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Airport capacity and entry deterrence: Low cost versus full service airlines
Abstract
We study entry deterrence in air transport markets with a full-service (FS) carrier (the incumbent) and a low-cost (LC) carrier (the potential entrant). We consider a vertically differentiated product model where airlines have different operating cost and different generalized prices so they compete in ticket prices and frequencies. Thus, more frequency allows airlines to increase ticket prices without losing demand. In this context, we show that the incumbent may increase the frequency offered in order to deter the LC carrier entry. We show that if the airport capacity is low enough the LC carrier entry can be easily blocked or deterred. However, if the airport capacity is sufficiently high, the LC carrier entry must be accommodated. Regulators should take these results into account in order to promote competition among airlines.
... Some researchers, such as [64,65], claim that alliances between airlines or with destinations contribute to streamlining costs. Frequency competition is critical for a full-service airline in gaining market share [64], and this allows airlines to increase ticket prices without losing demand [66]. Furthermore, airport slots represent an important avenue for further research on the airlines [67], on how airlines enhance the practice of price discrimi- The second stream deals with airlines (legacy and low-cost carriers) and airlines and cities' alliances to improve the accessibility and frequency at destinations and airports. ...
... Some researchers, such as [64,65], claim that alliances between airlines or with destinations contribute to streamlining costs. Frequency competition is critical for a full-service airline in gaining market share [64], and this allows airlines to increase ticket prices without losing demand [66]. Furthermore, airport slots represent an important avenue for further research on the airlines [67], on how airlines enhance the practice of price discrimination in the globalised market or 'the high dependence of airlines on efficiency and productivity gains [68], and to reduce carbon emissions by airlines. ...
Background: The purpose of this study is to provide an assessment of international airports and airlines, ‘IAAs’, and to organize and classify the literature on air transport to stage the importance of this topic and encourage future research in the projection of the aviation and tourism sectors. Methods: It is a bibliographic study, and this work focuses on IAA documents published in major international journals, conferences, and books from 2000 to 9 June 2021; this topic is scattered across various journals and has secondary data in many disciplines. Results: The findings suggest a new paradigm applied to the IAA topic and are classified in four first-order research streams: airports; airlines; connectivity; and competition. This study identifies new challenges and opportunities for researchers, airport and airline operators, and stakeholders to make better future decisions. Conclusions: There is no agreement on an explicit definition of the IAA concept that captures the true nature of this topic. For this reason, this article is innovative in the new IAA concept and in how it will possibly change the theoretical frameworks in future scientific research in the aviation and tourism sectors. This study has been needed to better understand the effectiveness, projection, and different business strategies to be adopted by researchers and organizations in the aviation and tourism future.
... In the context of Kalimarau Airport, efforts to provide accessibility facilities for people with disabilities are in place, such as specialized lifts, accessible restrooms, ramps, priority seating, and assistance [14] [15]. However, there are still deficiencies in the facilities provided, such as the absence of disability restrooms in the baggage check-in area and the lack of priority seating in the departure area [16] [17]. ...
Kalimarau Airport is an airport located in Teluk Bayur District, Berau Regency, East Kalimantan. Where at the Kalimarau airport terminal there are facilities for the public and for passengers with disabilities. As for the services provided in the form of assistance to make it easier for passengers with disabilities to communicate and move from the check-in process to the passengers with disabilities to carry out the boarding process. So that by providing the facilities and services that have been provided, the purpose of this study is to determine the ideal readiness of facilities and services as well as the availability of facilities for passengers with disabilities. In this study the authors used a quantitative research method. For data collection techniques using documentation, observation, interviews, and questionnaires. Whereas in processing the data from the questionnaire results the author uses validity test data and reliability test data, The final results achieved from this study indicate that for the results of the validity test all items obtained a value greater than the r table value, namely 0.344 which was declared valid and for the reliability test results obtained a value of 0.970 which was in the high category. So that a conclusion can be drawn where there are still deficiencies in fulfilling the accessibility of facilities for passengers with disabilities, while the availability of facilities and services that have been provided are quite good.
... According to Ethiraj and Zhou (2019) airlines engage in competition through price-cutting, capacity expansion, and quality differentiation. Moreover, they state that 'entry deterrence' occurs due to a situation of excess capacity, as long as airports are not congested (Kappes and Merkert, 2013;Valido et al., 2020). However, such capacity can be reversed, since incumbent airlines operate on multiple heterogeneous routes. ...
This paper studies the impact of airlines’ exits on passenger traffic. In this regard, univariate and multivariate structural time series have been applied. They have proved useful to quantify the net impact on passenger traffic and redistribution effects among incumbent airlines. As an application, a natural experiment is studied, in which two relevant airlines filed for bankruptcy in different periods. In the first, policymakers employed a laissez faire strategy, whereas in the second, they applied an incentive scheme programme. The programme was based on the support of destination promotion, tax and tariff discounts. Overall, the paper shows that under laissez faire, the incumbent airlines did not take over the passenger traffic left by the airline that exited the route. However, in the second case, following approval of the incentive scheme, the loss of passengers was mitigated by the incumbent airlines.
This paper describes an econometric model of the Brazilian domestic carrier Azul Airlines’ network construction. We employed a discrete-choice framework of airline route entry to examine the effects of the merger of another regional carrier, Trip Airlines, with Azul in 2012, especially on its entry decisions. The results suggest that post-merger, Azul has adopted a more idiosyncratic entry pattern, focusing on the regional flights segment to conquer many monopoly positions across the country, and strengthening its profitability without compromising its distinguished expansion pace in the industry.
We empirically investigate the capacity adjustments of major incumbent airlines facing the entry of a new low cost carrier in a secondary airport of a multiple airports region. We examine the effects of the threat of product repositioning constituted by the newcomer migrating operations to adjacent airport-pairs within city-pair markets. We develop an empirical model that allows for time-varying strategic responses, aiming at identifying possible degrees of route entry threat. We consider the case of the entry of Azul Airlines in the densest conurbation in Brazil. Our results suggest that the incumbents preemptively fortified their flight frequency positions on threatened routes to deter the anticipated march of the newcomer from the secondary airport toward the existing primary airports.
This paper develops an empirical model of online airfares to inspect the impact of the entry of a low-cost carrier (LCC). We utilize a database collected from the website of an online travel agent in Brazil. We test whether incumbents reshape their airfare temporal profiles in an attempt to attract the price-sensitive passengers who constitute the target market of the newcomer. Our results suggest that LCC entry partially spoils the existing market segmentation schemes of incumbents, forcing them to revise their distribution management strategy, simplify their fare structure and migrate from a non-monotonic to a weakly monotonic price curve.
This study analyses incumbent cost response to route-level entry in the Spanish airline market, by assessing the type of entrant and airport capacity restrictions. It includes 193 routes where incumbents react to entrants, estimating the operating costs for each carrier using a multiple-source database based on accounting and industrial engineering procedures. The results reveal that, under airport capacity restrictions, incumbents accommodate in costs more when facing low-cost entrants than formerly regulated ones; while the elimination of such restrictions drives incumbents to greater cost retaliation to low-cost entrants than to formerly regulated ones. Product differentiation predicts these dynamic effects.
We examine the effects of entry on the pricing of legacy airlines facing a rapidly expanding low-cost newcomer. We estimate the timing and the determinants of responses allowing for asymmetry and product differentiation. We propose a decomposition procedure of time fixed-effects to control for unobserved heterogeneity, accounting for time-varying route-, city-, and carrier-specific unobservables. We find that incumbents do price-respond to actual but not to potential entry. The lack of preemption is due to financial distress, which precluded costly deterrence against a deep-pocketed newcomer. Our model also uncovers product differentiation stemming from more convenient flights.
This paper investigates the role of code-sharing alliances on entry deterrence. One major carrier operates a network with one hub that links n cities. It competes with another foreign carrier on one international spoke, while the other spokes are domestic and monopolized. There exists a potential entrant on one of the domestic spokes. We demonstrate that entry may increase or decrease the major carrier's profits, depending on the network size and the degree of product differentiation. When entry decreases the profits, an alliance between incumbents can be used as a credible threat to deter entrants with no significant cost advantage.
Pre-print; author's draft Services are by nature perishable. As such, managing a service firm's capacity to match supply and demand has been touted as one of the key problems of services marketing and management practice. This paper advances an alternative perspective of unused service capacity. Based on a review of current literature and an exploratory study, this paper employs a theory-in-use methodology to map out a set of capacity strategy propositions. These propositions show a divergence between what literature suggests and what service firms actually practice with regard to reducing the occurrence of unused service capacity. The paper also demonstrates that capacity can be employed as a resource to achieve a series of strategic objectives that serve to improve the performance of the firm. Service firms should therefore approach capacity management not only from the standpoint of operations management but from that of marketing as well.
The prevalent airport slot policy, based on the grandfather rights and use-it-or-lose-it rule, may induce the so-called slot hoarding behavior, i.e., airline intentionally operates excessive or even unprofitable flights. This paper develops a vertical-structured model to explore the effects of such slot policy on airline’s service decisions (flight frequency, aircraft size and airfare) and airline profit, and the resultant implications for a profit-maximizing airport or a welfare-maximizing airport. The effects of airline competition on slot hoarding behavior are also examined with an oligopoly competition model in which the carriers provide horizontally differentiated flight services. Analytical solutions are derived and compared with the “no slot policy” scenario. We find that the claimed negative effects of the slot policy on airport congestion may be overstated since an airline chooses to hoard slots if and only if the demand/capacity ratio is significantly low. When the airline has to hoard slots by operating excessive flights, it would use smaller aircraft, charge a higher airfare and serve more passengers. For a private airport, the slot policy may increase the airport’s profit by allowing the airport to transfer some of the negative effects of weak travel demand to airlines. For a public airport, the slot policy does not decrease social welfare unless passengers’ valuation toward frequency benefit is low. Finally, for airlines with equal access to airport slots, as the substitutability among airlines and/or the number of competing airlines increases, the incentive of slot hoarding decreases. Hence, regulators may expect a much milder negative effect of slot hoarding in a competitive aviation market.
This paper investigates the competitive responses of China Eastern to the entry of Spring Airlines into its hub airports in Shanghai. The analysis takes into account of the actual and adjacent competition for both LCCs and full-service airlines (FSAs) within an airport-pair framework. The results of the econometric analysis showed that Spring put downward pressure on the average fares of China Eastern and other FSAs. But China Eastern responded more aggressively than other FSAs to Spring's competition on routes from the same and nearby airports. Having said that, the moderate price reduction of 4%–4.9% suggests that China Eastern did not perceive Spring as a serious competitor. Such limited impacts are due to restrictions imposed by the regulator onto Spring Airlines in terms of capacity control and access to major trunk routes.
We use a longitudinal dataset from the U.S. airline industry to estimate three different models for entry games with very general forms of heterogeneity between U.S. carriers in airline markets: a simultaneous game with complete information and two sequential games with or without strategic entry deterrence. In a sequential game with entry deterrence, an incumbent decides whether to incur a cost to deter potential entrants. We show that the model with sequential games with strategic deterrence provides the best fit to the data. We conclude that the results reject the hypothesis of a static model and support the hypothesis of the existence of strategic entry deterrence. (JEL L1)
This article studies incumbent price response to entry by low-cost carriers in the U.S. airline industry. I find that legacy carrier incumbents decrease their mean airfare, 10th percentile airfare, and 90th percentile airfare following entry by a low-cost carrier. Airfares decrease by a larger percentage at the right tail of the incumbents’ price distribution than at the left tail, suggesting that increased competition from low-cost carrier entrants leads to lower price dispersion.
The paper analyzes how US legacy carriers and Southwest Airlines respond to the threat of entry by AirTran Airways. It is found that that legacy carriers' ex post equilibrium prices are on average lower, whereas those of Southwest are on average higher in response to AirTran's threat of entry. Once AirTran actually flies the route, while the prices of legacy carriers fall further, those of Southwest don't change significantly. Hence, estimation results suggest that the pricing behavior of a low-cost incumbent is quite different from incumbent legacy carriers in response to not only actual but also potential competition by a low-cost carrier entrant.
This paper examines the relationship between low cost carriers (LCCs) and airports by undertaking a critical analysis of the academic research in this area. The findings show that the LCC's choice of airport is very much determined by its operating model, although through time a wide variation of models have evolved which has complicated the situation. The analysis also confirms that the nature of the airline–airport relationship has fundamentally changed, not only because of the growth of the LCC sector but also because of the commercialisation of the airport industry. However the academic literature is far less clear and conclusive about the overall impacts of LCC operations at airports and the extent to which airports benefit from LCCs, particularly in the long-term, and this suggests that more studies are needed. In addition more research from other regions outside of Europe, and also concerning passenger preferences, would fill some other knowledge gaps that have been identified.
Much of the literature on the airline industry identifies a potential entrant to a market based on whether the relevant carrier has presence in at least one of the endpoint airports of the market without actually operating between the endpoints. Furthermore, a potential entrant is often defined as a credible “entry threat” to market incumbents once the potential entrant establishes presence at the second endpoint airport of the market. This paper provides evidence that even when a potential entrant has presence at both endpoint airports of a market, incumbents may not respond to this as an effective “entry threat”. Specifically, we find that (1) incumbents lower price by more when the potential entrant has a hub at one or both market endpoints; and (2) incumbents increase rather than lower their price if they have an alliance partnership with the “potential entrant”.
This paper proposes an analytical framework for the scheduling decisions of road travellers that takes into account probability weighting using rank-dependent utility theory. The fundamental difference with the standard scheduling model based on expected utility is that the probabilities of arrivals are treated in a non-linear way. This paper shows how scheduling decisions are affected by the weighted probabilities of the traveller. We derive the costs of non-optimal chosen departure times because of probability weighting and show that if the parameterised probability weighting function is similar to what has been found for gambling, the costs of probability weighting for morning peak car travellers are around 3 per cent. For the full range of parameters tested, we find costs in the range of 0–24 per cent of total travel costs.
We derive the expected user costs of US domestic air travel delay variability taking into account scheduling behavior of travelers. Travelers do not only consider mean arrival delays, but also face scheduling costs because they arrive too early or too late at their destination. The model allows travelers to anticipate arrival delay variability by choosing an earlier flight. We show that the expected user costs of US air traffic delays are underestimated by 16% if arrival delay variability is ignored.
Low-cost airlines (LCAs) have become essential actors supplying nationwide and continental air services. This paper focuses on the European case and investigates how the LCA spatial strategy has evolved since the last available comprehensive analysis in 2004. Using comprehensive data, the analysis is conducted at three levels: global, cities and networks. It shows that LCAs now represent 31% of intra-European airline seats. Although LCA business has expanded to Central-East Europe, Morocco, and a few remote areas, it remains mainly focused on the intra-Western market. In general, LCAs serve large cities and tourist destinations. The use of secondary, regional airports is put into perspective. Service volatility is low at the city level but significant at the inter-city level. Average distance has increased, but most flights are short-haul. LCAs play an important role in launching new routes, thus diversifying the European airline network, and in increasing frontal competition with traditional airlines on pre-existing routes. The niche markets are common in terms of routes but are rather limited in terms of seats supplied. Actually, the main specificity of the largest LCAs is the provision of flights that do not serve the home country. A typology of networks demonstrates that there is no a single European low-cost model.
This paper investigates strategic interaction among airlines in product-quality choices. Using an instrumental variables approach, the paper estimates flight-frequency reaction functions, which relate an airline’s frequency on a route to its own characteristics and to the frequencies of competing airlines. A positive reaction function slope is found in some cases, indicating the presence of strategic interaction in the choice of frequencies. The paper also asks whether multimarket contact generates mutual forbearance in frequency competition, finding no evidence for such an effect.
The adoption of the low-cost carrier business model has applied competitive pressure on established network or “legacy” carriers, by offering fares at prices that legacy carriers find it difficult to match and still cover their fixed costs. This paper reports how two medium-sized national airlines-Air New Zealand and Air Canada-have coped with the low-cost threat by, in effect, turning their fixed costs into profit centres. Features such as full regional networks, long-haul connections, frequent flyer programs, membership in global alliances, lounges and business class cabins can be bundled into products which can be marketed and sold profitably to business and even some leisure travellers, and which cannot be easily replicated by low-cost carriers. Although not panaceas, the innovations of Air New Zealand and Air Canada to the competition they face in their domestic and trans-border markets demonstrate the possibility of an effective legacy carrier response to the low-cost carrier business model.
This paper builds a vertical differentiation model to analyse the effects of subsidies, or lower aeronautical charges, for secondary airports on competition between low cost and full scheduled carriers. The Ryanair–Charleroi Airport agreement in Europe is used as an example and as a basis for the model. The main findings are that subsidization or lower airport charges benefit consumers and negatively affect incumbent airlines. However, they may be more affected by competition than by the subsidy. An empirical analysis provides a few insights on the influence of dominating airports in Ryanair fares. We conclude that this airline sets lower fares when flights depart from or arrive at dominated airports.
This study explores the relation between airline market structure and schedule differentiation. Using a location theory framework applied to product differentiation over the time scale, the analysis relates the level of competition, and the presence of low-cost carriers in non-stop US markets to schedule clustering. As expected from theory, it is found that schedule clustering increases with competition, resulting in reduction in product differentiation. It is also found that this tendency is lower in the presence of low-cost carriers and when there is a strong hub effect where dominant hub airline own, rather than compete with their feeder subsidiaries.
The promotion of competition policies in air transport faces several obstacles, one being the absence of mobility of airports’ slots. The European Commission has been preparing legislation on this issue as a springboard to a more efficient use of scarce airport capacity. This paper analyses possible outcomes of such a policy, using a model that captures the main features of the airport market before and after the re-allocation of slots. Results show that the achievement of more efficiency depends on the criteria used for its assessment. In particular, welfare falls after the process of re-allocation. An empirical test of airlines’ pricing strategies is presented, and confirms one of the model's results, i.e. that airlines differentiate more prices between peak load and off peak hours in a more competitive environment.
When considering mode choice criterion, departing air passengers allow a period of time, additional to the time allowance predicted for their ground access to airports. This additional time is commonly known as a “safety margin”. The safety margin allowance increases the possibility of arriving at the airport no later than passengers' preferred arrival times. This study is the first to assess the magnitude of safety margin allowed for airport ground access trips. With the use of revealed preference survey data, the effects of safety margin allowances on ground access mode choices to Hong Kong International Airport (HKIA) are quantified by a multinomial logit-type mode choice model. The model results indicated that, when compared to non-business air passengers, business air passengers place a significantly higher value on both travel time and safety margin for their ground access to HKIA. The findings of this study provide valuable information to various transport operators for their design and improvement on airport related traffic.
This study proposes a framework to identify and measure the extent of product differentiation among services provided by transportation firms, and applies it to the US domestic airline markets. By formulating and estimating an Almost Ideal Demand System and a set of price response equations for competing carriers, we investigate empirically the degree of substitutability between the services provided by Full Service Airlines (FSAs) and Low Cost Carriers (LCCs). Our results indicate that there is a significant differentiation in services provided by FSAs and LCCs. As a result, the presence of LCCs alone will not ensure healthy competition in a market. Therefore, it is important for public policy makers to attempt to maintain competition between FSAs even in the markets where LCCs have substantial market shares.
An important question from the viewpoint of competition analysis in the air transport industry is the extent to which low-cost airlines operating from a secondary airport compete with full-service airlines serving a main airport in a multiple airport region. In this paper we address the issue of the competition between full-service and low-cost airlines serving adjacent airports in the Greater London using econometric estimation of demand structure (own- and cross-price elasticities). Our analysis follows the methodology in (Pels, E., Nijkamp, P., Rietveld, P., 2000. Airport and airline competition for passengers departing from a large metropolitan area. Journal of Urban Economics, 48 (1), 29-45, Pels, E., Nijkamp, P., Rietveld, P., 2003. Access to and competition between airports: a case study for the San Francisco Bay area. Transportation Research Part A: Policy and Practice, 37 (1), 71-83). It is based on the nested logit model which we use to capture three key dimensions of passenger choice: air fare, surface-access costs and frequency. We obtained estimates of the own- and cross-price elasticities, which was the focus of our interest. On the basis of our understanding of the industry dynamics we find these estimates, especially of the cross-price elasticities, to be on the low side.
This paper analyses entry deterrence and accommodation by low cost carriers (LCCs) with two games. In the first game two LCCs compete in a horizontal differentiation setting. Results show that the entrant may drive away the incumbent from its original location under certain conditions. In the second game the incumbent is a LCC and the entrant a full service carrier, with vertical differentiation. The incumbent tries to deter or accommodate entry by product proliferation. We find out that the incumbent will only deter entry if it can surpass the entrant's quality, and that product proliferation is not an accommodating strategy.
Passengers valuate frequency in air travel positively because it enhances their chances of arriving at their desired time. The valuation of frequency is therefore related to the time of arrival of flights. We develop a framework to link frequency and time of arrival. We use data from a stated preference survey to find customer valuations, adopting the random parameters logit approach to account for heterogeneity. Our empirical results are pretty much in line with those brought forward by other empirical studies, using revealed preference data. Our outcomes suggest that westbound long-haul leisure passengers in general prefer flights with afternoon arrivals and that the majority of these travellers prefer arriving before their desired arrival time over arriving after their desired arrival time. This implies that flights should not be spaced equally over time, but be biased towards arriving earlier.
We explore the interaction between full service carriers (FSCs) and low cost carriers (LCCs) in a market for air travel, of which flying is merely one component in a bundle of services. The paper employs a locational approach to product differentiation to provide insights concerning the degree to which LCCs compete with FSCs. This approach highlights the role of airports in both geographic location relative to the travel market and as independent business entities that generate both airside and groundside revenues. A simple address model is used to illustrate conditions under which LCCs (affiliated with subsidiary airports) only constitute partial competition for FSCs. Consequently, market interactions between FSCs and LCCs can exhibit price stability and relatively low price dispersion. The model also indicates that vertical relationships between airports and airlines can be both profit enhancing and socially desirable.
The growth of low-cost carriers (LCCs) is currently focused on the Western European market, where they represent the most determining factor in the evolution of airline networks. In this area, they stand for 18% of the total air transport supply according to seats. Limited to short and medium haul flights, networks are not too concentrated (no hubs). They are North–South, and compete with—when they have not replaced—some charter routes. The use of air freedoms beyond the fourth is still limited, but exclusive routes are a frequent phenomenon linked to the option for secondary (urban or regional) airports and/or niches.Finally, low-cost carriers give fresh impetus to point-to-point routes by drawing new networks complementing those of full service network carriers (FSNCs). If no hubs as such can be found in these new networks, significant concentrations characterize the major bases.The geography of low-cost networks is to a large extent the geography of EU air transport liberalization.
Direct competition between full service airlines and no-frills carriers is intensifying across the world. US and European full service airlines have lost a significant proportion of their passengers to low cost carriers, the experience now being repeated in the domestic markets of Asia. This paper attempts to provide answers to a number of critical questions: What are the key drivers of each type of airline's business model? Is there a difference in passengers’ perceptions between low cost carriers and full service incumbents in a mature European market and in a rapidly developing Asian economy? What are the principle reasons why a passenger chooses a particular airline model? How could a legacy carrier encourage passengers to return and so regain their domestic market share? These questions are addressed using information obtained in passenger surveys that were recently conducted in Europe and Asia.
Recent research has found that the entrance of a low cost carrier leads to lower prices on routes it has entered. This paper extends this analysis by examining the impact of route entry by a discount carrier, ValuJet into an established carrier’s hub, Delta, and by examining price changes on routes not entered by the low cost carrier. We found that Delta lowered its fares on competitive routes terminating in Atlanta and on routes flowing through its Atlanta hub in response to competition by ValuJet. We did not find evidence that Delta increased fares on non-competitive routes (either those terminating in Atlanta or flowing through Atlanta) to compensate for lost revenues on the competitive routes. This final result runs counter to the conjectures of the DOT and supports the argument that firms practice rational economic pricing in their hub-and-spoke networks. ©
The majority of studies of air travel choice behavior make use of revealed preference (RP) data, generally in the form of survey data collected from departing passengers. While the use of RP data has certain methodological advantages over the use of stated preference (SP) data, major issues arise because of the often low quality of the data relating to the un-chosen alternatives, in terms of explanatory variables as well as availability. As such, studies using RP survey data often fail to recover a meaningful fare coefficient, and are generally not able to offer a treatment of the effects of airline allegiance. In this paper, we make use of SP data for airport and airline choice collected in the US in 2001. The analysis retrieves significant effects relating to factors such as airfare, access time, flight time and airline and airport allegiance, illustrating the advantages of SP data in this context. Additionally, the analysis explores the use of non-linear transforms of the explanatory variables, as well as the treatment of continuous variations in choice behavior across respondents.
In this paper (nested) logit models that describe the combined access mode-airport-choice are estimated. A three level nested logit model is rejected. A two level nested logit model with the airport choice at the top level and the access mode choice at the lower level is preferred. From the estimation results, it is concluded that business travelers have a higher value of time than leisure travelers. In the (conditional) access mode choice, leisure travelers have a higher access cost elasticity (in absolute value), while business travelers have a higher access time elasticity (in absolute value). In general, access time is of large importance in the competition between airports in a region.
This paper highlights how particular characteristics of air travel markets impact key dimensions of predatory pricing investigations. The paper suggests that product complementarity, product differentiation and the existence of internally flexible capacity create particular challenges in defining and measuring the extent of predation in air travel markets. These ‘dimensions of predation’ are applied to recent predatory pricing allegations in Germany.
The severe crisis of the global aviation industry has primarily struck the “classical” Network Carriers (NCs) with their complex hub&spoke operation platforms. The crisis was deepened, but by no means caused, by the terrorist attacks on September 11, 2001. The root cause was the end of a temporary revenue “bubble” after the first Iraq war, leading to historically high airline profits and major capacity expansions. After the end of the “golden” 90 s, an economic downturn and a fear of terrorism resulted in massive overcapacities, with yields showing a return to continued long-term decline.Surprisingly at first glance, low-cost carriers (LCCs) were not only spared, but boosted by this massive downturn. Their lean business model offered a compelling alternative at a time when passengers began looking for ways to avoid paying the high prices NCs demanded in order to maintain their complex hub&spoke systems. On continental travel routes, LCCs are able to deliver 80% of the service quality at less than 50% of the cost of NCs. Consequently, LCCs can—at least in theory—tackle more than 70% of continental O&Ds (in the US as well as in Europe), taking them far from their origins as niche businesses. However, for most intercontinental routes (as well as some continental ones) bundling demand in a hub remains an indispensable requirement. The challenge for NCs is now to reinvent their own business model. If they succeed in providing almost the same service level at drastically reduced cost, they would not only stabilize their position, but also lead the industry as a whole to the next level of efficiency. This article analyzes the key drivers of the current transition phase and outlines the vision of advanced airline business models that potentially lead to a new era of equilibrium.
The US airline industry went through tremendous turmoil in the early 2000s, with four major bankruptcies, two major mergers, and various changes in network structure. This paper presents a structural model of the industry, and estimates the impact of demand and supply changes on profitability. Compared with 1999, we find that, in 2006, air-travel demand was 8 percent more price sensitive, passengers displayed a stronger preference for nonstop flights, and changes in marginal cost significantly favored nonstop flights. Together with the expansion of low-cost carriers, they explain more than 80 percent of legacy carriers' variable profit reduction. (JEL L13, L25, L93)
The paper discusses airline network competition. Low-cost airlines and conventional airlines have distinctly different strategies and network types. This determines their ability to compete with other airlines in specific markets. The paper discusses the lack of competition between conventional airlines in local markets, and sees why low-cost airlines are the primary source of competition in such markets. Conventional airlines are relatively strong on long-haul markets, using their networks to keep costs per seat relatively low. Charter airlines show that a long-haul low-cost strategy is feasible For scheduled low-cost airlines, this may be more difficult, but this does not automatically mean that low-cost airlines cannot enter thick long-haul markets.
We investigate the role of limited access to airport facilities as a determinant of the hub premium in the US airline industry. We use original data from competition plans that airports are required to submit to the Department of Transportation in compliance with the Aviation Investment and Reform Act for the 21st Century. We collect information on the availability and control of airport gates, leasing arrangements, and other restrictions limiting the expansion of airport facilities. We nd that the hub premium is increasing in the ticket fare. We nd that control of gates is a crucial determinant of this premium. Limits on the fees that airlines can charge for subleasing their gates lower the prices charged by airlines. Finally, control of gates and restrictions on sublease fees explain high fares only when there is a scarcity of gates relative to the number of departures out of an airport.
This paper analyses the cost of access travel time variability for air travelers. Reliable access to airports is important since it is likely that the cost of missing a flight is high. First, the determinants of the preferred arrival times at airports are analyzed, including trip purpose, type of airport, flight characteristics, travel experience, type of check-in, need to check-in luggage. Second, the willingness to pay (WTP) for reduction in access travel time, early and late arrival time at the airport, and the probability to miss a flight is estimated using a stated choice experiment. The results indicate that the WTPs are relatively high, which is partially due to the low cost sensitivity of air travelers. Third, a model is developed to calculate the cost of variable travel times for air travelers going by car, taking into account travel time cost, scheduling cost and the cost of missing a flight. In this model, the value of reliability for air travelers is derived taking 'anticipating departure time choice' into account. Results of the numerical exercise show that the cost of access travel time variability for business travelers are between 3-36% of total access travel cost, and for non-business travelers between 3-30%. These numbers depend strongly on the time of the day.
This paper proposes an analytical framework for scheduling decisions of road travelers that takes into account probability weighting using rank dependent utility theory. The fundamental difference with the standard scheduling model based on expected utility is that the probabilities of arrivals are treated in a non-linear way. This paper shows how scheduling decisions are affected by the weighted probabilities of the traveler. We derive the costs of non-optimal chosen departure times because of probability weighting and show that for typical parameter values these are in the range of 0-24 percent of total travel costs in the morning peak.
The paper argues that entry is deterred in an industry when existing firms have enough capacity to make a new entrant unprofitable. This capacity need not be fully utilized in the absence of entry. This can result in larger costs than are necessary, given output levels. It also results in higher prices and lower levels of output than those implied by various forms of the limit price model. Capacity and other forms of investment are effective entry deterring variables, partly because they are irreversible and represent preemptive commitments to the industry.
We examine how incumbents respond to the threat of entry by competitors (as distinct from how they respond to actual entry). We look specifically at passenger airlines, using the evolution of Southwest Airlines' route network to identify
particular routes where the probability of future entry rises abruptly. We find that incumbents cut fares significantly when
threatened by Southwest's entry. Over half of Southwest's total impact on incumbent fares occurs before Southwest starts flying.
These cuts are only on threatened routes, not those out of non-Southwest competing airports. The evidence on whether incumbents
are seeking to deter or accommodate entry is mixed.
In the past decade, low-cost carriers that offer point-to-point connections with frequent services have been consistently more profitable than those operating hub-and-spoke networks. Therefore, we study the advantages of each network as compared with the other. In addition to actual fares, time costs also affect the consumers' preferences, so the increase in flight frequency causes an increase in demand. Besides, the more passengers the airline carries, the more frequent services it offers. Thus, a positive feedback mechanism is incorporated into an economy of frequency. Additionally, the complementarity that arises from the demand for two-way trips is investigated.
This paper presents a simple model of airline schedule competition that circumvents the complexities of the spatial approach used in earlier papers. Consumers choose between two duopoly carriers, each of which has evenly spaced flights, by comparing the combinations of fare and expected schedule delay that they offer. In contrast to the spatial approach, the particular departure times of individual flights are thus not relevant. The model generates a number of useful comparative-static predictions, while welfare analysis shows that equilibrium flight frequencies tend to be inefficiently low.