Air Transportation, Nonscheduled

SIC 4522

Companies in this industry

Industry report:

This category includes establishments primarily engaged in furnishing nonscheduled air transportation. Also included in this industry are establishments primarily engaged in furnishing airplane sightseeing services, air taxi services, and helicopter passenger transportation services to, from, or between local airports, whether or not they are scheduled.

Industry Snapshot

The nonscheduled segment of the air transportation industry includes helicopter services and all airlines that provide charter service or carry passengers or cargo. One major characteristic of the nonscheduled industry is that companies operate on the basis of full-plane sales. Using this procedure, the total aircraft capacity is sold to an organization, such as a ticket wholesaler. In general, these wholesalers are tour operators, military and governmental agencies, specialty charter customers, and sponsors of incentive travel packages. Most charter carriers, either passenger or cargo, are small operations working within a niche market.

After the terrorist attacks against the United States on September 11, 2001, the air travel industry overall ground to a near-halt. However, more people began to turn to charter services rather than using major airlines. As the economy and travel industry rebounded in the mid-years of the first decade of the 2000s, charter air operators benefited from the long lines caused by increased security at major airports, as more business travelers sought the convenience of charter services. Operators who provided charter services for the military also experienced an increase in business as the United States engaged in military action in Iraq and Afghanistan. However, due in large part to the global economic recession of 2008, the charter industry was hard hit. Charter revenues dropped 23 percent to $4.3 billion. However, by 2011, the industry, along with the economy, was on the rebound.

Organization and Structure

According to the Federal Aviation Administration (FAA), there were about 3,000 charter on-demand operators in the United States in the early years of the twenty-first century. Of this total, 2,550 were fixed wing aircraft, and 450 were helicopter operators. There were also 275 air tour operators, with a total fleet of over 960 aircraft. Charter service data is not officially gathered, so the FAA can only estimate the value of the overall industry, which it has estimated to be as much as $13 billion or as little as $4 billion.

The nonscheduled airline industry includes charter passenger airlines and air taxi services. Charter passenger airlines provide service to vacation or leisure destinations and market their services through tour operators, travel agencies, or destination resort operators, which include cruise ship operators. With medium- to large-sized planes in their fleet, charter carriers also provide service to the U.S. military and other groups. Air taxi services companies provide short haul, on-demand transportation (in which case they are called "Part 135" operators) and helicopter service. Part 135 operators fly planes with fewer than 30 seats and rely largely on corporate-oriented clientele. Most carriers also utilize their fleets for sightseeing trips, commutes between airports, emergency medical transportation, and the delivery of workers and equipment to offshore oil well sites. Helicopter services provide similar on-demand corporate transportation.

Scheduled Traffic and Capacity.
Charter carriers typically board between 1 and 1.5 million passengers annually and log more than 18 billion revenue passenger miles (RPMs) based on one fare-paying passenger transported one mile. Charter airlines logged 9.1 billion of their RPMs in domestic service and 8.7 billion RPMs in international service. In comparison, annual enplanements (the number of revenue passengers boarding an aircraft) for the scheduled airline sector average 554.2 million per 12-month period, producing 547 billion RPMs. While charter airlines fly fewer people, they tend to fill more seats on their planes. Nonscheduled carriers average 70 to 75 percent load factors (a measure of seats filled), while scheduled airlines typically realize much lower load factors.

Load factors for specific charter airlines usually have been higher than the overall industry average, running anywhere from 80 to 100 percent. Load factor directly affects fare structure. With fares based on a load factor of 80 percent or more, each seat can be sold at a deep discount. However, unlike scheduled carriers, if a charter cannot meet these numbers, the flight is canceled. Therefore, charter operators work in high-demand markets and will pull out of the market when demand falls.

Nonscheduled airlines, like charter services, can access approximately 7,000 different airports in the United States. In comparison, scheduled airlines can use only about 600 airports around the country. Charter airlines rarely engage in direct competition with scheduled airlines. Instead, charters usually work in markets not directly served by the scheduled carriers. For example, Passport Travel, a Kansas City-based planner of Las Vegas trips, could not secure transportation through a scheduled carrier once the major hub in their market closed. As a result, PTI Tours, the wholesale division of Passport Travel, chartered a 166-seat plane for the summer and was responsible for filling those seats. On the other hand, some charter airlines work directly with cruise lines and operators of other vacation sites, bringing vacationers directly to specific islands from a main hub, say, in Miami.

Business use of charter aircraft expanded rapidly during the early 2000s. In the mid-2000s, the cost of chartering a plane varied widely, depending on aircraft type, flight time, and number of passengers. Small jets and prop engine aircraft ran as low as $650 per hour per person, whereas a large top-of-the-line jet, such as a Gulfstream V, could cost as much as $8,500 per hour.

All charter carriers are subject to the jurisdiction of and regulation by the DOT and the FAA under the Federal Aviation Act. The DOT is responsible for regulating economic issues affecting air service, including air carrier certification and fitness, insurance, leasing arrangements, allocation of route rights, authorization of proposed charter operations, and consumer protection. In 1993, the DOT enacted a major overhaul of charter airline regulations, simplifying the arrangement and sales of charter services while providing adequate consumer protection. Due to a spike in the number of fatalities caused by charter carrier accidents in 2003 and 2004, the FAA began to rework various charter regulations to enhance safety in the industry.

Background and Development

Charter Airlines.
Charter airlines have existed in the United States since the onset of commercial aviation, offering supplemental service to that provided by scheduled operators. Charter airline companies, generally small operations flying a few older aircraft, have never been well known among air travel consumers. The deregulation of the airline industry in the early 1980s offered severe challenges to charter airlines, primarily because it encouraged commercial airlines to offer low fares and plentiful flights to leisure travelers. Many charter carriers attempting to protect their traditional business were unable to compete with the larger commercial carriers and left the business.

While deregulation hampered the charter airline industry in one area, it helped in another. Due to the creation of the hub-and-spoke system, which was also a product of deregulation, many smaller cities lacked direct or nonstop service, especially to leisure destinations. Successful charter operations have found niche markets in these cities and have avoided direct conflict with scheduled carriers.

Charter airlines struggled to improve their image with the flying public. When the largest charter carrier, American Trans Air (ATA), began operations in 1973, the industry had a reputation for "rusty planes, lousy in-flight service and long delays," said George Mikelsons, chairman of Amtran, the parent company of ATA, in Travel Weekly. "It has been a very slow process to get people comfortable with the fact that you can buy a charter flight that is at least the equal of coach class on a good scheduled carrier."

The charter business has succeeded because it is efficient. Maintenance of that efficiency through finding and effectively serving niche markets will be critical to the industry's success beyond the first decade of the 2000s. ATA officials believe that the consolidation of the scheduled industry actually will help the charter market. Their explanation has been that as markets become more consolidated, airlines will be less willing to price seats for tour packages. In addition, as the scheduled carriers bring their tour operations in-house, they will be less willing to deal with outside operators. In turn, independent tour operators will have to depend on charters.

Industry analysts reported an 8.3 percent price increase in 1998 for the charter services sector of the nonscheduled air transportation industry. The overall industry rose at a somewhat slower pace in 1998. The robust economy was identified as the key market influence, but the 1998 Northwest pilot strike also contributed greatly to the enhanced charter airline market.

In 1999, however, the new airplanes ordered in anticipation of a continued growth market were delivered, and a glut of available seat space began to cut into profits. By August 1999, there were 500 domestic planes available for purchase or lease, about 100 more than in August 1998. To balance this glut, 268 aging aircraft were removed from the fleet in 1998, followed by the retirement of 241 aircraft in 1999 and 286 in 2000.

In addition to retiring older planes in the late 1990s, ldquo;fractional ownership" contracts increased. For example, companies might purchase 50 flight hours annually on a standard business jet by purchasing a one-sixteenth ownership interest for between $500,000 and $600,000 under these plans. In comparison, the company would spend $6.6 million to purchase the plane outright, in addition to another $1.2 million annually for maintenance and crew expenses.

Part 135 Operations.
Some carriers began to operate under the umbrella of a larger charter such as AMR Combs. Others ventured into additional markets such as providing contingency service. United Parcel Service (UPS) developed a contingency program in which the company called on Part 135 on-demand charter companies to deliver stranded packages if a UPS shipment missed the primary package sort at a hub. Some operators have kept their planes at UPS's Louisville, Kentucky, hub to increase their availability.

Executive Jet Aviation, Inc. created a "time-share" program called NetJet. Instead of owning an entire jet, NetJet allows executives to charter planes within the continental United States within a four-hour time frame, making availability of the utmost importance. Corporations purchasing shares in the program are guaranteed that NetJets arrive prepared to fly, and they eliminate maintenance needs, leasing fees for hangars, and a pilot's salary.

Helicopter Service.
Helicopter companies supporting the oil industry, police and public service operations, and the medical profession experienced continued growth through the end of the 1990s. Those companies offering diversified service were best equipped to produce consistent earnings. For example, Petroleum Helicopters worked primarily with the oil and gas industry in the Gulf of Mexico and also became involved in the emergency medical service (EMS) business. Keystone Helicopters, a subsidiary of Keystone Flight Services, split its contracts between EMS (approximately 80 percent) and on-demand charter and corporate management flying (20 percent). The public sector is predicted to be the fastest growing market in the helicopter industry.

Another successful approach for helicopter service was development of niche markets. For example, Portland-based Columbia Helicopters was one of the few commercial operators of heavy-lift aircraft worldwide. The company specialized in heli-logging, which did less damage to the land than conventional logging methods.

The September 11, 2001, terrorist attacks against the United States had a profound impact on the nonscheduled sector of the air transportation industry. According to Airlines for America (or A4A, formerly the Air Transport Association), charter revenues decreased to $4.45 billion in 2001, compared to $4.91 billion in 2000. Over the same time, international charter revenue ton miles fell from 2.7 billion to 2.2 billion, while domestic charter revenue ton miles decreased from 5.9 billion to 5 billion.

A weakened global economy also undermined sales, while increased insurance costs and security measures resulting from the terrorist attacks undermined profitability. To bolster sales, many companies began to reduce their ticket prices, which further eroded profits for many charter service providers. As a result, industry leaders like American Trans Air and World Airways posted losses in 2001.

When the economy began to recover in 2003 and continued to show significant improvement in 2004, the charter industry grew between 15 and 20 percent annually as business travelers turned to charter companies to avoid long lines and increased security checks at national terminals. Long the domain of professional sports teams and high profile business executives, charter travel was discovered by more and more mid-sized businesses in the mid-2000s as providing convenience and time management benefits that balanced the additional cost in spite of being more expensive than commercial services.

Passengers who charter a plane can often drive right out on the tarmac to board instead of arriving hours before a flight to pass through baggage checkpoints and security. Because nearly 70 percent of business charter flights return the same day, chartered service also often eliminates the need for hotel and meal costs of an overnight stay. Additionally, with access to thousands more airports than commercial aircraft, chartered planes could deliver executives closer to their destination, reducing the need for additional on-ground transportation arrangements.

Although it remained difficult to track regional charter trends because no statistics were kept by the FAA or other official body, chartered air service definitely increased in popularity during the mid-2000s. According to a survey by the National Business Travelers Association, 26 percent of its corporate travel manager members booked charter services in 2002. By 2004, the number chartering flights for their organizations had risen to 33 percent. Jon Winthrop noted in the Los Angeles Business Journal in November 2004, "For companies whose executives travel extensively or for individuals who take to the skies regularly, the benefits that private jet charter offer are clear in terms of flexibility, time-savings and increased productivity." Winthrop also argued that in many cases, charter services can be cost effective when compared to first-class commercial passenger travel.

By mid-2007, the National Transport Association reported that the popularity of the on-demand charter industry continued, with nearly 3,000 Part 135 on-demand charter operators nationwide and about 11,300 aircraft in the industry. According to 2009 statistics from the U.S. Census Bureau, there were 2,125 establishments engaged in the industry in the late 2000s. These companies employed 36,764 people who earned $2.24 billion in wages.

The need to trim corporate spending, combined with high-profile scandals involving companies such as Enron, WorldCom, and Tyco, led many corporations to forego the purchase of private aircraft or sell their planes. While this trend strengthened demand for charter services, it also led to an overcapacity of corporate jets in the market, which greatly increased competition among about 3,000 operators, which were also hampered by the high cost of fuel.

To provide the highest level of flexibility and service, Internet-based services, such as CharterAuction.com, appeared, offering what became known as "charter by demand." Charter by demand used brokers who bid out travel plans to a group of private jet operators and charter services, then provide the customers with the lowest bid. By the mid-2000s, there were over 550 charter by demand operators. Often, charter operators offered a prepaid debit system by which a company may purchase $50,000 or $250,000 in flight time. Each time this travel card is used, the flight time charges were deducted from the debit balance.

Current Conditions

By 2011, charter flights were available in and out of 5,000 U.S. airports, according to the National Air Transportation Association. In addition, the market research firm IBISWorld reported that profit in the charter flight industry was expected to rise moderately into the 2010s, explaining that although "strong competition from the scheduled air transportation market and high operating costs will continue to threaten businesses" in the industry, "rising disposable income and corporate profit will help boost demand." As confidence in the economy returned, individuals and businesses were expected to increase their use of charter air transportation between 2011 and 2016.

Industry Leaders

ATA Charter, a division of ATA Airlines (previously American Trans Air), was the largest U.S. charter airline in the 2000s. ATA Airlines provided scheduled service to about 30 locations, primarily vacation destinations, and its charter customers included corporations, military, tour and travel, and government agencies. However, unable to recover from the economic difficulties of the early 2000s, despite a federal loan in 2002, ATA filed for bankruptcy protection in 2004. Although it emerged in 2006, the company did not fully recover and in 2008 filed for bankruptcy again, this time shutting down operations. Southwest Airlines purchased ATA's assets for around $7.5 billion.

World Airways Inc. continued to act as an industry leader into the early 2010s. It provided worldwide, nonscheduled air transportation of passengers and cargo for commercial and government customers. As of 2011 World Airways had 20 MD-11 aircraft in the long-range international market. The MD-11s were available configured for first-class luxury seating, which included completely flat fold-out chairs for sleeping, coach seating, or a combination of business class and coach seating. The airline's business was seasonal, with the highest travel figures from May through July and in December. Its largest customer was the U.S. Air Force, which accounted for 77.5 percent of revenue in 2004. Cruise ship companies, tour operators, and international airlines were among its other clients. Global Aero Logistics completed acquisition of World Air Holdings and World Airways in August 2007. Revenues for World Airways in 2010 were $659 million, and the company employed almost 1,000 people.

Atlas Air Worldwide Holdings, which had overall sales of $1.3 billion in 2010, operated another industry leader in the charter industry (Atlas Air). Other industry leaders included Air Transport Services Group Inc., with more than 2,000 employees and revenues of $667 million in 2010, and Global Air Aviation Holdings Inc., which employed around 2,000 people and had sales of just over $1.0 billion in 2010. The latter owned the successor company to ATA, called World Airways.

Omni Air International, based in Tulsa, Oklahoma, provided charter services to the U.S. military, tour companies, corporations, and other airlines. In business since 1983, the privately owned firm had a fleet of Lear jets for on-demand charter services. NetJet, Inc., a subsidiary of Warren Buffet's Berkshire Hathaway conglomeration, was a leading player in the fractional market, but as the popularity of charter by demand services increased, NetJet began offering a 25-hour prepaid card, which provided access to nine different aircraft types on as little as 10 hours' notice. Pricing for the 25-hour card started at $109,900 in the mid-2000s. By 2010, Omni had revenues of $81 million and 1,083 employees.

America and the World

Charter airline service in Europe, as opposed to that in the United States, offered significant competition to the scheduled airline industry for passenger traffic to leisure destinations. In fact, charter airlines traditionally carried slightly more than half of all European travelers. The charter industry's success has been due in part to the fact that charter carriers have been subject to fewer regulations than the scheduled airlines. Therefore, the European market has been of interest to U.S. charter companies simply because charter services are well known and well liked throughout Europe.

In the mid-2000s, U.S. charter operator advocates, including the National Air Carrier Association (NACA), lobbied the Department of Transportation to limit the ability of foreign airlines to provide charter services to U.S. tour operators. The NACA claimed there was an excessive number of foreign airlines operating routes to third countries. In other words, charter companies were transporting U.S. passengers to and from destinations outside their country of origin. NACA wanted the Department of Transportation to give U.S. carriers "first refusal" rights to all U.S. departure points. The tour industry opposed the measure, saying it would limit competitive pricing. The Department of Transportation agreed in February 2005, denying NACA's request.

Research and Technology

The charter industry's ability to compete on a price basis was contingent on the efficiency of its aircraft operations. Therefore, some U.S. companies began to update their fleets. Amtran added a sixth extended-range Boeing 757 to its fleet. Lauded for its fuel efficiency and endurance, the 757 can amass up to 300 flight hours a month and was used for transatlantic charters and military transportation. Another aircraft to aid in competitive pricing was the new Airbus A320 aircraft, Europe's high-tech twinjet. The A320 was significantly more fuel-efficient than the 727-200, the 737, or the MD-80.

The helicopter sector of the unscheduled industry was also expected to profit from technological advances. Of particular importance was the military tilt rotor. The V-22 Osprey, for example, could function as a helicopter on takeoffs and landings but was capable of flying at a cruising speed of 300 knots an hour at an altitude of 20,000 to 25,000 feet as a conventional fixed-wing aircraft. The Marines were the primary users of the hybrid Ospreys, although the Air Force also received deliveries of unique units. The Bell/Agusta Aerospace BA609, the first civil tilt rotor aircraft, first flew in the mid-2000s. In 2011, the U.S. Navy planned to spend $8 billion to buy 122 more V-22s, although the cost of operating these aircraft had risen by an estimated 61 percent between 2009 and 2011.

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