Low Cost Carrier Entry, Incumbent Responses and Spatial Competition in the US Airline Industry

143 Pages·2015·0.77 MB·English

by  Ioan Bogdan Daraban

Florida State University Libraries
Electronic Theses, Treatises and Dissertations The Graduate School
2007
Low Cost Carrier Entry, Incumbent
Responses and Spatial Competition in the
U.S. Airline Industry
Ioan Bogdan Daraban
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THE FLORIDA STATE UNIVERSITY

COLLEGE OF SOCIAL SCIENCES

Low Cost Carrier Entry, Incumbent Responses and Spatial Competition in the
U.S. Airline Industry

By

Ioan Bogdan Daraban

A dissertation submitted to the
Department of Economics
in partial fulfillment of the
requirements for the degree of
Doctor of Philosophy

Degree Awarded:
Summer Semester, 2007
The members of the Committee approve the dissertation of Ioan Bogdan Daraban
defended on June 26, 2007.

Gary M. Fournier
Professor Directing Dissertation

Mark W. Horner
Outside Committee Member

David A. Macpherson
Committee Member

Thomas W. Zuehlke
Committee Member

The Office of Graduate Studies has verified and approved the above named committee
members.

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To my wife Viviana, and to my parents.

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ACKNOWLEDGEMENTS

First and foremost I would like to thank my dissertation advisor, Professor
Gary Fournier for all the help and guidance that he provided. It was a pleasure and an
honor to have the opportunity to work with him. The many thought-provoking
discussions and his detailed comments and suggestions were crucial in the completion of
this work. I gratefully thank him for all the important things I learned from him, for his
unconditional dedication and his words of encouragement along the way.
I would also like to thank the members of my dissertation committee Dr.
Mark Horner, Dr. David Macpherson and Dr. Thomas Zuehlke for their constructive
input and their willingness to serve. Special thanks are due to Dr. Zuehlke who provided
valuable assistance with important aspects of this dissertation.
My deepest thanks and respect go out to Professor Ljubisa Adamovich
who in so many ways was a source of strength and support throughout my graduate
studies.
A practical note of thanks is due to those who have provided financial
support towards the completion of this dissertation. I would like to acknowledge the
financial support provided through the Rod and Hope Brim Dissertation Fellowship and
the Manley Johnson Dissertation Fellowship.
Finally, I would have not been able to accomplish this without the love
and care of my wife and parents over the years.

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TABLE OF CONTENTS

List of Tables ................................................................................................ viii
List of Figures ................................................................................................ x
Abstract ...................................................................................................... xii

1. THE ISSUE OF LOW COST CARRIERS IN THE U.S AIRLINE
INDUSTRY ................................................................................................ 1

Introduction ................................................................................................ 1
Hub and Spoke Networks........................................................................... 2
The Low Cost Carrier Phenomenon........................................................... 4
Future Evolutions of the Industry............................................................... 9

2. A SPATIAL ECONOMETRIC APPROACH TO MEASURING THE
IMPACT OF LOW COST AIRLINES ON AIRFARES................................ 13

Introduction ................................................................................................ 13
Literature Review....................................................................................... 14
The Dummy Variable Approach to Modeling Spatial Effects in the
Airline Industry........................................................................................... 18
An Overview of Spatial Econometrics Methods........................................ 21
Estimation Procedures.......................................................................... 25
The Spatial Econometric Approach to Modeling Spatial Effects in the
Airline Industry........................................................................................... 26
Differences in the Two Approaches........................................................... 30
The Empirical Analysis of the Impact of Low Cost Carriers
on Airfares ................................................................................................ 34
Data ................................................................................................ 34
The Control Variables........................................................................... 35
Estimation Results................................................................................ 37
Model Predictions about the Overall Impact of Low Cost
Carriers......................................................................................... 38
Conclusions ................................................................................................ 43

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3. DYNAMIC RESPONSES TO LOW COST CARRIER ENTRY................. 45

Introduction ................................................................................................ 45
Literature Review....................................................................................... 47
Methodology............................................................................................... 50
The Spatial Econometric Approach to Estimating Panel Data
from the Airlines Industry........................................................................... 53
The Empirical Analysis of the Incumbents’ Response to Low
Cost Carrier Entry....................................................................................... 56
Data ................................................................................................ 56
Episodes of Low Cost Entry and Exit................................................... 59
Results ................................................................................................ 67
Savings to Travelers from 1994 to 2004...................................... 67
The Nature of the Pre-emptive Actions of the Incumbent
Legacy Carriers ........................................................................... 70
The Post-entry Response of the Incumbents................................ 72
The Post-exit Response of the Incumbents.................................. 72
The Other Control Variables........................................................ 73
Conclusions ................................................................................................ 73

4. THE IMPACT OF LOW COST CARRIERS ON AIRPORT SUBSTITUTABILITY
IN THE U.S.:THE CASE OF SMALL AND MEDIUM AIRPORTS.......... 87

Introduction ................................................................................................ 87
Sources of the Fare Differential.................................................................. 92
Methodology............................................................................................... 95
Objectives ............................................................................................ 95
Sample Selection .................................................................................. 97
The Empirical Analysis of the Fare Index ........................................... 98
The Control Variables.................................................................. 100
Correlated Effects for the Three Quarters before Entry
Time Dummies............................................................................. 101
The Empirical Analysis of the Fare Differential ....................................... 105
Results……. ................................................................................................ 105
The Fare Index Analysis....................................................................... 105
The Fare Differential Analysis............................................................. 111
Conclusions ................................................................................................ 114

5. CONCLUSIONS............................................................................................. 118

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REFERENCES ................................................................................................ 124

BIOGRAPHICAL SKETCH .............................................................................. 129

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LIST OF TABLES

Table 1.1: Domestic operating Expenses per Available Seat Miles.................... 6

Table 1.2: Fuel Hedge Positions of Major Airlines, 2006-2009.......................... 8

Table 2.1: Summary Statistics............................................................................. 38

Table 2.2: Estimation Results for 1998............................................................... 40

Table 2.3: Estimation Results for 2004............................................................... 41

Table 2.4: Savings Attributed to Low Cost Carriers........................................... 42

Table 2.5: Savings Attributed to Low Cost Carriers by Distance Band
Using the Spatial Specification (amounts in billions of dollars)......................... 43

Table 3.1: Summary Statistics............................................................................. 75

Table 3.2: The Effect of Southwest Entry and Exit on Route
Level Average Fares............................................................................................ 76

Table 3.3: The Effect of LCC (other than Southwest) Entry and Exit on Route
Level Average Fares............................................................................................ 78

Table 3.4: Estimated Coefficients on the Control Variables............................... 82

Table 3.5: Point Estimates used in the Calculation of Savings
Attributed to the LCCs......................................................................................... 84

Table 3.6a: Estimated Savings Attributed to
Southwest Airlines (in billions of dollars)........................................................... 85

Table 3.6a: Estimated Savings Attributed to LCCs other than
Southwest (in billions of dollars)......................................................................... 85

Table 3.7: Estimated Savings Attributed to Southwest Airlines Using
Inverse Distance Weights (in billions of dollars)................................................ 86

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Table 4.1: Total Enplanements and Ranking for Selected
US Airports in 2005............................................................................................. 90

Table 4.2: Summary Statistics for the Airport Level Variables.......................... 102

Table 4.3: Estimation Results for the Second Stage Fare
Index Panel Regression........................................................................................ 107

Table 4.4a: Estimation Results for the First Stage Probit Analysis
for Southwest Airlines Entry............................................................................... 108

Table 4.4b: Estimation Results for the First Stage Probit Analysis
for the Other LCC’s Entry................................................................................... 109
Table 4.5: Estimation Results for the Fare Differential....................................... 116

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