High-speed rail and air transport competition and cooperation: A vertical differentiation approach

This paper considers vertical differentiation between air transport and high-speed rail (HSR) with different ranges of travel distance to analyze the air-HSR competition effects on fares, traffic volumes and welfare, as well as the conditions under which air-HSR cooperation is welfare-enhancing. The analysis is conducted in a hub-and-spoke network with a network carrier, an HSR operator, and a spoke airline, taking into account potential hub airport capacity constraint. We find that air-HSR competition in the connecting market may result in the network airline charging an excessively high price in the HSR-inaccessible market. This effect is present even when the HSR-inaccessible route is a duopoly-airline market. On the other hand, air-HSR cooperation increases fares in the connecting market, and an improvement in rail speed or air-HSR connecting time reduces airfare on the routes where HSR and the airline compete. When the airline cannot serve all the markets due to limited hub airport capacity, it would withdraw from the market in which it has less competitive advantage over HSR. Finally, air-HSR cooperation is more likely to be welfare-improving when the hub airport is capacity constrained, and when either air transport or HSR exhibits strong economies of traffic density.     

Airline competition and network structure

This paper studies airline networks and their welfare implications in an unregulated environment. Competing airlines may adopt either fully-connected (FC) or hub-and-spoke (HS) network structures; and passengers exhibiting low brand loyalty to their preferred carrier choose an outside option to travel so that markets are partially served by airlines. In this context, carriers adopt hubbing strategies when costs are sufficiently low, and asymmetric equilibria where one carrier chooses a FC strategy and the other chooses a HS strategy may arise. Quite interestingly, flight frequency can become excessive under HS network configurations.     

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.     

Effects of high-speed rail and airline cooperation under hub airport capacity constraint

This paper analyzes the effects of cooperation between a hub-and-spoke airline and a high-speed rail (HSR) operator when the hub airport may be capacity-constrained. We find that such cooperation reduces traffic in markets where prior modal competition occurs, but may increase traffic in other markets of the network. The cooperation improves welfare, independent of whether or not the hub capacity is constrained, as long as the modal substitutability in the overlapping markets is low. However, if the modal substitutability is high, then hub capacity plays an important role in assessing the welfare impact: If the hub airports are significantly capacity-constrained, the cooperation improves welfare; otherwise, it is likely welfare reducing. Through simulations we further study the welfare effects of modal asymmetries in the demands and costs, heterogeneous passenger types, and economies of traffic density. Our analysis shows that the economies of traffic density alone cannot justify airline–HSR cooperation.     

One price for all? Price discrimination and market captivity: Evidence from the Italian city-pair markets

This paper tests whether, and to what extent, airlines exploit market captivity by using price discrimination strategies. The Italian passenger market is particularly fit for this purpose, given the high differentials in the degree of the inter-modal competition amongst domestic connections. Results show that, ceteris paribus, airlines adopt a different pricing behaviour depending on the degree of inter-modal market captivity. First, in highly concentrated markets with respect to air competitors, airlines price higher when the inter-modal competition is limited. This proves that inter-modal market captivity strengthens the effect of market power. Second, the inter-temporal price discrimination leads to a J-shaped distribution of fares over time, which is more pronounced when the inter-modal competition is effective. This suggests that airlines need to adopt a pricing technique that allows for a greater market segmentation in order to compete successfully with high-speed rail transport and to extract a larger part of passengers’ surplus. These results are relevant in terms of transport-investment implications and competition policy. The indirect benefits that investments in rail infrastructure would yield through downward pressures on competing airline fares should be embedded in any cost-benefit analysis of high-speed networks investments and in any policy evaluation of measures that aim to reduce the territorial gaps in infrastructure endowment and accessibility.     

The future relations between air and rail transport in an island country

This paper proposes a bi-level passenger transport market model taking into account competition between air and high-speed rail (HSR) in a domestic market. The paper discusses the characteristics of the relationship between market share and connectivity in domestic and international markets. The result suggests that because of the dominance of HSR in the domestic market, when connectivity between air and HSR is good, international passenger’s welfare can be improved. Finally, when considering profitability of the players, there is an incentive for airlines to cooperate with HSR, but there is no incentive for HSR to cooperate with airlines.     

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.     

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.     

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.     

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.     

Multiple hub network and high-speed railway: Connectivity,gateway, and airport leakage

This paper considers the relation between the role of airport as gateway (inter–intra transit airport) and the connectivity between air transport and high-speed rail (HSR) transport to discuss the possibility of a multiple gateway system with HSR. We deal with both international and domestic transport markets in the model analysis. In the international markets, only airlines compete against each other, while in the domestic market airlines and HSR compete against each other. The results suggest that the improvement of connectivity between air and HSR at the airport increases its international passengers, and therefore, that strengthens its role as gateway, for example, gathering more inter–intra transit passengers. However, the results also suggest that the demand of the area which the airport belongs to affects the role of airport as gateway.     

An aggregate demand model for air passenger traffic in the hub-and-spoke network

In this paper, we build an aggregate demand model for air passenger traffic in a hub-and-spoke network. This model considers the roles of airline service variables such as service frequency, aircraft size, ticket price, flight distance, and number of spokes in the network. It also takes into account the influence of local passengers and social-economic and demographic conditions in the spoke and hub metropolitan areas. The hub airport capacity, which has a significant impact on service quality in the hub airport and in the whole hub-and-spoke network, is also taken into consideration.Our demand model reveals that airlines can attract more connecting passengers in a hub-and-spoke network by increasing service frequency than by increasing aircraft size in the same percentage. Our research confirms the importance of local service to connecting passengers, and finds that, interestingly, airlines’ services in the first flight leg are more important to attract passengers than those in the second flight segment. Based on data in this study, we also find that a 1% reduction of ticket price will bring about 0.9% more connecting passengers, and a 1% increase of airport acceptance rate can bring about 0.35% more connecting passengers in the network, with all else equal. These findings are helpful for airlines to understand the effects of changing their services, and also useful for us to quantify the benefits of hub airport expansion projects.At the end of this paper, we give an example as an application to demonstrate how the developed demand model could be used to valuate passengers’ direct benefit from airport capacity expansion.     

On the relationship between airport pricing models

Airport pricing papers can be divided into two approaches. In the traditional approach the demand for airport services depends on airport charges and on congestion costs of both passengers and airlines; the airline market is not formally modeled. In the vertical-structure approach instead, airports provide an input for an airline oligopoly and it is the equilibrium of this downstream market which determines the airports’ demand. We prove, analytically, that the traditional approach to airport pricing is valid if air carriers have no market power, i.e. airlines are atomistic or they behave as price takers (perfect competition) and have constant marginal operational costs. When carriers have market power, this approach may result in a surplus measure that falls short of giving a true measure of social surplus. Furthermore, its use prescribes a traffic level that is, for given capacity, smaller than the socially optimal level. When carriers have market power and consequently both airports and airlines behave strategically, a vertical-structure approach appears a more reasonable approach to airport pricing issues.     

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.     

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.     

Hub location in the South-Atlantic airline market: A spatial competition game

The paper analyzes the airlines’ hub location problem through a spatial competition game played in two stages. First, airlines sequentially choose the location of their hub and second, they compete offering direct or connecting services between each city-pair. Different outcomes in the first stage will affect competition in the second, and as a consequence, the market share that airlines can obtain.Given actual demand patterns, results of the model are applied to the South-Atlantic airline market. We study the subgame perfect equilibriums obtained as a result of competition in each city-pair to anticipate where airlines will probably locate their hubs once an “open skies” policy is adopted in this market.     

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.     

Airline hubbing and airport economics in the pacific market

Transpacific hubbing over Tokyo's Narita airport, which is beset by severe capacity problems while serving a high proportion of nonlocal passengers, is explored from both a historical and an economic standpoint. Tokyo developed into Asia's dominant transpacific gateway because it was within range of the continental U.S. for the first generation of transcontinental jets. Its dominance continued after the introduction of the B747, while a more dispersed pattern of service developed on the U.S. side of the transpacific route system. Reasons for Tokyo's continuing dominance include its strong local market and the liberal fifth freedom rights of U.S. airlines out of Tokyo. A model of airline network competition is applied to the U.S.-Asia market. The model simulates the behavior of profit-maximizing airlines with different network types and hub locations, finding states of Cournot equilibrium. In a baseline run corresponding to the 3rd Quarter, 1985 system, the predicted transpacific network corresponds quite closely to the actual one. The impacts of demand growth, high terminal costs at Tokyo, and strengthened connectivity of alternative Asia hubs are then explored. Tokyo traffic is found to increase at a somewhat slower pace than overall demand as new non-stop services become feasible. Connecting traffic through Tokyo is found to be highly price sensitive because of the availability of alternative routings. Strengthening the connectivity of alternative Asian hubs, on the other hand, has a fairly modest effect on the distribution of traffic in the system. The results point to the need for Japan to carefully assess the costs and benefits of its role as Asia's dominant transpacific gateway.     

Wildlife strike cost revelation in the US domestic airline industry

Since the Federal Aviation Administration (FAA) last revisited its wildlife strike disclosure policy in 2009, the American domestic airline industry has undergone a significant increase in concentration. We analyze how the aforementioned shift in market structure has impacted the voluntary repair cost disclosure of US airlines following a damaging wildlife strike event. We also investigate the related relationship between profitability and disclosure using an instrumental variables strategy. Lastly, we examine the interaction between competition and profits. Our results show the probability of large American airlines disclosing direct repair costs after a wildlife strike event are linked to market competition and profitability. These findings could directly inform policies managing the economic burden of wildlife strikes, most importantly, the current voluntary disclosure policy.     

Competition and public service obligations in European aviation markets

This paper analyzes the effect of universal service policies on the airline markets of five European Union countries (France, Germany, Italy, Spain and the United Kingdom) in the period 2002–2010. Results show that airfare discount schemes for island residents raise demand and positively affect competition and the number of flights at the route level. These effects are evident in France and Italy, but are particularly marked in Spain. By contrast, public service obligations (PSOs) reduce competition on the protected routes, while their effect on the number of flights differs depending on national regulations. In Spain, routes protected with PSOs have greater flight frequencies than those on unprotected routes of similar characteristics, but in France, Italy and the UK the opposite result is found. The empirical model also finds that on routes with low-cost airlines market concentration is smaller and there is a larger number of flights. This result is relevant for the design of universal service policy, since in recent years low-cost airlines have entered a number of thin routes and have increased access to air transportation.