How do carriers price connecting flights? Evidence from intercontinental flights from Europe

In civil aviation, hub-and-spoke (HS) networks are used by all large carriers. The importance of this system implies that many travelers use connecting flights. Nevertheless, only scarce knowledge is available on price formation of these trips. In this paper, we focus on the fares of connecting intercontinental flights, with one stop and at least one competing direct flight. We develop a simple model of a HS network, with imperfect substitutability between direct and indirect flights and Cournot competition on every route in the network. We test the model empirically, using reported fares for flights from seven European origins, including the five major airports in Europe, to five non-European destinations. We find that the fare of a connecting flight can be expressed as the weighted average of the fare of its direct competitor, the travel times of both flights its costs and the monetary value of the utility attached to the trip. The weight of the direct fare decreases as product diversity increases.     

Quantity price discrimination in the air transport industry: The easyJet case

This paper extends the literature on low-cost carriers' pricing strategies by investigating the presence of quantity price discrimination implemented through a two-part tariff in offered fares. By analysing Internet fares for all easyJet flights departing from the Amsterdam Schiphol airport between March and April 2015, we search for price differentials based on the number of seats booked by a single consumer. We find that the lowest average unit price is associated with a single consumer reserving 5 seats. On average, the per-seat discount for a single consumer reserving 5 seats is €9.48, which is 14% of the single-seat fare. Additionally, a multivariate analysis shows that quantity discounts are greater for flights with a larger fraction of available seats at the time of booking, the seats are booked longer in advance, and the destination's gross domestic product per capita is greater. Conversely, quantity discounts are lower for longer routes, larger destination airports, and routes for which easyJet's market share is higher.     

The choice of air carrier, flight, and fare class

This paper reports the development and interpretation of air traveler choice models to gain insights into the tradeoffs air travelers make when they choose among different carriers, flights, and fare classes. Such insights can be used to support carrier decisions on flight scheduling, pricing, seat allocation, and ticket restrictions. This paper develops a conceptual framework and applies it to the choice of carrier, flight, and fare class as a basis for analyzing air travel demand in a competitive market. Model estimation results are used to quantify the importance of carrier preferences, market presence, quality of service, frequent flyer program membership, schedule convenience, and fares on carrier travel demand. The empirical results provide measures of the premium that business and leisure travelers are willing to pay to avoid schedule delays, to choose a carrier in which frequent-flyer program they participate, and to obtain the amenities and freedom from travel restrictions associated with higher fare classes.     

Ramsey pricing in practice: the case of the Norwegian ferries

The article develops a cost model for ferry operators, which enables us to estimate how long-run marginal costs for transporting different categories of vehicles are related to trip lengths. The model is estimated using cross-sectional data from 64 ferry services in Norway. The present fare system for the ferries is then compared with marginal costs and with Ramsey fares with the presumption that the ferries' subsidy needs are at today's level. Ramsey pricing implicates steeper relationships between fares and trip lengths than present fares, in particular for heavy vehicles. Consequently, fares based on general principles of economic welfare should, under present financial constraints for the ferry operators, lead to lower fares for short journeys and significantly higher fares for long journeys.     

Analysis of Iranian passengers' behavior in choosing type of carrier in international air travel to East Asia

Increased demand for East Asia flights from Tehran has intensified competition between Iranian and foreign carriers. In addition, the entrance of low-cost carriers (LCC) will make this competitive market even more intense. In this condition, carriers are striving to gain more market share by improving services and discounting their fares. Therefore, analyzing air travel demand is valuable for carriers' long term and short term planning. This study empirically investigates passengers' behavior in choosing five types of carriers in many groups of passengers using multinomial logit (MNL) and nested logit (NL) models. The data were collected through the stated preference (SP) questionnaire designed based on orthogonal main-effect. The main survey was conducted in the Imam Khomeini International (IKI) airport in July 2013 where 480 questionnaires were collected through face-to-face interviews. The results show that the ticket fare, the possibility of travel on desired date and time, international air travel experience, Frequent-flyer program (FFP) membership status, marital status, and gender are statistically significant contributors in explaining carrier choice. Interaction effects between trip purpose and ticket fare are statistically significant in choosing carriers. The results further indicate that business travelers are more willing to pay than non-business travelers for flights on desired date and time, although varying by type of carrier.     

Are airlines' price-setting strategies different?

Using a sample of fare quotes for non-stop travel from New York to London, this paper documents a set of stylized facts about pricing strategies of air carriers on this route. Two key facts stand out. First, airlines appear to employ strikingly different pricing strategies. Second, fares increase at an accelerated rate as the departure date approaches.     

Airline competition in the British Isles

We study the relationship between pricing and market structure on the routes connecting the UK and the Republic of Ireland. Because in 2007 the European Commission prohibited the takeover of Aer Lingus by Ryanair, the analysis focuses on their pricing strategies in particular. We use an original dataset of fares posted on-line, which allows to control for the fares’ inter-temporal pattern for each specific flight and each carrier’s specific yield management system. Our evidence supports the European Commission’s view that the elimination of a competitor in the Irish airline market is likely to have harmful consequences for consumers.     

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.     

Competitive responses to low cost carrier entry

Recent research has found that the entrance of a low cost carrier leads to lower prices on routes it has entered. This paper extends this analysis by examining the impact of route entry by a discount carrier, ValuJet into an established carrier’s hub, Delta, and by examining price changes on routes not entered by the low cost carrier. We found that Delta lowered its fares on competitive routes terminating in Atlanta and on routes flowing through its Atlanta hub in response to competition by ValuJet. We did not find evidence that Delta increased fares on non-competitive routes (either those terminating in Atlanta or flowing through Atlanta) to compensate for lost revenues on the competitive routes. This final result runs counter to the conjectures of the DOT and supports the argument that firms practice rational economic pricing in their hub-and-spoke networks. ©     

Fare impacts of Southwest Airlines: A comparison of nonstop and connecting flights

This paper examines the effects of Southwest Airlines' entry on its rivals' pricing, with a focus on comparing nonstop and connecting flights. The results produce two important findings. First, Southwest's nonstop entry depressed its rivals' nonstop airfares and connecting airfares. Second, Southwest's connecting entry depressed its rivals' connecting airfares, but did not depress their nonstop airfares. Considering nonstop and connecting services as differentiated products which differ in quality, the findings suggest that firms have quite different fare strategies upon the entry of different quality products.     

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 effect of low fare air carriers on airfares in the US

This paper examines the role that low fare air carriers play in determining air fares in the US. Regression modeling is used to test variables focusing on geographic and competition issues effecting airfare pricing. Variables tested in the modeling include the presence of low fare carriers in a market, hub domination, market share, and type of destination served. The final results show that low fare carriers play a statistically significant role in airfare determination in the US.     

The pain persists: Exploring the spatiotemporal trends in air fares and itinerary pricing in the United States, 2002–2013

In the United States, the Airline Deregulation Act of 1978 prompted higher levels of service frequency between large and/or popular markets, lowering associated fares, on average. However, deregulation also increased financial instability within the commercial air transport industry, reduced quality of service, increased passenger fees and accelerated changes in the operational configurations of networks through hubbing, dehubbing, mergers and acquisitions. Over time, these market forces have squeezed service to/from smaller communities through schedule reductions and higher fares, creating “pockets of pain” in the air transport landscape. The purpose of this paper is to explore the uneven spatiotemporal distribution of air fares, by airports and associated flight segments, examining both symmetries and asymmetries in fare patterns over time and across space. Results suggest that several significant pockets of pain still exist within the U.S., and that asymmetries in air fares creates a lopsided fare structure for many smaller markets, further aggravating the fare imbalances spawned by deregulation.     

Carrier collaboration with endogenous networks: Or,the limits of what carrier collaboration can achieve under antitrust immunity

Airlines maintain complex networks that are to large extents complementary. Therefore, some passengers need to change aircraft and airlines to fly from their origin to their final destination. The present study captures pricing problems in terms of double marginalization but goes one step further by incorporating network choices. The model involves a two-stage game with two carriers who choose their complementary networks in the first stage and fares in the second stage. Each carrier's network involves one or two links that are distributed geographically or distributed in time. If both carriers maintain two links, then transfer passengers can choose between two alternative connections which they consider as imperfect substitutes. There are only transfer passengers, and maintaining a link is costly. The analysis reveals that carrier collaboration and antitrust immunity can eliminate double marginalization and create incentives to extend networks. Our results indicate that the scope for the improvement of carrier networks via antritrust immunity can be rather limited relative to the social desirability of more extensive carrier networks. A possible policy lesson is that airlines should be granted antitrust immunity conditional on network expansion and/or frequency obligations.     

Airline daily fare differentiation in a medium-size travel market

This paper examines variation in airline fares for trips in a medium-size travel market. It develops a conceptual model of fares offered, and uses daily information about fare, plane and flight characteristics, and trip characteristics easily available on the internet. Based on this information it estimates a two-way fixed effects model of airline fares. The results show large differences in fares among the airlines, large variation in daily fares offered, and provide evidence of fare differentiation in the travel market analyzed.     

Airport competition - Regional airports losing ground to main airports

Regional airports in Norway are losing market shares to nearby main airports on flights to the national capital, Oslo, and on international travel via Oslo. Travellers are willing to spend several hours extra driving to a larger airport in order to take advantage of lower fares and more convenient airline services. Traffic leakage from regional airports is high when the service from the regional airport is indirect and fare differences are large. Public service obligation tenders (PSO) set maximum fares on the regional legs, but do not cover through travel from regional airports which involve commercial legs. Traffic leakage is particularly evident in the leisure segment. Leakage levels tend to increase as competition is intensified at main airports, but the evidence is rather mixed. Logistic curves of airport market shares have proven to be useful when comparing spatial variations in leakage levels.     

Introducing connecting flights in LCCs' business model: Ryanair's network strategy

In light of the ‘hybridization’ process characterizing airlines' business models, this work contributes to the literature by analyzing the rationale underpinning the decision to introduce connecting flights into the typical point-to-point networks of low-cost carriers (LCCs). By referring to the network of the largest European LCC, Ryanair, we provide evidence on how its new inter-connecting strategy is influenced by market, supply, and leg characteristics. Applying a probit model, results suggest that Ryanair is offering connecting flights on both non-directly offered markets and on markets that it already serves directly. The likelihood to observe a connecting flight increases at higher level of legs' frequency and at lower levels of Ryanair's legs' market share. Eventually, this new connecting strategy is negatively correlated with market distance, routing factor, direct frequency, and Ryanair's current O&D market share.     

Homogeneous service with heterogeneous products: Relationships among airline ticket fares and purchase fences

A fare table derived from homogeneous service is essential for revenue management applications in the airline industry. Restrictions or so-called fences are usually regarded as a useful tool to differentiate homogeneous seat service. Nevertheless, the relationships among fares and fences are not yet clear. This study aims to investigate passengers’ preferences on the choice of ticket alternatives describing by fares and fences and using Taiwan domestic air travel as an example. Regarding the attributes that an airline ticket may be attached such as departure time, booking time, ticket validity, changing fee, refund and fare, stated preference questionnaires are developed with multiple hypothetical scenarios for respondents to select in the experiment. 398 valid samples are collected for the logit model analysis. With the use of mixed logit model to accommodate both passengers’ heterogeneity and also the issue of relevant alternatives in the experiment, the results show statistical significance of all applied attributes with correct signs. In addition, passengers possess different attitudes on the fence of booking time, ticket validity, changing fee, and fare. Willingness-to-pay of each fence is further calculated to ultimately generate a fare table based on the combination of fences for practice use.     

Airfare pricing determinants in hub-to-hub markets

This paper expands upon past works in airfare pricing determinants by looking at a set of airports infrequently studied as a whole group by themselves, the hubs. The nature of hub-to-hub markets makes them unique and while they are unique in some aspects certain trends affecting all commercial air transportation markets are also seen affecting hub-to-hub markets. Pricing in hub-to-hub markets in the United States is examined and then on a carrier-by-carrier basis. Pricing in hub-to-hub markets is affected by a number of statistically significant variables including route type, presence and type of low fare carrier, and competition in hub-to-hub markets.     

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.