Average Airfares Research Articles

Environmental and social welfare effects of aviation liberalization: Evidence from Central Asia and China market

We investigate the effects of international aviation liberalization between China and Central Asia on environment and social welfare. Based on monthly international air traffic data between Central Asia and China, we estimate a random-coefficients discrete choice model and perform a counterfactual analysis to quantify the effects of improved air connectivity, mainly considering that the ratio of direct and connecting aviation services between Central Asia and Beijing is the same as those between Central Asia and Russia, between Central Asia and other former Soviet Union countries and between Central Asia and other Asian countries. The main findings are as follows. First, improving air connectivity intensifies competition in the market, resulting in a decrease in the passenger-weighted average airfares between Central Asia and Beijing by 0.86–5.15 US dollars (USD) in 2012 and an increase in the total number of passengers by 2930–20,790. Second, improving air connectivity increases total carbon emissions (CO2) between Central Asia and Beijing by 0.78–6.11 million kilograms (kg) in 2012 but also drives down per capita CO2 emissions in this market by 0.78–2.38 kg. Third, while increasing total environmental externality costs, improving air connectivity significantly enhances consumer welfare and airline profits, resulting in a net social benefit of 14.02–44.12 million USD between Central Asia and Beijing in 2012. Finally, several policy implications are discussed.

Competitive integrated airline schedule design and fleet assignment

Airline profits are significantly influenced by competitive timetables that match passenger demand to fleet resources. In this research, we develop an integrated, mixed-integer optimization model to derive a comprehensive flight schedule, fleet assignment, and average airfares jointly. Passenger choice behavior is incorporated through a prospect theory-adjusted, nested, multinomial logit model which estimates market share. The competitive fleet assignment and schedule design (CFSD) formulation is embedded in a differentiated Bertrand game, such that each transport operator optimizes their best response function connected through the market share model. To solve the integrated optimization problem efficiently, a hybrid algorithm is developed that combines stabilized column generation with a large neighborhood search algorithm.The game-theoretic framework is applied to a case study in China involving legacy airlines, a low-cost carrier, and a high-speed rail (HSR) operator. The equilibrium outcomes suggest that the low-cost carrier is likely to stimulate demand and improve the level of service through secondary airports. The further development of high-speed rail service is expected to intensify competition among airlines and reduce the overall fare level. The low-cost carriers and HSR are able to significantly increase overall consumer surplus, providing insights into the potential for low-cost service in the Chinese aviation markets and the entrance of the public service obligation program at minimum cost.

Jet Fuel Price Risk and Proxy Hedging in Spot Markets: A Two-Tier Model Analysis

This paper applies a two-tier model based on fuel hedging (model 1) and the testing of the impact of commodity risk on airline capacity forecasting, which is based on a system dynamics framework (model 2). Model 1 provides a comprehensive examination of the worldwide airline industry, including an analysis of the statistical impact of oil price fluctuations on the sector and the corresponding hedging strategies employed by airlines. This study examines a sample of North American and European airlines over a 10-year timeframe to assess the degree to which these airlines have engaged in kerosene hedging for future periods and the potential impact of such hedging on their corporate value and performance. In model 2, the author integrates a capacity-forecasting model within the system dynamics framework, drawing upon the theory of capacity forecasting. The study examines the impact of commodity risk by analysing the influence of fluctuations in the jet fuel spot price on the average airfare and its subsequent effects on other interdependent capacity variables. The hypotheses presented in this study were formulated based on a comprehensive review of the relevant literature and a causal feedback loop diagram. The diagram effectively depicts the dynamic interrelationships between capacity forecasting and risk variables. Furthermore, the diagram capturing causal feedback loops was transformed into a stock-flow diagram. This diagram was then utilised to evaluate the hypotheses that were derived using a dataset that pertains to the domestic airline market in the United States. The verification of the qualitative and quantitative models demonstrates the proven impact of commodity risk on capacity forecasting.

Empirical study of air transport demand forecast in Nigeria

The aim of the study is to estimate the air travel demand forecast of domestic passengers’ travels in Nigeria from 2002-2016. Data wesourced from Central Bank of Nigeria, National Bureau of Statistics, and Federal Airport Authority of Nigeria. The study utilized multiple regressions model using Stata-Graphic software solver to analyze the data. From the analysis, the result shows that there is significant relationship between the explanatory variable (passengers) and unexplanatory variables National Disposable Income, Population, Average Airfare, Gross Domestic Product, Exchange Rate, Total Expenditure, and Crude oil price, accounted for adjusted R of 93.624% relationship with demand for domestic air travel of passenger. The R-square statistic shows that the fitted model explains the variability in Number of passenger (NPAX) which is 96.8124%. The Hypothesis testing reveals that National Disposable Income and Air fare have strong statistically significant relationship with the demand for domestic air travel with P-value of 0.0013. Moreso, there is statistically significant relationship for National Disposable Income, Average Airfare, and Crude oil price with P-value of 0.0017 and 0.0445 respectively. Furthermore, forecast of the number of passengers and average airfare was carried out using ARIMA (1,0,0) model which made available the future predicted values for the number of passenger movement and average airfare for the next 10-12 years to come. Thus, the study recommends that stakeholders in the air transport sector should work towards improving the capacity and infrastructure to accommodate the growth of air travel demand for domestic air travel in Nigeria. Policy implications were made on how to regulate the sector by having a good pricing policy to control the air fare for the industry.

The role of network topology in competition and ticket pricing in air transportation: Evidence from Brazil

This paper investigates how the structure of the air transportation network affects air ticket prices in Brazil. Airlines serve specific airports in the vast Brazilian territory and, consequently, have unique air transportation network structures. Using more than 40 million airline-specific commercial flights, we extract topological patterns from these networks using complex network measurements. We then propose an economic meaning for these measures in the context of air transportation. Using microeconometric panel-data estimation, we find that the airports’ degree of substitutability (clustering coefficient) and peripheral location (authority score) are associated with lower average airfare prices. In contrast, the convenience of transportation (degree), measured by the number of different cities that an airport serves, and centrality (closeness) are attributes that raise the average price. Air convenience pricing is more pronounced at airports located inland than at capitals. We also look at how the airline-specific network structure affects the well-documented positive relationship between market power and air ticket prices. The relationship between local market power and the ticket price is stronger at airports located in inland municipalities. Our results suggest that public policies encouraging competition at inland airports are crucial for maintaining prices at adequate levels.

Internet penetration and airline pricing: Evidence from China

This paper investigates the impacts of increasing Internet penetration on airfares and price dispersion in the Chinese airline market. It is found that an increase in Internet penetration is associated with higher average airfares and lower price dispersion between the major Chinese carriers. It appears that the increase in Internet penetration seems to have strengthened the major airlines’ ability to maintain price stability, which is an indication of the existence mutual forbearance among the major carriers confirmed in other studies. Higher prices and lower price dispersion are mostly to occur in the most heavily markets. This research also finds that if carriers possess similar degree of market power, the price dispersion between the airline pair is smaller. The findings can generate important policy insights, and inform anti-trust policies in the post-Covid period, when more consumers use Internet for search and inquiries, and when big data and artificial intelligence technologies mature.

Price asymmetries in the US airline industry

AbstractWe document price asymmetries in the US airline industry. We find evidence that the average airfare increases in response to rising fuel cost but does not decrease in response to declining fuel cost. In searching for the cause of price asymmetries, we find that common ownership, measured by overlapping institutional investors, is associated with greater price asymmetry in the airline industry. To mitigate endogeneity concerns, we exploit the variation in common ownership induced by the financial institution mergers and conduct a difference‐in‐differences test to establish the causal effects of common ownership on price asymmetry in the airline industry. In addition, airlines in highly concentrated markets exhibit more price asymmetries than those in low concentration markets. Our results support focal price tacit collusion as an important determinant of asymmetric pricing. Furthermore, first‐class airfares are shown to decrease more slowly than economy‐class airfares in response to fuel cost decreases, which supports consumer search as the mechanism driving asymmetric pricing.

The pricing effects of entry by Hainan airlines: Evidence from the U.S.-China international air travel market

This paper examines the impacts of entry by Hainan Airlines (HA) to the U.S.-China air travel market, using user-reported data from Travelsuperlink.com. The sample consists of 15,773 round-trip economy-class fares for 39 routes purchased between 2010 and 2016. Our analysis indicates that, compared to other routes, the average airfare of the routes where HA entry occurs increases by up to 3.4 %. We also find evidence that U.S. legacy carriers respond to HA entry by raising their ticket prices, while smaller rivals do not. These findings are consistent with “the displacement effect” documented in the literature.

COST PASS‐THROUGH IN COMMERCIAL AVIATION: THEORY AND EVIDENCE

The significant worldwide decline in crude oil price beginning in mid‐2014 through to 2015, which resulted in substantial fuel expense reductions for airlines, but no apparent commensurate reductions in industry average airfares has caused much public debate. This paper examines the market mechanisms through which crude oil price may influence airfare. Interestingly, and new, our analysis reveals that the crude oil price‐airfare pass‐through relationship can be either positive or negative, depending on various market and airline‐specific characteristics. We find evidence that airline‐specific jet fuel hedging strategy and market origin–destination distance contribute significantly to pass‐through rates being negative. (JEL L93, L13, Q40)

When consumer type matters: Price effects of the United-Continental merger in the airline industry

Studies of airline mergers have largely focused on measuring the impact of mergers on average airfares. As a result, they may not sufficiently reveal the full range of price effects given the complexity of this industry. To address such industry intricacy, I investigate prices of merging firms and their rivals in response to the United-Continental merger on three types of routes: those include one or both endpoint airports as merging firms’ hubs (hub routes), those primarily consisting of price-sensitive leisure travelers (leisure routes), and those more likely to have both price-insensitive business passengers and leisure consumers (big-city routes). Results show that on hub routes, the merger creates hub premiums for merging firms and benefit legacy rivals rather than low-cost carrier rivals to raise fares. On big-city routes, the merging firms increase fares for business travelers but not for leisure passengers, and reduce prices for leisure travelers on leisure routes. Their legacy rivals increase fares on leisure routes but not on big-city routes. This finding suggests that a critical reason for inconsistent conclusions in previous research may be the failure to consider details of the airline industry.

How to manage seasonality in service industries – The case of price and seat factor management in airlines

Seasonality and its impact on forecasting have been long established for service industries, including airlines. Less researched is whether the response to seasonality through price and/or capacity management is beneficial in industries with rigid capacity and high demand volatility. This paper proposes and develops a theoretical model of rational airline seasonal behaviour to guide airline strategic management with pricing and/or capacity management decisions during periods of high seasonality. We develop, calibrate and test our model using a large sample of international airlines across the Asia Pacific, Europe as well as North and South America. Our results suggest that there is strong seasonal variation in both the fares and seat factor of the average airline. However, in most cases there is stronger seasonal variation in the average airfare than in the seat factor, which is diametrically opposite to the findings of the rational model. As a result airlines should allow both the seat factor and average airfares to be higher during seasonal highs than seasonal lows, but the ratio of the high to low seat factor should exceed the ratio of the high to low average airfare. In other words, in practice airlines should aim for more seasonality in the seat factor than the average airfare. This is an important finding for airline management practice and adds to the literature on revenue management and competitive strategy which has so far mainly focused on pricing.

An empirical study of price movements in the airline industry in the Indian market with power divergence statistics

In this article, we analyze the dynamic price dispersion of the Indian domestic airline industry. We develop the power divergence statistic (PDS) for each route and study the average PDS and average airfare movement. We analyze the effect of Average PDS based on a few selected route characteristic variables and market structure variables. Our research suggests that the competition and price dispersion steps up airfares as the departure date comes closer, when both full service carriers and low cost carriers operate in the same market. Application of Revenue Management and Dynamic Pricing is a common practice in the Indian domestic airline industry. It also shows that route characteristics affect airfare movement as well as airfare dispersion in different routes.

A STUDY ON THE TRANSFORMATION OF UAE’S AIR TRANSPORT INDUSTRY FOCUSING ON ITS CONTRIBUTION TO UAE’S ECONOMY

INTRODUCTION:Aviation industry has been instrumental in globalisation by connecting the global countries through its fast transport network. By providing quick access to global markets it has helped in easing the international travel, international trade, foreign investments and tourism. Impact of aviation sector on the global economy is massive. According to Oxford Economics (as cited in Aviation Beyond Borders, 2016) in 2014 it generated $ 2.7 trillion, which is 3.5 per cent of global GDP. Had aviation been a country, it would have ranked 21st largest economy in terms of GDP, similar in size to Sweden or Switzerland (Oxford Economics as cited in Aviation Beyond Borders,2016). In the same year Air transport generated employment for 62.7 million people in the world (Oxford Economics as cited in Aviation Beyond Borders,2016). Total direct employment in the sector was 9.9 million (Aviation Beyond Borders, 2016). Another noteworthy fact is that the jobs in this sector are 3.8 times more productive than other jobs (Oxford Economics as cited in Aviation Beyond Borders, 2016). In 2014 3.3 billion passengers took the services of the world airlines and in 2015 the number rose to 3.57 billion (ICAO and IATA as cited in Aviation Beyond Borders, 2016). Air transport is widely used in the transportations of very high valued and also time sensitive items like perishable products. In terms of the volume of trade shipments its share is less than one per cent; but it is around 35 per cent by value (Aviation Beyond Borders, 2016).On January 1st 1914 the first ever scheduled flight with a paying passenger was launched. It was a historic moment as it marked an event that changed the way the world travelled. In the last 20 years the global connectivity city -pairs have now almost doubled and_exceeded 16,600 in 2015, 350 more than in 2014(IATA's Annual Review, 2016). Over that same period, average airfares have more than halved (after adjusting for inflation), which has been a major stimulus for trade, tourism, and Foreign Direct Investment associated with global supply chains. There is massive increase not only in terms of the number of passengers but also in terms of the profits of the airlines. 2014 was the fifth successive year of profitability it registered an aggregate net profit of $16.4 billion. The year 2015 generated $35.3 billion net ,after tax profit, which was more than double of what was generated in 2014(IATA's Annual Review, 2016). As can be seen from the table 1, strong growth is forecasted in the aviation industry 20 years from 2014. Forecast for the year 2034 expects an increase of more than 100 per cent for many of the indicators of the aviation industry.RESEARCH OBJECTIVES:The study has been conducted aiming to achieve the following objectives:* To show the contribution of aviation industry on employment generation and GDP of the global economy.* To discuss the major infrastructural developments that took place in the air transport sector in the various Emirates of the UAE.* To analyse the direct, indirect, induced and catalytic (tourism) impact of the aviation sector on the job creation and GDP generation in the economy of the UAE.* To discuss the scope of the aviation sector in future in the economy of UAE.RESEARCH METHODOLOGY:This study is descriptive in nature. Secondary data has been used to project the overall contribution of aviation industry on the global economy in general and on the economy of the UAE in particular; and to highlight the major development done and achievements made in this sector. Data for this study has been taken from the official websites of General Civil Aviation Authority (GCAA), Various airport authorities such as Abu Dhabi Airports Company (ADAC) and Dubai Airports Company (DAC), airlines like Etihad Airways, Emirates Airlines etc., various reports such as Air Transport Action Group's (ATAG) Aviation Benefits beyond Borders April 2016, various reports of International Air Transport Association (IATA), UAE's leading newspapers and other sources on the internet. …

Airfare Distribution by Trip Purpose

Airfares are an important input to air travel demand forecasting and other analyses, but there is no readily available source of data on how airfares vary by trip purpose in any given market. This paper presents the results of an analysis of the distribution of airfares by trip purpose for U.S. domestic air trips. The analysis will be used for developing a procedure to estimate the average airfare by trip purpose in any given domestic air travel market. The analysis combines the results of a nationwide survey of air travelers who reported the details of their most recent domestic paid air trips with airfare data from the U.S. Department of Transportation’s 10% airline origin and destination survey. This approach gave generic distributions of the airfare paid in any given market for business and personal trips, expressed as a ratio of the average airfare in that market for all paid trips, which can be obtained from the airline origin and destination survey data. The paper describes how the results of the analysis can be used to generate the distributions of airfares and average airfares for business and personal trips in any given market and discusses future research needed to confirm and expand the analysis results and procedure presented in the paper.

An exploratory study of price movements along booking profiles in the airline industry in the Indian domestic market

In this paper, we analyse the price movements of the Indian domestic airline industry. In the first part, we conduct a detailed econometric analysis of five selected domestic routes. In the second part, we study the effect of time interval (of the day of booking to day of departure) and the weekend effect on the average airfare. Our exploratory research suggests that, on the same route in the same time window, there is strong positive correlation among the prices of different airlines in most of the cases. It also shows that the price competition steps up airfares as the departure date comes closer and weekend airfares are higher than weekday airfares. The application of revenue management and dynamic pricing (RMDP) strategy is a common practice in the Indian domestic airline industry.

The effect of de-hubbing on airfares

This paper studies the price effect of de-hubbing, which occurs when an airline ceases hub operations at an airport. We develop a simple theoretical model to study the impact of de-hubbing on prices and quantities of direct flights at the hub airport. Using an event study of seven cases of de-hubbing between 1993 and 2009, we analyze how average airfares change following de-hubbing. Consistent with the theoretical implications, the empirical results suggest that airfares decrease when there is a low-cost carrier presence at the de-hubbed airport, whereas airfares increase when the de-hubbed airport is not serviced by a low-cost carrier.

Investigating the Dynamic Spillover Effects of Low-Cost Airlines on Airport Airfare Through Spatio-Temporal Regression Models

Low airfare is associated with low passengers’ transportation expense, high regional accessibility, and active related industry market. Low-cost airlines have been found to be effective on airfare reduction. However, most previous studies examined their impacts from the perspectives of certain routes and companies. This paper extends the literature by examining the impact of low-cost airlines from the perspective of airports. A spatio-temporal regression model is used to analyze the relationship between airport airfare and low-cost airlines’ market shares. The spatial consideration, which is also under-investigated in the air literature, creates a chance to analyze the spatial interaction of airfare among airports. Along with the temporal consideration, this analytic framework helps to quantitatively show the impact of low-cost airline over time and space by the dynamic spillover-effect function. A case study of market share improvement of AirTran Airway at Albany International Airport (ALB) is used to illustrate the dynamic spillover effect. Results show that the average airfare of ALB will drop $18.64 right after AirTran takes 10 % market share, continue to drop in the following years, and stabilize at around 10 years. Airfare at other airports will also drop, and the magnitudes decrease as time and distance to ALB increase.

The determinants of full-service carriers airfares in European hub-to-hub markets

This paper explores the factors influencing the pricing behaviour of full-service carriers in European hub-to-hub markets. Drawing on a 2009 dataset containing route and airfare information, we establish an econometric model to estimate the impact of route structure, alliances, and market concentration on the pricing of European full-service carriers in these markets. The results suggest that alliances on routes connecting two primary hubs, airport concentration, market share inequality and competition from low-cost carriers influence average airfares of full-service carriers in the European hub-to-hub markets.

The impact of hub hierarchy and market competition on airfare pricing in US hub-to-hub markets

This paper explores factors influencing the pricing behaviour of full-service carriers in hub-to-hub markets, which to date have rarely been the exclusive focus of research. Drawing on a 2009 dataset containing route and airfare information, we estimate a pricing model for the hub-to-hub markets in the United States. Our econometric analysis suggests that an airport's position in carriers' hub hierarchies, competition from low-cost carriers, and other market structure variables influence average airfares.

The Effect of De-Hubbing on Airfares

This paper studies the price effect of de-hubbing, which occurs when an airline ceases hub operations at an airport. We develop a simple theoretical model to study the impact of de-hubbing on prices and quantities of direct flights at the hub airport. Using an event study of seven cases of de-hubbing between 1993 and 2009, we analyze how average airfares change following de-hubbing. Consistent with the theoretical implications, the empirical results suggest that airfares decrease when there is a low-cost carrier presence at the de-hubbed airport, whereas airfares increase when the de-hubbed airport is not serviced by a low-cost carrier.