The airline industry consists of companies that move people and cargo with planes. The International Air Transport Association (IATA) claims that this $450 billion worldwide industry stimulates 8 percent of global GDP through tourism, shipping and business travel. But despite its enormous contribution to world commerce, the industry has historically gone through dizzying booms and alarming busts as it reacts to changes in regulation and the economy. Currently, airlines are still trying to dig themselves out of the hole caused by September 11. IATA says the imposition of security measures since then has cost the industry an average of $5 billion per year. Spats with labor unions, troubles with underfinanced pensions, high jet fuel prices and a string of bankruptcies, from which some carriers were still emerging as late as 2006, have caused further havoc. Nevertheless, The Economist thinks that once these issues have been resolved (no easy task), the airlines will be in a position to expand.

Cleared for takeoff

The airline industry took to the skies (pun intended) following the Wright brothers' first successful flight in 1905. As with many new technologies, airplanes were first used extensively in a war -- namely, World War I, for reconnaissance, bombing and aerial combat. Following the war, when the U.S. found itself with a surplus of military aircraft and pilots with not much to do, the postal service opted in 1918 to use them to start a transcontinental air mail service, which ran from New York to San Francisco. To keep costs down, 12 spur routes were spun off to independent contractors -- thus were the familiar friendly sky-flying companies of American Airlines, United Airlines, TWA and Northwest born.

Passenger flights did not become a reality until Ford introduced a 12-seat plane, which made carrying people potentially profitable. Pan American Airways, the first airline with international destinations, was founded in 1927, with other airlines adding international routes in the 1940s. Remarkably, airlines remained generally profitable during the Great Depression. Following that period, World War II brought many advances to the civilian air transport sector. Innovations initially intended for bombers made passenger planes larger, faster, able to carry heavier payloads and to fly at higher altitudes. The 1970s saw the introduction of supersonic air travel with the advent of the Concorde -- which is now defunct.

Big trouble for the Big Six

Since September 11, Congress has given well over $20 billion to the airline industry in the form of reimbursements for losses incurred while planes were grounded following the attacks, monetary help for new passenger and plane security requirements, and pension funding relief. But many of the industry's major players were forced to shoulder massive debt loads to continue operating, on top of debt they had been accumulating since even before the terrorist attacks. Of the "Big Six" -- the grandes dames of the American airline industry, United, US Airways, American, Northwest, Continental and Delta -- all but two, Continental and American, have been forced to file for Chapter 11. Smaller airlines including Great Plains, Hawaiian, Midway, National, Sun Country and Vanguard have also shown up in bankruptcy court.

Airline aid

Though passenger confidence continued to grow in the years following the terrorist attacks, and an improved economy bodes well for the travel industry as a whole, the industry's red ink continues to flow: according to a June 2004 Senate report, the industry carried combined debts of more than $100 billion as of that year, with much of it due by 2006. As such, major carriers continue to lobby the feds for financial support in the form of subsidies and loans. Delta and Northwest are currently pleading with members of Congress to pass legislation allowing the airlines to stretch their multi-billion dollar pension payments over a 25-year period. As it stands now, Northwest would contribute $900 million in pensions in 2006, while Delta would give up $500 million -- amounts neither airline can afford. In order to force lawmakers into passing the bill, Delta and Northwest are threatening to terminate pension plans that cover a combined 86,000 employees -- a potential political disaster for members of Congress.

Looking up?

After industry profits reached a nadir in 2001 and 2002, business -- if not profit -- is showing signs of recovery. According to the IATA, a stronger world economy saw passenger traffic rise by 7 percent between 2005 and 2006, and air freight experienced a 5 percent gain. In order to accommodate this increased demand for air travel, and to lower their fuel expenditures, airlines are snapping up new, more fuel-efficient planes. The IATA predicts losses for 2006 will be in the $3 billion range (which, though not great, is lower than the $5 billion lost in 2005). Assuming oil prices stabilize, the industry should be back in the black in 2007.

The industry is being kept in the red by a combination of factors more complex that the Bernoulli effect. Air carriers were hit hard by rising fuel costs, with jet fuel prices exceeding $90 per barrel. Industry players estimate that if oil prices stay high, airlines will pay $21 billion more for fuel in 2006 than they did in the previous year. Labor disputes and underfinanced pensions have also been expensive problems for many carriers, at the same time as savvy consumers have been taking advantage of such services as Expedia and Orbitz to grab the lowest fares. Some carriers are playing to the budget travel crowd. Southwest just introduced a program called Ding which causes the customer's computer to make noise when low fares to specified destinations are released. Overall, costs associated with air travel dropped significantly over the past year, as a result of price competition and attempts to keep ticket prices low despite high fuel costs. Industry belt-tightening seems to be working. The IATA reports that the industry break-even fuel price went from $22 per barrel in 2003 to $50 per barrel in 2005, though with crude trading at nearly twice the break-even price, it seems that airlines may still have a ways to go.

A global network

Around the world, many airlines still are heavily subsidized -- or owned outright -- by their home nations. While this has been a successful set-up for many, others haven't been so lucky -- Swissair and Belgium's airline, Sabena, both crumbled when their respective governments couldn't keep up with demands for subsidies. Global alliances have been formed between subsidized international and U.S. carriers to avoid some regulatory issues and to maximize profits by sharing resources, including routes and marketing strategies. Well-known alliances include Oneworld, an alliance between American Airlines and British Airways, and SkyTeam, a partnership made up of Delta Air Lines, Air France and AeroMexico. Such partnerships aren't always successful -- an alliance between Dutch carrier KLM and Alitalia fell apart, for instance, after the Italian airline had trouble securing funding from its government patrons.

Partnerships aside, the airline industry remains remarkably competitive, and in today's tough climate, it's everyone for themselves. The only major merger between top airlines in the past few years was the early 2004 acquisition of KLM by Air France. Tight regulatory controls in the U.S. make it tough for major domestic carriers to merge, even if the companies involved were healthy enough to consider doing so. A plan to join United Airlines and US Airways was the last such proposal to be floated, and it was shot down due to antitrust regulations. The US Airways name showed up again in merger talks, linked to America West for $1.5 billion, and the two companies made it official in September 2005. Despite the mergers, size is no guarantee of profit. Four of the Big Six have gone into bankruptcy since 2001, while smaller Southwest has maintained its profitability, largely by an aggressive program of hedging fuel prices.

Going regional

Regional airlines, which benefit from smaller, newer jets and lower operating costs than the domestic giants, have gained ground in recent years, becoming the fastest-growing segment of the airline market. Approximately 25 to 30 regional, or commuter, carriers operate in the industry today, according to the Bureau of Labor Statistics. Recent statistics from the Regional Airline Association reveal that one in five domestic airline passengers travel on a regional airline, and that the regional fleet makes up one-third of the U.S. commercial airline fleet on the whole. The big carriers have taken notice, and many now have controlling interests in newer regional airlines -- Delta controls Delta Express, Atlantic Southeast and Comair, for instance, while American has American Eagle. The trend is reflected in Europe, too. Both globally and domestically, regional airlines benefit from such partnerships as alliances with major carriers allow the upstart regionals access to major airport hubs. In some cases, however, regional and low-budget airlines have skirted the hub question altogether by choosing to operate out of slightly out-of-the-way airports -- Southwest's use of Islip airport, in a suburb of New York, and JetBlue's adoption of Long Beach, near Los Angeles, are two examples. And in other cases, regional airlines have decided to spread their wings and join the burgeoning low-cost boom.

The budget boom

The budget airline sector-consisting of top performers like Southwest Airlines and JetBlue, plus a growing number of upstarts -- has gotten a good deal of attention lately. But budget flight isn't a new phenomenon in the industry -- in fact, Southwest has been around since 1971. The difference is in the branding and public acceptance of these carriers, fueled in part by Southwest's customer-centric approach, and by customers' reduced service expectations post-September 11. Expanded routes have helped, too--where once low-budget carriers limited their flights to relatively short hauls in regional markets, today's top discount airlines regularly offer cross-country, and even international, flights. The budget carrier phenomenon has rocked Europe, too, where more than 50 low-cost carriers were in operation in 2004, compared to just four in 1999. European customers have warmed up to the budget boom as well. British-based easyJet increased its passenger flow more than eight-fold between 1999 and 2004, while low-cost carrier Ryanair, operating out of Ireland, ranked as one of the top performers in the industry worldwide, second in market capitalization only to Southwest as of mid-2004, according to Yahoo! Finance.

Some of the larger airlines have decided to take advantage of the low-cost boom, such as United's Ted and Delta's Song, but to not much avail; Song, in fact, was reabsorbed into Delta in 2006, three years after its first plane took off. Despite Song's failure, airlines around the world have realized that there just aren't as many passengers willing to pay for five-star air travel these days -- at least, not enough to make these services profitable for most carriers. The demise of the Concorde, in 2003, was seen by many analysts as yet another indication of this trend. Instead, consumers prefer to pick and choose their perks. An in-flight cocktail on JetBlue will cost you the same, but XM radio and satellite TV is free. Charging for amenities that previously came gratis allows carriers to keep ticket prices low, yet still turn a profit.

Cutting costs

Above all, cost-savings are seen as key to the success of low-budget carriers. One way air carriers measure their fiscal health is through cost per available seat mile (or CASM), a complex formula involving airplane capacity, operating costs, route lengths and other factors. Whereas American Airlines spends about 9.4 cents for each seat on each mile flown, budget competitors like Southwest and JetBlue lighten their loads with CASMs of 7.6 cents and 6.4 cents, respectively, according to an MSNBC article from December 2003. Those pennies add up over time, and so-called "legacy" carriers are under pressure to pinch them ever harder. But with more liberal work rules and a less-senior workforce overall, low-cost carriers beat their established rivals in terms of labor costs.

Investing in a dream(liner)

Major carriers hope to save money in the future by investing in new planes that offer a lower cost of ownership and operation. In early 2004, Boeing got the go-ahead from Japan's Al Nippon Airlines to begin work on a new 787 Dreamliner passenger jet, which promises fuel savings of up to 20 percent -- other carriers' orders are expected to follow. Meanwhile, Airbus, the French firm and Boeing's rival for No. 1 aircraft maker in the world, unveiled a brand new high-scale jumbo-jet, the A380, at the start of 2005 at a gala event during the Le Bourget air show in Toulouse, France. Designed to comfortably seat 555, the A380 rocked the airline industry and represented a joint effort with France, Britain, Germany and Spain, all of whom contributed to the 10-year, $13 billion program that designed the plane. The double-decker leviathan, the largest plane ever built, boasts a 262-foot wingspan and extra space companies can use to install bedrooms, gyms, bars and lounges. The conservation end, though, is where the A380 packs its biggest punch: its carbon fiber components and fuel-efficient technology are estimated to match or exceed Boeing's 20 percent fuel savings, and slash cost per passenger. Delivery of the planes has already been delayed six months by technical issues.

Other cost-cutting measures in the airline industry overall include streamlining fleets and retiring older planes; cancelling unprofitable routes; greater efficiency in procurement processes involving suppliers; and slashing commissions once paid regularly to middlemen such as travel agencies. Many see technological advancements as their great hope-according to a January 2004 BusinessWeek article, Continental hopes to save $500 million annually in coming years partly by investing in web-based check-in systems and wireless bag tracking.

Labor pains

According to the Bureau of Labor Statistics (BLS), labor costs make up roughly 38 percent of many airlines' operating costs -- that's around 40 cents for every dollar spent by an air carrier. Passenger safety regulations, a workforce made up of highly specialized and rarely cross-trained professionals, half of whom are unionized, make it tough for airlines to trim costs from their labor budgets. One way they've done this is by cutting workforces to the bare bones. Following September 11, Continental Airlines and US Airways were the first to make dramatic cuts, laying off about 20 percent of their respective workforces and paring flight schedules. Most other carriers followed suit.

Industry employment is largely at the mercy of the economy, though the BLS expects jobs to increase somewhat independently due to a growing population and greater demand for air travel. The BLS predicts employment growth initially in low-cost and local carriers, with larger airlines following the trend as they cut costs post-bankruptcy.

There are several different categories of employment within the airline industry: flight attendants and customer service personnel, ground crews and pilots. The latter category represent some of the most highly-paid workers in the country, and so competition for these jobs is understandably intense. (Not as much for flight attendants, customer service personnel and ground crews.) The more FAA licenses a pilot has -- that is, the more flying time he has on complex, modern equipment -- the more in demand his services will be. For this reason, military-trained pilots are particularly desirable; however, recent military actions mean they are in short supply.

Civilians can learn to fly at a private flight school and gain experience on progressively larger aircraft; they may work their way up from private jets to regional carriers and from there to the larger airlines. Initially, a newly-hired pilot will be a flight engineer or co-pilot, assisting the captain with communications with control towers, instrument readings and flight duties. Work assignments for flight attendants and pilots are frequently given on a seniority basis, with the most senior employees having the pick of the litter. New hires, therefore, must be prepared to receive less desirable assignments initially.