European Air Transportation Networks After Liberalisation



European Air Transportation Networks After Liberalisation

Authors

ADLER N and BERECHMAN J, Tel Aviv University, Israel

Description

The aim of this research is to evaluate the effects of deregulation on the European aviation industry, from the point of view of the airlines and the effects on the airports. In the early 1980's, the United States of America (US) deregulated their air tra

Abstract

The aim of this research is to evaluate the effects of deregulation on the European aviation industry, from the point of view of the airlines and the effects on the airports. In the early 1980's, the United States of America (US) deregulated their air transportation industry and the European Union (EU) is in the process of undertaking similar policies today. These new policies imply free market entry and unrestricted setting of airfare and level of service by airlines. The question then arises as to how this liberalization will affect the airlines, airports and customers of the air transportation industry.

The EU is presently reforming air policy, and this alongside developments in world aviation carriers, will cause major changes in air transportation generally and in the European market in particular. The privatization of state-owned carriers and the removal of barriers to new entrants in the marketplace will lead to services at unregulated prices and levels.

These changes are likely to lead to the following results:

1) a decline in the number of firms operating

2) a decline in aviation prices and an increase in service frequency

3) employment of a clear hub-and-spoke (HS) network

Whilst such changes have already occurred in the US, it is unclear how these policy changes will affect the European market and to what ,extent. It should be noted that the effects of deregulation within Europe will not necessarily be the same as those that have already occurred in the US. Button & Pitfield (1991) argue that for the following reasons, European deregulation will not be the same:

1) The European market is predominantly international, as opposed to the US. This essentially slows .the changes, whereas in the US the laws were suddenly removed in a uniform manner.

2) The internal structure of the European market differs significantly from that of the US.

3) The distances traveled within Europe are significantly less. Consequently, hubbing within Europe, which may lengthen the time required to.travel, will have a greater impact on the total time traveled. This means that different modes of travel may provide greater competition in Europe than in the US.

4) Production costs are different in Europe which consequently may affect the network choice.in the different markets.


5) The US aviation industry is purely privatized whereas the European aviation industry still has substantial public sector participation.

6) European policy-makers can use the knowledge that they have gained from the US changes to avoid some of the perceived pitfalls of liberalization. These include the problems of airline mergers and the market power that can be accessed through flight code sharing and domination of the computer reservation systems.

Previous studies (see Bittlingmayer (1990), Encaoua et al (1992), Hendricks et al (1992), Spiller (1989) and Starr et al (1992)) examined the underlying economic rational for the increased use of HS networks as the regulations of the airline industry are liberalized, as occurred in the US over a decade ago. A HS network is shown to improve economic returns, enabling the airline to better exploit network economies. In addition, the carriers increase their frequency of service in order to increase their market share and deter entry. However, most studies to date have utilized models whereby both the price and hub location are exogenous and output is endogenous, whether it be passenger kilometers flown, number of flights, stage lengths etc. In this model both price and the hub choice.are endogenous whilst frequency (number of flights flown per week) is a decision variable. The liberalization of the European Airline Industry, circa 1997, will enable the airlines to choose the network most profitable to them which means that they will select as their main hub(s) those airports which yield the highest profits. Hence the main contribution of this model is in determining the most preferable network to a single, hypothetical airline.

The economic model-based algorithm, given demand and parametric inputs, computes the optimal plane size and frequency per network configuration such that the airline's profits are maximized. A network configuration includes the appointed hub(s) and specifies the connection of all other nodes with reference to the hub(s). Many network configurations can be used as input and the network that provides the airline with the maximum profit is considered the optimal network configuration for the single airline.

One of the byproducts of choosing an optimal HS system for the airline is the impact this will have subsequently on the airport(s) chosen as hub(s). The liberalization policies that will affect the airlines and encourage them to run a HS system, will urge certain airports to increase their size in order to accommodate the additional traffic that will occur at the hubs chosen. The mathematical program described in this article enables us to evaluate the effect on the hub of a HS system. The landing and passenger related charges paid by the airport become the revenue Of the airport. The airport capacities represent constraints in the original model. Consequently the airport's tariffs and capacities will directly affect the solution outcome. Therefore this model can be used to develop a charges and capacity policy for airports, in addition to choosing the optimal HS network for the airlines.

The structure of the paper is as follows: Section 2 states the economic model and its development into a mathematical program. Results of a hypothetical illustration of the European Air-Transportation Industry are presented in Section 3 and the effects on the airport are discussed in Section 4. Conclusions of the paper are in Section 5.

Publisher

Association for European Transport