Airline Economics: Consumer Demand

Airline Economics

Chapter 3

Michael W. Tretheway and Tae H. Oum

 Airline Economics: Consumer Demand

Basic Elements of Demand for Air Service

 When economists refer to the "determinants" of consumer demand for air
Services, they mean the set of factors which influences an individual’s
decision as to whether to travel by air, and how much travel by air they will
do each year. The main determinants of airline demand are:
 • Price. Lower airline prices induces people to travel more.
 Income. Higher disposable income influences consumers to travel more.
 Price and convenience of other modes of transport. People will be less
inclined to flyif the automobile is cheaper and/or more convenient.
 Frequency of service. More frequent service is more convenient service,
increasing the willingness of the consumer to travel by air.
 Airline Economics: Consumer Demand

Basic Elements of Demand for Air Service

 Tunning of service, in general, consumers prefer to fly first thing in the
morning, or late in the afternoon.
 Flights offered at these times will induce consumers to fly by air, whereas
flights at inconvenient times (such as 3 a.m.) tend to discourage consumers
from air travel.
 Day of the week. Consumers are more likely to fly on certain days of the
week than others.
 Typically, Sunday evenings are very popular, with business travelers leaving
home for their first appointment of the week.
 Similarly, Friday afternoon are also a busy time, as travelers are returning
home.
 Airline Economics: Costs
Understanding Airline Costs
Basic Elements of Demand for Air Service
 Season of the year. July and August are popular travel times, whereas
November and February are unpopular times.
 There are variations, of course, by market (sun spot destinations are winter
peaking) and continent (e.g. Australia, New Zealand).
 Safety and company goodwill. A good safety record is good for business.
Air travel drops whenever there is a major air disaster.
 Demographics. Age is often a factor in the travel decision. College students,
for example, are notorious for airline pilgrimages to Europe, popular ski
resorts, and holiday trips to home.
 Airline Economics: Costs
Understanding Airline Costs
Basic Elements of Demand for Air Service
 Individuals raising children tend to travel less, while empty nesters
seem to travel more.
 There are other demographic factors as well.
 New immigrants tend to travel back to the old country several times.
 Distance. The longer the travel distance involved, the fewer trips will be
made.
 Business and leisure travelers make relatively fewer trans-oceanic trips
than trips across the country.
 At the other end of the scale, few air trips are made over very short
distances.
 Airline Economics: Consumer Demand

Basic Elements of Demand for Air Service

 In-flight amenities. Consumers are somewhat influenced by how cramped
seats are, the quality of food, the availability of in-flight movies, ete.
 On average, these factors are less important in the decision of whether to
fly, but more important in the choice of air carrier.
 Customer loyalty. As in any industry, once the consumer has made the
decision to purchase a service or product, loyalty factors may come into
play in determining which carrier or firm will be chosen.
 In air transport, frequent flyer reward programs are especially important in
fostering customer loyalty.’
 Airline Economics: Consumer Demand

Basic Elements of Demand for Air Service

 Travel time. When jets were first introduced, there was a noticeable
increase in consumer demand for air travel.
 The reduction of transcontinental flying time from ten to five hours made
air travel far more convenient.
 It was easier, for example, for businesses to justify meetings which might
not have taken place previously.
 On time performance is also a factor here, especially when the consumer
chooses which carrier to use.
 Airline Economics: Consumer Demand

Which Elements of Demand Are Most important

 The listed elements of consumer demand are important. Some of the
factors are beyond the control of air carriers.
 Carriers cannot influence the level of income a consumer has, nor the price
and convenience of other modes of transport.
 Of the elements which the carrier can control, certain are of special
importance.
 Clearly, price is one of the most important determinants of consumer
demand.
 One of the greatest lessons of airline deregulation was that lowering price
induces consumers to travel more often.
 Airline Economics: Consumer Demand

Which Elements of Demand Are Most important

 Discount airfares opened a whole new market segment for air travel.
 In a series of studies of airline demand, a 10% drop in price would increase
demand for air travel in Canada by 11-13%.
 Another important variable is frequency of service. This is especially
important for business travelers, for whom the ability to maximize their
time productivity is very important.
 In a study of U.S. air travel demand, Morrison and Winston found that a
doubling of the frequency of air service would lead to a 21 % increase in
demand for air Services by business travelers.

 Airline Economics: Consumer Demand

Which Elements of Demand Are Most important

 For pleasure travelers, who are less sensitive to the availability of frequent
flights, the increase would only be 5%.
 The importance of frequency of service is underscored by the observation
that in the top 25 domestic city pair markets in Canada, the number of
flights doubled between 1983 and 1989."
 While income is a consumer demand determinant outside of the control of
the carriers, it is important to comment on its importance.
 In their study of Canadian airline demand, an income elasticity in the range
of 1.6-2.5.
 This means, that if the economy were to grow by 10%, then airline demand
would increase between 16-25%.
 Airline Economics: Consumer Demand

Which Elements of Demand Are Most important

 Very few goods in the economy are as responsive to income as is air
transport.
 The negative side of this is that in an economic contraction, of say 3 %, air
travel is likely to fail off somewhere in the range of 5-7%.
 Air travel is then, not just cyclic but procyclical.
 This procyclical behavior has likely been exacerbated by airline
deregulation.
 Airline Economics: Consumer Demand

Which Elements of Demand Are Most important

 In a study of U.S. air travel, were able to distinguish between business
travelers and leisure travelers.
 Business travelers had an income elasticity of only 1.5 whereas leisure
travelers had an elasticity of 2.1.
 As deregulation, with its lower prices, has made the proportion of leisure
travelers grow, the average income elasticity for the industry has been
creeping more and more toward the leisure traveler extreme.
 This procyclical behavior of air travel contributes to the financial challenges
the industry faces
 Market Segmentation
 air travelers are not a homogeneous group.
 There are at least two broad submarkets.
 The traditional bread and butter of the industry has been the business
traveler.
 This traveler, whose ticket is typically paid for by an employer, is concerned
with maximizing the productivity of his or her time.
 As a result, this individual is very sensitive to the frequency with which
service is offered.
 Market Segmentation
 This traveler also needs an airline service which is flexible, in the sense of
accommodating last minute changes in plans.
 Thus, high probabilities of being able to obtain a seat at the last minute are
essential, as is convenient air service with the shortest possible elapsed
trip time.
 Business travelers are generally willing to pay for the higher quality of
service, and thus tend to be less responsive to prices.
 On time performance and reliability of the airline to its published schedule
are also important to this group of consumers.
 The second broad segment of airline consumers is generally referred to as
the leisure traveler.
 This traveler is travelling on personal time, and is not quite as concerned
with maximizing time productivity.
 Market Segmentation
 Thus, these individuals are less sensitive with respect to how frequent
service is offered, or to the total elapsed time of the air trip.
 However, these individuals are very sensitive to prices, as already been
discussed.
 Schedule reliability is also less of an issue for these travelers.
 Another important characteristic of this consumer segment is that they
tend to make their travel plans well in advance.
 As a result, they can be induced to book and pay for their airline tickets
weeks before the actual airline flight.
 In contrast, the business traveler may not know until a few hours prior to
the trip that the trip is necessary.
Market Segmentation
 Market Segmentation
 Airlines have been able to exploit this fundamental difference in the two
consumer segments by tailoring different types of service for the two
groups.
 Leisure travelers are offered a service at a low price, but which requires
advance booking and has limited flexibility for accommodating change in
travel plans.
 The business traveler is offered a service with relatively good seat
availability at the last minute, and with no restrictions on the ability to
change plans.
 They are charged a higher price for this more expensive service.
 Market Segmentation
 They cannot avail themselves of the lower prices offered to leisure
travelers, as they cannot abide by the advanced booking requirement,
and/or the restriction on changing plans.
 There are, of course, various sub-segments of consumers within these two
broad groups.
 Some business traveler's need complete flexibility and are willing to pay
for it.
 Other travelers, such as those going to pre-planned business conferences,
tend to be somewhat more sensitive to price, and have an ability to
accommodate the airline by booking early.
 Leisure travelers can also be broken into several subgroups.
 Market Segmentation
 One distinction is between leisure traveler to holiday resorts, versus leisure
travelers to visit friends and relatives (VFR).
 Some leisure travelers, for example retired grandparents, are willing to
make their travel plans months in advance and will travel at inconvenient
times of the day, week or year in order to get a better bargain.
 There are also non-business trips which must be booked at the last minute,
such as visiting a sick family member or attending a funeral.
 Like business travelers, these individuals tend to be price insensitive.
 Demand Side Forces Favoring Large Carriers

 Market equilibrium and therefore market structure is determined by the

interaction of both supply (i.e. costs/production) and demand.
 In airline markets there are demand forces such that consumers prefer
large airlines over small ones, all other factors such as prices being the
same.
 In this context, large airlines mean those that serve a large number of
points.
 Some of these forces have been present for some time, while others have
been stimulated by marketing practices introduced since U.S. deregulation.
 Demand Side Forces Favoring Large Carriers
 In practice, there are at least three reasons why consumers prefer large
airlines.
 One reason is due to information costs.
 A traveler knows that a large carrier can get him or her to just about
anywhere in the country, while smaller carriers serve only a limited
number of communities.
 Travel agents act as intermediaries for the consumer,
 but even here large network airlines have an edge, such as when an agent
in one region needs to book flights in other regions.
 Demand Side Forces Favoring Large Carriers
 A second reason why consumers favor large airlines is attributable to the
higher quality of service these airlines offer.
 If connections must be made, less of the traveler's time will be required
with a single airline than when the trip involves switching airlines because
single airline flight connections are more likely to be timed to minimize
waiting time at intermediate points (hubs).
 Consumers are also aware that there is a lower probability of baggage
being lost or delayed with a single airline,
 as well as a higher probability that the same airline’s outbound flight
would be held for a traveler
 Demand Side Forces Favoring Large Carriers
 The third factor causing consumers to favor larger over smaller carriers is
the existence of frequent flyer programs.
 These programs reward the individual for patronizing a single carrier (even
though the fare for business travelers may be paid by their employers).
 It is much easier to accumulate points with an airline that flies to a large
number of destinations.
 In sum, there are natural market forces favoring large airlines in spite of
evidence of constant returns to "scale."
 These are economies of traffic density, and in addition, the demand side
factors such as information costs, higher quality travel, and reward
programs inducing consumers to favor large over small airlines.
 It appears that economies of traffic density can be fully exploited by an
airline the size of Air Canada and thus further consolidation is unlikely to
reduce its cost per seat kilometer by very much.
 Travel Time and Consumer Demand
 One of the consumer demand factors that has been found to be important
is the total elapsed time from origin to destination.
 A carrier which can offer a noticeable reduction in the elapsed time will be
more successful in attracting passengers.
 Airline economists have found it useful to break up total elapsed time into
four separate components.
 Travel Time and Consumer Demand
 The four components are:
 Schedule wait time. This is the time from when the consumer desires a
departure to the availability of an actual departure.1*
• Airport access time. This is the time for the traveler to get from
their home or place of business to the airport, check in at the airport, clear
security and customs, ete.
 Travel Time and Consumer Demand
 The four components are:
 Flight time. This is the actual time from scheduled departure to arrival at
destination.
 This might be broken up into three separate components:
 Deviation from scheduled times. Flights take longer than published
because of late departures and/or arrivals.
 Actual in-air time. This is the actual time spent flying in the aircraft. It
is affected by type of aircraft (jet versus propeller), air traffic control
and other delays, and degree of route circuity with hub and spoke
systems.
 Hub connection time. This is the time spent on the ground at a hub
airport making connections from one spoke of a flight to another
spoke.
 Travel Time and Consumer Demand
 The four components are:
 Denied boarding time.
 Occasionally, a passenger must wait from their originally scheduled
departure until the next departure because the original flight was
overbooked and they were denied boarding of the aircraft.
 Travel Time and Consumer Demand
 The segmentation of total elapsed time allows Identification of
opportunities for reduction.
 For example, more frequent flights reduces schedule delay time.
 Use of a close-in or downtown airport, provision of door to door limousine
Services, or expedited check in procedures can reduce airport access time.
 Use of faster aircraft (jets versus turbo props, Concorde versus traditional
jets) allows for reductions of actual in-flight time.
 Travel Time and Consumer Demand
 Procedures asking for volunteers when aircraft are overbooked help shift
the denied boarding time component to those travelers less sensitive to
total elapsed time.
 Sometimes, there are trade-offs between the various time components.
 The next section discusses one of the most important trade-offs: that
between frequent air service with a one-stop hub connection versus
infrequent but non-stop service.
Effects of Hubs on Passenger Travel Time, Schedule
Delay Time, and Passenger Demand
 Effects on Passenger Travel Time and Schedule Delay Time.
 As compared to non-stop flights, a hub and spoke network increases the
average passenger’s in-flight time because of the need for extra connecting
time at the hub and the circuitous routing of the passenger’s trip.
 On the other hand, it can also reduce the passenger’s "schedule wait time,,
due to the increased frequency of service on each route.
Effects of Hubs on Passenger Travel Time, Schedule
Delay Time, and Passenger Demand
 Effects on Passenger Travel Time and Schedule Delay Time.
 A passenger flying from city A to city D via hub H (see Figure 6) faces an additional
time penalty of the following magnitudes:
 Roughly 30 minutes due to the additional descent and ascent at the hub.
 Perhaps an average of 60 minutes for time to connect from one flight to
another at the hub
Effects of Hubs on Passenger Travel Time, Schedule
Delay Time, and Passenger Demand
 Effects on Passenger Travel Time and Schedule Delay Time.
 A passenger flying from city A to city D via hub H (see Figure 6) faces an
additional time penalty of the following magnitudes:
 Extra cruise time required for the circuitous routing.
 This extra cruise time depends on both the angle between the spokes
connecting two stations through the hub and the relative distances of
the two cities from the hub.
Effects of Hubs on Passenger Travel Time, Schedule
Delay Time, and Passenger Demand
 Effects on Passenger Travel Time and Schedule Delay Time.
 A passenger flying from city A to city D via hub H (see Figure 6) faces an
additional time penalty of the following magnitudes:
 This is shown by the law of cosines in Figure 7.
 A large angle (e.g. linking cities B to E through H in Figure 6) adds very
little time, whereas a small angle with an equal distance (e.g. linking
cities C to D via H in Figure 6) adds a great deal of extra time.
 As the distance on one spoke shortens, the circuitous routing time
penalty will drop (e.g. A to F in Figure 6). Because of the time penalties
of circuitous routing, passengers will be unlikely to fly via a hub when
the penalty is high. Thus, in Figure 6, routings such as F-H-E and C-H-D
may not be "viable."
Effects of Hubs on Passenger Travel Time, Schedule
Delay Time, and Passenger Demand
 Effects on Passenger Travel Time and Schedule Delay Time.
 A passenger flying from city A to city D via hub H (see Figure 6) faces an
additional time penalty of the following magnitudes:
 The total time penalty of a hub versus non-stop flight is thus approximately
90 minutes plus the circuitous routing time.
 For purposes of exposition, let us assume the average angle through the
hub of viable city pairs to be 125°.
 With spoke lengths equal, on average, this implies a circuitous routing
penalty of roughly 25%.
Effects of Hubs on Passenger Travel Time, Schedule
Delay Time, and Passenger Demand
 Effects on Passenger Travel Time and Schedule Delay Time.
 Assuming a typical flight through a hub involves two hours of flying time,
the circuitous routing penalty is 30 minutes.
 The total time penalty is thus 120 minutes as compared to a non-stop
flight.
 However, a hub and spoke system could allow the airline to increase
schedule frequency.
 The increased frequency reduces the passenger’s "schedule wait time," the
time between the passenger’s desired departure and the actual departure
time.
Effects of Hubs on Passenger Travel Time, Schedule
Delay Time, and Passenger Demand
 Effects on Passenger Travel Time and Schedule Delay Time.
 The reduction in schedule wait time depends on the increased frequency
with the hub and spoke system versus a system of non-stop flights.
 Assuming consumers’ desired departure time are uniformly distributed
over 14 hours per day, one flight per day means that the expected
frequency delay is seven hours for an average passenger.”
 As the departure frequency increases to two, three and five flights per day,
the schedule wait time decreases to 3.5, 2.3, and 1.4 hours, respectively.
 For the case when a move to a hub and spoke system increases frequency
from one to three flights per day, schedule wait time is reduced from seven
to 2.3 hours, a saving of 4.7 hours.
Effects of Hubs on Passenger Travel Time, Schedule
Delay Time, and Passenger Demand
 Effects on Passenger Travel Time and Schedule Delay Time.
 The total effect on travel time is thus the difference between the time
penalties (extra ascent/descent, connect time, extra cruise time) and
reduction in schedule wait time.
 For the example worked out above, this comes to a net decrease of 160
minutes: time penalties of 120 minutes offset by a reduction in schedule
wait of 280 minutes (4.7 hours).
 Actual reductions will vary for each route (and passenger), of course.
Effects of Hubs on Passenger Travel Time, Schedule Delay Time, and
Passenger Demand

 Effect on Passenger Demand.

 The move to a hub and spoke system will affect passenger demand in
several ways.
 the hub system will affect passenger travel times; negatively for routes
already with high frequency and those involving backtracking, and
positively for routes which previously had infrequent service or involved
multiple steps.
 However, there are other effects as well.
 These include the disutility of making connections, the effect on price and
the effect of allowing the airline to serve many more city pair routes when
new stations are added.
Effects of Hubs on Passenger Travel Time, Schedule Delay Time, and
Passenger Demand

 Effect on Passenger Demand.

 Hub Disutility. A hub and spoke system can increase the number of
transfers required to get from origins to destinations.
 This reduces the comfort and convenience of the passenger.
 We are all familiar with the "joy" of getting off one crowded airplane and
boarding another.
 There is the potential to miss a connection if the inbound flight is late.
 These factors create "disutility" for the passenger.
 Disutility can be valued; the passenger is generally willing to pay to avoid
these hassles (i.e. willing to pay somewhat more for a non-stop rather than
a one-stop flight).
Effects of Hubs on Passenger Travel Time, Schedule Delay Time, and
Passenger Demand

 Effect on Passenger Demand.

 The route choice model revealed value of one transfer to a connecting
flight is worth about 1.75 hours of transit time.
 Since the time required for a passenger to make a connection, one hour,
was taken into account in Section A, the pure disutility of making a transfer
is equivalent to a time delay of about 45 minutes.
 Assuming that the value of time is $30 per hour, then the value of the hub
connection disutility is $22.50.“
Effects of Hubs on Passenger Travel Time, Schedule Delay Time, and
Passenger Demand

 Effect on Passenger Demand.

 Effect on Price. Passenger demand for travel is highly responsive to price.
 The air travel price elasticity at about -1.2.
 Adoption of hub and spoke systems can affect price in several ways.
 First are effects on costs.
 A move from non-stop to hub flights increases flight times, hence fuel and
crew costs, etc.
 These extra costs can be offset in a number of ways.
Effects of Hubs on Passenger Travel Time, Schedule Delay Time, and
Passenger Demand

 Effect on Passenger Demand.

 The move to hub and spoke systems can lead to increases in average traffic
densities with a resulting drop in unit costs (e.g. spreading fixed station
costs over more passengers)
 The frequent routing of aircraft through the hub could allow more
opportunities to increase aircraft utilization, achieve economies in
maintenance, etc.
 Second, the adoption of hubs and the resulting increase in city pairs served
can allow the carrier to better utilize its inventory of unsold seats via
modem seat management techniques
 This may result in offering deep discounts for lightly travelled segments
that can now be connected to popular destinations with a resulting
increase in system-wide passenger demand.
Effects of Hubs on Passenger Travel Time, Schedule Delay Time, and
Passenger Demand

 Effect on City Pairs Served.

 If a new station (let’s Cali it K) had been added to the non-hub route
structure in Figure 8 via a flight to say F, then only a handful of new city
pairs would be viable.
 If viable city pairs are those involving one stop, then the addition of K to F
opens up three new city pairs (KF, KD, and KI).
 In contrast, adding a new station to a hub already serving (N-l) cities, opens
up service to N new origin-destination pairs (including the OD pair from
the new station to the hub).
Effects of Hubs on Passenger Travel Time, Schedule Delay Time, and
Passenger Demand

 Effect on City Pairs Served.

 Theoretically, a hub system with N stations (including the hub) will provide
zero or one stop service to N(N-l)/2 stations.
 This greatly "levers" the effect of adding stations to an existing hub.
 For example, by increasing the number of stations connected to a hub from
9 to 14 (total stations including the hub rise 50% from 10 to 15), the
number of OD pairs served more than doubles from 45 to 105.
Effects of Hubs on Passenger Travel Time, Schedule Delay Time, and
Passenger Demand

 Effect on City Pairs Served.

 One of the important consequences of this leverage is that it can make
service to smaller communities viable.
 A community which generates as few as two passengers per day to each of
30 cities in a network can justify a daily jet flight.
 If, on average, it can generate six passengers per day in each OD pair, then
three jet flights a day may be possible.
 This seems to have been a major "discovery" for some carriers after
deregulation.
 Immediately after the regulatory reigns were loosened, some of the major
carriers dropped service to small communities.
 As hubs have been established, however, they restarted jet service to small
communities by tying them into their hubs.
Effects of Hubs on Passenger Travel Time, Schedule Delay Time, and
Passenger Demand

 Effect on City Pairs Served.

 This greatly "levers" the effect of adding stations to an existing hub.
 For example, by increasing the number of stations connected to a hub from
9 to 14 (total stations including the hub rise 50% from 10 to 15), the
number of OD pairs served more than doubles from 45 to 105.
 One of the important consequences of this leverage is that it can make
service to smaller communities viable.
 A community which generates as few as two passengers per day to each of
30 cities in a network can justify a daily jet flight.
 If, on average, it can generate six passengers per day in each OD pair, then
three jet flights a day may be possible.
Effects of Hubs on Passenger Travel Time, Schedule Delay Time, and
Passenger Demand

 Effect on City Pairs Served.

 This seems to have been a major "discovery" for some carriers after
deregulation.
 Immediately after the regulatory reigns were loosened, some of the major
carriers dropped service to small communities.
 As hubs have been established, however, they restarted jet service to small
communities by tying them into their hubs.
Effects of Hubs on Passenger Travel Time, Schedule Delay Time, and
Passenger Demand

 Summary of Demand Effects of Hubs.

 In summary, hub systems have both positive and negative effects on
demand.
 They involve some important time penalties as well as disutility associated
with making a connection rather than flying non-stop.
 On the other hand, they can significantly reduce the passengers’ schedule
wait and add many OD pairs to the network.
 Costs can go down due to higher traffic densities, but these are offset by
the circuitous routings sometimes involved in hub operations.
 Overbooking

 One final aspect of consumer demand is that some travelers do not always
show up for flights they have booked.
 In 1961, it was estimated that 10 percent of passengers did not show up for
their flights, and in 1982 it was suggested that this figure was 20
percent.”
 Business travelers frequently fail to show up for flights, as their plans
change from moment to moment.
 While leisure travelers flying on discount tickets tend to be more reliable in
their travel plans, they too miss flights due to ground traffic, illness, etc.
 Because of this stochastic (random) nature of consumer demand, airlines
have offset the resulting loss of revenue by the practice of "overbooking"
 Overbooking

 Thus, if experience shows that Flight 147 has an average 15 percent no-
show rate on Thursdays,
 then the airline may actually sell 108 seats even though the aircraft only
has 100 seats.”
 This works fine for both airline and consumer if the actual number of "no-
shows” is the same or higher than the average.
 Sometimes, all the booked passengers show up, and some must be
diverted to other flights way due to a lack of seats.
 Prior to deregulation, carriers dealt with this "denied boarding" situation
using a "first come-first served" rule.
 However, the passengers who show up early tend to be those who are
more willing to shift to a later flight.
 Overbooking

 Business travelers, whose time is highly valued, tend to show up at the last
minute.
 Recently, airlines have been given some freedom to change the rule as to
which passenger will be denied boarding.
 While first come-first served remains the ultimate rule of last resort, they
first attempt to solicit volunteers to wait for the next flight.
 As incentives, they may offer volunteers free travel, discounted travel or
cash.
 This approach is generally acknowledged as being superior for all
concerned
 Overbooking

 Business travelers, whose time is highly valued, tend to show up at the last
minute.
 Recently, airlines have been given some freedom to change the rule as to
which passenger will be denied boarding.
 While first come-first served remains the ultimate rule of last resort, they
first attempt to solicit volunteers to wait for the next flight.
 As incentives, they may offer volunteers free travel, discounted travel or
cash.
 This approach is generally acknowledged as being superior for all
concerned
 The S-Curve Effect of Flight Frequency

 The importance of flight frequency as a key determinant of the consumer’s

choice of airline has been expressed by aviation economists in an S- curve.
 Figure 9 shows this phenomena.
 It shows that as a carrier adds flights in a market it can gain a
disproportionate share of total market traffic.
 The S-Curve Effect of Flight Frequency
 For example, in a two carrier market, the one with 60% of the flights may
receive 80% of the passengers.
 This phenomena is consistent with the earlier data on the importance of
schedule convenience in the consumer’s choice of carrier.
 This is especially important for the business traveler.
 The S-Curve Effect of Flight Frequency

 The power of the S-curve is further enhanced because the business

traveler also tends to pay higher airfares.
 Evidence suggests that business travelers account for two-thirds of
industry revenues.
 The S-curve effect may be an important factor in the strategic power of hub
and spoke systems.
 Hubs have considerable traffic generating power.
 As a hub carrier adds flights on a spoke, it will likely pick up increasing
portions of the traffic on the route, making it more difficult for a
competitor to maintain its share of the market.
 As this effect takes place on an increasing portion of the spokes from a
carrier’s hub, the carrier’s strength in the market becomes formidable.
 This phenomena is sometimes referred to as fortress hubs.
 Air Cargo

 Thus far, the demand for airline Services has been discussed only in the
context of passenger transportation.
 Carriers also provide significant amounts of cargo Services.
 Air Canada reported that cargo accounted for 11% of its 1989 revenues
while Canadian Airlines International’s cargo accounted for 8%.
 Just as passengers can be broken into two main market segments, cargo is
segmented into air freight and air express.
 Air express generally consists of small size shipments which are very time
sensitive.
 Air freight generally consists of larger size shipments, which are somewhat
less time sensitive.
 Air Cargo

 Air freight can be further divided into three submarkets:” a domestic price
sensitive market, a domestic service sensitive market, and an international
ransoceanic market.
 The price sensitive market consists of freight which can be easily diverted
to other modes, especially truck.
 This class of freight typically tolerates delivery times of one to two days.
 Unutilized aircraft is well suited to this type of cargo.
 As freight typically flies late in the day, it usually will not fly until the
following days passenger flights, with ultimate delivery between 24 and 48
hours.
 Air Cargo

 Such traffic can be priced on an incremental basis, as passengers generally

cover all the overhead costs of the flight.
 Belly space cargo revenues can represent a substantial increment to
passenger carrier profits.
 Further, airlines without cargo traffic bases, are at an important
competitive disadvantage.
 The smaller service sensitive domestic cargo market cannot wait for the
next day’s passenger flights, and requires dedicated cargo aircraft,
generally separating at night.
 Cargo too large to fit in bellyholds must also travel in dedicated cargo
aircraft. However, this traffic must be priced to cover the full stops of the
flight, and thus is very expensive.
 Air Cargo

 For inter-oceanic movements, longer delivery times are tolerated by the

dipper. The only competitive service is liner shipping which has very long
transit times.
 The large cargo carrying abilities of the typical transoceanic passenger
aircraft provide a reasonable amount of "space-available" lift which can be
incrementally priced.
 Dedicated cargo aircraft are also operated for the ore time sensitive
shipments.
 Sea-air combinations, which offer mid-range price and service option
between that of all-air and all-sea, are becoming more common.
 Air Cargo

 An example of a sea-air service would be movements of fashion apparel

from Asia to Europe.
 sea-air routing puts the goods on a liner ship from Asia to the West Coast
of North America (with rival times less than a week).
 At this point, the goods are trans-shipped to an aircraft destined for
Europe, providing total delivery times of less than ten days—which is very
attractive relative to a sea- air routing.
 Air express via a small and expensive market is highly service sensitive.
 The goods cannot wait until the next day’s passenger flights. Thus,
dedicated cargo aircraft flying overnight are required.
 While the costs of dedicated freighters is very high, the small size of
express packages results in attractive economics.
 Air Cargo

 For example, transporting a 90 kilogram passenger (including baggage,

carry-on luggage, meal service, etc.) one-way on a transcontinental
passenger movement will generate $200-$800 of revenue, depending on
whether the passenger is paying a discounted.
 The same 90 kilograms of lift could be used to transport 450 parcels of 200
grams each in one direction.
 At an average revenue of $8.00, the cargo revenue of $3,6000 is 4 to 18
times the passenger revenue.
 From this, the costs of local pick-up and delivery must be deducted, but the
bottom line is still attractive.
 The key to the air express market is the high willingness to pay for the
service, relative to the weight.
 Air Cargo

 Air freight (or passengers) generally does not have the same ability to pay
per 200 grams.
 Hub and spoke systems tend to be conducive to air express operations.
 However, cargo is not sensitive to backtracking, and thus a single multi-
directional hub works well for air express.
 Thus, an express package from San Diego to Seattle will likely travel via
Memphis.
 Passengers generally will not tolerate such circuity.
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