and is characteristic of continental Europe and the parts of the world colonized by European countries.

 

PTS:   1                    DIF:    Easy               REF:   Page 58

 

  1. What is “per se” violation under Anti-trust law?

 

ANS:

A per se violation is a type of violation is illegal, regardless if any economic harm is done to competitors or other parties.

 

PTS:   1                    DIF:    Medium         REF:   Page 66

 

  1. What the primary mission of the Federal Motor Carrier Safety Administration?

 

ANS:

The Federal Motor Carrier Safety Administration is a non-economic regulatory body whose main purpose is truck safety.

 

PTS:   1                    DIF:    Medium         REF:   Page 79

 

ESSAY

 

  1. The establishment of transportation policy and the development of transportation is complicated by the number of groups that are involved. Which groups are involved?

 

ANS:

In addition to the Congress and the President, more than 60 federal agencies and 30 congressional committees set transportation policy. Two independent regulatory agencies interpret transport law, establish operating rules, and set policy. The Justice Department interprets laws involving transportation and settles differences between the carriers and the public.

 

PTS:   1                    DIF:    Medium         REF:   Page 66

 

  1. Describe the key provisions of the Interstate Commerce Commission Termination Act of 1995.

 

ANS:

Railroad Regulations

 

  • Rail economic regulation is basically unchanged by the ICCTA.
  • The STB has jurisdiction over rates, classifications, rules, practices, routes, services, facilities, acquisitions, and abandonments.
  • Railroads continue to be subject to the common carrier obligations (to serve, not discriminate, charge reasonable rates, and deliver).
  • Rail tariff filing is eliminated; railroads must provide 20 days advance notice before changing a rate.
  • Rail contract filing is eliminated except for agricultural products.

 

Motor Carriers

 

  • All tariff filing and rate regulation is eliminated, except for household goods and non-contiguous trade (trade between the continental United States and Hawaii, for example).
  • Motor carriers are required to provide tariffs to shippers upon request.
  • Motor carriers are held liable for damage according to the conditions of the Carmack Amendment, (i.e., the full value of the product at destination). However, motor carriers can use released value rates that set limits on liability.
  • The Negotiated Rates Act undercharge resolution procedures are retained and the unreasonable practices defense is extended indefinitely for pending undercharge cases.
  • Undercharge/overcharge claims must be filed within 180 days from receipt of the freight bill.
  • The STB has broad powers to exempt operations from economic regulation with the existing exemptions remaining.
  • Antitrust immunity for collective rate making (publishing the national motor freight classification, for example), is retained.
  • The motor carrier is required to disclose to the person directly paying the freight bill whether and to whom discounts or allowances are given.
  • The concepts of common and contract authorities are eliminated; all regulated carriers can contract with shippers.

Freight Forwarders and Brokers

 

  • Both are required to register with the STB.
  • The freight forwarder is regulated as a carrier and is liable for freight damage.
  • The broker is not a carrier and is not held liable for freight damage.
  • The STB can impose insurance requirements for both.

 

PTS:   1                    DIF:    Hard              REF:   Page 68

 

  1. What is the role of the executive branch in connection with establishment of transportation policy?

 

ANS:

Many departments within the executive branch of government influence (establish) transportation policy. At the top of the list is the office of the president. The president has authority over international air transportation and foreign air carriers operating into the United States. The president also appoints individuals to head the various agencies that influence transportation and to head the two regulatory agencies-the STB and Federal Maritime Commission (FMC).

 

The Department of State is directly involved in developing policy regarding international transportation by air and water. The policies and programs designed to encourage foreign visitors to the United States are implemented by the U.S. Travel Service. The Maritime Administration is involved with ocean (international) transportation policy. It determines ship requirements, service, and routes essential to foreign commerce. In addition, international transportation policies and programs are shaped by the Military Sealift Command, Military Airlift Command, and Military Traffic Management and Terminal Service-agencies responsible for the movement of military goods and personnel.

 

On the domestic level, the Department of Energy develops policies regarding energy availability and distribution (fuel and rationing). The U.S. Postal Service contracts for the transportation of the mail; such contracts have been used to promote air transportation as well as motor and rail transportation at other times. The Department of Housing and Urban Development (HUD) consults with the DOT regarding the compatibility of urban transportation systems within the HUD-administered housing and community development programs. The Army Corps of Engineers is responsible for constructing and maintaining rivers and harbors and for protecting the navigable waterways.

 

The DOT, however, is the most pervasive influence of policy at the domestic level. The secretary of transportation is responsible for assisting the president in all transportation matters, including public investment, safety, and research. (See Appendix A at the end of this chapter for a list of agencies within the DOT.)

 

PTS:   1                    DIF:    Medium         REF:   Pages 72-73

 

  1. Why are the timing and time value of funds important in any capitol project analysis?

 

ANS:

The timing and time value of funds are important parts of any capital project analysis.  Political controversy exists about the choice of the specific discount rate and its application.  Several analytical points can be examined that will shed light on this task.  First, the discount rate should reflect the interest cost and impact to the public agency that borrows the initial funds.  Second, the rate should become higher in later years to reflect increasing risk, inflation, uncertainty, and forecasting difficulties.  This is a conservative practice of private project financial managers, and the logic of it can be applied soundly in a public setting.  Third, the counting of benefits should cease in some future period, even though the project might last longer.  This is another practice that is an implicit way of conservatively considering only those benefits within the intermediate term, unless a logical case can be made for an extended period of time.  These points are made as to ensure that benefit over-counting is minimized.

 

PTS:   1                    DIF:    Medium         REF:   Page 77

 

  1. What is the role of industry associations in connection with policy development?

 

ANS:

 

One facet of national policy development that is often overlooked in the study of transportation is the role of industry associations in shaping national, state, and local promotion, regulation, and policy.  These associations exist in most industries and their focus is to lobby Congress and other influential groups in the government to pass laws that will help their members.

 

These associations are nonprofit entities that derive their powers and resources from member firms.  They act on the charges given to them by their members.  In transportation, the railroads in the Association of American railroads (AAR) and the motor carriers in the American Trucking Associations (ATA) often meet to resolve matters of equipment uniformity and loss and damage prevention.  On the policy side, these associations develop legislative and administrative ruling concepts that favor the collective membership, or they serve as a united front against proposals that are perceived to be harmful to the group.

 

PTS:   1                    DIF:    Medium         REF:   Page 74

 

  1. Transportation project planning is described as a public activity where purely financial return is not the overriding benefit to be attained. Give the reasons why this activity is a major part of the public activity in the U.S. economy.

 

ANS:

Transportation project planning is the process whereby federal, state, or local groups review the movement needs or demands of a region or population segment, develop transportation alternatives, and usually propose or implement and alternative.  This process enables the development of new movement processes or allows existing ones to continue in an environment of change.

 

Transportation project planning is a public activity; purely financial returns and other concerns are not the overriding benefits sought.  It is a major part of the public activity in the U.S. economy for several reasons.  First, public transportation processes can facilitate trade or movement where private actions have not or would not have been enticed to do so for financial gain alone.  Second, various cultural and political benefits often come from projects and programs provided publicly.  Third, transportation planning also lowers the cost of living or reduces the social costs of delay or congestion.  Finally, transportation planning provides services that are not remunerative but are deemed socially necessary or desirable.

 

Transportation planning has been a critical factor in the beginning of the 21st century.  There are many areas of transportation investment from which private firms have withdrawn.  Many forms of transportation today are no longer economically profitable or compensatory.  Urban bus systems, commuter railroads, rail and urban research and development, and many rail services are examples of transportation forms that would not exist without public sector involvement.

 

Many forms of transportation require large capital investments that would normally discourage or basically prohibit private investment.  Port dredging and development, as well as airport and highway construction, are examples of capital items that are not affordable by the carriers using them.  Instead, the ability of a public authority to attract capital enables the asset to be built; cost is recovered through user charges.

 

Public planning of transportation is generally found in situations where environmental or social needs override financial ones.  A major argument used in modern subway construction is that, although the system might not recover its full costs from passenger fares, the city as a whole will benefit by increased access to already existing downtown facilities, including buildings, offices, stores, and water utility systems. Constructing other facilities in developing suburban areas will not be necessary.  Also, commuters save money because the subway eliminates the need for a second family auto, long driving, excess fuel consumption, costly parking in downtown areas, and so on.  Public planning of transportation involves a different viewpoint and set of objectives than does capital investment analysis in private firms.

 

PTS:   1                    DIF:    Medium         REF:   Page 75

 

  1. Discuss the rationale and problems associate with assessing user charges against carriers.

 

ANS:

 

User charges are present in the highway systems in several forms.  A major form is the fuel tax.  States look to this per-gallon tax as a major revenue source for highway construction and maintenance.  The federal government’s fuel taxes go to the Federal Highway Trust Fund, which is the financing source for the Interstate Highway System.  Some states have switched from a per-gallon to a percent of sales price method of fuel-based taxation because, in recent years, the number of gallons of fuel sold has decreased, leaving state agencies with less revenue in times that demand greater highway maintenance.  The percent of sales price approach can avoid much of this decline.  Another public revenue source is the federal excise tax on vehicle tires. States also obtain revenues through vehicle registration fees.  These mostly are assessed on a vehicle weight basis so as to recoup, somewhat, a proportionate share of construction costs related to heavier versus lighter vehicles.  Further, some states assess a ton-mile tax (e.g., Oregon).  Finally, tolls are a form of user taxes on turnpikes and many bridges.

 

Two major controversies are taking place with regard to highway user charges.  One concerns the Federal Highway Trust Fund.  The tax money that goes into this fund is collected primarily for interstate highway construction.  Approximately 96 percent of the interstate system has been built, but doubt exists over whether the remaining portions, mostly very costly urban sections, will ever be built.  Meanwhile, the fuel tax continues to be collected and accumulated in the fund.

 

A second problem with user taxes is on the state level.  Most states collecting vehicle fees and vehicle taxes only return a portion of them for highway purposes.  Some states have earmarked some of these funds for education and other uses.  In addition, industry groups continue to seek a greater share of these funds for highway development and improvement.

 

PTS:   1                    DIF:    Medium         REF:   Pages 82-83

 

  1. Transportation safety continues to receive significant government attention. Is this linked to economic deregulation? Explain your answer. What is the intent of federal safety regulations?

 

ANS:

With economic regulation being either reduced or eliminated, concerns were raised that carriers might skimp on safety to remain competitive. Critics of deregulation felt that heighten competition with it resultant impact on profits would cause carriers to forgo safety to improve profits.

 

The intent of federal safety regulations is to establish the minimum standards to which carrier must adhere. They also cover licensing of transport employees whose duties involve the operation of equipment. Regulations also cover design of transportation vehicles including safety equipment.

 

PTS:   1                    DIF:    Hard              REF:   Pages 84-85

 

  1. Why was the Department of Homeland Security established? Pick one of its component parts, name and define its role.

 

ANS:

After the September 11, 2001 terrorist attack on the United States, the Department of Homeland Security (DHS) was established with the goal of mobilizing and organizing the nation to secure the homeland from terrorist attacks.  Its mission is to lead a unified national effort to secure America; to prevent and deter terrorist attacks and protect against and respond to threats and hazards to the nation; and to ensure and secure borders, welcome lawful immigrants and visitors, and promote the free flow of commerce.

 

DHS is charged with protecting the security of the transportation system encompassing approximately 742 million air passengers (domestic and international),  11 million imported containers, and 11.5 million motor crossings among the U.S., Canada, and Mexico.7  The DHS transportation security programs and regulations are administered through the Coast Guard (CG), Customs Service (CS), and Transportation Security Administration (TSA).

 

The Coast Guard patrols the U.S. coastline and internal navigable waterways implementing the various security measures set forth by the DHS. The CG can stop a vessel from entering an U.S. port, board the vessel, and prevent any undesirable freight from being offloaded from a vessel.

 

The TSA administers the air passenger security-screening processes at U.S. airports. TSA hires and manages the airport screeners and sets forth items that are prohibited from being carried on board commercial passenger aircraft. TSA is testing various security devices and procedures to ensure the safety of passengers as well as reduce delays resulting from the security-screening process.

 

TSA has conducted a transit and rail inspection program with the goal of implementing rail passenger and luggage screening similar to that in the air passenger sector. In conjunction with Amtrak and the DOT, TSA is implementing phase II of a first-time rail security technology study to evaluate the use of emerging technologies to screen checked and unclaimed baggage as well as temporarily stored personal items and cargo for explosives.

 

The Customs Service has been focusing on implementing security measures for cargo entering the United States. CS has established the 24-hour rule that requires shippers to electronically transmit a description of the cargo to CS 24 hours before loading. CS can block any prohibited cargo items from being unloaded at any U.S. port or airport. CS is working in partnership with shippers to streamline the security paperwork in an attempt to reduce the negative consequences on global commerce entering the United States.

 

PTS:   1                    DIF:    Medium         REF:   Pages 85-87

 

  1. Describe the key governmental agencies involved in transportation safety and the transportation area they deal with.

 

ANS:

Safety regulations have been established to control the operations, personnel qualifications, vehicles, equipment, hours of service for vehicle operators, etc.  The Federal Aviation Administration (FAA) enforces and promulgates safety regulations governing the operations of air carriers and airports.  The Federal Motor Carrier Safety Administration (FMCSA) administers motor carrier safety regulations, and the National Highway Traffic Safety Administration (NHTSA) has jurisdiction over safety features and the performance of motor vehicles and motor vehicle equipment.  The Federal Railroad Administration (FRA) has authority over railroad safety regulations while the Coast Guard is responsible for marine safety standards for vessels and ports.  The newly created Pipeline and Hazardous Material Safety Administration (PHMSA) contains a Pipeline Safety Office that is responsible for hazardous materials standards for oil and natural gas pipelines and a Hazardous Materials Safety Office that manages hazardous materials regulations for all other modes of transportation.  The National Transportation Safety Board (NTSB) is charged with investigating and reporting the causes, facts, and circumstances relating to transportation accidents.

 

PTS:   1                    DIF:    Medium         REF:   Page 60

 

  1. What is the role of regualatory commissions?  How do the courts compliment that role?

 

ANS:

Our regulatory laws are often stated in vague terms, such as reasonable rates, inherent advantages, and unjust discrimination.  The roles of the regulatory commission are to interpret the meaning of these terms as they are stated in the law and to develop regulations that define their intent.  These regulations, then, are codified and serve as the basis for decisions made by the regulatory commissions.  However, these decisions are still subject to the intent of the law and to decisions made by the courts.

 

Even though the regulatory commission plays a powerful role in regulating transportation, it is still subject to judicial review.  The courts are the sole determinants of the intent of the law, and only court decisions can serve as legal precedent under common law.  The courts make the final ruling on the constitutionality of regulatory statutes and the interpretation of the regulation.  The review of the courts act as a check on arbitrary or capricious actions, on actions that do not conform to statutory standards or authority, or on actions that are not in accordance with fair procedure or substantial evidence.  The parties involved in a commission decision have the right, therefore, to appeal the decision to the courts.

 

Over the years, the courts had come to recognize the ICC as an expert body on policy and the authority on matters of fact.  This recognition has now been given to the STB.  The courts limited their restrictions on ICC and STB authority.  The courts would not substitute their judgment for that of the ICC or STB on matters such as what constitutes a reasonable rate or whether discrimination is unjust because such judgments would usurp the administrative function of the commission.

 

PTS:   1                    DIF:    Hard              REF:   Page 58

 

  1. Describe the purpose of transportation policy.

 

ANS:

The purpose of transportation policy is to provide direction for determining the amount of national resources that will be dedicated to transportation and for determining the quality of service that is essential for economic activity and national defense.  National policy provides guidelines to the many agencies that exercise transportation decision-making powers and to Congress, the president, and the courts that make and interpret the laws affecting transportation.  Thus, transportation policy provides the framework for the allocation of resources to the transportation modes.

 

The federal government has been a major factor in the development of transportation facilities – highways, waterways, ports, and airports.  It also has assumed the responsibility to:

  • Ensure the safety of travelers;
  • Protect the public from the abuse of monopoly power;
  • Promote fair competition;
  • Develop or continue vital transportation services; balance environmental, energy, and social requirements in transportation; and,
  • Plan and make decisions.

 

PTS:   1                    DIF:    Medium         REF:   Page 67

 

  1. Describe the key statements with on national transportation policy with respect to the rail road industry that were included in the Interstate Commerce Commission Termination Act of 1995 (Public Law 104-88):

 

ANS:

In regulating the railroad industry, it is the policy of the United States Government:

(1) to allow, to the maximum extent possible, competition and the demand for services to establish reasonable rates for transportation by rail;

(2) to minimize the need for Federal regulatory control over the rail transportation

system and to require fair and expeditious regulatory decisions when regulation Is required;

(3) to promote a safe and efficient rail transportation system by allowing rail carriers

to earn adequate revenues, as determined by the Board;

(4) to ensure the development and continuation of a sound rail transportation

system with effective competition among rail carriers and with other modes, to meet the needs of the public and the national defense;

(5) to foster sound economic conditions in transportation and to ensure effective

competition and coordination between rail carriers and other modes;

(6) to maintain reasonable rates where there is an absence of effective competition and where rail rates provide revenues which exceed the amount necessary to

maintain the rail system and to attract capital;

(7) to reduce regulatory barriers to entry into and exit from the industry;

(8) to operate transportation facilities and equipment without detriment to the public health and safety;

(9) to encourage honest and efficient management of railroads;

(10) to require rail carriers, to the maximum extent practicable, to rely on

individual rate increases, and to limit the use of increases of general applicability;

(11) to encourage fair wages and safe and suitable working conditions in the railroad industry;

(12) to prohibit predatory pricing and practices, to avoid undue concentrations of market power, and to prohibit unlawful discrimination;

(13) to ensure the availability of accurate cost information in regulatory proceedings,

while minimizing the burden on the rail carriers of developing and maintaining the

capability of providing such information;

(14) to encourage and promote energy conservation; and

(15) to provide for the expeditious handling and resolution of all proceedings

required or permitted to be brought to this part.

 

PTS:   1                    DIF:    Medium         REF:   Pages 68-69

 

  1. Describe the key statements with respect to pipeline national transportation policy that were included in the Interstate Commerce Commission Termination Act of 1995 (Public Law 104-88):

 

ANS:

System that meets the transportation needs of the United States, including the national

defense, it is the policy of the United States Government to oversee the modes of

transportation and in overseeing these modes:

(1) to recognize and preserve the inherent advantage of each mode of transportation;

(2) to promote safe, adequate, economical, and efficient transportation;

(3) to encourage sound economic conditions in transportation; including sound

economic conditions among carriers;

(4) to encourage the establishment and maintenance of reasonable rates for

transportation without unreasonable discrimination or unfair or destructive

competitive practices;

(5) to cooperate with each State and the officials of each State on transportation

matters; and

(6)to encourage fair wages and working conditions in the transportation industry.

 

PTS:   1                    DIF:    Medium         REF:   Page 69

 

  1. What are the various forms of government benefit the domestic air carriers receive?

 

ANS:

The domestic air system receives the benefits of several government programs.  Foremost is the Federal Aviation Administration’s (FAA) air traffic control system.  This system provides navigation and safety for every aircraft in flight within the United States.  The system assesses no direct fee to the airlines for its use and captures its operating expenses from airlines and passengers through user charges.

 

Another direct airline benefit is the subsidy program.  These subsidies generally apply to short and medium non-jet flights to cities that are unable to support high traffic volumes.  The subsidy has been a significant support mechanism for regional airlines.  In recent years, the growth of commuter airlines has enabled regional airlines to discontinue service to small cities.  The Air Deregulation Act of 1978 accelerated this trend, which resulted in a lessened need for regional airline subsidies.

 

The U.S. Postal Service also provides substantial support to airlines.  The prime source of income for airlines during their early years came from this subsidy program.  In recent years, mail income has not been as significant, but this subsidy is a major revenue source for the industry.

 

State and local agencies help promote the airline industry through air terminal development and construction.  Terminals represent substantial capital investments and would be difficult for the industry to finance and construct.  State and local agencies are able to raise the necessary construction funds at reasonable municipal bond interest rates, often backed by the taxing power of the community.  The airlines then rent terminal and hangar facilities and pay landing fees for each flight.

 

Many aircraft safety matters are handled by the federal government.  The FAA provides aircraft construction and safety rules as well as pilot certification.  In another capacity, the National Transportation Safety Board  (NTSB) investigates accidents so that others might be avoided or reduced through aircraft specifications or flight procedures.

 

Another indirect form of promotion to the airline industry comes from the military.  Defense contracts for military aircraft development often provide direct benefits to commercial aviation in the form of mechanical or navigational aircraft improvements.  Without military-related research and development activity, advancements in this area would take place at a slower place and at a higher cost to the private sector.

 

A last form of airline promotion, which is not found in the U.S. system, is direct government ownership, operation, or subsidy of air service.  This is common with foreign airlines that serve the United States.  In these instances, African, Asian, Latin American, and many European airlines are subsidized so the countries can operate their airlines for purposes of national defense, have some degree of control over traffic to and from their nations, and gain balance of payment benefits and hard currencies through ticket revenues.

 

PTS:   1                    DIF:    Medium         REF:   Pages 77-78

Chapter 7: Airlines

 

MULTIPLE CHOICE

 

  1. Which event marked the beginning of the modern airline industry?
a. The Wrights’ first flight at Kitty Hawk in 1903
b. The U.S. Post Office’s examination in 1908 of the feasibility of air mail service
c. Lindbergh’s flight to Paris in 1927
d. The use of airplanes for mail transport

 

 

ANS:  D                    PTS:   1                    DIF:    Medium         REF:   Page 228

 

  1. Mountain Airlines has annual operating revenues of less than $75 million with hubs in Denver and Salt Lake City. This airline would be classified in which air carrier category?
a. major carrier
b. national carrier
c. local hub carrier
d. regional carrier

 

 

ANS:  D                    PTS:   1                    DIF:    Medium         REF:   Page 228

 

  1. Air carrier revenues are concentrated in which group of carriers?
a. all-cargo, exempt, commuters and private
b. commuters, charters, all-cargo
c. major, nationals, regionals
d. private, regulated, exempt

 

 

ANS:  C                    PTS:   1                    DIF:    Hard               REF:   Page 228

 

  1. Most airline revenues arise from:
a. freight shipments.
b. baggage shipments.
c. passenger travel.
d. aircraft leasing and support services to private aviation

 

 

ANS:  C                    PTS:   1                    DIF:    Medium         REF:   Page 228

 

  1. The Transportwriter.com corporation owns four corporate aircraft of various sizes which they use to transport executives to various company locations, and as well as documents and small freight between the company headquarters and its production facilities. What type of carrier is Transportwriter?
a. private
b. commuter
c. exempt
d. charter

 

 

ANS:  A                    PTS:   1                    DIF:    Medium         REF:   Page 228

 

  1. What is the percentage of revenue generated by the top 10 air carriers?
a. 75 percent
b. 82 percent
c. 91 percent
d. 96 percent

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Page 230

 

  1. Deregulation of the airlines, in 1978, led to expectations that the number of carriers would increase. What has been the actual result of deregulation regarding the number of carriers in the market?
a. The numbers of carriers did increase initially but has remained steady of late.
b. The numbers of carriers did initially increase and the numbers continue to grow.
c. The numbers of carriers initially decreased but increased by 1994.
d. The numbers of carriers initially decreased and have continued to decrease.

 

 

ANS:  A                    PTS:   1                    DIF:    Medium         REF:   Page 230

 

  1. Air carries face _____ competition from surface modes for either freight or passengers.
a. very strong
b. a limited amount
c. very little
d. almost no

 

 

ANS:  B                    PTS:   1                    DIF:    Hard               REF:   Page 231

 

  1. Air carries face _____ competition from other air carriers for either freight or passengers.
a. almost no
b. a limited amount
c. some
d. very intense

 

 

ANS:  D                    PTS:   1                    DIF:    Medium         REF:   Page 232

 

  1. Which is the best reason for the increase in airline intramodal competition since deregulation in 1978?
a. substitution of smaller aircraft for larger aircraft
b. U.S. carriers forming alliances with foreign airlines such as United with Air Canada
c. increased use of discount fares in lieu of full fares
d. new air carriers entering given markets

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               REF:   Page 231

 

  1. What is the primary method of service competition between air carriers?
a. frequency and timing
b. in flight cabin service and added amenities.
c. serving new cities to force more competition
d. advertising

 

 

ANS:  A                    PTS:   1                    DIF:    Medium         REF:   Page 232

 

  1. Which of the following commodities would be most likely to be shipped on an air carrier?
a. commodities in high volume
b. low-value finished goods
c. raw materials and partially-finished goods
d. high-value and time-sensitive goods

 

 

ANS:  D                    PTS:   1                    DIF:    Medium         REF:   Page 233

 

  1. The traffic manager for WLG, Inc is evaluating transportation modes for shipment of the company’s products. WLG’s components division produces electronic assemblies according to buyer’s specifications. The typical product is high-value–in the range of $30,000 to $50,000, small–less than 8 inches square, very fragile, insurance costs are $1750 per day for each item, and the shipment distance is 2,500 miles. Which mode of transportation would be most appropriate?
a. Amtrak
b. air
c. freight forwarder
d. Time guaranteed delivery truck

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Page 233

 

  1. Air freight transportation is attractive to shippers because of the lower packaging costs associated with the transport of cargo. Which air transportation characteristics allow reduced packaging by shippers?
a. relatively smooth ride and automated ground handling systems
b. higher liability assumed by the air carriers and prompt payment of claims
c. quick acknowledgment of liability by the air carriers and prompt payment of claims
d. strict safety regulation by the FAA and higher liability limits required by the STB

 

 

ANS:  A                    PTS:   1                    DIF:    Hard               REF:   Page 234

 

  1. Which is the best reason for the relatively low proportion of fixed costs in the cost structure of the air carriers?
a. private investment in the airways and airports
b. the small number of aircraft that are actually owned by the airlines versus those that are leased for varying periods of time
c. public investment in the airway and airport
d. the proportion of energy and labor costs in the cost structure

 

 

ANS:  C                    PTS:   1                    DIF:    Medium         REF:   Page 239

 

  1. Which cost element of the U.S. scheduled airlines accounts for the largest portion of operating costs?
a. flying operations
b. maintenance
c. administration
d. labor

 

 

ANS:  D                    PTS:   1                    DIF:    Medium         REF:   Page 240

 

  1. Which government agency specifies acceptable flight operations and the hours of service for pilots?
a. FAA
b. STB
c. DOT
d. FMCSA

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               REF:   Page 241

 

  1. Why do business people pay more for airline travel?
a. The expense of the travel is paid for by their company and the business traveler demands more services than the leisure traveler.
b. They usually arrive and depart during low-demand periods.
c. They have to keep more rigid schedules.
d. Their travel expense is tax deductible and they can afford higher fares to offset the lower fares charges to leisure travelers.

 

 

ANS:  C                    PTS:   1                    DIF:    Hard               REF:   Page 244

 

  1. What does the operating ratio measure?
a. number of seats sold divided by miles operated
b. operating expense divided by operating income
c. stock share price divided by the total number of shares outstanding
d. number of airplanes in the fleet divided by miles flown by type

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Page 244

 

  1. What major factor is the main determinant in air cargo pricing?
a. discounts from full price levels as is done with motor carriers
b. weight
c. empty space on the aircraft
d. direction of travel of the shipment

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Page 244

 

  1. Shippers using air cargo transport may have to pay an over-dimensional charge. The charge is assessed by the carrier to gain a more appropriate revenue in which situation?
a. when the cargo shipped does not weigh much but takes up a lot of space.
b. when the cargo is of a gaseous nature rather than a solid.
c. when the cargo is a solid rather than a gas.
d. when the shipment takes up all the available cargo space in the aircraft and matches the allowable load weight for the aircraft.

 

 

ANS:  A                    PTS:   1                    DIF:    Medium         REF:   Page 244

 

  1. The airlines utilize technology to offer faster and more efficient service for their customers. One application of technology, developed by the airlines, is a paperless system called the Fast Flow Program. What is the Fast Flow Program designed to do?
a. speed aircraft takeoff and departures from congested airports
b. speed the processing of international passengers into the United States
c. speed the processing of air freight cargo through customs processing
d. speed the handling of passenger baggage

 

 

ANS:  C                    PTS:   1                    DIF:    Medium         REF:   Page 248

 

  1. How much did the U.S. airlines spend on fuel in 2007?
a. $60B
b. $42B
c. $50M
d. $60M

 

 

ANS:  B                    PTS:   1                    DIF:    Hard               REF:   Page 227

 

  1. How many people were employed in the air carrier industry in 2007?
a. 100,000
b. 500,997
c. 560,997
d. over 1,000,000

 

 

ANS:  C                    PTS:   1                    DIF:    Medium         REF:   Page 228

 

  1. Based upon the number of passengers who was the Top Airline in 2007?
a. American
b. Delta
c. Southwest
d. jetBlue

 

 

ANS:  C                    PTS:   1                    DIF:    Medium         REF:   Page 231

 

  1. Which air carrier had the highest operating revenue in 2007?
a. American
b. FedEx
c. UPS Airline
d. Alaska

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Page 231

 

  1. Which aircraft has the highest cargo payload in terms of tons?
a. B747-300
b. B747-F
c. MD-11
d. L1011

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Page 235

 

  1. Which aircraft has the highest operating cost in terms of $ per hour?
a. B747-200
b. DC-8
c. B727-100
d. L1011

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               REF:   Page 235

 

  1. If aviation fuel is at $2.60 a gallon, what is the price of fuel consumed per hour on a B747?
a. $2,000
b. $6,822
c. $7,163
d. $8,869

 

 

ANS:  D                    PTS:   1                    DIF:    Hard               REF:   Page 235

 

  1. Which airline pays a 10 year captains the most?
a. Delta
b. United
c. Southwest
d. Amerijet

 

 

ANS:  C                    PTS:   1                    DIF:    Medium         REF:   Page 241

 

SHORT ANSWER

 

  1. Technically, what is a commuter airline?

 

ANS:

It is a regional carrier.

 

PTS:   1                    DIF:    Hard              REF:   Page 228

 

  1. What is a no frills carrier is known for?

 

ANS:

Low fares and limited snacks and drinks.

 

PTS:   1                    DIF:    Medium         REF:   Page 232

 

  1. What is the primary advantage of air transportation?

 

ANS:

The primary advantage is speed.

 

PTS:   1                    DIF:    Easy               REF:   Page 234

 

  1. What are three functions performed at air terminals?

 

ANS:

Load and unload passengers, aircraft service and cargo handling.

 

PTS:   1                    DIF:    Medium         REF:   Page 237

 

  1. What is airline pricing characterized by?

 

ANS:

Discounts from full fare.

 

PTS:   1                    DIF:    Medium         REF:   Page 244

 

  1. Give an example of emergency value.

 

ANS:

A part worth $20 that will prevent a $200,000 delay if it arrives on time.

 

PTS:   1                    DIF:    Medium         REF:   Page 233

 

  1. What was the passenger fatality rate for autos versus airlines in 2006?

 

ANS:

Autos 0.67 per 1 million passenger miles, and air 0.01 per 1 million passenger miles.

 

PTS:   1                    DIF:    Medium         REF:   Page 246

 

ESSAY

 

  1. Explain the early development of air transportation in the United States.

 

ANS:

U.S. aviation began with the flight of the Wright brothers in 1903 at Kitty Hawk. In 1908 the federal government began studying the feasibility of air mail service. During that period the Government began to contract for mail capacity, this gave rise to commercial transportation companies.  The modern airline industry was born with the transport, in the early 1920’s and 1930’s, of mail and passengers with airplanes. Speed is the greatest asset of air transportation and the prime reason for the growth and development of the industry.

 

PTS:   1                    DIF:    Medium         REF:   Pages 227-228

 

  1. Distinguish between private air carriers and for-hire air carriers.

 

ANS:

Private air carrier is air transportation owned by a company for transportation of its own personnel or freight in aircraft that the company owns or leases. Most private air is used to transport company personnel.

 

For-hire carriers provide air transport services to customers for a fee. For hire carriers can be separated into two categories-according to type of service offered (all-cargo, air taxi, commuter, charter, and international) and annual revenue (majors, nationals, regionals).

 

PTS:   1                    DIF:    Medium         REF:   Page 228

 

  1. What are the revenue classifications of the U.S. based for-hire air carriers? Define, describe and discuss with examples.

 

ANS:

Air carriers categorized according to annual operating revenues.  The classifications are Majors, Nationals, and Regionals.

 

Major air carriers have annual revenues of more than $1 billion and provide service between major population centers in the U.S. Examples include American, United, Southwest and Delta.

 

National air carriers have revenues of $100 million to $1 billion and provide service between less populated areas and major population centers. Examples include Midwest, Sun Country and PSA.

 

Regional air carriers have annual revenues of less than $100 million, provide service within a particular region of the country, and connect lesser populated areas with larger population centers. Examples include Air Midwest, Big Sky, and Piedmont.

 

The all-cargo carrier, as the name implies, transports cargo. In some cases, the commuter line is owned by one of the large carriers. Examples include UPS, and FedEx.

 

The commuter carriers serves second tier markets and connects with the major air carriers. An example is US Airways Express.

 

Charter carriers cater to both passenger and freight but normally do not operate on a specified schedule except as required by the firm chartering the airplane.

 

PTS:   1                    DIF:    Medium         REF:   Page 228

 

  1. Each of the modes of transportation have a market niche in terms of the commodity transported by the mode. Describe the characteristics of the commodities transported by air carriers.

 

ANS:

Air transportation is suitable for commodities that are perishable, required on short notice, valuable relative to weight, and expensive to handle or store. Also, commodities that are at risk for pilferage, breakage, or deterioration, have high insurance costs for long in-transit periods, and require special handling are sent by air.

 

PTS:   1                    DIF:    Medium         REF:   Page 228

 

  1. What is the major advantage of air freight? How does this relate to logistics principals discussed earlier?

 

ANS:

The major advantage of air freight is speed and the value that speed provides and individual or a company.

 

For example, in comparison to a manufacturing shut down, the cost of air transportation is often inconsequential. An urgently needed part for  assembly line might have a $20 value, but if the air-freighted part arrives on time to prevent the assembly line from stopping, the “opportunity” value of the part might become hundreds of thousands of dollars. Thus, the $20 part might have an emergency value of $200,000, and the air freight cost is a small portion of this emergency value.

 

Examples of commodities that move via air carriers include mail, clothing, communication products and parts, photography equipment, mushrooms, fresh flowers, industrial machines, high-priced livestock, race horses, expensive automobiles, and jewelry. Normally basic raw materials such as coal, lumber, iron ore, or steel are not moved by air carriage. The high value of these products provides a cost-savings trade-off, usually but not always from inventory, that offsets the higher cost of air service. The old adage “Time is money” is quite appropriate here.

 

PTS:   1                    DIF:    Medium         REF:   Page 233

 

  1. Define and discuss the length of haul and capacity of air carriers. How does this relate to intermodal competition?

 

ANS:

Air carriers are long haul freight transporters. The average length of haul is currently about 1,400 miles. The average length of haul for passenger travel is about 1,000 miles, far greater than either bus or rail.

 

Recent developments have seen aircraft of greater capacity being added to some lanes with the larger airplanes 375 persons or 90-100 tons of freight. Airlines are trying to do a better job of sizing aircraft to routes to trim cost.

 

Air freight shipments tend to be small, less than 500 pounds and less packaging may be required that for shipments moving via surface carriers.

 

Air carriers are reasonably reliable except when weather conditions interfere. However, accessibility may be a problem for some users, given the distance to a major airport. However, the overall speed of air travel may offset that to some extent. In the short haul market, up to 500 miles trucks compete effectively on an overnight door-to-door basis.

 

PTS:   1                    DIF:    Hard              REF:   Page 234

 

  1. What is the situation as it relates to financing and operation of air terminals or airports? How does this relate to other carriers?

 

ANS:

The air carriers’ terminals (airports) are financed by a government entity. The carriers pay for the use of the airport through landing fees, rent and lease payments for space, taxes on fuel, and aircraft registration taxes. In addition, users pay a tax on airline tickets and air freight charges. Terminal charges are becoming increasingly more commonplace for passenger traffic. Table 5.4 summarizes the various types of taxes paid by carriers, shippers, and passengers in the airline industry.

 

The growth and development of air transportation is dependent upon adequate airport facilities. Therefore, to ensure the viability of air transportation, the federal government has the responsibility of financially assisting the states in the construction of airport facilities. The various state and local governments assume the responsibility for operating and maintaining the airports.

 

PTS:   1                    DIF:    Medium         REF:   Page 237

 

  1. Explain the cost structure of the air carriers.

 

ANS:

The cost structure consists of a high proportion of variable costs relative to fixed costs. The variable costs are about 80 percent of total operating costs, while 20 percent are fixed. The fixed costs are low because of the public investment in airports and airways. The major items of airline operating expenses are labor and fuel. Labor costs amount to 35 percent and fuel about 30 percent of operating expenses. Maintenance and other costs consume the rest of the operating expenses.

 

PTS:   1                    DIF:    Medium         REF:   Page 239

 

  1. What is the situation as related to airline labor? Be sure to include required skill levels, wages and the impact of unions.

 

ANS:

Air transportation employs many people with a high skill levels such as aircrew and ground crew personnel, and management. Some positions such as pilots and mechanics require high skill levels and federal licensing. Other positions require less skill and are on par with employees in other modes.

 

The FAA controls the nature of flight operations and hours of service for pilots. Mechanics and pilots must pass examinations regarding safety and operations and be licensed. Federal licensing in the airline industry is similar to that required by railroad engineers and truck drivers. These employee’s hours of service are also regulated by the government.

 

Pilot wages depend upon the plane rating of the pilot. Wages also differ between unionized and non-unionized airlines, where unionized employees will often earn more than nonunion.

 

PTS:   1                    DIF:    Medium         REF:   Page 240

 

  1. There are two ratios which are used to measure airline performance. One measures efficiency while the other measures equipment utilization. Define both, describe how they are computed and what factors they measure.

 

ANS:

An important measure of operating efficiency used by air carriers is the operating ratio. The operating ratio measures the portion of operating income that goes to operating expenses:

 

Operating Ratio = (Operating Expense/Operating Income) x 100

 

Only income and expenses generated from passenger and freight transportation are considered. Like the motor carrier industry, the air carrier industry’s operating ratio was in the low to mid-90s, between 1994 and 2000, ranging from 96.9 in 1994 to 94.7 in 2000. However, the operating ratio for the industry in 2002 was 108.8.19 The overall profit margin is small, and a loss is incurred when the operating ratio exceeds 100.

 

Another widely used measure of operating efficiency is the load factor (previously discussed). The load factor measures the percentage of a plane’s capacity that is utilized.

 

Load Factor = (Number of Passengers/Total Number of Seats) x 100

 

Airlines have raised plane load factors to the 65-70-percent range. The particular route and type of plane (capacity) directly affect the load factor, as does price, service level, and competition.

 

PTS:   1                    DIF:    Medium         REF:   Pages 244-245

 

  1. Discuss the current issues facing the airline industry.

 

ANS:

Safety is a primary goal of aviation. While air is the safest mode of transportation (auto is the most unsafe) there is still a great deal of anxiety by the public with respect to aviation safety.

Any incident involving airplanes receives a great deal of publicity from the media because of the large number of people affected at one time. While there were more than 38,000 auto accident fatalities in 2008, and there no fatalities on scheduled airline in 2008, accidents involving motor vehicles affect only a few people in each incident and tend to garner much less media attention.

 

Several factors affect airline safety. First, airport security has come under close scrutiny over the past several years. As a result of September 11, 2001, airport security has reached an all-time high, causing more delays at airport terminals. The U.S. Government created the Office of Homeland Security to be the agency that monitors and manages the security of the U.S. borders.

 

As with other transportation modes, the issue of substance abuse concerning pilots and ground crews has become important. Strict drug-testing policies and alcohol consumption guidelines are in effect for pilots and other aircraft personnel. In spite of these concerns, airline travel is still a very safe form of transportation; however, these issues are currently being addressed by the airlines to ensure that airline transportation remains safe.

 

Technology is another major item as the airline industry must offer quick and efficient service to attract business; it constantly needs more sophisticated equipment. An example of such technology efficiency is the Air Cargo Fast Flow Program, which was designed by the Port Authority of New York/New Jersey. The Fast Flow Program is a paperless system that speeds the processing of air freight cargo through customs processing, and provides better tracking of shipments and better communication between connecting carriers. These improvements will allow customers to receive their inbound shipments faster than ever before.

 

PTS:   1                    DIF:    Medium         REF:   Pages 245-248

 

  1. Describe the nature of service competition in the airlines.

 

ANS:

Primary service competition is on frequency and timing of flights.  The premium flight departures are early morning (7AM to 10AM) and late afternoon (4PM to 6PM).  The demand difference for flights taking off 3 hours later between the same city pairs is significant.

 

The airlines also compete through attempts to differentiate their service through advertising of amenities (e.g., on time arrival, friendliness, live satellite television, and frequent flyer programs).

 

Some airlines are competing through no-frills service (e.g., Southwest).  They charge lower fares but there is also a lower level of service with respect to items like snacks and drinks.  Additionally no frills typically has only one class of service.

 

PTS:   1                    DIF:    Medium         REF:   Page 232

 

  1. Describe Economies of Scale in airline operations.

 

ANS:

Airline economies of scale result from extensive use of large-sized planes.Market conditions (sufficient demand) must exist to permit the efficient utilization of larger planes (i.e., if the planes are flown near capacity, the seat-mile costs will obviously decrease).

 

Unlike other industries, the airline can not “inventory” an unused seat. If the plane takes off with the empty seats, the seats are “lost” for that flight because the airline cannot inventory the excess capacity for another flight that might be overbooked.

 

The marginal cost of filling those 10 empty seats right before the doors on the aircraft are closed are negligible. Another factor indicating large-scale operations for air carriers is the integrated communication network required for activities such as operating controls and passenger reservations.

 

PTS:   1                    DIF:    Medium         REF:   Page 242

 

  1. Describe the factors that effect price in the airline industry.

 

ANS:

Ticket restrictions: Staying over a weekend or advanced purchase.

 

Business travel:  Business people generally pay more due to rigid schedules and they depart and return during high demand times.

 

Impact of competition from other airlines.

 

Time and day of departure and return.

 

Level of service (coach versus first class).

 

PTS:   1                    DIF:    Medium         REF:   Page 244

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