Economies of Density, Multiproduct Scale and Scope in the Airline Industry.



Economies of Density, Multiproduct Scale and Scope in the Airline Industry.

Authors

S R Jara-Díaz, C Cortés, G Morales, Univerisad de Chile, CL

Description

New indices that replace RTD and RTS for the proper analysis of transport industry structure, namely density, scale and scope, are applied to the airline industry

Abstract

For more than twenty years now the airline industry has been analyzed with the help of empirical estimations of cost functions using aggregate descriptions of output. Along this effort there have been many improvements, particularly in the econometric methods and richness of data. Most of the discussion on industry structure has been done using two concepts: economies of density (RTD) and economies of scale (RTS). While the former deals with output growth keeping network size (and route structure) constant, the latter includes the variation of network size. Using these concepts, potential cost savings arising from output and/or network growth have been studied.

In spite of the seemingly clear definition of both RTD and RTS as scale concepts, both indices ? defined in the aggregates ? have been subject to some interpretation and discussion. Despite this, they constitute the main elements to perform industry structure analysis in air transport. In the last ten years, however, our research team has re-analyzed their definition and use in the literature, using the detailed description of product as the point of departure. As a result of a rigorous analytical development, we have concluded that RTD has to be calculated making some corrections on the aggregate output cost elasticities (Jara-Díaz and Cortés, 1996). In addition, as RTD implicitly assumes route structure constant, a related but more general concept has to be used, namely the multiproduct degree of economies of scale, S (Basso and Jara-Díaz, 2006a). Regarding RTS, we have shown in various ways that it is inadequate to study what it is intended for, namely the important issue of network size (Basso and Jara-Díaz, 2006b). To deal with it, we have designed an approach to calculate what we have called economies of spatial scope, SC (Basso and Jara-Díaz, 2005).

In this paper we summarize the results obtained by applying the new procedures and concepts to those published studies in air transport that provide enough information to re-calculate the indices, covering from 1984 to 2001. While making very explicit the assumptions and approximations needed, we have calculated the corrected values for RTD, the (new) values of S and the (new) values of SC. As a general result, we obtained that the corrected RTD are usually smaller than the published ones, which in turn are always somewhat smaller than S. Various (related) types of positive SC are detected: network size, trunk-local services, and domestic-international markets. We conclude that the observed changes and trends in the airline industry are better explained with the new indices.

Publisher

Association for European Transport