Airline competition analysis

Abstract

Introduction: The purpose of this study is to investigate how airlines share the passengers, attracted to air transportation. The percentage of these passengers, that one airline will carry in any given market, where it is in competition with other airlines, depends mostly on the frequency it operates, number of competitors in the market, stage length number of daily non-stop and one-stop flights, type of aircraft and the connecting flights. Market share furthermore depends on variables such as passenger service, the image of the airline, the amount of money spent on advertising in the given market. These variables are called behavioral variables and are impossible to be included in the models because of the inavailability of data on them. In this study investigation was restricted to the variables on which data can be fairly easily obtained. Until recently it was assumed that market share depends mostly on frequency share and furthermore that the relation between these is linear. This implies that if for example one airline operates 70% of the flights in any given market, it will carry 70% of the passengers in that market. The models presented in this study investigate this hypothesis as well as the effects that some of the other variables have on the market share. Model 1 investigates the effects of varying stage length and frequency share. Model 2 brings in additional explanatory variables including the second most important variable, number of competitors in the market. At this stage of investigation it was recognized that market share depends almost completely on frequency share. However the form of the relationship was not yet clear. Models 3 to 6 are an attempt to determine this relationship. Models 7 and 8 investigate the effects of times of flight through the day and the quality of service offered.