Modes of transportation

Introduction

Tourists travel by a variety of means. This chapter will explore the characteristics of the various modes of transportation and focus on two areas of particular importance: regulation and the marketing of transportation.

Air travel

Size and importance. The airlines of the world carry over 900 million passengers a year. This represents a passenger load factor, the relationship between seats occupied and seats available, of 66 per cent. That is, on average, passenger planes were two-thirds full. The US scheduled airlines carry over 40 per cent of total world passengers. Europe, on the other hand, accounts for 70 per cent of the world's charter traffic. This is because of the well-developed package holiday business in Europe. Overall the percentage of kilometers flown on charters worldwide has been declining steadily and now represents just over 3 per cent of total passenger kilometers flown. It is forecasted that air traffic will grow at an annual rate of over 6 per cent in Europe and in the United States and 8 to 10 per cent in Asia and the Pacific.

The largest IATAN-member (International Air Traffic Association) airlines in terms of revenue passenger kilometers (number of passengers times number of kilometers flown) in 1986 were:

In the United States over 70 per cent of adult Americans have flown at least once in their lives. In any one year about one-third of American adults take an airline trip, just over half being for pleasure.

Ownership. More and more government-owned airlines (British Airways, Japan Air Lines, KLM (Royal Dutch Airlines), and Singapore Airlines, for example) are being offered for sale to the public. However, most foreign airlines are totally or partially owned by the government. In the United States, airlines are privately owned, and airline management is responsible to a board of directors to produce a return on investment. Airlines must operate accordingly in the prices they charge and the services they provide as they compete with each other, with foreign (often subsidized) airlines, and with other modes of transportation.

In the United States, eight major carriers account for approximately 90 per cent of revenue passenger miles. Texas Air, which took over Eastern Airlines, Continental, People Express, Frontier and New York Air, has 21 per cent of the market; United has about 16 per cent, and American has 13 per cent.

Support. The airways are federally owned. The federal government has also been actively involved in several areas that have encouraged development of the air transportation system. The government has been involved in the research and development of new aircraft, has helped provide terminals, has, through the payment of subsidies, helped defray some of the carriers' operating costs, and has taken a role in the training of personnel.

Market characteristics

Since 1981, US airlines have been classified on the basis of annual revenues. Majors are those with annual operating revenues of more than USD 1 billion; nationals have between USD 75 million and USD 1 billion a year; large regional is the term for companies that have annual operating revenues of between USD 10 million and USD

75 million; medium regionals are those with less than USD 10 million in annual operating revenues. However, the industry still commonly thinks of airlines on the basis of whether they are scheduled air carriers or charter air carriers. We will discuss these differences next.

Scheduled air carriers. In the US, scheduled air carriers are given a Certificate of Convenience and Necessity by the Civil Aeronautics Board (CAB) to provide service between various points on a regularly scheduled basis. They fall into one of several types. Domestic trunk lines operate the long-haul routes and serve large metropolitan areas and medium-sized cities. American, United, Eastern, TWA, Continental and Western are thought of as falling into this category.

International airlines are those that operate between the United States and foreign countries in addition to those that operate over international waters and US territories. While many airlines operate overseas, those regarded as international are Pan American, Northwest and TWA.

Aloha, Hawaiian, Alaska, and Wien Air Alaska are airlines operating primarily within the US states Alaska and Hawaii.

Domestic regional or local airlines connect smaller cities with regional centers. The system is known as the "hub and spoke". Trunk airlines designate certain cities as "hub" cities for them. Regional airlines form the spokes to transport passengers to regional centers where they are fed into the trunk airlines. With the advent of deregulation many regional carriers have expanded to provide service to local communities and even to fly overseas. Republic and US Air, for example, offer international flights.

Charter air carriers. Charter or supplemental airlines offer nonscheduled flights. They were originally started to provide lower air fares to people traveling as a group. As noted earlier, charters are more important in Europe than in North America. Within Europe, charter air services account for 60 per cent of all air travel.

A variety of complex regulations developed in the United States to ensure that the flight was a bona fide charter. In the deregulation of 1978 most of the categories were abolished and replaced with the term "public charter".

A public charter is characterized as follows: There is no requirement to purchase a ticket in advance; there is no minimum stay requirement; no restrictions are placed on discount pricing; there is no minimum group size, and travelers are allowed to buy one-way charters. Two additional classification were kept. Affinity charters are for members of organizations with a common purpose, such as social, professional or religious groups. Single-entity charters occur when a person, company or organization hires an aircraft for a specific trip. Scheduled airlines may also offer charters.

Ever since deregulation, the charter share of the market has declined. Much of the reason is that, as competition intensified, ticket prices dropped. Because charters arose to provide lower prices, as regular air fares dropped, charters lost their reason for being. It is estimated, for example, that about 86 per cent of revenue passenger miles are on discount fares with the average discount over 55 per cent of the posted fare.

Charter airlines must be certificated by the CAB and meet US Federal Aviation Administration (FAA) standards.

Other carriers. There are a variety of other carriers. Cargo air carriers carry freight rather than passengers. Commuter airlines operate small aircraft on a scheduled basis. They must meet FAA regulations but are non- certificated. Air taxi airlines operate only on a charter, contract or demand basis. In the US helicopters have been used successfully to provide transfers between Kennedy International Airport in Queens and downtown Manhattan.

The future. The future of air transportation is dependent upon several factors. Designers are considering the development of hypersonic aircraft capable of traveling at up to 6,437 kilometers an hour. This would mean that a flight from New York to London would take 2 hours; a flight from Los Angeles to Tokyo, 2 hours 18 minutes. At present the supersonic planes (SSTs) operated by Air France and British Airways travel between New York and

Europe in just over 3 hours. The airlines have found the SSTs uneconomical, however. If manufacturers can come up with a hypersonic plane that can be operated economically it will undoubtedly stimulate international long-haul travel.

Air transportation is heavily dependent on the price and availability of petroleum. Most experts expect oil prices to remain reasonable in the short-run. At any time, however, problems could occur because of the volatility of the world situation.

Deregulation, covered in detail later, has spawned more competition and fare wars. A shakeout phase ended in

1986, and the industry has moved into a period of consolidation. While price wars still occur in certain very competitive markets, it is expected that a period of stability will ensue.

Tourism is becoming more international in scope. As more attractions and facilities are developed there will be more attempts to lure the international traveler. Air transportation will benefit.

A final caution has to be given because of the safety and convenience factors. Deregulation has also brought more flights and carriers into the air. Concern has been expressed about the crowded skies. While flying is still the safest way to travel, more and more people are concerned about the safety of the skies. Terrorist bombings have caused great concern among airline passengers. There is also the inconvenience of crowded airports. In some cases the time spent on the ground from plane to downtown is greater than the time spent in the air.

Rail travel

Size and importance. Travel by railroad steadily declined in the United States after World War II. This was due to several factors: construction of the interstate highway system; growth of the airline industry; the heavy fixed costs involved in developing and maintaining railroad equipment; disputes over the role of the private and public sectors in the railroad business; rising costs of operation because of union practices; a desire on the part of the public to travel faster in order to spend more time at the destination.

People often look to Europe and Japan and wonder why the United States cannot have a similar rail system. The population is more concentrated, distances shorter, and personal mobility less important than in the United States. In addition, the railroads are often heavily subsidized. A major problem as far as speed is concerned is the poor quality of the roadbed and rails. In the United States, heavy freight usage has slowed the speed of passenger trains using the same rails. Trains are available to travel faster; however, the roadbed cannot support faster trains.

Support. Railroad development was aided by massive government grants, primarily in the form of land, in the late nineteenth century. In return, railroads agreed to haul government passengers and freight at reduced rates. This reimbursement did not end until 1945. While public assistance of the railroads was justified on the basis of carrying passengers (settling the American West, drawing the nation together) railroads preferred to carry freight and often actively tried to dissuade passenger travel. Nevertheless, the system of rails in the United States is in great part the result of a desire to provide passenger transportation.

Market characteristics

Amtrak. In 1981, Amtrak was formed to assume operation of all inter-city rail passenger service except for that of three railroads: The Southern Railway, Denver and Rio Grande Western, and the Rock Island and Pacific lines. These three, however, provide connections with Amtrak. Amtrak itself was organized by the US government as a quasi-public corporation with the intent of cutting down on the number of routes and points served and upgrading the remainder of the system.

Service is provided to 525 communities covering 24,000 route miles in 44 states. Amtrak carries over 20 million passengers a year traveling over 5 billion passenger miles. Significant government subsidy is needed as revenue pays only 60 per cent of the costs of operation.

International revenue from foreign visitors has been steadily increasing while the Florida Auto Train, which allows people from the Northeast to take their autos with them for a Florida vacation, has seen a large percentage increase in ridership.

The Official Railway Guide (ORG) lists fares, schedules and routes. Amtrak offers the coach or basic fare with additional charges for such things as a bedroom, slumber room or a drawing room; special fares for groups, families, travel agents, and the military, among others; and the USA Rail Pass, which gives unlimited train travel for a specified period of time.

In addition to carrying passengers, Amtrak has sold the right to lay fiber optic cables along the Northeast corridor to long-distance telephone companies. The line has also rescheduled east and westbound trains out of Chicago to compete with the trucking industry to carry second-class mail.

Charter train tours. It is possible for members of a group to charter a train. Tours include meals, bus excursions, accommodations and the services of guides. Activities are also planned on board the train. Private operators operate tours to various places in the United States.

The future. As the cost of owning and operating a car increases and the time required to go from downtown to downtown by plane expands, travel by train may be a viable alternative. It is likely, however, that rail transportation will play a relatively small part in pleasure travel.

Because of the subsidies given to Amtrak, other carriers, particularly the bus lines, have complained vigorously. Subsidies will probably continue to support what has been called "the world's largest train set".

Sea travel

Size and importance. There are about 130 cruise ships worldwide with a capacity of over 137,000 passengers and 57,700 cabins. About 80 ships serve the North American market. The Soviet Union operates 36 cruise ships in international waters. Although their rates are 20 per cent below most Western ships, Soviet ships are banned from US ports.

Over 2 million people a year take a cruise. Residents of the United States are the principal market segment, accounting for approximately 75 per cent of all cruise passengers. West Germany, the United Kingdom and Australia account for the majority of remaining passengers. Yet the surface has hardly been scratched. In the United States only one person in 20 has taken a cruise. California provides almost 20 per cent of these passengers, followed closely by Florida. Substantial numbers of passengers also come from New York, Illinois, Pennsylvania and Texas.

Support. Transportation by sea was the first major means of human travel. Countries with seacoasts were the explorers of the world. In the United States, waterways, harbors, and seaways have historically been owned and operated by the federal government. Federal involvement has continued with the building of canals, improvement of rivers and harbors, and the provision of navigational aids.

Market characteristics

The late 1960s marked the end of regularly scheduled travel by ships between two points. Cunard's QE2 is the only regularly scheduled passenger liner crossing the Atlantic today. Most all travel by sea today is in the form of a cruise.

Cruise ships. Cruises are sold on some combination of cost of the cruise, amount of time the cruise lasts and the ports of call visited. The shape of the cruise business has changed over recent years. Cruises have become shorter, appealing to those who have the money but not the time to travel.

Three- and four-day cruises are a growing segment of the market. The most favored destinations are cruises to the Caribbean from Florida and Puerto Rico. One item that resulted in a number of lines moving from the Mediterranean to the Caribbean was the hijacking of the Achille Lauro by terrorists in 1985. There is also a strong summer demand for cruises from the West Coast to Alaska.

The profile of the "typical" passenger is also changing. Passengers are getting younger. For US passengers there is an equal proportion, about 37 per cent, of people in the 15 to 34 age group and in the 55-and-over age group. For British passengers the respective figures are 40 and 34 per cent. About 60 per cent of cruise ship passengers are female, almost two-thirds of all passengers are married, and about one-quarter are single. The remainder are separated, widowed or divorced. The average income is high. Over 50 per cent of US passengers have an annual income of over USD 25,000.

The major ports for US ships are, in descending order, Miami, New York City, San Juan, Port Everglades, Los Angeles, San Francisco and New Orleans.

Because of oversupply (or, as some prefer, underdemand) cruise lines have developed aggressive marketing strategies. Large price discounts were offered to passengers, and commissions far above normal were made available to travel agents, through whom most cruises are sold. On board as many as three different prices are charged, depending on the location of the cabin. Theme cruises with special celebrities are popular. Cruise lines have also teamed up with airlines to offer fly/cruise packages. In some cases the flight to the cruise port is "free" with purchase of the package. Stopover privileges have proved to be a successful sales strategy. Passengers can visit particular destinations either before or after the cruise. They may cruise some ports, stay a while, and fly back on a combination air/cruise/land package.

Freighter/cargo liner. A freighter or cargo liner is a vessel that operates primarily for carrying goods. However, these ships are licensed to carry up to 12 passengers on board. Passengers bring added income while adding little to the operating costs. The cabins may be equivalent to first class on a cruise ship while the cost to the passenger is much lower.

The "price" the passenger pays is that there is no medical service or entertainment on board. Moreover, schedules are dependent on the freight carried. Itineraries can be changed because of delays in loading or unloading of the freight. It has also been the case that, en route to one destination, the goods on board were sold and the destination changed! For some daring people this might be an attraction!

Charter yacht/sailing excursions. Some yacht owners charter their boats to help defray the high costs of ownership. A popular system in the Mediterranean and Caribbean is for people to buy yachts as an investment. A company controls a fleet of yachts, each individually owned. The company markets and maintains the yachts and shares the income generated with the yacht owners.

Riverboats. Riverboat travel is popular in Europe and, in North America, on such places as the Saint Lawrence Seaway and the Mississippi River. Boats may offer staterooms, restaurants, and entertainment.

Houseboat vacations are becoming more popular. They are rented by the week on various rivers and large lakes.

The future. Annual growth of 12 to 15 per cent is expected in the cruise industry. That growth will occur only if passengers will pay the rates necessitated by the high costs of construction and operation, which are steadily increasing. The QE2 was built in 1969 at a cost of USD 94 million; to replace her today would cost over USD 300 million. The average age of the cruise fleet is over 20 years, and many replacements will be needed soon. Some lines are looking at modular ships capable of carrying 1,000 passengers. The hull would be built and an engine installed.

The stateroom would be pre-constructed and fastened into the hull in one piece. All staterooms would be the same size. As present, staterooms are built to fit the particular curvature of the ship, and first-class accommodations outsell the less expensive cabins. Can an all-first-class ship be built for which people will pay?

The cost of operating a ship is high. The principal costs are fuel and labor. A partial solution to the cost of fuel is to build longer ships. Long ships operate more efficiently than do shorter ones. Some lines have taken an existing ship, cut it in half, and added a new body section. This can result in the addition of up to 40 per cent more space at a cost one-third less than the construction cost of a new vessel.

Road travel

Size and Importance. Most travel in the world, domestic and international, is by the family car. In the United States over 80 per cent of all intercity travel is by automobile. Over the years the growth of international traveler arrivals has paralleled, but at a slightly higher rate, the growth of passenger car registrations. For example, between

1960 and 1973 international traveler arrivals worldwide increased at an average of 7.8 per cent a year while car registrations worldwide increased an average of 7 per cent per annum; from 1974 to 1984 the respective figures were 4.8 per cent and 4 per cent.

In fact, a useful method of forecasting international tourism is to project the growth of passenger car registrations.

Support. Highways, streets and bike paths are man-made and publicly owned. For pleasure travel the biggest boom has been the building of the interstate highway system. Properly titled the "National System of Interstate and Defense Highways", this network of roads has made much of the country more accessible to Americans. Typically, the federal government provides a portion of the funds to build and maintain the roads while state government owns, operates and actually maintains the highways. User fees on such items as tires, gasoline and vehicle-use pay much of the costs of building and maintaining the interstate system.

Market characteristics

Private cars. There are over 130 million private autos in the United States and over 145 million in Europe (both East and West). Domestic tourism in the United States is heavily dependent upon the desire of Americans to travel by auto. If the cost of owning and operating a car becomes prohibitive, tourism will suffer. There is no sign of that happening in the immediate future, but the one event that could dramatically change the situation is a shortage of gasoline, as occurred twice during the 1970s.

Recreational vehicles. A recreational vehicle (RV) is one that has wheels and living quarters. There are over 8 million RVs in the United States used by over 25 million people. Owners spend an average of 23 days a year in their vehicles, traveling an average of 5,900 miles. A number of dealers rent recreational vehicles.

Car rentals. Car rental companies operate over 700,000 cars in the United States. The major companies are Hertz, Avis, National and Budget. American companies produce USD 4 billion a year in revenues in the United States, another USD 1 billion in foreign markets.

About 70 per cent of car-rental customers rent at airports. The increase in air travel brought about by deregulation has helped stimulate the car-rental business.

Most customers are business travelers. Business customers are primarily concerned with how reliable the firm is and how convenient it is to rent the car. Most business occurs Monday through Friday. Because the industry operates on small profit margins, auto-rental firms have gone after the pleasure traveler, especially the weekend traveler. This makes use of cars that would otherwise stand idle over the weekend. Pleasure travelers also rent the cars for a longer period. This reduces the costs involved in selling and servicing the vehicles. Because pleasure travelers put more miles on the car than do business travelers, companies are putting caps on their free mileage programs.

This means that car mileage is reduced and the resale value of the car is increased.

There is room for creative marketing in the car-rental business. Less than 10 per cent of the United States population has ever rented a car. Companies have teamed up with other sectors of the travel business to offer fly/drive and train/auto packages both domestically and internationally.

Motor coach. The motor coach industry was deregulated in 1982. The immediate effect was to double the number of bus service companies from 1,500 to 3,000. Because of an increase in insurance rates ranging from USD 2,500 to USD 15,000 per vehicle, many of the smaller motor coach companies ceased to operate. The major companies in the business are Greyhound Lines and Continental Trailways. Bus companies serve 14,600 communities, including 9,000 localities not served by any other public mode of transportation.

Lower-income groups, the young, the elderly, and minorities tend to use regularly scheduled bus transportation more than most.

Charters and tours. Slightly less than one-third of the motor coach industry's revenue comes from charters and tours. Business growth has been slow but steady.

Most business is either a city package tour, an independent package tour, or an escorted tour. A city package tour includes accommodation and sightseeing in one city or its immediate area. An independent package tour consists of travel to a variety of places and includes accommodations and sightseeing. An escorted tour is scheduled during specific times of the year. Lasting from 5 to 30 days, this type of tour includes the services of an escort.

Ground transportation. Ground transportation is the term reserved for buses and limousines used for sightseeing at a destination and for carrying travelers between airports and hotels. In the United States, Gray Line and American Sightseeing International offer regularly scheduled sightseeing tours of most major cities. Other companies contract their buses for local services to a tour operator as part of a tour. Many hotels close to airports offer complimentary transfers between airport and hotel.

Regulation

The past decade has seen sweeping changes in the regulation of the American transportation system. In order to understand the present environment it is necessary to review the past.

Goals of regulation

As the airline industry developed in the 1930s there was concern that unbridled growth could have negative consequences for industry and passengers alike. From this concern there developed a desire to control the growth of the airline industry through a variety of regulations.

The goals of regulation were twofold: to protect the public and to promote the best possible system of transportation. Because these goals can be contradictory, the result was a system that did neither one completely.

Types of regulation

There were two types of regulations: economic and physical. The Civil Aeronautics Board or CAB was formed in 1938. The board consists of five members who are independent of the executive branch but appointed by the US President with the consent of Congress. The CAB was primarily responsible for the economic aspects of regulation at the federal level.

Economic. Economically, control was exerted over rates, entry into and exit from the market, and the level of service provided. Economic regulations were intended to prevent a few airlines from controlling the market. The airlines were regarded as a public utility, and there was a fear that open competition might result in service to only the major markets; many communities would not receive airline service.

Control of the rates charged involved the concepts of "reasonableness" and "discrimination". Rates could be charged that would allow the carriers to earn a "reasonable" profit. The CAB ruled that airlines could earn a return of 10 to 12 per cent on the fair value of the airline. The Interstate Commerce Commission (ICC), which regulated the railroads, ruled that railroads might earn 6 per cent on fair value. In motor transportation, because of the difficulty of determining "fair value", commissions used the "operating ratio" approach to rates. The operating ratio is the operating expenses divided by the operating revenue multiplied by 100. A target of 92 would mean 92 cents out of every US dollar of revenue would go for operating expenses.

"Discrimination" in economic terms refers to the idea of charging a different price that is not reflected in a difference in costs. Railroads, for example, had been using a system of differential pricing. Railroads lowered rates when they were in a market where they were in competition; they raised prices when they had a monopoly between two points.

Transportation regulations prohibited "undue discrimination", and the board or commission defined "undue". As a result of the ideas of "reasonableness" and "discrimination" the prices that carriers could charge had to be approved by the appropriate board or commission. The deregulation act of 1978, which affected the airline industry, established a "zone of reasonableness" around the standard fare level of the airline industry. Carriers could reduce fares by up to 50 per cent or raise them up to 5 per cent without formal approval. Now carriers can essentially charge whatever they like.

To enter the marketplace, carriers had to have a Certificate of Public Convenience and Necessity. They had to show that public convenience would be served and that a necessity for the service existed. Carriers also had to show that they were "fit, willing, and able" to offer the service. The principal concern in deciding whether or not to certify a new carrier was whether or not companies already doing business would be hurt economically.

Carriers were also required to apply for permission to add new routes. Today they can choose where to fly. Regulations were developed to outline the services that carriers could offer. The goal was to ensure that the

public was offered good service. Since prices were regulated, carriers might cut back on services to save money. In return for the right to operate, carriers had to assume certain duties. They had to serve all comers and could not abandon service between two points without permission. Carriers are now free to leave unprofitable routes.

On December 31, 1985, the authority of the CAB was eliminated.

Physical. The second type of US regulation relates to the physical aspects of safety and reliability. This was, and still is, the province of the Federal Aviation Authority (FAA). Established in 1958, the basic purpose of the FAA is to ensure air safety while promoting the growth of aviation. The agency is responsible for setting and enforcing safety standards; certifying the health and the skills of pilots; monitoring standards in developing, operating and maintaining aircraft; investigating air accidents; and controlling air traffic while helping to develop a national system of airports.

Freedoms of the air

The above aspects of regulation relate to domestic carriers. International travel requires the cooperation of nations. It has been accepted that it is not feasible to have an international system of air travel that is totally free. Some type of regulation is necessary. The foundation for such a system was laid down in the Chicago Convention of 1944 and the Bermuda Agreement of 1946. The notion of "Freedoms of the Air" was first discussed in Chicago, while the Bermuda Agreement focused on bilateral agreements to put into operation the various freedoms.

There are eight Freedoms of the Air, and they are illustrated in Figure 3.1. The first freedom refers to the right of an airline to fly over one country to get to another. The second freedom refers to the right of an airline to stop in another country for fuel or maintenance but not to pick up or drop off passengers. These first two freedoms are widely accepted. The next four freedoms are the subject of bilateral agreements. They are: the right of an airline to drop off, in a foreign country, traffic from the country in which it is registered to a separate country; the right of an airline to carry back passengers from a foreign country to the country in which it is registered; the right of an airline to carry passengers between two foreign countries as long as the flight originates or terminates in the country in which it is registered; the right of an airline to carry passengers to a gateway in the country in which it is registered then on to a foreign country, where neither the origin nor the ultimate destination is the country in which it is registered.

The final two freedoms, numbers seven and eight, are rarely allowed. These are the right of an airline to operate entirely outside of the country in which it is registered in carrying passengers between two other countries, and the right of an airline, registered in a foreign country, to carry passengers between two points in the same foreign country.