Estimating the costs of airport congestion due to fast connections

Short-term airport congestion due to service peaks causes transitory peaks in demand for customer services and ground-handling processes. Efforts to maximize flight-specific revenues have been mitigated by the recognition of the excessive burden to the service processes caused by these busy periods. The costs of peak periods for one mid-size European airline at its main airport are examined. The case company can cut the costs of ground-handling processes by 30% by applying slightly different timetabling principles. In fact, by adjusting only a few flights during the morning rush hour the company could save up to a million euros annually. These results show the importance of estimating the total economic effects of service peaks also to the authorities and the providers of airport services. In future research, the revenue impacts of despoking should be considered in addition to total process costs.     

Revenue and operational impacts of depeaking at U.S. hub airports

Historically, peaked schedules have been used with hub-and-spoke networks to maximize passenger connection opportunities. Although peaked schedules can generate more attractive connecting itineraries and revenue for an airline, they are costly to operate because additional manpower and equipment resources are needed to serve the peak periods. Several airlines experimented with depeaking their hubs as a way to reduce costs and improve operations in the 2000s. Prior studies have quantified operational improvements and cost savings associated with depeaking; however, none have quantified revenue impacts. We use difference-in-differences methods to quantify revenue and operational impacts associated with depeaking for five U.S. hubs. Results show that depeaking tends to improve operations, but may negatively impact revenue per available seat mile (RASM). In some cases, revenue losses exceed reported cost savings.     

Determinants of airport cost flexibility in a context of economic recession

The recent economic downturn led to a significant contraction in the global demand for air travel and cargo. In spite of that, airports’ operating costs did not mirror the traffic trends and kept increasing during the same period, showing evident signs of lack of flexibility. With this background, this paper aims at identifying the drivers of airport cost flexibility in a context of economic recession. This is done by estimating a short-run stochastic cost frontier over a balanced pool database of 194 airports worldwide between 2007 and 2009. Using the total change in cost efficiency during the sample period as a proxy for cost flexibility, the impact of variables such as ownership, outsourcing, airline dominance, low-cost traffic, and revenue diversification is tested in a second-stage regression. Contrary to the existing literature, a higher level of outsourcing is shown to reduce cost flexibility. Results also indicate that low-cost traffic, diversification, and corporatization increase the airports’ ability to control costs. The negative impact of airline dominance suggests the need for more stringent regulations on slot allocation at congested airports in order to ensure optimal infrastructure usage.     

Evaluating the multi-period operating efficiency of international airports using data envelopment analysis and the Malmquist productivity index

For the most part, airports are publicly or semi-publicly owned and operated with fixed assets. As such, airports have been often considered little more than infrastructure providers for airlines. However, as airports have begun to offer a variety of ancillary services including passenger transfers, re-fueling, parking, and shopping, they no longer play second fiddle to airlines. To come into their own, a growing number of airports realized their need to develop competitive strategies that can attract more air traffic and generate greater revenue. Such strategies start with the assessment of their competitiveness in terms of operating efficiencies relative to others. To help airport authorities identify major drivers for enhancing the airport operational efficiency and the subsequent competitiveness, this paper evaluates the comparative efficiencies of international airports for a multi-year period (2006–2011) using data envelopment analysis intended for dynamic benchmarking and Malmquist productivity index built on time-series analysis. Our study indicates that the productivity of an airport was influenced by exogenous factors such as shifts in government policies and technological advances rather than endogenous factors driven by improvements in managerial practices.     

Cost and revenue synergies in airline mergers – Examining geographical differences

Deregulation, privatization and shifting demand patterns in the airline industry, combined with the emergence of low-cost airlines and rising fuel prices have increased the competitive pressure on legacy airlines. Since alliances do not deliver sufficient benefits to counterbalance these trends, many airlines have engaged in mergers to seek for additional cost and revenue synergies. An extent body of literature investigates the synergy potential in mergers and alliances, but there is no study on how synergies differ among mergers and what potential influence factors cause these differences. This paper aims at explaining differences in synergy estimates and realized synergies in recent airline mergers and places a special focus on geographical influence factors.The research methodology uses a comparative case study comprising six large airline mergers between 2003 and 2012 from Europe, North America and Latin America. After analyzing the cases individually, the pre-merger situation of the merging airlines, the synergy estimates and the realized synergies of the cases were compared.The results show considerable geographical differences in pre-merger cost structures, synergy estimates, and synergy realization. The European mergers present lower synergy estimates but also lower integration costs than mergers in the Americas. Whereas European airlines estimate cost synergies higher than revenue synergies, both North and Latin American airlines expect more revenue synergies than cost synergies from airline mergers. Only one merger showed superior post-merger profitability which indicates that the achieved synergies in the broad majority of the cases are insignificant.     

On the factors that affect airline flight frequency and aircraft size

This paper assesses the determinants of aircraft size and frequency of flights on US airline routes by considering market demographics, airport characteristics, airline characteristics and route characteristics. It shows that frequency and aircraft size increase with population, income, and runway length. An increase in the proportion of managerial workers in the labor force or the proportion of population below the age of 25 results in greater frequency with the use of small planes. Slot constrained airports and an increase in the number of nearby airports lead to lower flight frequency with the use of smaller planes. Hubs and low cost carriers are associated with larger plane sizes and higher frequency, while regional airline ownership leads to higher frequency and the use of smaller planes. An increase in distance between the endpoints leads to lower frequency with the use of larger planes. As airport delay rises, airlines reduce frequency and use smaller planes, though when airport cancellations rise, flight frequency increases with the use of larger planes.     

The impact of carbon emission fees on passenger demand and air fares: A game theoretic approach

The implementation of an environmental market-based measure on U.S. aviation industry is studied. Under this policy, each airline pays a carbon fee for the carbon dioxide emissions it generates. The impact on ticket prices and corresponding market shares is investigated via the joint estimation of an air travel demand model and an airlines' behavior model. In the demand model, aggregate air traffic data is used to determine the marginal effects of flight attributes that are specific to itinerary, airline and airport on market share. The airline's behavior model incorporates the carbon fee in the airline marginal cost. After the implementation of the carbon policy, the increased cost forces airlines to adjust ticket prices in order to maximize profits. The results obtained by the proposed model indicate a moderate price increase which strongly depends on the per tonne carbon price. Air travel demand falls from 2.4% to 21% depending on the carbon price level.     

Commodity price pass-through in the US airline industry and the hidden perks of consolidation

How do changing jet fuel prices impact airline revenues? As expenses for jet fuel are one of the most relevant cost factors for airlines, their economic success largely depends on the ability to match changes on the cost side with an adaption on the revenue side. While previous studies primarily focused on the impact of fuel price changes to consumer prices, this paper empirically examines the ability of US airlines to pass-through lagged jet fuel prices to scaled operating revenues from an airline driven perspective. Our results suggest that the extent to which an exogenous increase in fuel prices can be passed on to revenues will deviate according to the competitive situation faced by an airline. Based on these findings our research should also be of interest for European policy makers who are discussing actions to exogenously increase jet fuel prices due to environmental reasons.     

Whether low-cost-carrier passengers spend more on duty-free goods at the airport? Evidence from Incheon International Airport

With a dramatic growth in the low-cost carrier (LCC) traffic around the world, many airports have built budget terminals to accommodate the LCC flights with cheaper airport charge to the airlines but inferior shopping environment and service quality to the passengers. This study aims to answer the following research questions: i). Whether the LCC passengers have higher purchasing power than FSC (full-service carrier) passengers for the airport concessions, particularly the duty-free goods? ii). Would the budget terminal design contribute to or jeopardize the LCC passengers' airport concession expenditure? iii). How could the airport operator maximize its concession revenue by re-designing terminal or re-allocating flight slots? We collect the actual airport duty-free transaction data from Incheon International Airport (ICN) for an empirical investigation. Our empirical evidence first suggests that LCC passengers could have comparable or even higher purchasing power than FSC passengers in consuming duty-free goods at the airport. Among all the LCC passengers, Chinese have the highest purchasing power. Second, the inferior shopping environment and service quality of budget terminal seriously jeopardize the duty-free sales from the LCC passengers. Third, counterfactual analyses show that, if ICN could convert its budget terminal into a conventional terminal, 44 million USD more duty-free sales can be generated per year. Even keeping the current terminal design, re-allocating the LCC flights between the budget terminal and conventional terminal could bring approximately 4.9 million USD more duty-free sales per year. The findings provide managerial implications to ICN and other airports for effective airport revenue management. First, the budget terminal design may not be ideal to accommodate LCC traffic as it damages the concession revenue from particular LCC passengers with high purchasing power. Second, exploring the concession revenue from the growing LCC traffic could help maintain an airport's advantage in aeronautical charge under single-till regulation.     

The impact of low cost airline entry on competition, network expansion, and stock valuations

We conduct event studies and statistical analysis to explore the impact of low cost carriers’ entry on legacy airline stock prices. Oligopoly structures, entry barriers, and high fixed costs make the airline industry highly susceptible to competitive and network expansion impact of low cost airlines’ entry. Positive stock returns are observed, which we interpret as the spillover effects of network expansion. Thus, rising passenger traffic and improved connectivity increase the revenues of legacy airlines to sufficiently offset the low cost carriers’ competitive threats.     

The cost allocation approach of airport service activities

This study suggests a new allocation approach to the joint costs between airports and airlines and proposes estimates for airport service costs. Using correlation coefficients, data envelopment analysis and regression models, the research measures the relation and efficiency between service activity and airport operation costs. The regression outcomes not only reveal a significant management issue concerning the apron fee measurement, but also show that the airport physical activity cost drivers need to be considered with cost and revenue management. The DEA outcomes reflect the expansion of the terminal areas.     

Airline cost changes: To what extent are they passed through to the passenger?

Since the start of the Millennium airline costs have been highly volatile, mainly due to large fluctuations in jet fuel prices. An important question for airlines and regulators is whether airlines are able to pass through cost changes to their prices. Little empirical evidence on the pass-through of costs exists. In this paper, we investigate which pass-through rates are most likely. According to economic theory, the pass-through of costs depends strongly on the type of cost increase (firm-specific or sector-wide) and market conditions (monopoly, oligopoly, perfect competition). In monopolistic markets, the shape of the demand curve also matters (linear, constant elasticity, log, power function). A pass-through rate of 100% is often assumed based on the reasoning that the aviation sector is highly competitive. We analyse market concentration in all airline markets in the world, and generally find a high level of concentration. Additionally, different airlines offer different products based on a variety of factors, including service, flight frequency, legroom, bags allowed on board, flight time and transfer time. Therefore, most aviation markets can be characterised as differentiated oligopolies. As airlines choose their quantities first (flight schedules) and adapt their prices to demand (yield management), we consider the Cournot model the best choice. In such markets, firmspecific cost changes will be passed through by a rate of less than half while sector-wide cost changes are passed through by a rate of more than half. In specific situations, the pass-through rate may be different. Examples are limited airport capacity (congestion), cross-subsidization, and the extent to which there is a level playing field.     

Airline strategies for aircraft size and airline frequency with changing demand and competition: A simultaneous-equations approach for traffic on the north Atlantic

Airport planners need to know the forecast demand on the facilities provided airside at airports. For this they need to know how airlines will deal with traffic in terms of the size of aircraft and frequency of service. In response to increasing demand, airlines may increase capacity by increasing the frequency of flights or they may choose to increase aircraft size. This may yield operating cost economies. If the airports they operate from are capacity constrained they will be limited in the extent that they can change frequency that will limit their ability to compete with the number of frequencies offered. Consequently, these airports are excluded as are major hubs as frequencies will be influenced by connecting passengers. Routes are identified on the north Atlantic that can be analysed and conclusions are suggested on the basis of three stage least-squares estimates for pooled time series-cross section data. An increase in passengers on the whole will result in a larger increase in frequency than in aircraft size but the impact of competition does not yield significant results due to the strategy of excluding certain categories of airport.     

Peripheral market entry,product differentiation,supplier rents and sustainability in the deregulated European aviation market – a case study

Ryanair, in its net margin and passenger numbers compared with its national airline, is the most successful new airline in Europe. The history of the airline is examined briefly and the Ryanair product is analysed. The airline has developed a very low fare product with high staff productivity. It has also tackled costs to airlines of services such as airports, handling, reservations and ticket retailing. Ireland’s island location was an attractive base for a low cost airline and rapid traffic growth has resulted from Ryanair’s entry to the market. The paper examines the sustainability of the low fare Ryanair product in respect of passenger preference, labour markets, and external costs such as airports and reservations. The optimum regulatory environment for the successful operation of low cost airlines is examined in the light of the Ryanair experience.     

Temporal configurations of European airline networks

The deregulation of the US domestic airline industry resulted in the reconfiguration of airline networks into hub-and-spoke systems. In contrast to the US airlines, airlines in Europe already operated spatially concentrated networks long before deregulation. This concentration at the national home-base was the outcome of bilateral traffic rights designated to the national carrier. With a few exemptions, however, most of these star-shaped networks were not coordinated in time. Transfer opportunities at most national airports only existed by accident. Only airports that were operated as gateways to Europe provided planned connectivity between intercontinental flights and European feeder services. The deregulation of the EU market stimulated a second phase of airline network restructuring. European airlines concentrated their networks by adopting or intensifying wave-system structures (‘banks’ to use the US term) in their flight schedules. This paper investigates these post-deregulation temporal concentrations in European aviation networks. The development and configuration of wave-system structures at European airline hubs is analyzed as well as the resulting transfer opportunities during the 1990s. It is found that a temporal concentration trend exists among European airlines with deregulation resulting in the adoption or intensification of wave-system structures by airlines. These wave-system structures, as well as overall traffic growth, have significantly stimulated the number of indirect hub connections. Airline hubs with wave-system structures generally perform better because of the increased indirect connectivity given the number of direct connections.     

Identifying airline cost economies: An econometric analysis of the factors affecting aircraft operating costs

This paper provides the results of an econometric analysis of the influences of airline characteristics on the average operating costs per aircraft movement. The analysis combines a comprehensive selection of airline-output variables, airline-fleet variables, and airline-market variables. The results confirm the existence of economies of density, economies of load factor, economies of aircraft utilisation and economies of aircraft size. The paper does not provide evidence of economies of scale, economies of stage length or economies of fleet commonality. Furthermore, airlines that additionally operate full freighters, airlines that are members of a worldwide alliance and airlines that operate a multi-hub system face higher average operating costs per aircraft movement. Surprisingly, the regression results demonstrate that airlines that use newer aircraft have higher average operating costs per aircraft movement, suggesting that ownership costs (depreciation and leasing costs) of new aircraft outweigh the increasing maintenance costs of old aircraft. Finally, the results show that airlines that have a dominant position at their hubs or bases have higher operating costs per aircraft movement, implying that the absence of serious competitive pressure enables airlines to charge higher ticket prices and, with that, leads to a limited focus on cost savings.     

Policy issues and planning of UK regional airports

The principal motivation for this paper is to examine the policy issues for UK regional airports within the air transport system with particular reference to airport airline relationships. The geography of airline route networks is considered a key factor that determines location of the pressure for infrastructure development. Regional airports policy is considered in this context. The problems of the resultant concentration of air traffic has largely been ignored up until now and so this paper seeks highlight the issues this presents to policy makers. The paper reviews the changing regional airport ownership patterns and examines a range of implications. It then explores the policy implications for the future regulation and development of the air transport system. The authors contend that regulation and the planning system are the only two remaining policy levers for government to guide privately owned airlines, privately owned airports and commercialised airports towards national policy goals.     

Price premiums and low cost carrier competition

This study presents a time series examination of price premiums in the US airline industry. Price premiums are defined as price markups due to domination and concentration at the airport and route market levels. The differential effect of these price premium drivers is empirically investigated, and it is shown that the largest components of price premiums are those from airport market share and airport concentration. The effect of low cost carrier competition on the level and composition of price premiums is of particular interest in this study. The results indicate that low cost carriers do not charge price premiums, and that high cost carriers’ price premiums tend to be lower when there is competition by low cost carriers. While the absolute values of price premiums have been fairly constant over the 1992–2002 time frame, the proportion of US passengers subject to price premiums has decreased due to the increasing share of low cost carrier traffic.     

The opening of direct flights across the Taiwan Strait: the impact on the global role of Taiwan’s international airport

Scheduled direct flights between Taiwan and Mainland China were halted for six decades and restarted in December 2008. The Taiwan’s government has a policy of developing Taoyuan International Airport (TPE), the major international airport in Taiwan, as one of main hubs in East Asia, based on the airport’s access to Mainland China. To assess whether the airport is progressing toward meeting the set expectation, this study evaluates the changes in airline networks of the TPE after the opening of direct flights across the Taiwan Strait. The time-dependent earliest arrival time algorithm is applied to global flights in 2004, 2008, and 2012. Empirical evidence demonstrates that providing direct flights across the Taiwan Strait has significantly increased accessibility from TPE to airports in China, but did not improve the centrality of TPE. Additionally, the transfer dependency of TPE on other airports is increasing significantly. This result was based on two major reasons: the first involves the Chinese government’s refusal to allow Chinese citizens to use airports in Taiwan as transfer points to and from other countries and the second reflects the competitiveness among airports and airlines in the region. The key finding is that political exclusion of airline use by external governments via travel regulations adversely influences the development of an airport as a global hub.     

Evaluating airline efficiency: An application of Virtual Frontier Network SBM

In this paper, airline efficiency is divided into three stages: Operations Stage, Services Stage and Sales Stage. The new three-stage strategic operating framework of airline efficiency is a modification of existing models. A new model, Virtual Frontier Network SBM, is proposed to evaluate the efficiency of 22 international airlines from 2008 to 2012. The results demonstrate the following: 1. The new model can apply to a new benchmarking airline such as Scandinavian Airlines. 2. Although passenger traffic, cargo traffic and revenue decreased from 2008 to 2009, most airlines’ overall efficiency increased in the period.