Is it in Germany's economic interest to allow Emirates to fly to Berlin? A framework for analysis

The economic approach (as compared to the traditional exchange of rights approach) to evaluating international aviation liberalisation proposals is gradually becoming more commonly used. With it, the various benefits and costs of liberalisation are assessed in a cost benefit framework. This approach is used to develop a framework to evaluate whether Germany will gain or lose from allowing airlines of the United Arab Emirates, and specifically Emirates Airlines, to fly to Berlin. This is something that the German government has so far refused. The economic approach is still evolving, and several new aspects of cost and benefits are being recognised and evaluated, for example the implications of foreign ownership of airlines, and benefits from inbound tourism. In this paper, a framework for determining whether Germany will gain from allowing these airlines access to Berlin is set out, and indicative conclusions are drawn.     

US open skies agreements and unlevel playing fields

We examine the relationship between ‘Open Skies’ agreements (OSAs) signed between the USA and various countries or regions and the existence of subsidies and other forms of protection that advantage one nation's airlines over those of co-signatories to an OSA. We argue that under an oligopoly market structure, strategic competition brought about by OSAs creates incentives to subsidize and/or protect domestic airlines. Such incentives are maintained or amplified by political lobbying efforts that bias civil aviation policies towards producer interests over wider measures of economic welfare. We report on financial aid and policies which have advantaged US airlines during the OSA period and which suggest that unlevel playing fields have been made more unlevel during the era of OSAs.     

Martin Kunz Memorial Lecture. Tourism benefits and aviation policy

Many tourists now travel by air, and aviation liberalisation has greatly contributed to the boom in international tourism. The relevance of tourism economic benefits in aviation policy decisions is becoming established, though there has been little by of analysis of these, of how they can be measured. Here, the nature of tourism's economic benefits is discussed, and ways of measuring them are suggested. These rely on the use of computable general equilibrium models of economies. The measures of tourism benefits obtained from these are positive, though they smaller than more ad-hoc measures which are sometimes used, such as total tourism expenditure. The role of tourism benefits in aviation policy making is considered in several case studies. These indicate that while the tourism benefits to a country from aviation liberalisation are not likely to be as large as benefits to home country travellers or the costs to home country airlines, they are sufficiently large to tilt the balance of benefits and costs of liberalisation in many cases.     

The effects on tourism of airfare subsidies for residents: The key role of packaging strategies

Airfare subsidies for residents in remote tourism destinations can negatively affect the local tourism industry. In this paper, we study the effects of airfare subsidies on a remote region's tourism sector with a theoretical model of air transport and tourism service transactions involving a remote tourism region, the rest of the country and the rest of the world. We show that firms' widespread packaging strategies in tourism markets, i.e. selling tourism packages composed of air transport and tourism services at a single price, acts as hidden price discrimination, since the packages are cheaper than buying the services separately. Thus, in the presence of higher airfares due to a subsidy, the tourists not entitled to the subsidy have incentives to switch to a cheaper alternative, namely tourism packages. Consequently, a packaging strategy can lessen or even avoid the negative impacts of the subsidy on a region's tourism sector.     

Chapter 11 and the level playing field: Should chapter 11 be considered as a subsidy?

This paper assesses whether Chapter 11 is a form of subsidy for US airlines. US airlines have used Chapter 11 to restructure their operations. This has been criticized as a subsidy by major non US airlines and governments for a long time and recently, in the “level playing field” debate. Applying legal and economic perspectives of subsidy, we examine the different opportunities of Chapter 11 to reduce airlines’ costs. It is argued that most of the forms available, such as the modification of collective bargaining, do not constitute a subsidy. Only the termination of pension plans might involve a subsidy, but only using a legal definition of doubtful relevance since there is normally no use of public funds.     

What are passenger perspectives regarding airlines' environmental protection? An empirical investigation in Taiwan

Many airlines recognize the importance of environmental protection. The airlines implement a number of environment-friendly activities related to in-flight services and wish to trigger passengers' support and therefore inquire as to their preferences. Because these activities are not identical between airlines, it is not known which items are actually supported and which items are opposed. In this paper, major airline environmental protection activities were collated, and the Smart partial least square software was used to analyse data from 442 passengers who have experienced air travel in the past 3 years. The results showed that in general, passengers would prefer to choose airlines that supported environmental protection activities. However, several activity items would be rejected if passengers felt their rights or interests being compromised. It was also indicated that people from countries at different stages of economic development had varying preferences regarding their support of airlines' environmental protection activities, and the young generation had more concern about environmental protection than others. The findings of this research could be beneficial for airlines setting up their differentiated marketing strategies for enhancing both environmental protection efforts and business performance.     

Low-cost airlines,secondary airports,and state aid: An economic assessment of the Ryanair–Charleroi Airport agreement

This paper builds a vertical differentiation model to analyse the effects of subsidies, or lower aeronautical charges, for secondary airports on competition between low cost and full scheduled carriers. The Ryanair–Charleroi Airport agreement in Europe is used as an example and as a basis for the model. The main findings are that subsidization or lower airport charges benefit consumers and negatively affect incumbent airlines. However, they may be more affected by competition than by the subsidy. An empirical analysis provides a few insights on the influence of dominating airports in Ryanair fares. We conclude that this airline sets lower fares when flights depart from or arrive at dominated airports.     

How large are tax subsidies to motor-vehicle users in the US?

There has been considerable discussion about the extent to which motor-vehicle use in the US is “subsidized,” making petroleum-based motor vehicle use more attractive than other transportation modes. Estimates of these subsidies vary widely, and in many cases can be criticized on methodological grounds. In this paper we estimate corporate-income-tax, sales-tax, property-tax, and personal-income-tax subsidies related to motor-vehicle use. Whereas previous estimates of sales-tax and corporate-income-tax subsidies have been built piecemeal, tax provision by tax provision, we offer an alternative method, based on the difference between actual tax payments of the motor vehicle industry compared to other industries. We estimate that the total “tax subsidy” to motor-vehicle users in the US may be in the range of $19–64 billion (10⁹) per year, or $0.11–0.37 per gallon ($0.03–0.10 per liter) of motor fuel. However, the amount of the subsidy, and hence the magnitude of its effect, depends greatly on the tax baseline with respect to which the subsidy is estimated. (The property-tax subsidy is particularly uncertain.) We emphasize that without doing a full equilibrium analysis, we cannot say how eliminating these subsidies would affect social welfare.     

Local emission charges – A new economic instrument at German airports

In January 2008, charges were introduced at selected German airports aimed at reducing local emissions of nitrogen oxide and hydrocarbon. The charge is aimed at setting economic incentives to accelerate the introduction and foster the use of environmentally friendly engine technology and is designed to be revenue-neutral in the sense that it does not increase the airports' overall revenues from air traffic. To achieve this, the general landing fees need to be decreased by the amount of the emission charge. The introduction of this charge will have economic impacts on airlines and may have an impact on airline competition in the German air transport market. Case studies based on empirical data are presented for selected German airports. The results indicate that airline's finances will be affected differently by the emission charge, depending on the engines employed and on the aircraft population of the airport considered.     

A tale of airline competition: When full-service carriers undercut low-cost carriers fares

The pricing of low-cost carriers (LCCs) compared with traditional airlines has been extensively investigated since their inception in the air transport market. Abundant empirical evidence attests that, on average, LCCs' fares (per km) are lower than those usually offered by full-service carriers (FSCs). Such literature, however, paid virtually no attention to the conditions under which LCCs lose their convenience compared to traditional airlines. The purpose of this study is to investigate the occurrence of LCCs sometimes offering higher fares than FSCs on competing flights. By using a dataset expressly collected for this purpose, we are able to quantify its frequency and suggest some possible explanations. These findings concur to cast some questions on the widely held preconception of vertical differentiation between LCCs' and FSCs’ offered services. Further research will be needed in order to understand the relative weight of the suggested factors.     

Eco-positioning of airlines: Perception versus actual performance

To date there has been little research in air transport into the eco-positioning of airlines, that is, their environmental image relative to other airlines and how actual environmental performance relates to this eco-positioning. This paper identifies the environmental perceptions that passengers hold of twelve airlines and relates these perceptions to airlines' actual environmental performance, using load factors, aircraft age and the atmosfair Airline index as proxies for environmental performance. Based on a survey of over 600 passengers at Liverpool John Lennon Airport, the research analyses air travellers' perception of airlines from an environmental perspective. The results show that while there are significant differences in people's environmental perception of airlines, the eco-positioning of the airlines is not correlated to their actual environmental performance. The results support previous research findings in other industries that in many cases actual performance is less important than communicating environmental messages to the public in creating a superior eco-positioning.     

To bargain or not to bargain: Airlines,legitimacy and nonmarket strategy in a COVID-19 world

Nonmarket strategy – strategic actions directed at influencing the governmental, legalregulatory, and societal environment of business – is a key factor in an airlines' competitive position yet remains relatively under-analyzed in aviation research. The COVID-19 crisis has created a heightened role for nonmarket strategy and our paper argues that in deciding how to respond to a variety of policy measures introduced by governments, airline executives need to take into account the perceived legitimacy from the flying public of their response to governments. Our paper presents an integrative framework to analyze airlines' nonmarket response to COVID-19 governmental policy measures. Using a two-by-two matrix, we identify key conceptual links between industry's nonmarket response, the health impacts of a given policy measure as well as its economic costs for the airlines. Our study concludes that, unless economic stakes in a given policy measure are high, airlines do not risk active bargaining with governments over the content of that measure. Such bargaining could trigger a delegitimation cascade: a self-reinforcing process in which key stakeholders reassess their view of airlines' conduct and the industry's broader societal impact. Bargaining is pursued when economic impacts of policy measures are high, and in that case, the choice between cooperative and adversarial posture towards the government depends on the health impact of a given policy.     

Market strategy development and innovation to strengthen consumer-based equity: The case of Brazilian airlines

A brand valued by passengers would be able to convey quality and credibility, adds value to air transport the service, and increases passengers' willingness to pay a premium for tickets. However, studies on consumer-based brand equity in the air transport sector have been scarce, especially in developing countries such as Brazil. This study examines the relationship between marketing strategies adopted by Brazilian airlines in the domestic market and the strengthening of consumer-based brand equity (particularly brand associations with brand awareness, perceived quality, and brand loyalty). A literature review and a survey of 33 managers from Brazil's top airlines were conducted to develop the study's conceptual model. To empirically test the model, another survey was conducted on 480 passengers at six airports in the central western, southern, and southeastern regions of Brazil and the data analyzed via structural equation modeling. The results show that joint investments are necessary for innovation in service, price promotion, and event sponsorship in order to strengthen the key consumer-based brand dimensions. This study provides a basis for the development of future studies on passenger-based brand equity and helps airlines target their marketing strategies with maximum effectiveness.     

China's economic rise and its implications for logistics: The Australian case

China's economic rise has had a significant impact on the global economy in terms of trade patterns and orientation. Much has been done to quantify the impact of China's economic rise on international trade, but very little has been done to assess its implications for logistics. In this paper, we examine the effects of China's continued economic rise on the Australian logistics sector. Unlike previous work that used partial equilibrium models, we use a computable general equilibrium (CGE) model. This allows us to capture the direct and indirect ramifications of trade and other economic developments associated with China's economic rise. The results are mixed between sub-sectors, but overall the Australian logistics sector would potentially benefit significantly from China's continued economic rise. However, these potential benefits will hinge partly on the Australian logistics sector's ability to respond to these opportunities.     

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.     

An analysis of the greenhouse gas emissions profile of airlines flying the Australian international market

International commercial flights (with the exception of flights between countries in European Union including Iceland, Norway and Liechtenstein) are currently not subject to greenhouse gas emission reduction regulation. To formulate effective and efficiency policy to manage greenhouse gas emissions from air transport, policy makers need to determine the emissions profiles of all airlines currently flying into their country or region. In this paper, we use 2012 data on airlines' aircraft characteristics, passenger load and cargo load (obtained from statistics reported by Australian Government Bureau of Infrastructure, Transport and Regional Economics) to estimate the volume and carbon efficiency on each international route flying to and from Australia. This is the first study to use actual passenger and cargo load data to determine the greenhouse gas (specifically CO₂) efficiency of airlines operating in the Australian international aviation market. Airlines' CO₂ emission profile is dependent on many factors including but not limited to the aircraft used, payload, route taken, weather conditions. Our results reveal that the airlines’ CO₂ emission profile is not only dependent on the aircraft used and the number of passengers but also the amount of cargo on each flight.     

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.     

Distributional effects of public transport subsidies

We analyze the distribution of transit subsidies across population groups in Stockholm. We develop a novel methodology that takes into account that the subsidy per passenger varies across transit links, since production costs and load factors vary. With this, we calculate the subsidy per trip in the transit network and analyze the distribution of subsidies across population groups. The average subsidy rate in Stockholm is 44%, but the variation across trips turns out to be large: while 34% of the trips are not subsidized at all but generates a profit, 16% of the trips have a subsidy rate higher than 2/3. We calculate the concentration index to explore the distribution of subsidies across income groups. The average subsidy per person is similar for all income groups, except for the top income quintile. This holds not only for the current flat-fare system, but also for distance-based fares and fares with a constant subsidy rate. Transit subsidies is hence not effective as a redistribution policy in Stockholm. The largest systematic variation we find is across residential areas: the average subsidy per person is five times higher in the peripheral areas of the region compared to the regional core, and the subsidy per trip is ten times higher.     

Post pandemic aviation market recovery: Experience and lessons from China

China was the first aviation market in the world hit hard by COVID-19 and has been recovering gradually as the pandemic became largely under control within mainland China. This study reviews the recovery pattern influenced by the Chinese government's aviation policy choices, in the hope that our discussions and findings will help improve aviation policy responses elsewhere. While the domestic market in mainland China has enjoyed a quick recovery to about 80% of the pre-crisis level by July 2020, the recovery of international services has been much slower, due to the bilateral route and flight frequency/capacity control and strict requirements for health check and quarantine. China's domestic aviation market was recovered by about 80% in two months after the pandemic became under good control. Most other countries with a “curve flattening” strategy, instead of full pandemic control, may not expect the fast recovery path China has achieved. A British “travel corridor” approach may be more practical for Western countries to follow, albeit more likely to be subject to serious setbacks and disruptions. The aviation fee reductions and cost support China and many other countries have been using are helpful by reducing airlines' marginal costs, but not sufficient for carriers to return to profitability or sustainable operations. Capital injection and/or credit guarantee may be needed for many airlines to survive. With various, often uncoordinated, regulations imposed in international markets, airlines based in open economies that have small domestic markets will face particularly serious challenges during the recovery process.     

Real option analysis of aircraft acquisition: A case study

This paper demonstrates that aircraft acquisition by airlines may contain a portfolio of real options (flexible strategies) embedded in the investment's life cycle, and that if airlines rely solely on the static NPV method, they are likely to underestimate the true investment value. Two real options are investigated: i) the “shutdown-restart” option (a carrier may shutdown a plane if revenues are less than costs, but restarts it if revenues are more than costs), and ii) the option to defer aircraft delivery. We quantify the values of these options in a case study of a major U.S. airline. The economic insight could help explain observed capital expenditures of airlines, and serve as a rule of thumb in evaluating capital budgeting decisions. A compound option (consisting of both the shutdown-restart and defer options) is also analyzed.