Weekend effect in airfare pricing

Internet traffic during weekends is lighter than at weekdays, allowing airlines to adopt a distinctive pricing policy during the weekend. By analyzing the daily airfares for 1000 US domestic routes, this study tests whether a weekend effect exists in the level and dispersion of airfares. It finds a strong weekend effect for airfare dispersion, but not for price level. This suggests that different arrival timing of online consumers during the weekdays motivate airlines to adopt a distinctive pricing mechanism during weekends, by offering occasional discounts while maintaining the same fare level on average.     

Dynamic effect of inter-firm rivalry on airfares: Case of Japan's full-service and new air carriers

This paper analyzes the dynamic changes in carriers' airfares and outputs and computes the change in the consumers' surplus year by year after new Japanese carriers entered thriving routes and started to compete with Japanese full-service airlines. Using unbalanced panel data from 222 routes and carrier specific sample observations, it finds that new carriers discounted airfares significantly as soon as they entered new markets, but two early carriers, Skymark Airlines and AIRDO, which had entered with very low airfares, raised their prices year by year. On the other hand, both All Nippon Airways and Japan Airlines responded to the new entrants and lowered their airfares to a much lesser extent than the new entrants did, and their airfare levels remained almost unchanged for at least four years after the first entry. The consumers' surplus increased significantly in the first year of each new entry but gradually decreased as the new entrants raised their airfares.     

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.     

An airline's management strategies in a competitive air transport market

Over the last decade, the demand for domestic and international flights in Korea has increased substantially. To meet the strong flight demands, several low cost carriers have begun to offer flight services. In addition, full service carriers have been motivated to establish their own subsidiary low cost carriers to maintain their market share against rival low cost carriers. This paper studies the management strategies of three kinds of airlines - full service carrier, its subsidiary low cost carrier and rival low cost carrier - based on game theory in the competitive air transport market. Each airline is assumed to act as a player and chooses strategies regarding airfare, flight frequency, and the number of operating aircrafts for specific routes while maximizing its own profits. Demand leakages between the airlines are considered in the flight demand function according to the selected strategies of all airlines. Through various game situations reflecting realistic features, this study provides managerial insights that can be applied in the competitive air transport market.     

The impact of flight delays on passenger demand and societal welfare

US airline passengers increasingly have access to flight delay information from online sources. As a result, air passenger travel decisions can be expected to be influenced by delay information. In addition, delays affect airline operations, resulting in increased block times on routes and, in general, higher carrier costs and airfares. This paper examines the impact of flight delays on both passenger demand and airfares. Delays are calculated against scheduled block times as well as against more idealized feasible flight times. Based on econometric estimations, welfare impacts of flight delays are calculated. We find that flight delays on a route reduce passenger demand and raise airfares, producing significant decreases in both consumer and producer welfare. Since producer welfare effects are estimated to be three times as large as consumer welfare effects, we conclude that from an economic efficiency rationale, airlines should be required to pay for the bulk of flight delay remediation efforts.     

Assessing the price effects of airline alliances on parallel routes

The impact of airline alliances on airfares on nonstop hub-to-hub routes is investigated. Analytical results suggest that the net effect on airfares is uncertain. Empirical evidence shows that the impact of two of three alliances (Star and SkyTeam) on prices on transatlantic hub-to-hub routes is insignificant after controlling for other factors. Routes between oneworld alliance hubs, however, have significantly lower business class airfares compared to other routes. These results indicate that the impact of alliances on transatlantic hub-to-hub airfares varies depending on the alliance; possibly due to the ability of an alliance to coordinate fares.     

Flight delay impact on airfare and flight frequency: A comprehensive assessment

This paper presents a comprehensive empirical analysis of flight delay impact on airfare and flight frequency in the US air transportation system. We model airfare and flight frequency as functions of cost and demand characteristics, competition effects, and flight delays at origin, destination, and intermediate hub airports. Estimation results confirm that airlines tend to pass delay cost onto passengers through higher fare, whereas delay has an upward effect on flight frequency. We find that proportionate airport delay reduction across the system can result in annual fare reduction in the order of billion dollars.     

Student’s vacation travel: A reference dependent model of airline fares preferences

This article reports the results of student vacation travel choice analysis using a reference dependent model of airline fare preferences. Findings suggests, as expected, that the preferences/utility decreases with increasing levels of cost. The evaluation of the airfare, however, becomes significantly more critical in the regime were low-fare airlines are more expensive than the regular airlines, meaning that price sensitivity for low-fare airlines is higher in this case. Part-worth utility functions for airfare as part of a more general portfolio model of vacation decisions of students suggest that indeed a reference dependent model captures such regimes in utility space.     

The effects of China's airline mergers on prices

This paper looks at the effects of some of the recent airline mergers in China. Overall, no significant airfare increases are found in a sample of markets served by the merged China Eastern and China Southern after 2002; indeed in most of the markets directly affected airfares declined. This was despite the absence of antitrust laws and enforcement over the period. However, market power was possibly exercised after the mergers in China Eastern's hub-to-hub networks.     

An analysis of profitability of the world’s major airlines

This paper analyses airline profitability through an examination of the changes in their productivity growth and the ability to markup prices above costs. A yearly panel data of 22 major airlines over the 1986–1995 period is used. Despite the fact that the European carriers were subjected to a more rapid rise in input prices and a faster decline in airfares than their North American counterparts, they achieved a faster growth in profitability since the early 1990s thanks to their higher productivity growth caused largely by the increased competition in Europe. Although overall profitability of the industry has improved during the 1990s, there are significant variations across airlines because of their differential capabilities to deal with the increasing competition and input prices.     

Supply-and-demand models for exploring relationships between smaller airports and neighboring hub airports in the U.S.

Airport passenger leakage is the phenomenon of air passengers choosing to travel longer distances to access more extensive air services offered by airlines at an out-of-region hub (or, substitute) airport, instead of using their local airports. Airport leakage can cause further reduction in services offered by airlines at a local airport, thereby causing even further leakage, and so on, which can significantly impact an airport's role in the growth of the local economy. This paper explores the geographic and operational attributes of local-and-substitute airport pairs in the United States, explicitly accounting for the interactive feedback relationship between passenger volumes and air service characteristics that contribute to the onset, persistence, and exacerbation of airport passenger leakage. A two-stage least squares regression model of air passenger demand at small- and medium-sized airports is first presented, where local passengers may travel by vehicle to larger, out-of-region hub airports. The results confirm that airfare and passenger volume relationships exist between the local and substitute airport pairs included in the dataset, and that lower airfares at the substitute airport have a greater impact on airport choices made by larger travel groups. They also suggest the existence of positive feedback in that if an airport attracts increasingly smaller passenger numbers with fewer air services and fewer air services with fewer passengers, without external intervention airport leakage impacts may be irreversible and exacerbate over time. A conceptual market share equilibrium analysis is used to illustrate the mechanisms of a direct two-way feedback relationship between passenger volumes at a local airport and air service characteristics at both the local and substitute airports. With data, this quantitative framework can help guide airport planners in further assessing and verifying suspected passenger leakage issues at their airport. The results suggest that without intervention, airport leakage impacts may be difficult to reverse; further exacerbating the trend are technological advancements that make driving cheaper and easier (connected and autonomous vehicles). However, the results can also guide planners in choosing the types and degrees of infrastructure investments and airline incentives that may be used to expand or retain air services to attract passengers.     

Using multiple correspondence cluster analysis to map the competitive position of airlines

Airlines can use market positioning to identify the major strengths and weaknesses of their services. The empirical analysis examines the international airlines operating on the Taipei–Tokyo and Taipei–Osaka routes. The multiple correspondence analysis results illustrate the relative positions of airlines, service attributes, and travelers’ characteristics in a perceptual map. The cluster analysis clearly identifies two groups of airlines that compete on particular services. The findings suggest that each airline can simultaneously adopt strategies to maintain and enhance its current strengths and to strengthen attributes in which it is lacking.     

The airfare pricing and seat allocation problem in full-service carriers and subsidiary low-cost carriers

This study investigates the competitive market situation in the air transport industry considering full-service carriers (FSC), subsidiary low-cost carriers (LCC) and rival LCCs on the flight-leg level while subsidiary LCCs are established by FSCs against rival LCCs to keep the market share and to make more profit. It is assumed that the demand of economy class for each airline follows a known distribution, and the mean value of that distribution is a function of its airfare and the airfare differences with other airlines. In addition, no-shows and cancellations are introduced to reflect a real situation. Based on this situation, a mathematical model is developed to derive efficient airfare pricing and seat allocation for each airline for maximizing the profit sum of both FSCs and subsidiary LCCs using a repeated game. A repeated game model integrated with a Tabu search algorithm and an EMSR based heuristic is suggested to deal with the proposed repeated game. A numerical example is provided to validate the model and solution procedure with hypothetical system parameter values under two kinds of market situations that show before and after the emergence of subsidiary LCCs.     

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.     

A Cournot model for analysing the effects of an open skies agreement

In the last decades there has been a gradual liberalisation of international air transport markets through the implementation of open skies agreements which seek the deregulation of the air transport industry and consequently the functioning of the market in a freer way. The objective of this work is to study the effects of an open skies agreement in order to understand if the airlines and the consumers will benefit after the market deregulation. With this purpose, we develop a Cournot model to compare the initial situation (without agreement) and the situation after the implementation of the open skies agreement.Based on the model developed we conclude that after market liberalisation the prices on international market segments where competition increases should decline, thus benefiting consumers. Regarding the incumbent airlines in the market, an open skies agreement should jeopardize the airlines that fail to operate new routes, leading to decreased profits.     

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.     

Predicting the impact of Trans Java Toll Roads on demand for intercity air travel in Indonesia

This paper aims to explore the factors influencing a potential air passenger shift to autos due to the completion of the Trans Java Toll Road and an increase in airfares. The study focuses on intercity trips for nonbusiness purposes. A face-to-face interview survey of 751 air passengers was conducted in three main airports on Java Island, Indonesia. Both the theory of planned behavior and the discrete choice model were applied to understand the factors for influencing toll road use among air passengers. The empirical results reveal that psychological factors, consisting of attitudes, subjective norms, and perceived moral obligations significantly influenced intentions to use the toll road. Meanwhile, perceived control of external resources was essential for airline passengers in their intention to use toll roads. Sociodemographic factors such as age, gender, income, frequency of airplane use, travel time, and cost also significantly influenced the decision to drive. Female, older passengers, high-income passengers, and frequent flyers were more likely to continue flying. The finding confirms that the Trans Java Toll Road affected a decline in air demand on Java Island. However, traveling with family members, rather than airfare hikes, became a more substantial reason for air passengers to switch to driving the toll roads. This research found that air passengers were inelastic related to changes in travel time, while 6% were willing to switch due to airfare increases of 10%.     

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.     

Entry effect of low-cost carriers on airport-pairs demand model using market concentration approach

The trend of open sky policies and growth of low-cost airlines, the topic of airport-pairs demand is gradually being addressed in the golden aviation circle of Northeast Asia. The variety of flight services among the four major metropolises with dual-airport systems leads to a competition-cooperation relationship existing between various airports and airlines. Therefore, this study investigates the causal relationship between the route-level passenger demand and influential factors using aggregate data collected through website observations. The empirical study focuses on direct flights of airport-pair routes among Taipei, Shanghai, Seoul, and Tokyo. Results of the passenger regression model indicate that frequency, code-share, and morning flights have positive impacts on increasing passenger numbers for airlines. Further, the market concentration degree of Herfindahl-Hirschman Index and entry effect of low-cost carriers are important for the route-level passenger demand. In addition, routes with departures and arrivals in hub airports have a considerable attraction relative to other airport-pair routes. Finally, the proposed passenger model performs well in predicting market share, especially for routes with high demand.     

New Europe,new low-cost air services

Only a few years ago European low-cost service was almost exclusively focused on Western Europe. However, the enlargement of the European Union to East Central Europe has brought with it an expansion of the liberalised air space, thereby offering new opportunities for service to Community airlines. Low-cost air service has since diversified in favour of new west–east air links that represent almost 60% new routes that have opened up between Western and East Central Europe. The western low-cost airlines dominate the market rather than Eastern European ones. The new west–east routes reflect new forms of mobility: post-migration flows from the east by those who have gone to work in Western Europe, new tourist practices and undoubtedly new types of business as well.