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.     

A latent class choice based model system for railway optimal pricing and seat allocation

In this paper, discrete choice methods in the form of multinomial logit and latent class models are proposed to explain ticket purchase timing of passenger railway. The choice model and demand functions are incorporated into a revenue optimization problem which jointly considers pricing and seat allocation. The framework provides insightful policy implications in term of fare and capacity distribution derived from actual passenger behavior. It shows that accepting short-haul demand provides greater revenue than long-haul demand using the same capacity. Revenue improvement ranges from 16.24% to 24.96% in multinomial logit models and from 13.82% to 21.39% in latent class models respectively.     

Stochastic seat allocation models for passenger rail transportation under customer choice

We study the seat allocation problem for passenger rail revenue management, in which a rail operator attempts to determine the optimal quantity of seats to be allocated to each cabin class for each train service. We formulate the problem with single-stage and multi-stage decisions as two stochastic programming models that incorporate passengers’ choice behavior. We transform the stochastic models into equivalent deterministic mathematical programs that are easy to solve. Then, we form a variety of seat allocation polices from the optimal solutions to the seat allocation models. A number of simulation tests are offered to test the policies.     

The pricing responses of non-bag fee airlines to the use of bag fees in the US air travel market

Using a panel data for Southwest and JetBlue in the 1st quarter of 2009, 2011, and 2013, we develop an empirical study and find evidence suggesting that the amount of bag fee charged by bag fee airlines, including those direct rivals at the route level and indirect rivals competing from adjacent airports, has a positive and significant effect on the airfare of non-bag fee airlines and such a positive association is smaller on vacation-oriented routes, but greater on routes with higher per capita income at endpoint cities. Moreover, the results are found that on the routes where Southwest is the only non-bag fee airline, the amount of bag fee charged by other airlines has a positive and significant effect on the traffic volume of Southwest. This traffic increasing effect, however, may be offset by the higher airfare of Southwest in response to other airlines’ imposition of bag fees.     

The simultaneous berth and quay crane allocation problem

This paper addresses efficient berth and crane allocation scheduling at a multi-user container terminal. First, we introduce a formulation for the simultaneous berth and crane allocation problem. Next, by employing genetic algorithm we develop a heuristic to find an approximate solution for the problem. The fitness value of a chromosome is obtained by crane transfer scheduling across berths, which is determined by a maximum flow problem-based algorithm based on a berth allocation problem solution defined by the chromosome. The results of numerical experiments show that the proposed heuristic is applicable to solve this difficult but essential terminal operation problem.     

Differential pricing strategies of air freight transport carriers in the spot market

The single pricing approach fails to reflect different demand changes in response to its cargo space prices at different sales periods. This might be an obstacle to maximize the cargo space revenue of air freight carriers. This paper conducts the empirical analysis on pricing strategies in the spot market for two competitive air freight transport carriers operating on the same segment. It concludes that two carriers gain more revenues with the optimized differential pricing approach than with the single pricing approach. In theory, the research enriches the current literature in terms of pricing strategy optimization under the competition of two parties. In practice, it provides references for air freight transport carriers in their decision-making of applying the differential pricing strategy.     

Financial distress,survival network design strategies,and airline pricing: An event study of a merger between a bankrupt FSC and an LCC in Brazil

This paper develops an event study to investigate the airfare effects of the bankruptcy of a financially distressed full-service carrier (FSC) and its subsequent acquisition by a low-cost carrier (LCC) in Brazil. We account for the distressed carrier's survival network design strategies (SNDS) pursued during its reorganization—a suspected source of sample selection bias. Additionally, as rivals' pricing could be aimed at driving the distressed/bankrupt carrier out of the market, we treat the carrier's distress as endogenously determined with it. Our results do not uncover any survival pricing behavior stemming from SNDS, but reveal fiercer price competition from rivals in periods preceding both the distressed carrier's bankruptcy filing and acquisition. We also find evidence of enduring price competitiveness in the long run of the acquisition event, shedding light on the potential facilitating role played by bankruptcy protection regulations in keeping and sustaining market contestability after the bankruptcy-filing period.     

Optimising flight connection times in airline bank structure through Simulated Annealing and Tabu Search algorithms

In hub and spoke airline networks, flight arrivals and departures generally have a bank structure to increase connections among spoke cities through a hub airport in order to provide cheaper service for higher volumes of air traffic. In this study, we introduce the airline bank optimisation problem with a novel mathematical model for improving flight connection times. The mathematical model aims to minimise the total connection times for transfer passengers and generates flight schedules regarding slot capacities in the hub airports. Since the problem is a combinatorial optimisation problem NP-hard and computational complexity increases rapidly for real-world problems, we employ the simulated annealing and the tabu search algorithms to achieve better solutions in a reasonable time. We generate sub-problems using real-world data and investigate the effectiveness of the algorithms. Finally, we present the results of a real case study of a Turkish airline company which has a hub airport connecting the flights between Middle Eastern and European cities.     

The geography of the Spanish airport system: spatial concentration and deconcentration patterns in seat capacity distribution, 2001-2008

This paper analyzes the geography of seat capacity at Spanish airports between 2001 and 2008. Concentration and deconcentration patterns for different markets have been identified. For this purpose, we use the Herfindahl-Hirschman Index (HHI), the Concentration Ratio (CR) and the Lorenz curve. From our analysis, we conclude that seat capacity follows a deconcentration pattern due to the growth of low-cost carriers at small- and medium-sized Spanish airports. This is in line with earlier studies for Europe as a whole. Intercontinental seat capacity still remains very much concentrated in Madrid and, to a lesser extent, in Barcelona. However, new strategies by long-haul airlines bypassing the primary European hubs foster the deconcentration of seat capacity in the Asian and North American markets. In the case of Spain, the recent liberalization of the EU-US market may become an important enabler of such network strategies, e.g., Delta has operated a route from Valencia to New York-JFK since 2009. In other intercontinental markets, capacity is more and more concentrated in Madrid. We highlight the restructuring of Iberia’s network as an important factor behind the increasing dominance of Madrid in intercontinental markets.     

Exact and heuristic methods to solve the berth allocation problem in bulk ports

In this paper, we study the dynamic hybrid berth allocation problem in bulk ports with the objective to minimize the total service times of the vessels. We propose two exact methods based on mixed integer programming and generalized set partitioning, and a heuristic method based on squeaky wheel optimization, explicitly considering the cargo type on the vessel. The formulations are compared through extensive numerical experiments based on instances inspired from real bulk port data. The results indicate that the set partitioning method and the heuristic method can be used to obtain near-optimal solutions for even larger problem size.     

The growing influence of low-cost carriers in Northeast Asia and its implications for a regional single aviation market

This paper provides an overview of the development of the low-cost carrier (LCC) sector in China, Japan, and South Korea. It is the first paper that documents LCC contributions to the passenger traffic and cheaper fares in Northeast Asia (NEA)'s intra-markets. We argue that a single aviation market can facilitate the growth of the LCC sector, which in turn will make a significant contribution to the NEA connectivity, mobility, and integration. In addition, with a single aviation market, NEA countries can adopt a proactive, unified approach in negotiating air transport agreements with the major aviation partners to maximize the interests of this region as a whole, which will further provide valuable growth opportunities for the LCCs.     

The role of perceived acceptability of alternatives in identifying and assessing choice set processing strategies in stated choice settings: The case of road pricing reform

In designing choice experiments, it is common to present a number of alternatives to a respondent and have them choose the most preferred alternative. However, respondents may ignore one or more alternatives which they deem unacceptable for various reasons. This possibility aligns with the idea of the ‘consideration set’ which influences the choice of an alternative given the choice set of interest. This paper uses an endogenous choice set model to investigate the influence that contextual effects and socioeconomic characteristics play in explaining variations in the choice sets considered by respondents when they reveal their preferences.