Global Airlines, Third Edition: Competition in a Transnational Industry

389 Pages·2007·3.82 MB·English

by  Pat Hanlon

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Global Airlines
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To my wife Janet
and my daughter Helen
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Global Airlines
Competition in a transnational industry
Third Edition
Pat Hanlon
University of Birmingham
AMSTERDAM• BOSTON• HEIDELBERG• LONDON• NEWYORK• OXFORD
PARIS• SANDIEGO• SANFRANCISCO• SINGAPORE• SYDNEY• TOKYO
BUTTERWORTH
HEINEMANN Butterworth-Heinemann is an imprint of Elsevier
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Butterworth-Heinemann is an imprint of Elsevier
Linacre House, Jordan Hill, Oxford OX2 8DP, UK
30 Corporate Drive, Suite 400, Burlington, MA01803, USA
First edition 1996
Second edition 1999
Third edition 2007
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British Library Cataloguing in Publication Data
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ISBN-13: 978 0 7506 6439 4
ISBN-10: 0 7506 6439 8
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Contents
List of figures vii
List of tables x
Preface to the third edition xiii
Preface to the second edition xv
Preface to the first edition xvi
1 Introduction 1
2 The airline industry 11
2.1 Airlines around the world 11
2.2 Demand for air travel 19
2.3 Factors affecting airline operating costs 37
2.4 Financial performance of the industry 48
2.5 Full-service versus low-cost 57
3 Competition issues 63
3.1 The regulation versus competition debate 63
3.2 Contestable markets 73
3.3 Loyalty schemes in airline marketing 84
3.4 Sales distribution 107
3.5 Increasing concentration 113
4 Route networks 123
4.1 Network patterns 123
4.2 Freedoms of the air 129
4.3 Accidents of geography 137
4.4 Europe compared with the US 143
4.5 Regional services 148
4.6 Extending marketable networks 156
5 Scheduling through hubs 183
5.1 Co-ordination of flight activity 183
5.2 Online and interline connections 188
5.3 Quality of connections 197
5.4 Effects on airline operating costs 208
5.5 Effects on airports 211
5.6 Effects on passengers 228
5.7 The future of hubbing 234
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vi Contents
6 Pricing power 239
6.1 Variations in fare levels 239
6.2 Price discrimination 246
6.3 How airlines do it: yield management 249
6.4 Discrimination and competition 260
6.5 Predatory pricing 262
6.6 Exclusionary behaviour 278
7 Mergers and alliances 287
7.1 Mergers and acquisitions within national boundaries 287
7.2 Cross-border acquisitions 298
7.3 Alliance patterns 302
7.4 Experience of alliances 314
7.5 Pro- and anti-competitive effects 316
8 Transnational airlines 323
8.1 Are airlines losing their nationalities? 323
8.2 Bilateral, multilateral, and plurilateral approaches to 328
route access
8.3 Aglobal competition authority? 331
8.4 Towards global airlines 334
Recommendations for further reading 339
References 343
Index 355
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Figures
Figure 1.1 One view of future growth in world passenger traffic 4
Figure 1.2 Distribution of world passenger traffic 6
Figure 1.3 Variations in growth rates by major market areas, 7
2005–24
Figure 1.4 Life cycles of airline markets 8
Figure 2.1 Ten largest airlines in 2004 12
Figure 2.2 Components of air travel demand 20
Figure 2.3 Ademand curve 21
Figure 2.4 Degrees of price elasticity of demand 23
Figure 2.5 Estimates of own-price demand elasticities for air 25
travel
Figure 2.6 Relationship between GDPand air travel 26
Figure 2.7 International comparisons of air travel related to 27
GDP, 2004
Figure 2.8 Air travel and income categories 28
Figure 2.9 Average passenger incomes at major UK airports, 29
2003
Figure 2.10 Propensity to fly by UK Planning Region, 2003 30
Figure 2.11 Estimates of income elasticities of demand for 31
air travel
Figure 2.12 Network of domestic routes within China, 33
1985 and 2004
Figure 2.13 Visits abroad by Chinese citizens, 2001–2005 34
Figure 2.14 Affluent middle class consumers in China, 2004 34
and 2020
Figure 2.15 Percentage of business travellers flying on BAin 36
first and business class, 1986–2003
Figure 2.16 Unit operating costs as a function of stage length 38
Figure 2.17 Average annual prices for jet fuel, 1998–2005 43
Figure 2.18 Total fuel bill incurred by IATAairlines, 1996–2007 43
Figure 2.19 Average fuel efficiency across IATAairlines’ 44
aircraft fleets, 1970–2000
Figure 2.20 Operating margins and net profits/losses, 49
IATAairlines, 1997–2007
Figure 2.21 Returns on invested capital in aviation-related 51
industries, 2004
Figure 2.22 Airline Profitability: US airlines compared to 54
airlines from the rest of the world, 1997–2007
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viii List of figures
Figure 2.23 Growth in US airline industry capacity and 54
major airline liquidations, 1978–2004
Figure 2.24 Unit cost differentials, US full-service versus low-cost 61
airlines, 1998–2004
Figure 2.25 Percentage changes in passenger revenue yields, 61
US full-service versus Low-cost airlines 2000–2004
Figure 2.26 Operating profits and losses, US full-service 62
versus low-cost airlines, 1998–2004
Figure 3.1 Fatal accident rates on scheduled services, 1972–2002 67
Figure 3.2 Median round-trip fares in real terms, US domestic 68
routes, 1980–2005
Figure 3.3 Jet fuel prices and airline yields, US domestic routes, 78
2000–06
Figure 3.4 The effect of marketing on the demand curve 84
Figure 3.5 Distribution channels for airline sales 112
Figure 3.6 Average booking costs, US airlines, 1999–2002 112
Figure 3.7 Approximate share of world passenger-kilometres 114
performed by the top 20 airlines, 1974–2020
Figure 3.8 Theoretical model of potential trade-offs with 116
increased concentration
Figure 3.9 Two measures of market concentration 119
Figure 3.10 Values of the HHI for top 100 US domestic routes, 121
1979–91
Figure 4.1 Network patterns 124
Figure 4.2 Network of the former Eastern Airlines 125
Figure 4.3 Network of routes radiating out of United Airlines’ 126
hub at Chicago O’Hare
Figure 4.4 Leverage of a hub 127
Figure 4.5 Two kinds of hub 128
Figure 4.6 Freedoms of the air 130
Figure 4.7 Connection through Singapore, SIAservices, 139
June 2004
Figure 4.8 Network of Emirates Airline, June 2005 141
Figure 4.9 The European ‘hot banana’ 145
Figure 4.10 High-speed rail networks in Europe 146
Figure 4.11 Differences among US airports offering commercial 153
airline service, 2001
Figure 4.12 Proximity of US small community airports to major 154
hubs and airports served by low-cost airlines
Figure 4.13 Advertisements taken out by Virgin Atlantic and 163
British Midland
Figure 5.1 Typical connections scheduled at European hubs 186
Figure 5.2 Effect of where stabling overnight takes place 187
Figure 5.3 Connecting traffic on London–USAroutes 191
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List of figures ix
Figure 5.4 Intra- and inter-terminal transfers at London 200
Heathrow
Figure 5.5 Composition of passengers on BAtransatlantic 204
flights
Figure 5.6 Composition of passengers on Air France North 204
Atlantic services (Place of resident of AF passengers
on flights to and from Canada and the US, 2004)
Figure 5.7 Illustration of the ‘dual-hub’ strategy of 210
Air France-KLM
Figure 5.8 Average aircraft size and load factor, passenger 220
aircraft on scheduled schemes, 1960–99
Figure 6.1 Changes in indices of European air fares: 1992, 1997, 242
and 2003
Figure 6.2 Pricing under high and low-price elasticities of 247
demand
Figure 6.3 London–New York return fares, BA, November 2006 250
Figure 6.4 Price discrimination and consumer surplus 253
Figure 6.5 Distribution of passenger bookings over time and 254
by fare category
Figure 6.6 Average one-way fares on the Minneapolis–Des 271
Moines route, 1990–2000
Figure 6.7 Advertisements of discount fares sold through 282
unofficial travel agencies
Figure 7.1 Competition between hubs: an example of double 321
hubbing on routes between Gothenburg and
Kansas City, Autumn 1997
Figure 8.1 Forecast growth in passenger traffic by region, 330
2005–2025
Figure 8.2 Increases in non-stop routes between the UK and 337
the US (excluding routes to/from Heathrow and
Gatwick) 1994–2006