Multi-period efficiency and productivity changes in US domestic airlines

This study tracked the static efficiency and dynamic productivity changes of 14 US airlines from 2006 to 2015. Moreover, we estimated the principal economic drivers of the environmental variables to increase the US domestic airlines' efficiency using the double bootstrap regression analysis. The major aspects of this study are as follows: First, network legacy carriers have the highest efficiency, whereas low-cost carriers are lowest. Nonetheless, network legacy carriers still have room to improve scale inefficiency. Second, the fluctuations in technical change, rather than in efficiency change, tended to have greater effect on the fluctuation of Malmquist productivity index for US domestic airlines. Third, M&A between US airlines have both positive and negative effects in terms of efficiency and economies of scale. Fourth, cost environmental factors have a negative effect on US airlines' efficiency, while revenue factor is a positive effect. The results of this study may help US airline industry practitioners to understand the US domestic airline environment from an operator's perspective.     

Innovation: The winning formula to regain profitability in aviation?

Most airlines have overcome the immediate effects of the recent global aviation crisis partly because of economic upturn and partly because of massive restructuring. Legacy network carriers had to take on the challenge of low-cost carriers, and regain competitiveness in short- and mid-haul business through considerable cost cutting and more flexible pricing models and are now profitable. On the other hand, many airlines do not make a reasonable profit, and the majority of carriers do not earn their capital cost. Airlines claim that they are still squeezed between their neighbors in the aviation value chain that leverage local monopolies (such as airports) or oligopolies (such as aircraft equipment manufacturers). Many legacy carriers, however, have not properly prepared for an era of deregulated and changing markets. They have not yet taken appropriate steps to escape from there positions between the few successful premium carriers and low-cost carriers. This middle position has little differentiation potential, an unsatisfactory growth perspective, and poor profitability prospects. Further, despite ongoing liberalization, the regulatory framework still does not enforce far-reaching consolidation, leaving the industry in a fragmented status with massive overcapacities. Consequently, the industry needs to further leverage external deregulation as well as internal restructuring to establish more efficient and competitive business models. Aside from basic cost cutting, innovation may become the decisive driver of progress, comprising advanced business models, customer segmentation, and technologies (Franke, M., 2006. Innovation: the winning formula to regain profitability in aviation? Speech at the Hamburg Aviation Conference, Hamburg).     

The evolving low-cost business model: Network implications of fare bundling and connecting flights in Europe

In a context of limited organic growth, some low-cost airlines have considered business strategies that are changing two key principles of the low-cost airline business model: fare unbundling and point-to-point operations. Using a multivariate analysis we identify the influence of several route characteristics on the share that European pure low-cost and hybrid low-cost carriers have on the routes they operate. Results show that, from a network perspective, the distance between the archetypical low-cost carrier business model and the adapted low-cost carrier business model with a hybrid approach is widening. Differences are also clear between hybrids offering connecting services and hybrids offering fare bundling. The results are also important from an airport policy perspective, since secondary airports and legacy airports in transition could be able to reduce the gap between them and the main hub airports.     

End of the free lunch? The responses of traditional European airlines to the low-cost carrier threat

The short-haul operations of traditional European airlines such as British Airways and Lufthansa have come under increasing pressure from the growth of low-cost carriers. This paper examines their competitive responses. These are found to include reductions in labour costs, greater use of regional aircraft and a run-down of secondary hubs. Minimum stay requirements on cheap fares have been axed in many markets, while changes to the on-board service and a move to direct-sell bring these airlines closer to the low-cost carrier product. The network strength is largely maintained, however, which appears a better strategy than setting up a low-cost subsidiary.     

Cost savings from trajectory deviations in the European air space

Air transport deregulation has lead to an increase of air traffic, together with a reduction of air fares. Air fare reduction has narrowed operational margins of airlines, bringing financial and employment instability. This has brought airlines to pay increasing attention to flying costs reduction. Two important components of flying costs airlines can try to cut modifying the planned flight are en route charges and operational costs. We rely on Demand Data Repository (DDR2) data to calculate deviations from planned flight trajectories to analyse the extent to what airlines try to cut operational costs making shorter flights than planned if possible, and cut en route charges providing a planned flight with lower en route charges than the planned flight. Our findings show that there is no generalised strategy among airlines to reduce en-route charges asking for deviations of the planned route. On the other hand, airlines are achieving savings of operational costs regularly. Higher savings per nautical mile are obtained in night flights, with longer planned distance and operated by low cost carriers.     

The emergence and effects of the ultra-low cost carrier (ULCC) business model in the U.S. airline industry

The effects of “low cost carriers” (LCCs) such as Southwest Airlines and JetBlue Airways on the competitive landscape of the U.S. airline industry have been thoroughly documented in the academic literature and the popular press. However, the more recent emergence of another distinct airline business model—the “ultra low cost carrier” (ULCC)—has received considerably less attention. By focusing on cost efficiencies and unbundled service offerings, the ULCCs have been able to undercut the fares of both traditional network and low-cost carriers in the markets they serve.In this paper, we conduct an analysis of ULCCs in the U.S. aviation industry and demonstrate how these carriers' business models, costs, and effects on air transportation markets differ from those of the traditional LCCs. We first describe the factors that have enabled ULCCs to achieve a cost advantage over traditional LCCs and network legacy carriers. Then, using econometric models, we examine the effects of ULCC and LCC presence, entry, and exit on base airfares in 3,004 U.S. air transportation markets from 2010 to 2015. We find that in 2015, ULCC presence in a market was associated with market base fares 21% lower than average, as compared to an 8% average reduction for LCC presence. We also find that while ULCC and LCC entry both result in a 14% average reduction in fares one year after entry, ULCCs are three times as likely to abandon a market within two years of entry than are the LCCs. The results suggest that the ULCCs represent a distinct business model from traditional LCCs and that as the ULCCs grow, they will continue to play a unique and increasingly important role in the U.S. airline industry.     

Legacy carriers fight back: Pricing and product differentiation in modern airline marketing

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.     

The impact of low cost airline entry on competition, network expansion, and stock valuations

We conduct event studies and statistical analysis to explore the impact of low cost carriers’ entry on legacy airline stock prices. Oligopoly structures, entry barriers, and high fixed costs make the airline industry highly susceptible to competitive and network expansion impact of low cost airlines’ entry. Positive stock returns are observed, which we interpret as the spillover effects of network expansion. Thus, rising passenger traffic and improved connectivity increase the revenues of legacy airlines to sufficiently offset the low cost carriers’ competitive threats.     

Cost and revenue synergies in airline mergers – Examining geographical differences

Deregulation, privatization and shifting demand patterns in the airline industry, combined with the emergence of low-cost airlines and rising fuel prices have increased the competitive pressure on legacy airlines. Since alliances do not deliver sufficient benefits to counterbalance these trends, many airlines have engaged in mergers to seek for additional cost and revenue synergies. An extent body of literature investigates the synergy potential in mergers and alliances, but there is no study on how synergies differ among mergers and what potential influence factors cause these differences. This paper aims at explaining differences in synergy estimates and realized synergies in recent airline mergers and places a special focus on geographical influence factors.The research methodology uses a comparative case study comprising six large airline mergers between 2003 and 2012 from Europe, North America and Latin America. After analyzing the cases individually, the pre-merger situation of the merging airlines, the synergy estimates and the realized synergies of the cases were compared.The results show considerable geographical differences in pre-merger cost structures, synergy estimates, and synergy realization. The European mergers present lower synergy estimates but also lower integration costs than mergers in the Americas. Whereas European airlines estimate cost synergies higher than revenue synergies, both North and Latin American airlines expect more revenue synergies than cost synergies from airline mergers. Only one merger showed superior post-merger profitability which indicates that the achieved synergies in the broad majority of the cases are insignificant.     

Do low cost carriers have different corporate governance models?

In this paper, we investigate whether different business models in the same industry (passenger air transportation) lead to different corporate governance models. We found that low-cost carriers organise their boards differently from full service carriers to achieve lower costs and a faster decision-making process that is required by their business model. We also found that low-cost carriers and full service carriers solve their potential agency cost problems differently and that full service carriers have more board monitoring committees, and low-cost carriers have a closer coincidence of interests between shareholders and executive directors.     

Towards a maturity model for big data analytics in airline network planning

The evaluation, acquisition and use of newly available big data sources has become a major strategic and organizational challenge for airline network planners. We address this challenge by developing a maturity model for big data readiness for airline network planning. The development of the maturity model is grounded in literature, expert interviews and case study research involving nine airlines. Four airline business models are represented, namely full-service carriers, low-cost airlines, scheduled charter airlines and cargo airlines. The maturity model has been well received with seven change requests in the model development phase. The revised version has been evaluated as exhaustive and useful by airline network planners. The self-assessment of airlines revealed low to medium maturity for most domains. Organizational factors show the lowest average maturity, IT architecture the highest. Full-service carriers seem to be more mature than airlines with different business models.     

A productivity comparison of the world's major airlines

This paper measures and compares productivity and unit cost of the world's 23 major airlines using yearly panel data (1986–1993). An extensive effort was expended to put together a reliable database. These data are then used to accomplish the following: first, unit cost per unit of aggregate output is measured and compared. The effect of input price changes on the unit costs are also examined. Second, the ‘gross’ Total Factor Productivity (TFP) is measured and compared. In order to compare true productive efficiency across airlines and over time, a ‘residual’ TFP index is computed after removing effects of the variables beyond managerial control such as average stage length and composition of outputs. Log-linear TFP level, and TFP growth rate regressions are used to accomplish this task. Our results show that:

1. (a) during the sample period (1986–1993), the major European carriers and the carriers in newly industrialized countries in Asia have achieved significantly higher productivity growth than their North American counterparts;

2. (b) as a result, the productivity gap between North American and other carriers have diminished significantly;

3. (c) however, on average, the North American carriers still enjoy higher productive efficiency than the carriers in Asian NICs and European carriers, but the gap is closing very rapidly; and

4. (d) it is observed that, over time, the productive efficiency of carriers competing in the same markets tends to converge.

Finally, Asian NIC carriers clearly enjoy unit cost advantages over other major carriers. Our results show that European aviation liberalization which began in 1987 appears to have produced substantial productivity gains.     

Effects of internal resources on airline competitiveness

This article examines the performances of 114 major international airlines between 1987 and 2010 using the resource-based theory. Results show that intangible resource is the most important resource among the human, physical and intangible resources at the aggregate industry level. In addition, successful airlines need to be able to provide an adequate level of service at relatively low cost. Nonetheless, some airlines enjoy higher profits than the others due to the country-specific differences arising from the bilateral open skies agreement between countries, the geographical location of the airline hub etc. There are also evidences suggesting an increasing consumer acceptance of new airlines, which connote that established airlines cannot be complacent. Following the emergence of budget airlines that provide point-to-point service to short distance destinations, full legacy carriers could differentiate themselves by offering direct connections on long-distant flights.     

Fuel hedging and airline operating costs

Fuel hedging is a common risk management tool used in the airline industry. But past studies have not addressed the question of whether fuel hedging creates any benefit to airline operations. This study is the first work that empirically examines the role of fuel hedging in reducing airlines’ operating costs. Using US airlines data from 2000 through 2012, we find that, after accounting for the presence of cost inefficiency, fuel-hedging airlines had about 9–12% lower operating costs, but this effect is statistically insignificant. Irrespective of the hedging status, US airlines could reduce operating costs by an average of 12–14% per year without reducing output.     

Identifying airline cost economies: An econometric analysis of the factors affecting aircraft operating costs

This paper provides the results of an econometric analysis of the influences of airline characteristics on the average operating costs per aircraft movement. The analysis combines a comprehensive selection of airline-output variables, airline-fleet variables, and airline-market variables. The results confirm the existence of economies of density, economies of load factor, economies of aircraft utilisation and economies of aircraft size. The paper does not provide evidence of economies of scale, economies of stage length or economies of fleet commonality. Furthermore, airlines that additionally operate full freighters, airlines that are members of a worldwide alliance and airlines that operate a multi-hub system face higher average operating costs per aircraft movement. Surprisingly, the regression results demonstrate that airlines that use newer aircraft have higher average operating costs per aircraft movement, suggesting that ownership costs (depreciation and leasing costs) of new aircraft outweigh the increasing maintenance costs of old aircraft. Finally, the results show that airlines that have a dominant position at their hubs or bases have higher operating costs per aircraft movement, implying that the absence of serious competitive pressure enables airlines to charge higher ticket prices and, with that, leads to a limited focus on cost savings.     

Network industries in collision: aviation infrastructure capacity,financing and the exposure to traffic declines

This paper discusses how various aviation infrastructure service providers have dealt with the fall off in airline traffic following the terrorist attacks in the US on September 11th. It shows that these organizations have relatively high fixed costs and low incremental costs for providing services. As such, small changes in traffic have large impacts on revenue because revenues are generally proportional to activity. However, because of the high component of common and fixed costs, airport and ATS provider costs do not change in proportion to activity. When traffic declines, revenue shortfalls can arise because most airport and ATC systems operate on a simple cost recovery basis. The responses to the events of September 11th have also caused substantial increases in security costs. To the extent these costs are passed forward to system users, they will increase the price of travel and impact patronage further. Airlines also have substantial fixed capacity costs. The declines in traffic are often felt as an erosion of yields and fares as carriers seek to maintain traffic loads for the capacity they are going to operate. In general, the ability to pass along cost increases from providers to airlines or from airlines to passengers depends on relative supply and demand elasticities. Because infrastructure provision is often a monopoly, and the demand for airline services is price elastic, we suggest that most of the cost increases will be borne by the airlines. We also suggest that short-haul flights will be most severely impacted because the fees and taxes are a larger proportion of the fare for these flights. We also examine the extent to which additional infrastructure costs imposed on operators may exacerbate the downturn in their traffic.     

The transformation of a legacy carrier – A case study of Turkish Airlines

This study examines the metronomic rise of Turkish Airlines into a global carrier in the period following domestic deregulation and part privatisation. Using a comparative assessment of the carrier's network and its competitive strategies during the 2003–2013/2014 period it was found that Turkish Airlines now benefits from considerable network, cost, service and brand advantages over competing European and to a lesser extent Middle-Eastern airlines. Its network operation based in Istanbul Ataturk airport enjoys strong geographic and demographic advantages, which enables it to optimise the use of its large and young short-haul fleet between a significant number of domestic and international points. This study has important implications for partially or fully state owned legacy carriers as to how to gain competitive advantages in an increasingly open and liberal airline industry.     

Network competition and the difference in operating cost: Model analysis

In this paper, we propose a bi-level air transport market model which can handle the shape of network, airfare and service frequency as airline’s control variables and passenger’s behavior. We apply the model to the simple duopolistic market and observe how airlines change their network shape. We assume two types of airlines, the incumbent and the entrant, having different operating cost and conduct numerical computation. From the results, we discuss the features of network equilibrium considering difference in operating cost and confirm that inviting low cost carriers contributes to improving social welfare.     

Intangible resources of competitive advantage: Analysis of 49 Asian airlines across three business models

Without sustainable competitive advantage firms have limited economic reasons to exist and will decline. Competitive advantage concerns the factors which provide competitive strength. This paper is based upon the resource-based view which considers firm resources to be heterogeneous and which believes that firms only have a small bundle of core resources irrespective of their overall performance. This research establishes the role of 36 intangible resources for 49 Asian airlines across three business models: network airlines; low-cost subsidiaries from network airlines; and low-cost carriers. It uses the VRIN framework which examines whether resources are valuable, rare, inimitable, and non-substitutable. Research participants distribute points between their chosen seven resources according to their perceived role in firm performance. Resources which meet all four requirements of VRIN are considered core competences and sources of sustained advantage. Across all 49 Asian airlines, the top-three most important resources of advantage are slots, brand, and product/service reputation. While these core resources are predictable, they have not previously been proven within the context of airlines, let alone geographically and by airline model. Results show that the core bundle of resources vary for each model, which helps to explain the difference in performance across models, and that some resources which were expected to be high-ranking, such as organisational culture and customer focus, were not.     

Are low-cost carrier passengers less likely to complain about service quality?

Complaints made by airline passengers to the U.S. Department of Transportation (DOT) are often used in academic research and in the media as a proxy for the quality of commercial air service in the United States. In this paper, we test whether passengers of network carriers are more likely to make a complaint to the DOT about service quality failures than passengers of low-cost carriers. Through a fixed-effects regression, we find that passengers of low-cost carriers like Southwest Airlines are less likely to complain about service quality than passengers of network carriers like United Airlines, given the same levels of service quality and controlling for yearly fixed effects. This behavior could be explained by price-based expectations of service quality, lack of information about how to complain to the DOT, or qualitative differences in front-line customer service between airlines.