Airline’s choice of aircraft size – Explanations and implications

When facing a growth in demand, airlines tend to respond more by means of increasing frequencies than by increasing aircraft size. At many of the world’s largest airports there are fewer than 100 passengers per air transport movement, although congestion and delays are growing. Furthermore, demand for air transport is predicted to continue growing but aircraft size is not. This paper aims to investigate and explain this phenomenon, the choice of relatively small aircraft. It seems that this choice is associated mainly with the benefits of high frequency service, the competitive environment in which airlines operate and the way airport capacity is allocated and priced. Regression analysis of over 500 routes in the US, Europe and Asia provides empirical evidence that the choice of aircraft size is mainly influenced by route characteristics (e.g. distance, level of demand and level of competition) and almost not at all by airport characteristics (e.g. number of runways and whether the airport is a hub or slot coordinated). We discuss the implications of this choice of aircraft size and suggest that some market imperfections exist in the airline industry leading airlines to offer excessive frequency on some routes and too low frequency on others.     

Low cost carrier competition and route entry in an emerging but regulated aviation market – The case of China

Although China lags behind other liberalized aviation markets in low cost carrier (LCC) development, its largest LCC, Spring Airlines, has achieved rapid growth in traffic volume and revenue, as well as consistent profitability, since its inauguration in 2005. Our empirical study on the Chinese domestic market suggests that Spring adopts a “cream skimming” strategy to enter high-priced routes, allowing the carrier to achieve both a very high load factor and considerable profitability. Spring’s capacity and market share on individual routes are constrained to low levels, likely due to government regulation and/or a “puppy dog” strategy adopted by the carrier. As a result, Spring is able to achieve fast growth without triggering price wars. To incumbent full service carriers, high speed rail (HSR) services impose much more significant competitive pressure than low cost carriers. Similar to LCCs in developed markets, Spring prefers to serve markets with high traffic volumes out of its operational base in Shanghai. Overall, Spring’s entry decision is not significantly affected by competition, either from full service airlines or HSR services. Our investigation suggests that LCCs have potential to introduce more competition but are yet to be a “game changer” in China. Further deregulation of the domestic market is needed.     

The effect of code-share agreements on the temporal profile of airline fares

This paper aims at investigating how the pricing strategy of European airlines is affected by code-share agreements on international routes. Our data cover several routes linking the main UK airports to many European destinations and includes posted fares collected at different days before departure. By analyzing the temporal profile of airline fares, we identify three main results. First, code-share increases fares especially for early bookers. Second, the higher prices in code-shared flights are offered by marketing carriers. Finally, in single operator code-shared flights (unilateral code-share), the pricing profile is flatter than under parallel code-share.     

Price effects of airlines frequent flyer programs: The case of the dominant firm in Chile

Frequent flyer programs create a switching cost for the consumer and allow firms to obtain rents, for example, by exploiting the principal agent problem existing between the employee who travel and purchases the ticket and the employer paying for that ticket. In Chile LAN is the dominant airline in domestic markets and the only one that has a frequent flyer program (FFP); it faces some competition from two small carriers. Using a unique dataset for Chile, collected by ourselves from airlines websites in 2011 and 2012, we estimate the impact of the dominant airline FFP. For this purpose, we compare for each route the fares between airlines and between weekday trips (that accumulate full miles and are mainly for business purposes) and weekend trips (that accumulate less than full miles and are mainly for leisure purposes). The results show that the differential premium LAN is able to charge for weekday trips due to the FFP is around 35%. Three particularities of the Chilean market help the econometric identification: there is only one hub for all airlines (the capital city of Santiago), there is no business class in domestic flights, and none of the airlines is a low-cost carrier.     

Market power and its determinants in the Chinese airline industry

This paper first measures the degree of Chinese airlines’ market power by using Lerner index, and then investigates its determinants. Our empirical results show that a certain degree of market power exists in the Chinese airline industry. Of the three dominant carriers, Air China exhibits the strongest market power whereas China Eastern Airlines the weakest, with China Southern Airlines being in the middle. Furthermore, the extent of market power varies significantly among regional markets, with China’s northeast region as the strongest, followed by the eastern and western regions, and the central area as the weakest. We also find a hub-premium effect similar to the result found in the US airline market. Our analysis shows that the existence of high-speed rail and low-cost carriers, income level, population size, seasonality, and number of competing airlines are the main determinants of competition in the Chinese airline market.     

Role of the Railways in the Future of Air Transport

Abstract

The role of the railways in the air transport industry is usually limited to provision of access to airports. However, the development of high-speed rail networks and the congestion and environmental problems faced by the air transport industry suggest the railways could have a greater role in working with the airlines to provide an integrated transport service for medium-distance journeys (up to 800 km). Many air journeys involve two flights and a transfer at a hub airport. The alternative being investigated here would replace air journeys by a rail journey and a flight, and a transfer between them at the hub airport. Such integration could offer a positive alternative to aircraft on some routes and lead to railway journeys to airports becoming part of air transport services, and not only to provide access to them. Integration could therefore provide a better use of available air capacity rather than duplicating some high-speed rail routes and services.     

Airlines’ reaction to high-speed rail entries: Empirical study of the Northeast Asian market

We investigate the impact of the commencement of high-speed rail (HSR) services on airlines’ domestic available seats on affected routes in China, Japan, and South Korea. The study is based on a dataset covering the 1994–2012 period. We use the propensity score matching method to pair HSR affected routes with routes without HSR services. The difference-in-difference approach is used to estimate the impact of HSR entry. We find that HSR entries may, on average, lead to a more significant drop in airlines’ seat capacity in China than in Japan and Korea given similar HSR service speed. In China, HSR services with a maximum speed about 200 km/h can produce strong negative impacts on medium-haul air routes but induce more air seat capacity on long-haul routes. HSR services with a maximum speed of 300 km/h have little extra impact on medium-haul routes but a strong negative impact on long-haul routes. Finally, although HSR has a strong negative impact in Japan’s short-haul and medium-haul air markets, little impact is observed in its long-haul markets.     

Intercontinental-airport regulation

This paper analyzes strategic interaction between intercontinental airport regulators, each of which levies airport charges paid by airlines and chooses its airport capacity under conditions of congestion. Congestion from intercontinental flights is common across intercontinental airports since departure and arrival airports are linked one to one, while purely domestic traffic also uses each airport. The paper focuses on two questions. First, if both continents can strategically set separate airport charges for domestic and intercontinental flights, how will the outcome differ from the first-best solution? Second, how is strategic airport behavior affected by the extent of market power of the airlines serving the intercontinental market? We see that strategic airport pricing and capacity choices by regulators lead to a welfare loss: the regulators both behave as monopolists in the market for intercontinental flights, charging a mark-up and decreasing capacity. This welfare loss even overshadows possible negative effects from imperfect competition within the intercontinental airline market. We further discuss how the presence of multiple regulators on one continent or a simple pricing rule might constrain the welfare loss created by strategic airport regulation.     

Control strategies for departure process delays at airport passenger terminals

This paper explores the characteristics of process delays at airport passenger terminals and establishes a queuing model for both passengers and baggage served by different connecting type facilities. The impact of delay propagation on other processes and flights is investigated using an analytical approach. In addition, the extra costs incurred on passengers, process operators, and airlines are examined using the delay cost functions. To reduce the impact of process delays, various delay-controlled strategies are proposed, such as setting scheduled times for completion of a process, increasing the number of service counters, and priority service for emergent flights. Taoyuan International Airport in Taiwan is used as a case study when facing special events. Results showed that the model can effectively and efficiently estimate delay propagation and its costs. In addition, processes that are not consecutive allow more buffer time between different operations, which helps ease propagation of delays caused by previous services.     

Does European high-speed rail affect the current level of air services? An EU-wide analysis

This paper analyses whether the current provision of air services in Europe is impacted by high-speed rail (HSR). An ex-post analysis is carried out considering 161 routes EU-wide using transnational data. We use censored regressions with special attention paid to the presence of outliers in the sample and to the potential problem of non-normality of error terms. It is found that shorter HSR travel times involve less air services, with similar impact on both airline seats and flights. This impact quickly drops between 2.0- and 2.5-h HSR travel time. The impact of HSR frequencies is much more limited. Hubbing strategies led by the airlines have the opposite effect from HSR, as hubs involve more air services. Airline/HSR integration at the airport and cities being served by both central and peripheral stations have no significant impact. Metropolitan and national spatial patterns may help to better understand intermodal effects.     

Modelling the resilience,friability and costs of an air transport network affected by a large-scale disruptive event

This paper deals with developing a methodology for estimating the resilience, friability, and costs of an air transport network affected by a large-scale disruptive event. The network consists of airports and airspace/air routes between them where airlines operate their flights. Resilience is considered as the ability of the network to neutralize the impacts of disruptive event(s). Friability implies reducing the network’s existing resilience due to removing particular nodes/airports and/or links/air routes, and consequently cancelling the affected airline flights. The costs imply additional expenses imposed on airports, airlines, and air passengers as the potentially most affected actors/stakeholders due to mitigating actions such as delaying, cancelling and rerouting particular affected flights. These actions aim at maintaining both the network’s resilience and safety at the acceptable level under given conditions.Large scale disruptive events, which can compromise the resilience and friability of a given air transport network, include bad weather, failures of particular (crucial) network components, the industrial actions of the air transport staff, natural disasters, terrorist threats/attacks and traffic incidents/accidents.The methodology is applied to the selected real-life case under given conditions. In addition, this methodology could be used for pre-selecting the location of airline hub airport(s), assessing the resilience of planned airline schedules and the prospective consequences, and designing mitigating measures before, during, and in the aftermath of a disruptive event. As such, it could, with slight modifications, be applied to transport networks operated by other transport modes.     

Reprint of “Modelling the resilience,friability and costs of an air transport network affected by a large-scale disruptive event”

This paper deals with developing a methodology for estimating the resilience, friability, and costs of an air transport network affected by a large-scale disruptive event. The network consists of airports and airspace/air routes between them where airlines operate their flights. Resilience is considered as the ability of the network to neutralize the impacts of disruptive event(s). Friability implies reducing the network’s existing resilience due to removing particular nodes/airports and/or links/air routes, and consequently cancelling the affected airline flights. The costs imply additional expenses imposed on airports, airlines, and air passengers as the potentially most affected actors/stakeholders due to mitigating actions such as delaying, cancelling and rerouting particular affected flights. These actions aim at maintaining both the network’s resilience and safety at the acceptable level under given conditions.Large scale disruptive events, which can compromise the resilience and friability of a given air transport network, include bad weather, failures of particular (crucial) network components, the industrial actions of the air transport staff, natural disasters, terrorist threats/attacks and traffic incidents/accidents.The methodology is applied to the selected real-life case under given conditions. In addition, this methodology could be used for pre-selecting the location of airline hub airport(s), assessing the resilience of planned airline schedules and the prospective consequences, and designing mitigating measures before, during, and in the aftermath of a disruptive event. As such, it could, with slight modifications, be applied to transport networks operated by other transport modes.     

Airline network choice and market coverage under high-speed rail competition

While the existing literature has focused on the short-term impacts, this paper investigates the long-term impacts of high-speed rail (HSR) competition on airlines. An analytical model is developed to study how an airline may change its network and market coverage when facing HSR competition on trunk routes. We show that prior to HSR competition, an airline is more likely to adopt a fully-connected network and cover fewer fringe markets if the trunk market is large. Under HSR competition, the airline will, for a given network structure, have a greater incentive to cover more fringe (regional or foreign) markets if the trunk market is large, or the airline network is close to hub-and-spoke. Further, the airline will, for any given market coverage, move towards a hub-and-spoke network when the trunk market is large, or the number of fringe markets covered by the airline network is large. Both effects are more prominent when the decreasing rate of airline density economies is large. We further show that HSR competition can induce the airline to adopt network structure and market coverage that are closer to the socially optimal ones, thereby suggesting a new source of welfare gain from HSR based on its long-term impacts on airlines. Implications for operators, policy makers and specific countries (such as China) are also discussed.     

The European freight railway system as a hub-and-spoke network

This paper addresses a hub-and-spoke network problem for railroad freight, where a central planner is to find transport routes, frequency of service, length of trains to be used, and transportation volume. Hub-and-spoke networks, often found in air freight, have not been favoured by railways in the past. Such a structure could be profitable, however, if there exist concentrated freight flows on some service links. We formulate a linear integer programming model whose objective function includes not only the typical operational cost, but also cost due to the transit time spent by freight in the network. We then develop heuristic algorithms to solve large scale instances occurring in rail freight systems in France plus Italy; Germany; and a 10-country European network. By assuming that every node is equipped with consolidation capability, we let the final solution naturally reveal potential hub locations, the impact of several of which is studied by sensitivity analysis.     

Public service obligations for air transport in the United States and Europe: Connectivity effects and value for money

Public service obligations (PSOs) are used by governments in many countries, including the United States and 11 countries in Europe, to mandate a minimum level of commercial air transportation service, especially for small or rural communities. This paper analyzes PSOs in these 12 countries for the year 2010 using the recently proposed Global Connectivity Index to measure direct and indirect market access and a novel subsidy database covering 90% of PSO movements in these countries to assess value-for-money.We show that PSO services represent about 2.5% of all commercial movements in the 12 countries analyzed, generating about 1% of these countries’ total air transport connectivity. Over all routes for which data was available, approximately USD$ 900 million was earmarked for PSO and air service discount provision in 2010, with average subsidies per movement ranging from about $700 to $3500. PSO market access and efficiency outcomes vary across the countries analyzed. Some countries, such as Germany and the United States, focus on providing network access for smaller communities, thereby creating not only point-to-point, but also onward connectivity, while others such as Norway, Sweden, and Ireland, predominantly aim at providing “lifeline services” that connect remote regions to a nearby economic center without providing onward connections.     

Airport and airlines competition: Incentives for vertical collusion

This paper develops a model of airport and airline competition in a three-stage game. We analyse incentives for vertical collusion between one airport and one airline that compete with another airport and another airline, by means of static and dynamic games. We find that incentives for collusion exist when airports and airlines have different market sizes and, under certain conditions, also when secondary airports and low cost airlines compete with main airports and full service airlines.     

Environmental charges in airline markets

Over the last two decades many airline markets have been deregulated, resulting in increased competition and use of different types of networks. At the same time there has been an intense discussion on environmental taxation of airline traffic. It is likely that an optimal environmental charge and the effects of a charge differ between different types of aviation markets. In this paper, we derive optimal flight (environmental) charges for different types of airline markets. The first type of market is a multiproduct monopoly airline operating either a point-to-point network or a hub-and-spoke network. The optimal charge is shown to be similar in construction to an optimal charge for a monopolist. We also compare the environmental impact of the two types of networks. Given no differences in marginal damages between airports we find that an airline will always choose the network with the highest environmental damages. The second type of market we investigate is a multiproduct duopoly, where two airlines compete in both passengers and flights. The formulation of the optimal charge is similar to the optimal charge of a single product oligopoly. However, we also show that it is, because of strategic effects, difficult to determine the effects of the charge on the number of flights.     

Deregulating European aviation — A case study

European international scheduled aviation has been characterised by bans on market entry, price collusion, and capacity sharing. High fares were charged compared to world standards and the fares charged by European charter airlines.In May 1986 new entrants with pricing freedom were permitted on the London-Dublin route which was then the third largest in European scheduled international aviation. Prior to deregulation the route experienced high fare growth. The unrestricted fare ex-London increased 72.6 per cent compared to a Retail Price Index increase of 41.5 per cent. There was a growth in passenger numbers in the years 1980–85 of 2.8 per cent.Since deregulation passenger numbers have risen to 2.3 million compared to 994,000 before deregulation. Fares have declined by an estimated 37 per cent ex-Dublin and 42 per cent ex-London in real terms. There have been four cases of market entry and one of market exit. The estimated share of the new entrants in the second half of 1989 was 28 per cent. The preregulation earnings data of Aer Lingus, the market leader, indicated that protection allowed staff to earn economic rents. A two-tier structure was introduced in response to competition.Remaining barriers to contestability in UK/Ireland aviation include hub airport dominance, ground handling monopolies, and the ability of airlines with routes in both regulated and deregulated markets to engage in geographical price discrimination against airlines with routes in deregulated markets only. A pro-contestability aviation policy in Europe will require measures to prevent the abuse of dominant positions by established airlines over new market entrants and to prevent collusion between established airlines.     

Economic effects of air transport market liberalization in Africa

Although the aviation industry is increasingly becoming important for Africa’s economic development and integration, the ability of airlines to access foreign markets remains hindered by restrictive regulatory policies. Attempts have been made to fully liberalize the intra-African air transport market. Except for general assertions about the merits/demerits of liberalization, our empirical understanding of the welfare effects of such polices in Africa remains rudimentary. This study empirically measures the economic effects of air transport liberalization, mainly on two supply side variables: fare and service quality, measured as departure frequency. The empirical models evaluate how air fares and departure frequency respond to measures of openness in air services agreements, while controlling for other determinants. The results show up to 40% increase in departure frequency in routes that experienced some type of liberalization compared to those governed by restrictive bilateral air service agreements. Furthermore, there is a relatively larger increase in departure frequency in routes which experienced partial liberalization compared to fully liberalized ones. This can be explained by the diminishing marginal effect of progressive liberalization on departure frequency. While the effect of liberalization is substantial in improving service quality, there is no evidence of its fare reducing effect.     

A three-stage least squares approach to the analysis of airline strategies for aircraft size and airline frequency on the north Atlantic: an airline case study

In response to increasing demand, airlines may increase capacity by increasing the frequency of flights or they may choose to increase aircraft size. This may yield operating cost economies. If the airports they operate from are capacity constrained, they will be limited in the extent that they can change frequency which will limit their ability to compete with the number of frequencies offered. This article focuses on this trade-off and pays particular attention to the practices of a specific airline. Conclusions are offered on the impact of inter alia competition, changes in aircraft technology, 9/11 and the impact of slot constraints. It appears that changes in size are more important than frequency, which is consistent with the presence of slot constraints and there is a significant impact of competition. As the concentration of carriers increases, so aircraft size falls. 9/11 also has a significant impact on traffic whereas the introduction of the Boeing 777, as an illustration of a change in technology, does not.