Observations of fundamental changes in the demand for aviation services

This paper addresses the seemingly inexorable decline in yield in the airline industry. The external shocks to the industry of the terrorist attacks of 9/11/2001, wars in Afghanistan and the Arabian Gulf and SARS all had downward impacts on the demand for air travel. However, these effects mask a more fundamental change in the demand for aviation services. The analysis uses published sources and a survey of 264 travellers to examine the fall in yields. The traffic mix of economy, business and first class passengers is shown to have changed over a 10 year period as proportionally more travellers choose to use economy class products. This combined with a fall in yield by a third in this cabin during the same period has lead to a significant fall in industrywide yields. Behavioural shifts in business travel and leisure demand are examined. Business travellers have switched from business class products as the difference between business class and leisure fares have increased significantly and as economy class and low-cost carrier products are increasingly viewed as acceptable for business traveller needs, particularly in short-haul markets. Leisure travel has increased as low-cost carriers have introduced low fares, generating new traffic and winning market share from scheduled and charter airline competitors alike.     

Perspectives for a future high-speed train in the Swedish domestic travel market

Gröna tåget (the Green Train) is a research and development project with the aim to develop a high-speed tilting train concept for the Swedish and Nordic markets. Competition with other modes needs to be evaluated, especially as regards travelling times and fares, with special attention paid to domestic airlines.For new trains, gains in travelling times and lower operational costs can be expected. Model calculations of operational costs for domestic air stages and high-speed trains, respectively, show that high-speed trains have lower costs per available seat kilometer. Train operators can meet competition with fares from coaches and air carriers provided they introduce yield management. The primary competition is about travelling times. Gröna tåget would increase the train’s attractiveness and win over some travel from airlines.     

考虑换乘费用的城市公共交通票价优化

换乘所产生的附加费用,如时间和票价等,导致配流影响因素产生变化,如果沿用传统方式将降低预测精度和可靠性。通过引入换乘次数和方式等因子计算出行等待、乘车、换乘及风险评估预留时间等,定义广义出行费用与计算方法;建立双层规划模型求解最优票价,最后通过算例分析弹性出行需求、换乘费用、票价之间的关系。计算结果表明,换乘费用对出行需求的影响小于票价优化对出行需求的影响,优化票价随换乘费用增加而加速降低,为公共交通票价优化提供研究依据。     

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.     

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.     

Elasticities of demand for leisure air travel: A system modelling approach

In this study, the UK outbound demand for leisure air travel has been examined using a demand system which takes into account the ways in which the expenditure on air fares interacts with both the expenditure on non-fare components of travel abroad and with expenditure on domestic leisure. The findings suggest that there is a strong link between total consumer expenditure and expenditure on air travel with the expenditure elasticity greater than one but that, considered in aggregate, the demand for air travel is moderately inelastic with respect to air fares alone. However, the findings also show that interactions between air travel expenditure, other costs of travel abroad, as well as expenditure on leisure activities in the UK, involve sizeable cross-price elasticities.     

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.     

Network dependency and airline competition – Consequences for remote areas in Norway

Due to the long stretched shape of the country and sparse population many regions in Norway are dependent on air travel that involves chained trips with two or more legs. Northern Norway and the west coast are particularly dependent on such networks. In these areas a number of short take-off and landing airports and subsidised regional airlines engaged in a public service obligations route tendering systems. However, regions dependent on competitive network travel have not all benefited from the last ten years of competition which has lead to lower fares on the main routes and ‘through-fares’ for network travellers have become relatively expensive. This is because there is only one network airline offering through fares. Network travel where one leg is commercially provided and not covered by public service obligation rules, leaving regulation authorities to intervention when fares are excessively high on other legs.     

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.     

Effects of parking and cordon charge policies on tourist's modal shift in central business district of Mashhad city,Iran

The second largest holy city of the world, Mashhad, attracts high volumes of tourists and pilgrims every year. Most visitors travel by private car and are a source of considerable funds for the local economy. Among road users, tourists as one of the major traveller categories in Mashhad city behave differently due to the particular trip purpose. The aim of this research is to model tourist's shifting modes of travel behaviour when policy measures, such as the parking and cordon fares, are implemented. The tourists’ preferences were examined using binary logit analysis when different options of travel cost and time scenarios were provided. Results indicate that travel time, parking cost, cordon cost, education level and vehicle price influence tourist's modal choice. In addition, the finding shows that congestion pricing will be more effective than a parking pricing strategy in encouraging switching of modes.     

Does the theory of the ‘core’ explain why airlines fail to cover their long-run costs of capital?

The major air transport markets at the early part of the 21st century are failing to generate sufficient revenues to cover their long-run costs. Many airline are being supported by subsidies, going out of business (e.g. Sabena, Ansett, Canadian International, Swissair) or having to resort to various forms of financial restructuring such as afforded by Chapter 11 bankruptcy laws in the US (US Airways, Midway, National). The effects of the terrorist attacks of September 2001 have exacerbated this situation, but the data suggests the problem be more deep routed in the ‘deregulated’ markets that now exist in many parts of the world. This paper concerns itself with the issue of whether there are intrinsic features of the scheduled network airline industry that makes the current structure of liberalized markets unsustainable. It highlights on a number of features of this market but pays particular attention to the question of whether the market is naturally prone to excesses in competition that, because of its nature, forces airline fares down to the level where full costs cannot be recovered. It focuses in this sense on a long established concept in economics, namely does a core exist in this market. The fact that there is prima face evidence to suggest that the core is empty then leads to a discussion of appropriate policy reactions that may allow a more sustainable market structure to survive.     

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.     

The assessment of the EU–US Open Skies Agreement: The counterfactual and other difficulties

The advent of the EU–US Open Skies Agreement has been widely anticipated. A number of consequences have been predicted, for example, impacts on fares, on passenger volumes, choice and on consumer welfare. Airline costs are also predicted to fall as a result of increased competitiveness and increased cooperation among airlines. In the short period since the implementation of the Agreement, it is relatively easy to assess the supply-side changes that have been made, but more difficult to make wider judgements. For example, can traffic growth be attributed to Open Skies and does airline and alliance market power result in less fare flexibility with consequently less influence on changes in passenger volumes? Have airline costs changed and what has been the source of the savings? This paper offers some insight into the data that will be required to make these and other wider judgements and discusses some methodological difficulties.     

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.     

The impact of the London congestion charging scheme on the generalised cost of car commuters to the city of London from a value of travel time savings perspective

This paper shows that the impacts of the London Congestion Charging Scheme should not be analysed from the standard approach to value of travel time savings. This will invariably lead to the mistaken conclusion that drivers who value their travel time savings below the £5 congestion charge will be regarded as losers from the Scheme. The use of a simple expression of generalised costs leads to different conclusions. First, a motorist who continues to drive but values the time savings of the Scheme less than £5 can still gain from the scheme, if the generalised cost post-charging is lower than the generalised cost pre-charging. Second, a motorist who switches to the bus can still gain from the scheme. Since the bus travel time post-charging will typically be lower than the bus travel time pre-charging, it is possible that the generalised cost of a trip by car pre-charging will be higher than the generalised cost of a trip by bus post-charging, even after taking into consideration the inconvenience of switching.     

Hub competition and travel times in the world-wide airport network

The aim of this work is to measure the competition between airport hubs based on an analysis of travel times in the world-wide airport network. By considering the minimum travel time required to connect each pair of airports, it is possible to create new measures of hub competition, separating the effects of hub position and temporal coordination. This analysis was carried out at the global level, considering all 232 airports with more than 3 million seats yearly offered in departure flights in 2008, and also in relevant geographic markets. The results show a high level of competition among the most important world airports, but the major airports of Europe have a geographical advantage in relation to world markets over the major American and Asian airports. We also show that airports located in different continents often compete for the same origin–destination markets. Geographical position appears to be the most important variable explaining hub performance. Secondary hubs show a higher degree of specialization towards specific markets.     

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.     

Differentiating metropolitan transport disadvantage by mode: Household expenditure on private vehicle fuel and public transport fares in Brisbane,Australia

Public transport (PT) has become important in everyday travels in Australian cities. Rising PT fares create a competitive disadvantage against private motor vehicles which is threatening PT ridership. This paper seeks to gain further insights into transport disadvantage by exploring spatial patterns of household transport expenditure on PT fares and private vehicle fuel use for the Brisbane metropolitan area. Several datasets are used to measure mode-specific transport costs, including the journey to work matrix, fuel efficiency of the private vehicle fleet and PT fares for the city. Through an advanced spatial analysis, the results show that PT was not a cost-effective means of transport for households when compared to private motor vehicles. The paper then compares mode-specific trip costs with patterns of suburban socio-economic disadvantage in Brisbane. We demonstrate that the high PT fares increase household exposure to higher transport costs and compound other forms of transport disadvantage and vulnerability, particularly in outer suburban areas.     

A passenger demand model for air transportation in a hub-and-spoke network

This paper develops an air passenger model that deals with city-pair demand generation and demand assignment in a single framework. Using publicly available and regularly collected panel data, the model captures both time series and cross-sectional variation of air travel demand. The empirical analysis finds that pattern of correlations among alternatives can be described by a three-level nested logit model. Fare, frequency, flight time, direct routing, on-time performance, income, and market distance have significantly effects on air demand. Correcting for the problem of endogenous air fares using instrumental variables yields more plausible estimates of price sensitivity and value of time.     

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.