Introduction to Air Transport Economics: From Theory to Applications

513 Pages·2013·17.03 MB·English

by  Bijan Vasigh

IntroductIon to AIr trAnsport EconomIcs
Reviews of the first edition of
Introduction to Air Transport Economics
This is a landmark textbook in airline economics as, for the first time, disparate information from
various economic disciplines is integrated with key institutional factors that affect the industry. Basic
material is presented in an easy-to-read and understand format with plenty of real-world situations.
Much of the material in this book cannot be found in other sources. I highly recommend this book.
Darryl Jenkins, Ohio State Airline Operations Center, USA
This book represents a thorough and comprehensive coverage of the key topics in aviation economics by
applying fundamental theories and methods available in micro-economics and industrial organization
economics. This book also treats excellently the current policy and strategic issues facing policy makers,
airlines, airports and other professionals in aviation. This is a rare book that combines both theory and
applications in a very meaningful way. As such, I recommend it very strongly to graduate students,
policy makers, managers and researchers in aviation.
Tae H. Oum, Air Transport Research Society (ATRS) and University of British Columbia, Canada
The aviation industry provides a good backdrop for understanding a variety of economic principals.
Introduction to Air Transport Economics offers valuable insight into how the fundamentals
of economics apply to aviation. The book covers a broad range of topics from underlying passenger
demand to aviation infrastructure. It offers an overview into the dynamic industry environment while
using practical industry applications to explain general economic concepts—a great introduction to the
world of aviation and explanation for what keeps airlines in the air.
Zane Rowe, Senior Vice President Network Strategy, Continental Airlines
In helping to establish a new international university with a focus on aviation, I have recently had
the opportunity to review many books and materials that might be critical as a resource for our future
students. The authors’ new book, Introduction to Air Transport Economics, is just such a resource.
I was privileged to see this book early on, and I was immediately struck with its scope and timeliness.
Most importantly, it provides a look at the industry from the keen perspective of a distinguished
economist. So, rather than another survey of industry trends, this book takes rigorous, well established
economic principles and applies them to the most important aspects of the international aviation
industry. Even in areas such as safety and security, the authors provide clear insight to show how it is
economics that drives the successful airlines to adhere to the highest standards of safety and security.
I believe that this book will be used by faculties and students, worldwide, in their effort to understand,
and then manage, the activities of the aviation industry.
Irwin Price, Dubai Aerospace Enterprise University
Dr Vasigh has produced a detailed introduction to the subject of airline economics, covering both
the theory and its application to the modern air transportation industry. Students and those already
engaged in the industry will find this an illuminating guide to an ever more complex business.
Barry Humphreys, Virgin Atlantic Airways
Introduction to Air Transport Economics: From Theory to Application provides a comprehensive
treatment of the economics of the commercial air transport industry. Written in easy-to-read, jargon-
free English, the book first reviews the fundamentals of economics, using air transport examples, to
illustrate concepts related to demand, costs, and competition. Specific chapters then cover, again from
an economic perspective, key topic areas, such as the emergence of low cost carriers, international
air transport, and aviation infrastructure. The book will be beneficial to those seeking a deeper
understanding of the workings of the major players in the air transport industry, including airlines,
airports, and aircraft manufacturers. Readers will learn, for example, how airlines use revenue
management to maximize their profits or how airlines and airports forecast passenger traffic. Since
the book does cover economic principles, it can be read as a standalone text by undergraduates and
graduate students with limited backgrounds in economics. Those students with a deeper understanding
of economics, at the intermediate level or higher, can read quickly through the principles chapters and
delve directly into the airline applications.
Martin Dresner, University of Maryland, USA
Introduction to Air Transport
Economics
From Theory to Applications
Second Edition
BIJAN VASIgH
Embry-Riddle Aeronautical University, Florida, USA
kEN FlEMINg
ACG Aviation Consulting Group LLC, Florida, USA
&
thomAs tAckEr
Embry-Riddle Aeronautical University, Florida, USA
© Bijan Vasigh, ken Fleming and Thomas Tacker 2013
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system
or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or
otherwise without the prior permission of the publisher.
Bijan Vasigh, ken Fleming and Thomas Tacker have asserted their moral right under the Copyright,
Designs and Patents Act, 1988, to be identified as the authors of this work.
Published by
Ashgate Publishing limited Ashgate Publishing Company
Wey Court East 110 Cherry Street
Union Road Suite 3-1
Farnham Burlington
Surrey, gU9 7PT VT 05401-3818
England USA
www.ashgate.com
British Library Cataloguing in Publication Data
Vasigh, Bijan.
Introduction to air transport economics : from theory to
applications. -- 2nd ed.
1. Aeronautics, Commercial--Finance. 2. Airlines--
Deregulation. 3. Airlines--Cost of operation.
4. Aeronautics and state. 5. Aeronautics, Commercial--
United States.
I. Title II. Fleming, ken. III. Tacker, Tom.
387.7'1-dc23
ISBN: 978-1-4094-5486-1 (hbk)
978-1-4094-5487-8 (pbk)
978-1-4094-5488-5 (ebk)
978-1-4724-0024-6 (epub)
Library of Congress Cataloging-in-Publication Data
Vasigh, Bijan.
Introduction to air transport economics : from theory to applications / by Bijan Vasigh, ken
Fleming, and Thomas Tacker.
p. cm.
Includes bibliographical references and index.
ISBN 978-1-4094-5486-1 (hardback) -- ISBN 978-1-4094-5487-8 (ebook)
1. Aeronautics, Commercial--United States--Finance. 2. Airlines--Deregulation--United States.
3. Airlines--United States--Cost of operation. 4. Aeronautics and state--United States. I. Fleming,
ken. II. Tacker, Tom. III. Title.
HE9803.A5V37 2013
387.7'10973--dc23
V 2012030097
Contents
List of Figures xi
List of Tables xv
Glossary of Terms xix
List of Abbreviations xxvii
About the Authors xxxi
Acknowledgements xxxiii
Foreword xxxv
Preface to the Second Edition xxxvii
1 The Evolving Air Transport Industry 1
The Airline Industry 2
Financial Condition of the Airline Industry 6
Consolidation and Bankruptcies 12
Factors Affecting World Air Traffic growth 17
Economic Impact of the Air Transport Industry 19
Outlook for the Air Transport Industry 22
Summary 23
Discussion Questions 24
References 24
2 Principles of Economics with Applications in Aviation 27
Basic Economics 28
Scope of Economics 29
The Role of Economic Systems 33
government Failures and Market Failures 38
Summary 41
Discussion Questions 43
References 43
3 Supply and Demand: Analysis in the Airline Industry 45
Basics of Demand 46
Basics of Supply 62
Market Equilibrium 67
Consumer and Producer Surplus 76
Disequilibrium 80
Elasticity 81
Summary 93
Discussion Questions 94
References 95
vI IntroductIon to AIr tr Ansport EconomIcs
4 Cost and Production Analysis: The General Concepts 97
Cost Division 98
Cost Functions 105
Economies of Scale, Scope, and Density 112
Airline Industry Cost Structure 116
Airline Economies of Scale, Scope, and Density 124
Airline Breakeven Analysis 126
Operating leverage 128
Airline Operating leverage 130
Summary 130
Discussion Questions 131
Appendix: Airline Cost Classification and Division 132
References 133
5 Aviation Infrastructure: Operations and Ownership 135
Air Traffic Control System 136
Institutional Problems in US Air Traffic Control 141
Air Traffic Control in a government Corporation 142
Political Obstacles to Reform 143
Solutions to Air Traffic Control Problems 143
Airport Ownership and Management 145
Summary 152
Discussion Questions 152
Appendix 152
References 154
6 International Economics and Aviation 155
Trade globalization 156
International Economics and Trade 158
Why Nations Trade 166
Aircraft Manufacturing and governmental Subsidies 173
International Trade Policy in Air Travel—Optimality versus
Political Realities 175
Foreign Currency and Exchange Rates 178
Summary 181
Discussion Questions 181
Appendix: International Free Trade Agreements 182
References 186
7 Open Skies and Global Alliances 189
Chronology of International Air Transport Agreements 190
Bilateral and Multilateral Air Service Agreements 191
Open Skies in Europe 198
Open Skies in Asia 199
global Airline Alliances 201
Summary 210
Discussion Questions 211
References 211
contEnts vII
8 Competitive Market Structure and Monopolistic Markets 215
Perfect Competition 216
Monopoly 224
Price/Output Decision for Monopolies 230
Monopoly Pricing and Consumer Well-being 234
Monopoly Market Power in Aviation 235
Monopsony 240
Summary 240
Discussion Questions 241
References 242
9 Hybrid Market Structure and the Aviation Industry 245
Monopolistic Competition 246
Oligopolies 248
Examples of Oligopoly 252
Contestability Theory 256
kinked Demand Curve Theory 259
Cournot Theory 260
Price–Output Determination under hybrid Market Structure 262
Profitability Issues 265
Competition and Anti-trust Issues 268
Industry Consolidation 272
Beyond Market Concentration Considerations 278
Anti-trust, Market Evolution, and Cooperation 279
Summary 280
Discussion Questions 280
References 281
10 Aviation Forecasting and Regression Analysis 283
Aviation Forecasting Applications 284
Qualitative Forecasting Methods 285
Quantitative Forecasting Methods 289
Descriptive Statistics 290
Time-series Analysis 293
Time-series Forecasting 296
Forecast Accuracy 304
Regression Analysis 308
Data Sources 324
Summary 328
Discussion Questions 328
References 331
11 Dynamic Pricing Policy and Revenue Management 333
Dynamic Pricing Policy 334
Cost-based Pricing 336
Markup and Price Elasticity of Demand 337
Bundling 338
Unbundling and Airline Ancillary Revenue 339
vIII IntroductIon to AIr tr Ansport EconomIcs
Market Skimming and Penetration Pricing 340
Peak-load Pricing 341
Price Discrimination 341
Consumer Surplus 342
Necessary Conditions for Price Discrimination 342
Degrees of Price Discrimination 344
Uniform Pricing versus Price Discrimination 345
Importance of Revenue Management 347
Scenario: Uniform versus Multiple Pricing 349
Revenue Management “Fences” 351
Revenue Management Control Types 354
Spoilage and Spillage 356
leg-based Expected Marginal Seat Revenue Model 358
Overbooking 365
Other Issues Associated with Revenue Management 369
Summary 369
Discussion Questions 370
Appendix: Derivation of Overbooking Probability Equation 371
References 371
12 Low-cost and Start-up Airlines: A New Paradigm 373
The Evolution of the Industry 374
Characteristics of low-cost Carriers 377
Cost Structure Comparison 388
Incumbent Carriers’ Response to low-cost Carriers 393
The Future of low-cost Carriers 396
Summary 397
Discussion Questions 397
Appendix: Select Airline Two letter Codes 398
References 398
13 The Economics of Aviation Safety and Security 401
The Basics of Aviation Safety 402
The History of Aviation Safety 404
Incentives for Aviation Safety 407
Causes of Aviation Accidents 410
Basic Economics of Safety 418
Politics and Safety Regulation 419
Accident Prevention 420
Summary 422
Discussion Questions 422
References 422
14 An Overview of Macroeconomics for Managers 425
Economic growth 426
Unemployment 429
Inflation 434
Monetary Policy 439
contEnts Ix
Fiscal Policy 441
The Sovereign (government) Debt Crisis 445
Can the US Avoid greece’s Fate? 447
What is the Future of the World Economy? 449
Summary 450
Discussion Questions 450
References 451
Airport and Airline Codes 453
List of Countries by GDP (2012) 459
Traffic Movements (2012) 461
Passenger Traffic (2010) 463
Index 465