Sources of Economic Rent in the Deregulated Airline Industry

Competition and Entry in Small Airline Markets

HIS paper presents an analysis of the effects of airline deregulation on passengers-business and personal, first class and coach-and explores how capital and labor have fared in a free market. The evidence corroborates many benefits that proponents of deregulation predicted, but it has not worked perfectly. Prices are not fully competitive, and for certain dimensions service quality is down. Furthermore, the contestability hypothesis as applied to the airline industry does not withstand statistical examination.

This article examines the brand-name effect of airline crashes. These disasters raise several financial issues. A crash represents the loss of a plane, the loss of lives, the loss of scheduling capacity, higher insurance costs, and the potential loss of consumer goodwill. This article focuses on the last of these. Are consumers reluctant to fly with airlines that have poor safety records or do they treat crashes merely as random events that bear no reflection on the quality of the airline?

A Theory of Oligopoly

IT is now generally recognized that there are many cases of vertical restraints that do not fit the standard "consumer free riding on special services" theory.1 For example, the widespread use of resale price maintenance in the marketing of brand name clothing cannot be explained as inducing retailers to supply services such as dressing rooms. It is unlikely that consumers must be prevented from trying on clothing free of charge at a full-service retailer before purchasing the clothing at a discount from retailers who do not supply dressing rooms. A number of authors recently have attempted to correct this deficiency in the standard theory by expanding the type of services that vertical restraints may induce retailers to supply and the corresponding retailer free-riding problems.2 The standard economic analysis of how vertical restraints operate to induce desired retailer behavior has remained essentially unchanged, however. The standard analysis assumes that when it is not feasible for a manufacturer to write explicit, court-enforceable contracts with retailers for the supply of particular services, the only alternative mechanism manufacturers can use to induce the supply of desired services is to increase the direct return retailers receive from consumers when those

The paper discusses a hidden aspect of a firm's capital structure through the use of a real options application. It is applied to the US airline industry, characterized by over levered balance sheets, and one which on some estimates, has made zero cumulative profit taking the years of the last century together. The paper introduces the notion of flexibility, defined as the freedom (or flexibility) enjoyed by a conservatively geared firm to respond quickly and secure positive NPV projects, as opposed to an over levered firm. This is then valued as a real option using a model based on arithmetic Brownian motion involving a path dependant option pricing framework. It analyses the implications of debt financing in the US airline industry and develops a capital structure model that incorporates the value of enjoyed by conservatively geared carriers. This model essentially balances the quantified value of financial flexibility enjoyed by conservatively geared carriers against the relevant cost of obtaining this flexibility (i.e. the cost of carrying a sub optimal capital structure) and factors in the implications of fire sales (Pulvino, 1998) which is specific to the US airline industry. In its application to South West Airlines the paper concludes that the optimal capital structure, if the value of financial flexibility is incorporated - should move closer to the origin. A methodology of integrating the value of financial flexibility into the traditional theories of capital structure is proposed and demonstrated that (at least) in the US airline industry, failure to do so can result in a significant misstatement in a firm's value and its optimal capital structure. This paper makes two key contributions to the existing body of academic literature. The notion of valuing financial flexibility as a real option has been introduced previously by Beneda and Nelson (2003). However their quantification of the option value is through a standard Black Scholes equation where the underlying assumptions of this are not valid in quantifying a real option of this nature and this chapter makes a modification of the standard Black Scholes equation to reflect reality. Furthermore the paper applies the concept of financial flexibility specifically to the US airline industry and develops a conjecture on how this can be incorporated into the traditional theories of capital structure which is another contribution to the academic literature.

The US airline industry has experienced severe turbulence during the recent decade. The September 11 terrorist attack (9/11) was the greatest shock at the beginning of the 2000s. Recently, the dramatic increase in fuel costs emerged as another shock to the industry. To understand the effects of these two major events, this study investigated the cross-sectional efficiency of the US airline industry and its changes using the data envelopment analysis technique. The primary findings suggest that 9/11 affected the network carriers (NCs) more severely than the low-cost carriers (LCCs), while fuel costs more seriously influenced the LCCs than the NCs.

Opting out of the Legal System: Extralegal Contractual Relations in the Diamond Industry

A firm's actions in one market can change competitors' strategies in a second market by affecting its own marginal costs in that other market. Whether the action provides costs or benefits in the second market depends on (a) whether it increases or decreases marginal costs in the second market and (b) whether competitors' products are strategic substitutes or strategic complements. The latter distinction is determined by whether more "aggressive" play (e.g., lower price or higher quantity) by one firm in a market lowers or raises competing firms' marginal profitabilities in that market. Many recent results in oligopoly theory can be most easily understood in terms of strategic substitutes and complements.

THIS paper derives and tests some implications about differences in behavior resulting from differences in property right arrangements, and in particular, between proprietary for-profit and nonproprietary not-for-profit hospitals (hereafter referred to as proprietary and nonproprietary hospitals respectively) . The arrangements in nonproprietary nonprofit enterprises are different from those in proprietary profit-seeking organizations because (1) certain rights or claims to benefits in nonproprietary organizations are not transferable by sale as they are in proprietary organizations, and (2) managers or workers in nonprofit organizations do not have exclusive claim on residual products (the current flows of money and nonmoney benefits) that is characteristic of for-profit enterprises.

Railroad Deregulation, Innovation, and Competition: Effects of the Staggers Act on Grain Transportation

Contents: Introduction. Part I Deregulation and Liberalization: The evolution of US airline competition, Severin Borenstein Governing the skies: conditions for the Europeanisation of airline policy, Thomas C. Lawton Low-cost carriers in Asia: deregulation, regional liberalization and secondary airports, Anming Zhang, Shinya Hanaoka, Hajime Inamura and Tomoki Ishikura. Part II Business Models and Operating Characteristics: Impact of the adherence to the original low-cost model on the profitability of low-cost airlines, Fariba Alamdari and Simon Fagan An empirical model of low-cost carrier entry, Alessandro V.M. Oliveira Where next for low cost airlines? A spatial and temporal comparative study, Graham Francis, Ian Humphreys, Stephen Ison and Michelle Aicken. Part III The Airline-Airport Relationship: Low-cost airlines and airport competition, Eric Pels, Nenad Njegovan and Christiaan Behrens How do the demands for airport services differ between full-service carriers and low-cost carriers?, Sean D. Barrett Competitive advantage of low-cost carriers: some implications for airports, David Gillen and Ashish Lall Airports' perspectives on the growth of low-cost airlines and the remodeling of the airport-airline relationship, Graham Francis, Ian Humphreys and Stephen Ison Low-cost airports for low-cost airlines: flexible design to manage the risks, Richard de Neufville. Part IV Network Characteristics: The geography of deregulation in the US airline industry, Andrew R. Goetz and Christopher J. Sutton An analysis of European low-cost airlines and their networks, Frederic Dobruszkes The impact of low-cost carriers on airport and route competition, Martin Dresner, Jiun-Sheng Chris Lin and Robert Windle. Part V Pricing and Competition: Low-cost airlines and online price dispersion, Enrico Bachis and Claudio A. Piga Bundling, integration and the delivered price of air travel: are low cost carriers full service competitors?, David Gillen and William Morrison The propensity of business travellers to use low cost airlines, Keith J. Mason Price discrimination strategies of low-cost carriers, Carlos F. Alves and Cristina Barbot Competitive responses to low cost carrier entry, Robert Windle and Martin Dresner. Part VI Impacts and Implications for the Future: End of the free lunch? The responses of traditional European airlines to the low-cost carrier threat, Nigel Dennis Carriers within carriers: a strategic response to low-cost airline competition, Brian Graham and Timothy M. Vowles The transferability of the low-cost model to long-haul airline operations, Graham Francis, Nigel Dennis, Stephen Ison and Ian Humphreys The growth limits of the low cost carrier model, Jaap G. de Wit and Joost Zuidberg. Name index.

Assessment of product debundling trends in the US airline industry: Customer service and public policy implications

A comparative analysis of cost change for low-cost, full-service, and other carriers in the US airline industry

This study addresses the effect of productivity, quality, and safety on profitability in the US airline industry. Using data from 1989 to 2008 on airlines operations, we determine the inter-relationships between productivity, quality, and safety and their effect on profitability. Our analysis suggests that labour productivity is the main source of profitability in the US airline industry. The relationship between aircraft productivity and airline productivity appears to be significant, supporting the positive effect of technological advancement in the aircraft industry on profitability in the airline industry. On-time performance is not related to profitability, while service quality is directly related to profitability. Safety has a positive effect on productivity but it is not significantly related to profitability. Recommendations for future research are outlined at the end.