Article

Actual, Adjacent, and Potential Competition Estimating the Full Effect of Southwest Airlines

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Abstract

Southwest Airlines is frequently credited with having an important influence on the success of airline deregulation in the United States. This paper uses an original set of competition variables to estimate the extent of that influence in 1998. The estimated savings - due to actual, adjacent, and potential competition from Southwest - were $12.9 billion. Southwest's low fares were directly responsible for $3.4 billion of these savings to passengers. The remaining $9.5 billion represents the effect that actual, adjacent, and potential competition from Southwest had on other carriers' fares. These savings amount to 20 per cent of the airline industry's 1998 domestic scheduled passenger revenue and slightly more than half the fare reductions attributed to airline deregulation. From a policy perspective, these results are both troubling and encouraging. On the one hand, it is troubling to find that a large part of the fare reductions from airline deregulation is due to one carrier. On the other hand, if entry by a carrier with the appropriate characteristics can make such a difference, policies that encourage entry - for example, relaxing the restriction on entry by foreign-owned carriers - may have a large impact on passenger welfare. ? The London School of Economics and the University of Bath 2001

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... For example, the type of competitor often plays an important role in determining prices. In the airline industry, price competition is much tougher between lowcost and legacy carriers compared to situations where only legacy carriers compete ( Windle and Dresner, 1999;Morrison, 2001;Ciliberto and Tamer, 2009;Brueckner et al., 2013 ). ...
... However, it is likely that the entry and exit of LCCs has significant impact on NLC pricing. Previous literature finds that LCCs not only price differently com pared to NLCs, but also that LCC presence induces substantial changes to NLC pricing behaviour ( Windle and Dresner, 1999;Morrison, 2001;Ciliberto and Tamer, 2009;Brueckner et al., 2013;Ethiraj and Zhou, 2019 ) 8 . It is thus important to explicitly control for market structure changes involving LCCs in order to ensure that the monoduo and duomono results are not driven by LCC entry or exit, respectively. ...
... To eliminate concerns about competition between adjacent airports, we perform a robustness check using a sample in which routes are defined on a city-to-city instead of an airport-to-airport basis (see Morrison, 2001;Berry and Jia, 2010;Dai et al., 2014 ). As in our main results, we use data on the number of tickets sold from DB1B to estimate carrier market shares. ...
Article
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This paper uncovers price asymmetries across oligopolistic and monopolistic markets that are seemingly identical in structure but different in competitive history. This is done by identifying "quiet life" markets that have not (yet) experienced a change in structure, and "non-quiet life" markets that have been disrupted by firm entry and/or exit. Using a long panel dataset from the U.S. airline industry, we find that quiet life duopolies price significantly higher than duopolies that come about by entry in monopoly, and that quiet life monopolies price significantly lower than monopolies that come about by exit in duopoly. We show that the path towards a particular market structure matters for the determination of prices and explore several mechanisms that likely explain the price asymmetries, including engagement in anticompetitive behaviour, adjustment behaviour to market structure changes, and the cost heterogeneity of competing firms.
... In terms of operating airlines, the presence of network carriers (American, Delta, and United) at a nonhub airport leads to higher passenger yield, while effects of Alaska and Allegiant are opposite. Considering Allegiant operated into at least 54 of the 215 nonhub airports (with accessible data), its effect in lowering the average passenger yield is comparable to the 'Southwest effect' at hub airports (Asahi and Murakami, 2017;Morrison, 2001;Vowles, 2000), and therefore can be termed as the 'Allegiant Effect'. Meanwhile, Alaska Airlines operated into much fewer nonhub airports than Allegiant (only 20 out of 215), but had a comparable effect size on average passenger yield in those limited locations. ...
... The effect of ULCC represented by Allegiant (G4) in lowering the average passenger yield, or 'Allegiant Effect', is significant for nonhub airports. This finding is similar to previous studies about Southwest Airlines, whose operations focus mostly on large airports and busy OD markets (Asahi and Murakami, 2017;Morrison, 2001;Ren, 2020;Vowles, 2000Vowles, , 2001Zhang et al., 2013). However, in the nonhub primary airport category, Southwest only flew to 4 out of 208 airports analyzed by this study. ...
... Meanwhile, it should be noted the 'Allegiant Effect' on nonhub airports found by this study is limited to its direct impact on the nonhub airports served by Allegiant only. The model does not test the impact of adjacent or potential competition from Allegiant, as what has been previously analyzed for the Southwest Effect (Morrison, 2001). ...
Article
Nonhub airports are an essential component in the National Plan of Integrated Airport Systems (NPIAS) of the United States in that they connect regional towns and small communities to the air transportation network. Understanding the interplay of operational and spatial factors in determining average passenger yield of nonhub airports provides airlines with valuable information for network planning and revenue management. This study examines factors contributing to the yield variation among nonhub airports in the U.S. Using ordinary least squares (OLS) based econometric models, this study captures the spatial dependence of passenger yield of nonhub airports, which tends to increase with a corresponding increase in distance to the nearest large hub airport. Nonhub airports surrounding large hub airports with higher passenger enplanements and higher average yields also have higher yields than other nonhub airports. In addition, this study finds the effect of Allegiant Airlines in lowering the average passenger yield of the nonhub airports served directly by the airline, which can be termed as ‘Allegiant Effect’. Findings of this study could provide valuable guidance for airlines to analyze network planning strategies and to identify future markets for growth and for policymakers when allocating resources to communities relying on these nonhub airports.
... A sampling of this research includes: the presence of an airline hub premium (Borenstein, 1989); higher traffic densities of spokes in a hub-spoke flight network reduce fares (Brueckner et al., 1992); and price discrimination by airlines (Borenstein and Rose, 1994;Dana, 1999;Dai, 2014). Researchers have also documented dynamic price discrimination (McAfee, 2006;Alderighi et al., 2015;Escobari et al., 2019); the role of bankruptcy on airline prices (Borenstein, 1995); and Southwest Airlines' effect on fares (Morrison, 2001;Goolsbee and Syverson, 2008;Kim et al., 2021). ...
... In particular, while Southwest is similar in size to the legacy carriers, it generally has lower marginal cost and employs a different business model. We use Southwest Airlines' presence as a proxy for competition since prior work by Morrison (2001) and Goolsbee and Syverson (2006) find substantial fare reductions by legacy carriers are associated with the presence or potential presence of Southwest Airlines on the route. Moreover Brueckner et al. (2013) find nonstop competition from Southwest Airlines reduces fares by legacy carriers by 26% while non-stop competition from other LCCs has a smaller 12% effect. ...
Article
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We examine how competition impacts the provision of product quality. Using a unique data set of inflight amenities provided by U.S. airlines, we find that the composition of competition matters. There is significantly higher product quality - Wi-Fi, entertainment, and at-the-seat electrical power outlets - on on more competitive routes (with lower HHI). The presence of Southwest Airlines on the route, however, is shown to reduce product quality offerings. We also find significantly higher product quality on routes with more passengers, tourist destinations, and red-eye flights. We find lower posted base ticket prices on routes with Wi-Fi and entertainment amenities.
... The success of Southwest's business model in the USA has spread worldwide, leading to the birth of airlines such as Ryanair and EasyJet in Europe, flydubai and Flyadeal in the Middle East, and Jetstar, AirAsia and Spring Airlines in the Asia-Pacific. The negative effects of the LCC model on airfares is known as the 'Southwest effect' and the 'Ryanair effect' (see, e.g., Morrison, 2001;Vowles, 2001;Alderighi et al., 2012;Zhang & Lu, 2013). Bennett and Craun (1993) estimated that if airfares on the routes where Southwest Airlines served were raised to the level of the airfares on the routes without Southwest, the industry revenue would increase by USD2.5-3 billion (holding traffic constant). ...
... Bennett and Craun (1993) estimated that if airfares on the routes where Southwest Airlines served were raised to the level of the airfares on the routes without Southwest, the industry revenue would increase by USD2.5-3 billion (holding traffic constant). Morrison (2001) finds that the airfares of a route were lower but varied to different degrees depending on whether ...
Thesis
Air transport plays an important role in a country’s economic development. Because of post-colonial government attitudes, the civil air transport industry in Cambodia, Laos, Myanmar and Vietnam (the CLMV countries) did not develop from the 1960s onwards when compared with other countries in the Asia-Pacific region. The CLMV countries share a similar history in their political systems, the development of their aviation industries and their economic development in general. This study examines the air transport industry of the Southeast Asian region from two perspectives: (1) the relationship between air transport development, economic growth and inbound tourism in the CLMV countries; and (2) the impact of airline service quality on customer satisfaction and repurchase behaviours in Laos and Myanmar. There is a bi-directional causality between air passenger traffic and economic growth in the long term. Inbound tourism has a significant impact on air transport demand in the long run but no significant relationship exists between the two in the short run. Air transport deregulation has a positive and significant impact on traffic volumes, particularly for Cambodia. Further reforms are still needed before such an outcome can occur in Myanmar. The most important factor leading to airline choice for both Laos and Myanmar was brand credibility while the responses of air passengers demonstrated that product uniqueness was also of significant importance. Surprisingly, price and perceived value were not ranked as the most important influences of airline choice in these two low-income countries. Despite high service quality not necessarily generating repurchase behaviour, airlines need to understand customers’ needs to ensure that their service quality matches customers’ expectations to have a better chance of creating customer satisfaction. Because happy and satisfied customers are much more likely to re-purchase.
... 3 Then, I define the spatial 2 Additionally, this paper contributes updated evidence to the literature on the relationship between LCC entry and fares. Previous research in this area such as Morrison (2001) and Goolsbee and Syverson (2008) typically focused on the impact of Southwest airlines, as other LCCs had not yet grown into national competitors. More recently Brueckner, Lee, and Singer (2013) use data from 2007Q3 to 2008Q2 to evaluate the impact of competition on fares, and allow for an impact of service at adjacent airports in 11 multi-airport metro areas. ...
... Lastly, I note that while the price impacts documented for local and nearby adjacent LCC competitors in this paper for the 2012-2019 period are smaller than those documented in earlier work (Morrison, 2001;Brueckner, Lee, and Singer 2013), this may result from differences in time periods rather than differences in methodology. For example, Brueckner, Lee, and Singer (2013) considered airfares in a window prior to the recession (2007Q3-2008Q2) and estimated fare reductions associated with LCC presence on the order of 20%. ...
Research
I analyze the spatial relationship between entry and airfares in the U.S. airline industry. I define the spatial relationship between adjacent airports based on catchment overlap, and evaluate the spatial impact of entry on fares. Using a fixed-effects estimator, I find that the impact of LCC entry on prices is not only larger than that of Legacy entry, but also influences prices at more distant airports. Owing to endogeneity concerns in our estimates, I also consider quasi-experimental evidence from the expiry of the Wright Amendment, which resulted in rapid and dramatic entry by Southwest Airlines from Dallas. Echoing our descriptive results, I find a broad spatial impact of entry by Southwest on rivals' airfares. Overall, our evidence suggests that current approaches to market definition in the airline industry may be overly restrictive, and recommend researchers consider grouping a broader set of airports when defining markets.
... Market dominance and LCCs have a statistically significant impact on pricing in domestic U.S. market. Morrison, 2001 Total market-wide savings for passengers through presence of LCC. ...
... Windle and Dresner (1995) find that the pricing effect of an LCC presence persists over time. Dresner et al. (1996), Windle and Dresner (1999), and Morrison, 2001 report that (a) the pricing effect is observed also when an LCC enters a nearby airport and (b) there is a spillover pricing effect to other routes that do not face direct LCC competition but either originate from or connect at the same hub or base. Chi and Koo (2009) and Fageda et al. (2011) establish that the impact of an LCC depends also on its market share and on the focal route's market concentration. ...
Article
Low-cost carriers (LCCs) of the long-haul type have gained momentum in the years pre-COVID19, and on North Atlantic routes in particular. Yet their market impact on fare levels has never been evaluated, and findings related to short-and medium-haul LCCs cannot be readily applied to the long-haul case. We assess the effect, on market fare levels, of a long-haul LCC presence by proposing a stylized analytical model for hypotheses development. Then, while running two-stage least-squares regressions with instrumental variables, we distinguish between fares for economy and business classes, based on an extensive multi-year sample of North Atlantic routes. We estimate that, ceteris paribus, the presence of an LCC is associated with a 11% to 18% reduction in long-haul fares for economy class and 2% to 6% for business class. These findings continue to be relevant post-COVID19, as point-to-point-focused LCCs pose an alternative to sub-scale hub networks, especially with more leisure-/touristic-focused demand scenarios.
... Long-distance airport substitution has been investigated through studies that mainly account for air service characteristics at local and distant hub airports (also known as substitute airports) such as airfare, airport access cost, flight frequency, and availability of direct flights (1,2,(9)(10)(11)(12)(13)(14)(15)(16). In studies based on surveys, travelerspecific characteristics such as trip purpose, access to car, age, income, travel frequency, frequent flyer membership, and previous airport experience have been incorporated (2,10). ...
... Around the year 2000, before major airline mergers, it was estimated that air travelers would travel up to 75 mi to access airports that offered lower fares because of the presence of low cost carriers (15,16). Subsequent studies then showed that air travelers drove in excess of 250 mi to out-of-region large hubs (2,20). ...
Article
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Following airline mergers and network reorganizations aimed at reducing operational costs, consolidated air services at large hub airports have encouraged air travelers to forego use of their smaller local airports to access large hub airports offering superior air services farther away. This study investigates airport leakage in areas of Wisconsin and Michigan served by small airports, where air travelers may leak to neighboring large hubs. Using a proximity-based service area definition, three airports experiencing leakage are identified, and a hierarchical logit airport choice model is applied that accounts for air service characteristics and access distance for travelers coming from these airports’ service areas. Results show that a similar mean number of flight legs at both the local and substitute (large hub) airports will encourage leakage at Dane County Regional and Gerald R. Ford International airports, indicating that adding direct flights alone will not be sufficient to combat leakage. Comparable access distances to local and substitute airports have opposite effects on the local markets of Gerald R. Ford International and Milwaukee Mitchell International airports—promoting leakage at the former but discouraging it at the latter. Furthermore, proportional increases in airfares at local airports lead to uneven losses of markets in investigated service areas. Overall, the study provides empirical evidence of long-distance airport leakage in parts of the U.S. Midwest, and how its implications can be used by small airports seeking to further understand and respond to travelers’ airport choices within their local markets.
... Given the fact that LCCs have been so successful, it is not surprising that they have attracted a lot of attention in the literature. A great deal of research has been conducted to demonstrate LCCs' dramatic downward pressure on airfares, which, in turn, leads to a significant increase in air travel demand and passenger traffic (examples include [2][3][4][5][6][7][8][9] and many others). Nevertheless, with a concurrent fare drop and overall traffic rise, it is unknown whether and to what extent LCCs may affect other carriers' profits on a route. ...
... As early as 1993, Bennett and Craun concluded that Southwest's operations on the Oakland-Burbank route resulted in a 55% decrease in prices. Later research studies found similar results by studying different routes and different settings, including [3][4][5][6][7][8][9]12] and many others. ...
Article
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This paper studies the effects of Southwest Airlines, the largest low-cost carrier (LCC) in the U.S., on other carriers’ payoff functions and entry probabilities. A static entry game model is developed and estimated by viewing entry as an indicator of underlying profitability and making use of Nash Equilibrium. Results indicate that Southwest has a remarkable and negative impact on the payoffs of other carriers. This impact is firm-specific, with LCCs being more affected than full-service carriers (FSCs). Comparing the two service types, the results show that Southwest’s nonstop presence apparently imposes more downward pressure on opponents’ profits than its connecting presence. A counterfactual experiment is then conducted. Once Southwest is counterfactually removed, the probability of each carrier entering a market significantly changes. This paper examines Southwest’s impacts from a new perspective and extends literature on entry game estimation.
... Vowles (2001) was particularly focused on examining the effect of Southwest entry on fares and traffic on the competing adjacent routes that include multi-airport regions. In addition to actual and adjacent competition, Morrison (2001) also stressed the effect of Southwest on the reduction of fares in the LCC's potential routes, especially when it serves both endpoints of a route but not the route itself. The author also estimated the social benefit of around $12 billion generated by Southwest entry on the market. ...
... The empirical studies that examine the LCCs' impact on FSCs' pricing can be generally split into two large groups. The first group of studies (Windle and Dresner, 1995;Morrison and Winston, 1995;Morrison, 2001) investigated changes in an average one-way fare on a particular set of routes in the U.S. by employing the reduced form of fare regression. The second group encompasses the most prominent studies that simultaneously examined the yield and the passenger demand (Dresner et al. 1996;Richards, 1996;Hofer et al., 2008;Cho et al., 2012;Dresner et al., 2015). ...
Article
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The concept of long-haul low-cost operations has become somewhat appealing in the airline industry in recent years. In Europe, the rapid expansion of low-cost carrier Norwegian that entered the long-haul markets from several large metropolises (London, Paris, Barcelona, etc.) imposed a burden of challenges to full-service carriers (FSCs). However, Norwegian operates a large portion of its long-haul service from London Gatwick by offering flights mainly on high-density routes. Although Norwegian's capacity and market shares on these routes are still at a low level mainly due to the carrier's “puppy-dog” strategy, it seems that its effect on British Airways, the dominant carrier on these markets, cannot be ignored. The purpose of the research is to examine the extent to which the presence of Norwegian affects the prices charged by British Airways on three selected high-density transatlantic routes performed from London area. The model applies simultaneous equation systems to determine how the emergence of Norwegian affects the price and the passenger volume of British Airways, as a traditionally dominant carrier, at the city-pair markets. The findings are consistent with the well-established view held in the literature, that a LCC's presence at a specific market would generally affect the incumbents to reduce their prices. Indeed, British Airways announced the capacity expansion as a counter-strategy to mitigate the competitive pressure induced by Norwegian and its affordable service.
... Many studies have examined the effect of LCCs on airline pricing and traffic (e.g., Windle and Dresner, 1995;1999;Dresner et al., 1996;Morrison, 2001;Homsombat et al., 2014;Zhang, 2015;Fu et al., 2015;Wang et al., 2018). In the spirit of Morrison and Winston (1995) and Fu et al. (2015), a reduced-form price and traffic equations are employed to see how the presence of LCCs in the NEA intra-market has influenced the traffic flow and airfares. ...
... The negative sign of the LCC market share in the price equation and the positive sign in the demand equation are consistent with previous literature such as Dresner et al. (1996) and Morrison (2001). However, in China's domestic market, Wang et al. (2018) found that the LCC share variable does not have a significant effect of reducing the prices and promoting passenger traffic. ...
Article
This paper provides an overview of the development of the low-cost carrier (LCC) sector in China, Japan, and South Korea. It is the first paper that documents LCC contributions to the passenger traffic and cheaper fares in Northeast Asia (NEA)'s intra-markets. We argue that a single aviation market can facilitate the growth of the LCC sector, which in turn will make a significant contribution to the NEA connectivity, mobility, and integration. In addition, with a single aviation market, NEA countries can adopt a proactive, unified approach in negotiating air transport agreements with the major aviation partners to maximize the interests of this region as a whole, which will further provide valuable growth opportunities for the LCCs.
... No entanto, quanto a estudos empíricos relacionados a esse tipo de ameaça, verifica-se que o número de trabalhos é mais restrito e abrange um período mais recente. Entre estes, podem ser destacados os trabalhos de Morrison (2001), Goolsbee e Syverson (2008), Brueckner et al. (2013), que também analisaram o mercado de aviação civil. Em todos estes estudos, foram encontradas evidências de que as incumbentes respondem à ameaça de entrada com redução de preço, com a magnitude do efeito variando caso a caso. ...
Article
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Resumo O presente estudo analisa os impactos, em termos de preços, decorrentes da exclusão de um concorrente potencial no setor aéreo brasileiro. Não obstante a relevância desse tipo de pressão competitiva, as análises concorrenciais têm um foco mais voltado para a concorrência efetiva, fazendo com que a concorrência potencial ainda seja um tema pouco explorado pela literatura empírica. Buscando preencher essa lacuna, o presente estudo analisa os impactos decorrentes da aquisição da empresa Webjet pela empresa Gol, em 2012, tendo como foco de investigação a concorrência potencial. Antes de ser adquirida, a Webjet exercia tanto o papel de concorrente efetiva da Gol, em algumas rotas, como o papel de concorrente potencial, noutras. Assim, nesse contexto, foi possível comparar as tarifas aéreas antes e após a operação nessas rotas, e estimar os impactos decorrentes dessa retirada de concorrência potencial. Para essa análise, aplicou-se o método de diferenças em diferenças, utilizando os dados de tarifas aéreas da Agência Nacional de Aviação Civil (ANAC) referentes aos períodos pré e pós-operação. Os resultados indicam a ocorrência de aumentos de preços nessas rotas, que variam de 7,68% a 16,42%, a depender do modelo utilizado. Esses resultados evidenciam, portanto, a importância de se levar em consideração os efeitos da concorrência potencial nas análises de fusões e aquisições.
... Even though COVID-19 is the most recent and probably the strongest pandemic that has impacted the industry, it has been struck before by other their costs better than their counterpart FSCs, offering passengers lower fares on their routes [20]. Literature has documented that the entry of LCCs into the market escalates airline competition, benefiting passengers [31]. In addition, LCCs focus on point-to-point travel, which avoids connecting passengers, using a single-family fleet with a single-cabin configuration, focusing on secondary airports wherever possible, and on direct sales without intermediaries [21]. ...
Article
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This study's objective is to estimate airline performance and identify the most resilient business model during periods affected by global crises, including financial crises, natural disasters, pandemics, terrorist attacks, and post-crisis periods. A balanced panel of 80 airlines, classified into full-service carriers (FSC), low-cost carriers (LCC), high perceived quality, and low perceived quality, during 2008–2021 is used in this work. The data is sourced from the ICAO Data+ and Skytrax databases. Following the recent literature on airline efficiency, we consider airlines' internal structure, which unfolds into three stages: (a) operations, (b) services, and (c) sales. Also, we employ a novel three-stage multi-parametric bias correction (MPBC) slacks-based measure (SBM) network data envelopment analysis (NDEA) approach to estimate system- and stage-specific efficiencies. It has been proven that the MPBC estimates are consistent, while the MPBC-SBM-NDEA approach addresses the limitations of conventional NDEA and SBM-NDEA models. This work highlights that airline passengers have become more price-sensitive, selecting value-for-money airline products and services after the Global Financial Crisis. Given this trend and the remainder of the study's findings, LCCs offering value-for-money products and services and operating smaller-scale networks with smaller plane capacities are less vulnerable to external shocks and are easier to rebound during post-crisis periods.
... The role of the intensity of competition has been approximated through measures of concentration at the route and/or airport level (Berry et al., 2006;Borenstein, 1989;Carlsson, 2004;Fageda, 2006), liberalization policies (Abate and Christidis, 2020;Bernardo and Fageda, 2017;Schipper et al., 2002), mergers (Borenstein, 1990;Carlton et al., 2019;Kim and Singal, 1993;Kwoka and Shumilkina, 2010;Richard, 2003) or network overlaps (Brueckner et al., 2013;Shrago, 2022;Zhang et al., 2023). The downward pricing pressure that LCAs exert on the routes they operate is also well documented (Bernardo and Fageda, 2020;Dresner et al., 2017;Hofer et al., 2008;Huse and Oliveira, 2012;Goolsbee and Syverson, 2008;Morrison, 2001;Murakami, 2011;Oliveira and Huse, 2009;Dresner, 1995, 2017). Similarly, airlines usually react to competition from high-speed rails by reducing fares (Bergantino et al., 2015;Ma et al., 2019;Wei et al., 2017;Wang et al., 2018). ...
... 4 Within the airline industry, a vast literature has considered the relationship between competition and fares-particularly the impact of LCCs on legacy carriers' fares. In a seminal paper on the topic, Morrison (2001) studied the relationship between Southwest Airlines and competitors' fares, and found that Southwest's presence was associated with significant fare reductions on routes that were directly served by Southwest as well as on routes where Southwest was a potential entrant. Goolsbee and Syverson (2008) likewise focused on potential competition, and found that incumbents significantly reduced fares on routes that Southwest was likely to enter. ...
Article
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I study the relationship between competition and price dispersion by evaluating the competitive role of “ultra-low-cost carriers” (ULCCs) in the U.S. airline industry. These carriers have significantly lower unit costs than do traditional “low-cost carriers” (LCCs), and the ULCCs focus almost exclusively on leisure travelers, and offer unbundled products with low base fares and fees for many ancillary services. Public statements in carriers’ earnings calls from 2012 to 2019 indicate that “legacy carriers” responded to ULCC expansion by increasing fare segmentation and further reducing fares at the bottom of the fare distribution. Using data from 2012Q1 to 2019Q4, I show that ULCC presence significantly widens fare dispersion, whereas competition from legacy carriers and LCCs does not meaningfully affect fare dispersion in most cases. More generally, my results show that failing to account for firm-level heterogeneity could lead to inappropriate conclusions about the relationship between competition and price dispersion.
... By mid-2015, in the midst of the FAA's slot control review, United Airlines and Delta Air Lines struck a controversial automatically-renewable slot lease agreement whereby Delta would lease 24 Newark slots to United for $14 million, de facto permanently transferring these slots to United. The Department of Justice (DOJ) challenged this transaction on the grounds 3 For studies that control for slot-constrained airports in equations where price is the dependent variable, see [2,7,12,17,19,24]. that it presumably posed anticompetitive harm to consumers since, at the time, United controlled 73% of Newark slots (i.e., 902 of the 1233 allocated slots). The proposed slot acquisition would have raised United's slot possession at Newark to 75% [23]. ...
... Further enlarging the LCC fleet increases the overall expected consumer surplus due to the additional 8% decrease in leisure airfares and 19% increase in flight frequencies. Six additional airport pairs are served in this case and these findings are consistent with the well-known Southwest Effect (Morrison, 2001). ...
... Su modelo de negocio se basa en elevadas frecuencias en los vuelos y precios muy bajos, sin usar el Hub and Spoke System. Utilizando un conjunto de variables indicativas del nivel de competencia (actual, adyacente y potencial), Morrison (2001) estima en un 20% el ahorro que la compañía Southwest Airlines ha permitido a los viajeros norteamericanos en vuelos domésticos, teniendo en cuenta el efecto indirecto sobre los precios de las restantes compañías. ...
Article
Este artículo analiza el impacto de las compañías aéreas de bajo coste (CBC) en el turismo español, utlizando la base de datos proporcionada por el Instituto de Estudios Turísticos (IET). Desde el año 2004, la proporción que representan las aerolíneas de bajo coste en el transporte de los turistas que llegan a España por vía aérea se ha incrementado drásticamente, superando hoy el umbral del 60%. En particular, Ryanair se ha convertido en una destacada lider, con presencia en los principales aeropuertos. Esta expansión de las CBC ha tenido un efecto positivo y elevado en el número de turistas, pero al mismo tiempo ha influido negativamente sobre su estancia media, y aún más claramente sobre su gasto medio, haciendo que no sea observable un impacto positivo sobre el gasto turístico total. Por otro lado, podría aventurarse que parece existir un trade-off entre más días de estancia y más gasto por día, con los países situados en diferentes combinaciones. Estos resultados podrían ofrecer una guía útil para la política económica, comenzando por frenar el fomento de las CBC mediante subvenciones.
... The emergence of LCCs has had a profound impact on the airline industry worldwide, but also on airport business models, for example with a new breed of airports specializing in serving LCCs (Efthymiou and Papatheodorou 2018). The impact of LCCs on airfares and airline competition has been a long-standing research topic (e.g., Windle and Dresner 1995;Morrison 2001;Franke 2004;Pels 2008). The traditional full service carriers (FSCs) have been forced to respond by adjusting their service offerings, particularly in the short-haul markets (Tsoukalas et al., 2008;Pearson and Merkert 2014). ...
... Adding arrows to the spatial network indicates whether there is a direct flight between them. According to Morrison (2001), if the distance between the two airports is within 75 miles, the two airports are adjacent (Fukui, 2012;Pai, 2010). An adjacency matrix is commonly used to represent the network's structure (Arvis and Shepherd, 2011; Barthélemy, 2011) in Geographic Information Systems (GIS). ...
Article
This research investigates the number of on-time flights (OTFs) at European airports and how this number is influenced by an airport's flight connectivity. We conduct a spatial statistical analysis of the spatial context relationship using econometric models, and the interaction between the number of airport's on-time flights (OTFs) and flight connectivity. Using 2017 and 2018 data, we characterize the relationship between a European airport's air connectivity index (ACI) and the number of flights that depart or arrive at a gate within 15 min of schedule (OTFs). We also analyze the relationship between OTFs at a given airport and those of neighboring airports. As the distances between airports increase, autocorrelation shifts from a positive to a negative sign meaning that at greater distances, airports' on-time performance is less dissimilar. We find that before the pandemic and the ensuing global travel shutdown, a spatially lagged term of ACI improves the model's ability to account for variations in OTFs across airports. Flight delay propagation in the air transport system caused delays to occur due to the shared resources underlying an initially delayed flight and subsequent flights. This analysis offers a rational for increasing airport connectivity as a way of improving the share of on-time flights of European airports.
... The data contain six market structure variables. In addition to the carrier's market share and route HHI from the DB1B (2018 Q3), the data include a Southwest dummy and an LCC dummy to indicate the presence of the Southwest and other LCCs separately on the route, as studied by Morrison (2001) and Kwoka et al. (2016). The hub dummy (which equals 1 if either end-point airport is a hub airport for the operating carrier) and the slot restricted airport dummy are used to measure the fare premium charged by the dominant airlines at the end-point airports (Borenstein 1989). ...
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Airfares are affected by a variety of factors, but it is less clear which factors are the key determinants and how they interact. Based on a unique transaction level data set, this paper introduces a widely used, machine learning based pricing tool to investigate the airline market segmentation and dynamic price discrimination problems. The empirical results suggest that purchasing time, city distance, market structure, market size, and seat availability are the five most important pricing factors in order. Airlines first partition their markets into an early market and a late market, and split the market further by city distance and other factors. While intertemporal price discrimination explains the majority of fare variations, there are strong indications that airlines use their market power in the late market and charge higher fares on late-arriving consumers (but not on early consumers), in response to extra seats sold.
... 4 Within the airline industry, a vast literature has considered the relationship between competition and fares, particularly the impact of LCCs on legacy carriers' fares. In a seminal paper on the topic, Morrison (2001) studied the relationship between Southwest Airlines and competitors' fares, and found that Southwest's presence was associated with significant fare reductions on routes directly served by Southwest as well as routes where Southwest was a potential entrant. Goolsbee and Syverson (2008) likewise focused on potential competition, and found that incumbents significantly reduced fares on routes Southwest was likely to enter. ...
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I study the relationship between competition and price dispersion by evaluating the competitive role of Ultra-Low Cost Carriers (ULCCs) in the U.S. airline industry. These carriers have significantly lower unit costs than traditional Low-Cost Carriers (LCCs), and focus almost exclusively on leisure travelers, offering unbundled products with low base fares and fees for many ancillary services. Public statements in legacy carriers' earnings calls from 2012-2019 indicate legacy carriers responded to ULCC expansion by increasing fare segmentation and further reducing fares at the bottom of the fare distribution. Using data from 2012Q1-2019Q4, I show that ULCC presence significantly increases fare dispersion, as the price response by ULCCs' competitors is much stronger at the bottom of the fare distribution. More generally, my results show that failing to account for firm-level heterogeneity could lead to inappropriate conclusions about the relationship between competition and price dispersion.
... As a result, LCCs can often compete with significantly lower fares and lead to strong traffic growth. Such a pattern has been consistently observed in the aviation markets in North America, Europe and recently in Asia (Windle and Dresner, 1995;Dresner et al., 1996;Morrison, 2001;Alderighi et al., 2004;Franke, 2004;Gillen and Lall, 2004;Doganis, 2005;Zhang et al., 2008;Fu et al., 2011Fu et al., , 2015aWang et al., 2017). On the other hand, it has been pointed out that because of LCCs' reliance and sensitivity to lower costs, an identical cost increase will be more likely to harm them more than FSAs (Fu et al., 2006;Oum and Fu, 2007). ...
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The Japanese aviation market experienced significant changes in the past decade, with a few entrant low-cost carriers (LCCs) changing the duopoly by the two dominant full-service airlines (FSAs) of Japan Airlines and All Nippon Airways. However, the major disruptions caused by the COVID-19 pandemic might change industry development trajectory. This study provides an updated review of the development and performance assessment of the Japanese domestic market, with a focus on the effect of the COVID-19 pandemic on airlines' capacity, frequency, yield and competition using data from 2019 to 2020. Special efforts are dedicated to investigating whether there is significant asymmetry between FSAs and LCCs across different types of routes. Our empirical results suggest that the pandemic did impose significant negative effects on airline yield, scheduled seats and frequency. Such effects were different across mainline vs. regional routes, with FSAs still maintaining much of their dominance. The two leading FSAs' duopoly appears to be strengthened, whereas the market share of the third-largest carrier, Skymark Airlines, shrank significantly towards the end of 2020. Regional routes’ sustainability has been further challenged to the extent that more resources may have to be allocated to maintain regional connectivity until sustainable recovery of travel demand. Entrant LCCs continue to put downward pressure on yield, but their contribution to overall market competition may be moderated by their affiliations with the two dominant FSAs under the so called airlines-within-airlines strategy. Affiliated LCCs could strengthen, instead of reducing, the dominance of the duopoly JAL and ANA over independent airlines in the Japanese domestic market. The government should ensure that there are no entry barriers blocking independent entrants to the market.
... The presence of Delta Airlines (DL), which completed its merger with Northwest (NW) from 2010, favors non-Nash behavior whereas Southwest (WN) complicates convergence toward a Nash equilibrium. This echoes the empirical literature that documents the ability of Southwest to trigger fierce reactions by its competitors (see Morrison (2001) and Goolsbee and Syverson (2008)). ...
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We build an index for the likelihood that an equilibrium obtains based on the postulate that it is more likely to occur when it is the only rationalizable outcome. The market should be in equilibrium if the index is lower than 1, conditional on the ability of the researcher to observe the full set of products/services proposed by competing firms. If not, the relevant threshold for the index should be adjusted below 1. Assessing the plausibility of the occurrence of an equilibrium can thus be used to delineate empirically the scope of the relevant market, which is a well-known concern for competition authorities. We illustrate our framework with data from the U.S. air transportation industry. JEL classification numbers: C51, D21, L13, L40, L93.
... Sweeting, Roberts and Gedge (2020) study the behaviour of incumbent airlines in the US and find that when Southwest airlines (potential entrant) operates at airports that are on a certain route but do not operate on the route itself, incumbents see this as the potential threat of entry and react by price reductions. According to Goolsbee and Syverson (2008), these price cuts were up to 20%, and Morrison (2001) determined that these price cuts lowered traveller's expenditures on air tickets by 3.3 billion USD in 1998. Sweeting, Roberts and Gedge (2020) determine in their model that incumbent airlines should use limit pricing rather than a capacity expansion to deter entry. ...
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This paper aims to identify the possible implications of quantity competition in markets with differentiated products on entry deterrence. If capacity commitments characterise this industry, quantities can be expected as the choice variable of rational players, even in the presence of product differentiation. Different equilibria of a static game occur depending on the degree of asymmetry of players, incumbent and entrant, which will crucially affect the shape of their best response functions. Asymmetry can stem from players’ advantage in demand and costs, their different objective functions, or the first-mover advantage. We will analyse entry where incumbent maximises the weighted average of profit and revenue while entrant is maximising profit. The reduction of asymmetry may intensify competition in the industry and, consequently, reduce entry barriers. Our findings provide an insight that could be used for practical recommendations for conducting competition policy and other sector-specific regulations, where the introduction and higher intensity of competition are desirable.
... Bubalo and Gaggero (2015) found that LCCs contributed to a reduction of delays for airlines and flights landing improving the delay performances of airports including major airports. Morrison (2001) found that Southwest Airlines substantially contributed to the success of airline deregulation in the United States. Brueckner, Lee and Singer (2013) found that competition among LCCs has dramatic effects on fares. ...
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This study uses a large dataset to consider the network change of the three largest European Low Cost Carriers (LCCs) easyJet, Ryanair and Wizz Air during the preCovid-19 period and the Covid-19 pandemic period. Network changes are characterized in terms of airport pairs, city pairs, numbers of flights and network overlaps. The results show that European LCCs increasingly expanded their networks into markets that had already been served by incumbent LCCs, which indicates that LCCs increasingly compete head-to-head among themselves. Difference-in-differences regressions estimate that network overlaps among these LCCs lead to airfare reductions of approximately six Euros, ten percent.
... Private airlines and low-cost carriers (LCCs) in China, however, are still at development stage (Wang et al., 2017b(Wang et al., , 2018Liu and Oum, 2018). LCCs have emphasized on quick turnaround and high aircraft utilization (i.e., shorter ground buffer) (Morrison, 2001;Fu et al., 2015). As observed by Jetzki (2009), without lengthy ground and flight buffer, European LCCs could suffer more serious delay propagation problem. ...
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Delay propagation is the flight departure delay caused by the arrival delay of pre-segment flight. Chinese airline market has suffered very poor on-time performance (OTP) in recent years. It is, however, unclear whether delay propagation prevails as one major source for such problem. This study first aims to empirically quantify delay propagation in the Chinese airline market. Specifically, we shed light on heterogenous levels of delay propagations across different airports and airlines. Then, the distinct delay propagation patterns in China are also discussed and compared with other developed airline markets (e.g., the US and Europe). Our estimation is based on OTP data for over 12 million Chinese flights covering the 2015–2017 period. Specifically, it is found that 10 min arrival delay of pre-segment flight within 1 hr before the departure lead to an average of 7.49 mins delay propagation for subsequent departure flight. Arrival delay of earlier pre-segments (1–2 and 2–3 hr before the departure) leads to much less delay propagation, due to longer ground buffer. Chinese airlines arrange longer ground and flight buffer than that of the US airlines to prevent the delay propagation from accumulating along the subsequent flights in a day. Thus, unlike the US market, delay propagation is not the major reason for poor OTP in China. In addition, delay propagation is less prevailing at the Chinese hub airport. This is because China has relied on point-to-point network, which does not require sophisticated schedule coordination. And the local passengers at these Chinese hub airports have higher time value such that the Chinese airlines also try to improve OTP at these hub airports to better serve these lucrative but time-sensitive local passengers. Unlike the European LCCs, Spring Airlines, the largest low-cost carrier (LCC) in China, outperforms major full-service carriers (FSCs) in controlling delay propagation. This finding may also apply to other Northeast Asian LCCs sharing common operational characteristics as Spring Airlines. Last, we find that airlines purposely tolerate moderate departure delays of up to 15 min, which is the threshold that defines delays, no matter whether the pre-segment flight arrives late or on-time. The relevant policy and managerial implications are also discussed.
... Similar, Franke (2004), Dobruzkes (2006) and Alderighi et al. (2012) found that Low Cost Carrier (LCC) presence translates to fare decreases and demand stimulation. Morrison (2001) even argued that the entrance of Southwest lowered fares by 46.2 % in the U.S. domestic market. Bilotkatch et al. (2010) found on the NYC-LON route that the pricing strategies of different carriers vary strongly. ...
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In autumn 2017, Air Berlin, the second biggest player in the German airline market, discontinued its operations due to bankruptcy. Prior to this, the struggling carrier had already been reducing its domestic capacities and adjusting its service patterns, which had impacts on the competitive situation for the remaining carriers on various domestic origin-destination (O&D) markets. This paper aims at identifying resulting changes of, e.g., the yields generated in intra-German air transport. In the German domestic market, the relevant competition per route can be narrowed down to a few players as opposed to continental or intercontinental flights. We found evidence that on 90% of the TOP20 O&Ds, representing 96% of the total passenger volume, revenue per pax (as an indicator for yield) increased. We found FRA-BER and MUC-BER – both O&Ds with intense Easyjet competition to be the only O&Ds that did not show an increase in price/yield after the market exit of Air Berlin.
... In the transportation literature, this effect demonstrates that when Southwest Airlines, a low cost company, enters into a particular market there is a twofold effect; a significant increase in the number of passengers traveling in the market and a noteworthy decrease in the average fare paid by travelers in the market (Dresner, Lin, & Windle, 1996;USDOT, 1993;Vowles, 2001). Research indicates the Southwest Effect is not only prevalent in the market the carrier enters, but there is evidence that the effect expands into markets in multi-airport regions as well, even if the carrier is only serving one of the airports in the market (Dresner, Lin, & Windle, 1996;Morrison, 2001;Vowles, 2001). Interestingly, this effect has not been well-researched in the strategy industry. ...
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This paper reports the findings of an empirical study of low cost airlines. The investigation centers upon low cost strategies and organization structure of three airlines in the United States over a four year period. Results show that such strategic combinations are very influential on the entire market, resulting in increased sales for all carriers and a decrease in the average fare sold. Of particular note is the role that structure plays in low cost airlines that enables success as they continue growing and competing in new geographic markets.
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