Airline competition : empirical insights for European and international markets

Abstract

This dissertation consists of three empirical studies on the assessment of airline competition among Low-Cost Carriers (LCCs hereinafter) and Full-Service Carriers (FSCs hereinafter). Airline competitions are analyzed in the European aviation market, and in the Australia-UK aviation market, separately. The increase in network overlaps and related airfare impact have been captured using fixed effects estimations in the first and second studies. Changes in consumer preferences and changes in cost structures arising from competitions have been captured using utility-based empirical models in the third study. This dissertation shows that airline competitions have a negative impact on airfares and airfare dispersion in the European aviation market, and that travelers in the Australia-UK aviation market had an increased preference for one-stop flights. The first study uses a large dataset to consider the network change of the three largest European Low Cost Carriers (LCCs) easyJet, Ryanair and Wizz Air during the pre-Covid-19 period and the Covid-19 pandemic period. Network changes are characterized in terms of airport pairs, city pairs, numbers of flights and network overlaps. The results show that European LCCs increasingly expanded their networks into markets that had already been served by incumbent LCCs, which indicates that LCCs increasingly compete head-to-head among themselves. Difference-in-differences regressions estimate that network overlaps among these LCCs lead to airfare reductions of approximately six Euros, ten percent. The second study uses airlines’ posted prices to estimate the effect of competition on intertemporal price dispersion in the short and the long run in Europe. It argues that posted prices have the advantage of referring to a standardized trip. Intertemporal price dispersion is measured by the difference between prices for flights booked one week before departure and prices booked one month, three months or six months before departure. Event studies are used to establish causality. More efficient two-way fixed effects regressions are used to show that competition mainly benefits late bookers. Long differences are used to show that low-cost carrier competition has a lasting effect on pricing dynamics whereas full-service carrier competition does not. The third study focuses on the three Gulf Carriers. Emirates, Etihad and Qatar Airways have gained substantial market shares over the last two decades. In the Australia-UK markets, their market shares increased sixfold between 2002 and 2012. This study shows that their success can be explained by the passengers’ increasing preference for one-stop flights and a substantial drop in marginal cost after the financial crisis in 2008. The regressions indicate that frequency information substantially contributes to the quality of the empirical model. This raises a methodological problem because complete frequency information is difficult to obtain for international markets. This study offers a solution for this data problem by concentrating on the frequencies of outbound and inbound flight segments.