Airline industry deregulation and changes in systematic risk

Deregulation of U.S. Airline Industry may have lowered systematic risk because pricing freedom and route flexibility improved airline management reaction to various economic conditions. Reduced systematic risk offers lower cost of equity capital for the industry as a whole as well as for individual carriers. Previous research has had mixed results in identifying a relationship between deregulation and airline industry cost of capital. This study plots airline industry Beta coefficients across the years 1963 to 1987 and clears up previously conflicting research findings. Beta coefficients had been falling since the fuel crisis of 1974 and continued to fall through 1980. Fluctuations since deregulation have been relatively minor and systematic risk has leveled off at a significantly lower value than before deregulation. Studies which concentrate on the fluctuation in Beta since 1978 are dependent on the exact time period of analysis, and their conclusions that deregulation raised or lowered systematic risk are likewise suspect. A broader view of systematic risk changes in the deregulatory era shows airline Betas peaking from 1971 to 1973 and a gradual decrease as deregulation was being discussed, implemented, and legally mandated. This gradual decline from 1974 to 1980 may be attributed to such factors as fuel prices, interest rates, general inflation as well as deregulation. In any case systematic risk of the U.S. Airline industry has been lower since deregulation than in decades before.     

Capital structure in the world airline industry

This article presents a managerial approach to the airline capital structure through a definition of an efficient frontier. To develop the analysis a technique called data envelopment analysis was used. This paper tests the hypothesis that airline industry's financial performance depends on companies keeping a reasonable level of leverage and also seeks to establish this level. The research identifies the biggest airline companies which use capital efficiently to generate return with a low level of fixed assets. In these companies, shareholders' capital represents at least 40% of all funds employed. It could be seen by simplifying the analysis that it is possible to identify the most and the least efficient companies by studying their indebtedness and return on assets. A large proportion of the companies are moving to reduce their level of indebtedness and raise their returns over the course of time. The analysis by country revealed that countries do not offer comparative advantages, with the companies' performance depending fundamentally on their management.     

Port privatization policy and practice

In recent years a significant number of countries have implemented policies aimed at reforming their port industry. In the belief that it will improve efficiency and reduce the heavy financial burden placed upon governments that attempt to support such a capital-intensive industry, privatization has often formed an important strand of such policies. A key claim in favour of privatization is that the transfer of ownership from public to private hands will ultimately lead to an improvement in economic efficiency and, hence, financial and operational performance. This paper investigates the theoretical underpinnings and practical validity of this claim and concludes that privatization is only a partial cure for what ails the world's ports and that, if implemented in isolation, it simply cannot deliver the much-needed panacea for the industry's woes.     

Code sharing,joint fares,and competition in the regional airline industry

In the wake of airline deregulation, virtually all large jet carriers have entered into cooperative marketing agreements that involve shared designator codes and joint fares with commuter airlines. This paper examines the development of these agreements, the role they play in the competitive strategies of major and commuter airlines. and the implications of these agreements for the structure of the airline industry and for service to travelers to and from small communities.     

Air deregulation revisited: Choice of aircraft,load factors,and marginal-cost fares for domestic air travel

If airline deregulation is working as predicted, then fares should fall to marginal costs. This paper computes such optimal fares, allowing for a wide variation in point-to-point distance, traffic, and available aircraft type. It is shown that marginal-cost fares are exceeded by average carrier costs. This implies an unpleasant dilemma: either the industry is naturally destructive (if the returns are internal to firms) or else the sustainable industry configuration is less than welfare-optimal. In the latter case, the possibility of a Pareto-improvement with a judicious form of re-regulation cannot be ruled out. In light of this, a certain amount of caution about the results of deregulation is suggested.     

The impact of strategic management and fleet planning on airline efficiency - A random effects Tobit model based on DEA efficiency scores

As a result of the liberalisation of airline markets; the strong growth of low cost carriers; the high volatility in fuel prices; and the recent global financial crisis, the cost pressure that airlines face is very substantial. In order to survive in these very competitive environments, information on what factors impact on costs and efficiency of airlines is crucial in guiding strategic change. To evaluate key determinants of 58 passenger airlines’ efficiency, this paper applies a two-stage Data Envelopment Analysis (DEA) approach, with partially bootstrapped random effects Tobit regressions in the second stage. Our results suggest that the effects of route optimisation, in the sense of average stage length of the fleet, are limited to airline technical efficiency. We show that airline size and key fleet mix characteristics, such as aircraft size and number of different aircraft families in the fleet, are more relevant to successful cost management of airlines since they have significant impacts on all three types of airline efficiency: technical, allocative and, ultimately, cost efficiency. Our results also show that despite the fuel saving benefits of younger aircraft, the age of an airline’s fleet has no significant impact on its technical efficiency, but does have a positive impact on its allocative and cost efficiency.     

Congestion spill effects of Heathrow and Frankfurt airports on connection traffic in European and Gulf hub airports

We develop two stage fixed-effects single-spill and double-spill models for congestion connection spills of London Heathrow and Frankfurt airports on 9 hub airports in Europe and the Gulf. Our panel data covers connection traffic from 1997 to 2013 for Heathrow and 1997 to 2011 for Frankfurt. The single-spill results support strongly that the connection spills from Heathrow’s capacity limitations do strengthen competing hub airports of major alliance groups and to a lesser degree one Gulf hub. The double-spill model for Heathrow and Frankfurt shows nearly asymmetric overall spill characteristics between the two airports. Our results underline the influence of airline network strategies on congestion spills as European airline networks are shaped by alliances and umbrella mergers. Thus, the airline network perspective in airport capacity expansion decisions needs to play a greater role, as indicated by our asymmetric results for overall spill effects between Heathrow and Frankfurt airports.     

Airport–Airline interaction: some food for thought

Abstract

We provide an interpretive analysis of vertical relations between airports and carriers, while assessing the way in which deregulation of the airline market and the privatization of airports have created incentives for airport–airline interaction. In particular, if the vertical structure approach has become the standard approach in air transport research, we add to the literature by discussing three issues that we believe need further understanding. The three issues that we think should be the focus of future research on airport–airline interaction are (i) incomplete contracts and asymmetric information structure; (ii) upstream horizontal complementarities; and (iii) airports as two-sided platforms.     

The impact of U.S. rail regulatory reform on railroad management and organizational structure

The management structure of U.S. railroads has been historically characterized as static and bureaucratic. Many writers have attributed this to years of restrictive government regulation. This paper tests the hypothesis that observable characteristics and organizational structure of railroad management have changed in conjunction with recent regulatory reform. Management characteristics are analyzed in both 1977 and 1983. Major findings are that managers in 1983 are significantly younger and better educated with fewer years of company and industry service. Railroad organizational structures are also reviewed before and after deregulation to assess whether management structures are becoming leaner and less mechanistic.     

A math-heuristic algorithm for the integrated air service recovery

A sophisticated flight schedule might be easily disrupted due to adverse weather, aircraft mechanical failures, crew absences, etc. Airlines incur huge costs stemming from such flight schedule disruptions in addition to the serious inconveniences experienced by passengers. Therefore, an efficient recovery solution that simultaneously decreases an airline's recovery cost while simultaneously mitigating passenger dissatisfaction is of great importance to the airline industry. In this paper, we study the integrated airline service recovery problem in which the aircraft and passenger schedule recovery problems are simultaneously addressed, with the objective of minimizing aircraft recovery and operating costs, passenger itinerary delay cost, and passenger itinerary cancellation cost.Recognizing the inherent difficulty in modeling the integrated airline service recovery problem within a single formulation (due to its huge solution space and quick response requirement), we propose a three-stage sequential math-heuristic framework to efficiently solve this problem, wherein the flight schedules and aircraft rotations are recovered in the first stage, Then, a flight rescheduling problem and passenger schedule recovery problems are iteratively solved in the next two stages. Time-space network flow representations, along with mixed-integer programming formulations, and algorithms that take advantages of the underlying problem structures, are proposed for each of three stages. This algorithm was tested on realistic data provided by the ROADEF 2009 challenge and the computational results reveal that our algorithm generated the best solution in nearly 72% of the test instances, and a near-optimal solution was achieved in the remaining instances within an acceptable timeframe. Furthermore, we also ran additional computational runs to explore the underlying characteristics of the proposed algorithm, and the recorded insights can serve as a useful guide during practical implementations of this algorithm.     

Is it the labor unions’ fault? Dissecting the causes of the impaired technical efficiencies of the legacy carriers in the United States

Data envelopment analysis is used to evaluate the technical efficiencies of a number of major passenger airlines in the United States at transforming their inputs (labor, fuel and fleet-wide seating capacity) into available seat-miles. A tobit regression model is then used to identify the underlying drivers of airline efficiency, as measured by the data envelopment analysis efficiency score. The impact of unionization on airline efficiency is found to be statistically insignificant, controlling for the influences of other hypothesized determinants of airline efficiency: the average age of an airline’s fleet, the average size of its aircraft, its average stage length, the extent to which the airline relies of hubbing within its route structure, the percent of its passenger enplanements that are international, and whether the airline is a legacy carrier. The statistically significant drivers of airline efficiency, at a ten percent level of significance, are average aircraft size, average stage length and the extent to which the airline relies on hubbing and connecting flights within its route structure. The stage length variable is not significant at a five percent level of significance, however. An increase in average aircraft size or in average stage length enhances an airline’s efficiency whereas an increase in hubbing reduces it.     

Airline ambidextrous competition under an emissions trading scheme – A reference-dependent behavioral perspective

This study presents a reference-dependent Hotelling model for analyzing airline competition in pricing and green transportation investment, as well as the resulting financial performance under the European Union emission trading scheme. One feature of the proposed methodology is that it embeds psychological benefits/costs of consumers to characterize consumer attitudes to the increases in airline fare adjustments and improvements in green transportation. This study then investigates the equilibrium solutions for airfare adjustment and green transportation investment margins in different scenarios. The analytical results reveal specific operational conditions under which a cost-efficient airline can gain supreme competitive advantage by increasing both airfare and green transportation investment margins beyond the increases made by competitors under the emission trading scheme, whereas certain specific conditions may favor a cost leadership strategy. Conversely, a cost-inefficient airline can compete with a cost-efficient airline in both market share and profitability using the green transportation investment-differentiation strategy, particularly when consumers perceive the airfare difference as equaling the increased psychological benefit induced by the airline’s green effort.     

The development of urban bus regulatory policy in Korea reviewed

The urban bus industry in Korea used to be controlled to provide stable transport services and enable operators to secure proper profits, but there were adverse effects within the industry such as inadequate business management and a downward spiral of low quality services resulting from lower fares. The government began easing restrictions on entry, operation, fares, and some conditions and procedures for licensing in the late 1980s, until in 1993, the government published a package of deregulatory measures that were considerably more drastic than those previously seen, such as freely adjusting the number of vehicles within 10%, easing the restrictions and requirements for operators’ employing staff and drivers, and improving the fare system. However, these measures seem to have been introduced too late and too luke‐warmly to encourage new entrants to the industry. Therefore, to gain the desirable effects of deregulation and to secure the development of the urban bus sector, there needs to be provision of a market atmosphere and greater scope for free competition; a positive attitude among operators for efficient business management and new services; and alert observation and monitoring by passengers.     

Analysis of performance and equity in ground delay programs

The discrepancy between the projected demand for arrival slots at an airport and the projected available arrival slots on a given day is resolved by the Ground Delay Program (GDP). The current GDP rationing rule, Ration-by-Schedule, allocates the available arrival slots at the affected airport by scheduled arrival time of the flights with some adjustments to balance the equity between airlines. This rule does not take into account passenger flow and fuel flow performance in the rationing assignment tradeoff.This paper examines the trade-off between passenger delays and excess surface fuel burn as well as airline equity and passenger equity in GDP slot allocation using different rationing rules. A GDP Rationing Rule Simulator (GDP-RRS) is developed to calculate performance and equity metrics for all stakeholders using six alternate rules. The results show that there is a trade-off between GDP performance and GDP equity. Ration-by-Passengers (a rule which maximizes the passenger throughput) decreased total passenger delay by 22% and decreased total excess fuel burn by 57% with no change in total flight delay compared to the traditional Ration-by-Schedule. However, when the airline and passenger equity are primary concerns, the Ration-by-Schedule is preferred.     

Economic factors affecting the registration of lower CO2 emitting aircraft in Europe

We examine the various forces influencing the development and uptake of environmentally beneficial technical changes, focusing on airline technology. Within this context, we consider not only the nature of competition within the final market in which aircraft, an intermediate product, are sold, but also that of the product market itself, the commercial airline industry. The reasons for the gradual reduction in CO₂ per seat per aircraft movement in aircraft design are examined in terms of the real costs of aviation fuel, changes in the nature of the supply industry, the movement towards carbon cap-trade policies, and endogenous technical progress in the technology of the industry. The latter being taken as an empirical proxy for the role market forms play in influencing the fuel efficiency of the types of aircraft used. The results support the existence of these latter forces on the demand for aircraft types, allowing for other influences that affect aircraft technology.     

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.     

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.     

Competition and deregulation: Do air passengers get the benefits?

It is well established that increased airline competition can produce benefits to passengers, and it is generally assumed that airport deregulation, as part of the same process of liberalisation, will produce similar benefits. But this paper shows that this may not be the case. The potential benefits to passengers from increased airline competition will in general be partially absorbed by increased airport charges at unregulated airports, and in some circumstances this may even result in increases in overall charges, not reductions. This problem is sometimes tackled by putting regulated price caps on aeronautical services, but if these are not extended to the complementary commercial services (such as retailing) which airports also provide then the adverse effects may still occur. Similarly, unilateral deregulation leading to increased airport competition in one country may just lead to the majority of the gains going abroad. Overall, the conclusion is that claims of big passenger gains from deregulation and competition may be exaggerated, and achieving these gains in reality may need subtle and quite far-reaching government intervention.     

How can the maritime industry meet Sustainable Development Goals? An analysis of sustainability reports from the social entrepreneurship perspective

Sustainability Development Goals (SDGs) are a comprehensive agenda agreed upon globally that aims to stimulate actions towards economic, environmental and social sustainability. Being one of the key stakeholders, the international maritime industry plays an important role in contributing to global sustainability. By applying the concept of social entrepreneurship (SE), this study aims to examine (1) the basic and extended responsibilities (SDG 1–SDG 16) and (2) the potential collaborations within the value chain (SDG 17) concerning SDG implementation in maritime industry. To achieve these, we conduct a content analysis of sustainability reports published by container shipping liners and terminal operators from 2016 to 2019. More specifically, manual text classification is adopted to categorise the text content of sustainability reports based on 17 SDGs, and automatic text mining is employed to further identify the key roles of maritime industry related to each SDG. A unified framework is proposed, which points to varied motives and levels of comprehensiveness of the sustainability efforts by the maritime industry. This framework reveals the theoretic process of maritime industry's transitional involvement in sustainability from the SE perspective. It also creates managerial implications regarding the resource allocation strategies by maritime industry in meeting SDGs.     

A critical examination of an airport noise mitigation scheme and an aircraft noise charge: the case of capacity expansion and externalities at Sydney (Kingsford Smith) airport

In the wake of the Australian airline liberalization in 1990 and its forecasted impact on air traffic, capacity has been expanded at Sydney (Kingsford Smith) airport (Sydney KSA) – Australia's busiest commercial airport – with the construction of the third runway in 1994. Coinciding with the approval for this capacity expansion, the Commonwealth Government amended the Federal Airports Corporation (FAC) Act to direct the FAC to carry out activities which protect the environment from the effects of aircraft operations, with the cost to be borne by the airline industry according to the ‘Polluter Pays Principle'. Noise management plans were part of the conditions for developmental approval for a third runway. To this end, since 1995, Sydney KSA imposes a noise levy designed to generate sufficient revenues to fund a noise mitigation scheme. Although the issues of aircraft noise, in particular its impact on property values and land use planning around the airport, have been extensively addressed in the literature, no one has empirically examined the implications of new environmental policies in conjunction with airline liberalization and change in airport infrastructure. Principles and policy analyses are discussed in this paper. By focusing on the specifics of Sydney KSA, broader policy issues likely to be relevant for other major airports around the world are discussed.