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UBC Theses and Dissertations

Three Essays on Air Transport Economics Fu, Xiaowen

Abstract

This dissertation examines two important issues in the air transport industry. The first one is airline competition in the presence of major Low Cost Carriers (LCCs). The second issue is airports' role in downstream airline competition. These issues are studied in three essays, which are chapter 2 to chapter 4 in this manuscript style dissertation. Essay 1 empirically examines airline competition in the presence of a major LCC, especially in the period when the initial effects of LCC entry are stabilized. Using a panel data front the United States domestic markets, an Almost Ideal Demand System (AIDS) is estimated for carriers competing in the same city pair markets. This enables one to calculate carrier-specific demand equations and identify substitution possibilities between Full Service Airlines (FSAs), as well as substitution between LCCs and FSAs. Competition analysis is carried out by empirically estimating reduced form price equations for LCC and FSA. The study found strong evidence of product differentiation between the services provided by FSAs and LCCs. The average prices being charged by FSAs and LCCs are more sensitive to the competition from airlines of the same type. Airlines with higher market shares (regardless of whether they are FSA or LCC) tend to charge higher prices, indicating effect of market power on pricing. Contrary to most previous research results, this study found that the competition between FSAs is important even in the markets where a major LCC is present. Essay 2 examines how pricing behavior of unregulated airports affect downstream airline competition, especially the competition between airlines offering differentiated services including the case of FSAs vs. LCCs competition. The study found that LCCs suffer more from an identical input price increase than FSAs and are, therefore, more vulnerable to an airport's monopolistic pricing. This implies a reduction of competition in downstream airline markets because in recent years LCCs have been a major source of competition in many airline markets. Essay 3 studies the competitive and welfare implications when an airport offers the option of sharing its concession revenue with airlines. It is found that such revenue sharing allows airlines and airports to internalize positive demand externality, which could lead to substantial welfare gains. However, such practice may cause negative effects to airline competition. In fact, there are cases where an airport can maximize its profit by strategically aligning with dominant airlines. Such airport's strategy would, of course, further strengthen the dominant firm's market power since its market share is larger after revenue sharing. In addition, while sharing concession revenue with airlines an airport may still prefer to increase airport charge.

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