Airline Deregulation and the
Evolution of Airline Market
Power in the United States
Severin Borenstein
Professor, Economic...
Deregulation in the United States
 Before 1978 domestic deregulation, carriers
were privately owned and competed, but
 N...
Conflicting history of U.S. airlines since
domestic deregulation in 1978
 Lots of entry and exit
 Declining real fares
...
Early research found market power
from route and airport concentration
 Supported by Levine (1987) after he had
been CEO ...
Three trends since the 1980s
 Expansion and contraction of hub-and-spoke
networks
 Steadily increasing load factors
 Ex...
Changes in average domestic price,
operating cost and load factor since 1990
6OECD Competition Committee, 19 June 2014
Market Presence of Low-Cost Carriers
7OECD Competition Committee, 19 June 2014
Concentration and price premia at 10
concentrated hub airports
8OECD Competition Committee, 19 June 2014
“Share Gap”
 Example from Dallas/Ft.Worth (DFW)–
Charlotte (CLT) route. US Airways (US) is
dominant at CLT, America (AA) ...
Share Gap over time
10OECD Competition Committee, 19 June 2014
Share Gap is strongly associated with
airport dominance and business travel
 First analysis in 1991, using 1986 data
(Bor...
So why have airline prices and hub
airport premia fallen?
 Declining impact of Airport Dominance
 In 1990s, effect is la...
Airline Prices 1990-2010
 Airline cost reductions, including increased
load factors, offset fuel cost increases, but
pric...
Airline prices in the next decade
 Already rising before most recent mergers
took effect, continuing since then
 Much of...
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Airline Deregulation and the Evolution of Airline Market Power in the United States - Severin Borenstein – June 2014 OECD discussion on airline competition

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This presentation by Severin Borenstein was made during a roundtable discussion on airline competition held at the 121th meeting of the OECD Competition Committee on 19 June 2014. Find out more at http://www.oecd.org/daf/competition/airlinecompetition.htm

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Airline Deregulation and the Evolution of Airline Market Power in the United States - Severin Borenstein – June 2014 OECD discussion on airline competition

  1. 1. Airline Deregulation and the Evolution of Airline Market Power in the United States Severin Borenstein Professor, Economic Analysis and Policy Group Haas School of Business University of California, Berkeley 1OECD Competition Committee, 19 June 2014
  2. 2. Deregulation in the United States  Before 1978 domestic deregulation, carriers were privately owned and competed, but  Needed government authority to enter a route  Could only charge government-set prices  Competition on frequency, amenities, advertising  Deregulation lifted price and route restrictions  Coincided with increased U.S. efforts for international “open skies” agreements  No movement then, or now, towards allowing non-US airlines on US routes (cabotage) OECD Competition Committee, 19 June 2014 2
  3. 3. Conflicting history of U.S. airlines since domestic deregulation in 1978  Lots of entry and exit  Declining real fares  Significant economic losses in the 1980s and 2000s, small profits in the 1990s BUT  Concentration on many routes  Airport dominance => Airport premia  High-cost firms maintain high market shares  Mergers increasing national concentration 3OECD Competition Committee, 19 June 2014
  4. 4. Early research found market power from route and airport concentration  Supported by Levine (1987) after he had been CEO of a startup airline  Contestable airline markets rejected by numerous studies  Market power associated with airport dominant position above and beyond route concentration or share  Some finding of density economies  not finding of network scope economies 4OECD Competition Committee, 19 June 2014
  5. 5. Three trends since the 1980s  Expansion and contraction of hub-and-spoke networks  Steadily increasing load factors  Expansion of low-cost carriers (LCCs)  What explains the large decline in real price?  What’s the role of changes in market power?  What does that suggest post-consolidation?  I focus mostly on 1990-2010 5OECD Competition Committee, 19 June 2014
  6. 6. Changes in average domestic price, operating cost and load factor since 1990 6OECD Competition Committee, 19 June 2014
  7. 7. Market Presence of Low-Cost Carriers 7OECD Competition Committee, 19 June 2014
  8. 8. Concentration and price premia at 10 concentrated hub airports 8OECD Competition Committee, 19 June 2014
  9. 9. “Share Gap”  Example from Dallas/Ft.Worth (DFW)– Charlotte (CLT) route. US Airways (US) is dominant at CLT, America (AA) at DFW  In 2010, on DFW-CLT, US got 65% of passengers whose trip originated at CLT, 38% of passengers who originated at DFW  American got 22% at CLT, 49% at DFW  Share gap is seen in the industry as measure of regional advantage: advertising, marketing, loyalty programs  Frequent flyer and corporate discount programs 9OECD Competition Committee, 19 June 2014
  10. 10. Share Gap over time 10OECD Competition Committee, 19 June 2014
  11. 11. Share Gap is strongly associated with airport dominance and business travel  First analysis in 1991, using 1986 data (Borenstein, Quarterly Journal of Economics, Nov 1991)  Differential share by point of ticket origination  as function of differential endpoint airport dominance and the business orientation of route  Same analysis for 1984-2010 shows  Share gap a bit more associated with airport dominance and biz travel now than in 1990s  Airline loyalty as strong as ever 11OECD Competition Committee, 19 June 2014
  12. 12. So why have airline prices and hub airport premia fallen?  Declining impact of Airport Dominance  In 1990s, effect is larger than effect of route share  By 2006-2010 effect is essentially zero  Steady effect of Share Gap  Routes with large share gap have higher prices after controlling for route share and concentration  Interpretation: Airport access/amenities advantages have declined (AIR21 regulation), but loyalty impact remains strong 12OECD Competition Committee, 19 June 2014
  13. 13. Airline Prices 1990-2010  Airline cost reductions, including increased load factors, offset fuel cost increases, but prices fell 37% by 2009  About 10% recovery by 2012  Fares at dominated airports and on business routes declined relative to other routes, combined up to 20% drop by 2009  But airline loyalty/marketing advantages remain very strong and strongly associated with business travel and dominated airports 13OECD Competition Committee, 19 June 2014
  14. 14. Airline prices in the next decade  Already rising before most recent mergers took effect, continuing since then  Much of that likely just rationalization from very low prices of the 2000s  Share gap analysis suggests airlines have maintained strength from loyalty programs  Leveraging loyalty programs seems likely to be more important with 4 major players left  Raising barriers to new entrants  Dividing markets, possibly softening competition 14OECD Competition Committee, 19 June 2014

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