Air Transport Economics: From Theory to Applications, Fourth Edition
Bijan Vasigh and Brian Pearce
Contents
List of Figures vii
List of Tables xi
Preface to the Fourth Edition xiv
Foreword xv
Acknowledgments xvi
About the Authors xvii
1 Evolution of the Air Transport Industry 1
2 Principles of Economics with Applications in Air Transport 27
3 Supply, Demand, and Elasticity: Analysis in the Airline Industry 53
4 Cost and Production Analysis: The General Concepts 117
5 Competitive Market Structure and Monopolistic Markets 160
6 Hybrid Market Structure and the Aviation Industry 194
7 Forecasting in the Air Transport Industry 235
8 Dynamic Pricing Policy and Revenue Management 293
9 Ultra-Low-Cost and Low-Cost Airlines: Paradigm Shifts 341
10 Economics of Aviation Safety and Security 369
11 International Economics and Aviation 395
12 Air Traffic Liberalization and Global Alliances 430
13 Aviation Infrastructure: Operations and Ownership 456
14 Climate Change and the Contribution of Transport 481
List of Abbreviations 499
Glossary of Terms 501
Answers to Selected Questions and Problems 508
Index 525
Figures
1.1 World Airline Operating Profits (in Billions) 4
1.2 Cost Comparison between Ultra-Low-Cost, Low-Cost, and Legacy Carriers (CASM) 10
1.3 Evolution of US Airline Industry 13
2.1 GDP per Capita versus Passengers/Population, 2022 34
2.2 Annual Percent Change in CPI, 1987–2022 35
2.3 Historical Unemployment Rates, 1991–2022 38
2.4 Monthly Passenger Enplanements, 1996–2022 40
2.5 Scheduled Departures within the United States, 1991–2022 47
2.6 Fatality Rates per Million Aircraft Miles Flown, 1960–2020 49
3.1 Abstract Demand Curve for JFK–LAX Flight 57
3.2 Air Transport Passengers Carried per Population and GDP per Capita in USD 61
3.3 Observed Demand Curve for JFK–LAX Route 63
3.4 Observed Demand Curve for JFK–LAX Route: Omitting Four
Lowest Fare Classes 64
3.5 Conceptual Log-Linear Demand Curve 66
3.6 Change in Quantity Demanded for JFK–LAX Flight 68
3.7 Demand Curve (JFK to LAX) – Shift to the Right 69
3.8 Demand Curve – Shift to the Left 70
3.9 US Airline Industry Passenger Enplanements Since 1970 72
3.10 Seasonality of Passenger Enplanements, ORD to SEA and BOS to SFO 73
3.11 Demand for AA 75
3.12 The Hypothetical Demand for JetBlue Airways 75
3.13 The Hypothetical Demand for United Airlines 76
3.14 Market Demand for DAB–JFK 76
3.15 Supply Curve of JFK–LAX 85
3.16 Impact of Deregulation on Supply 86
3.17 Impact of Fuel Shortage on Supply 87
3.18 Price Movements: Average Fare Is Below Equilibrium 88
3.19 Spoilage and Spillage for DirectJet’s Flights from New York to Seattle 91
3.20 Shift of Demand Curve 92
3.21 Shift of Supply Curve 92
3.22 Movement of Both Supply and Demand Curves 93
3.23 Supply Shortage 95
3.24 Consumer and Producer Surplus at Equilibrium 97
3.25 Price Controls on Landing Fees in Airports 98
3.26 Price Controls: Floor and Ceiling 100
3.27 Airport under Bad Weather 101
3.28 Price Elasticity of the JFK–LAX Route 103
3.29 Pricing Decision Based on Elasticity 106
4.1 Disaggregated Cost Functions 124
4.2 Fixed Cost Function 127
4.3 Average Fixed Cost Function 127
4.4 Average Variable, Fixed, and Total Cost Function 128
4.5 Average and Marginal Cost Functions 128
4.6 Fixed Cost Function 130
4.7 Variable Cost Function 131
4.8 Total Cost Function 132
4.9 Average and Marginal Cost Functions 132
4.10 Hub-and-Spoke Route Network 136
4.11 Point-to-Point Route Network 136
4.12 US Airlines Fuel Efficiency (ASM per Gallon per Seat), 2022 142
4.13 US Airlines Average Stage Length, 2022 143
4.14 Correlation between Fuel Efficiency and Average Stage Length 143
4.15 Crew Costs per Block Hour, 2022 144
4.16 US Airline Maintenance Costs per Flight Hour 146
4.17 US Airlines Cost per Available Seat Mile Breakdown, 2022 148
4.18 US Airlines Per-Minute Cost of Delay 148
4.19 Breakeven Point (BEP) 153
4.20 Comparison of Actual and Breakeven Load Factors for US Airlines, 2022 154
5.1 Market Equilibrium, Short Run 165
5.2 Market Equilibrium, Firm 165
5.3 Market Equilibrium 167
5.4 Short-Run Loss in Perfect Competition 167
5.5 Industry 168
5.6 An Individual Firm 168
5.7 Industry Adjustment 169
5.8 Firm Adjustment 177
5.9 Profit Maximization for a Monopolist 178
5.10 Loss Scenario for a Monopolist 178
5.11 Equilibrium Price under Monopoly and Perfect Competition 179
6.1 Short-Run Equilibrium: Monopolistic Competitive Market 197
6.2 Progression of Demand Curve: Perfect Competition to Monopoly 198
6.3 Long-Run Equilibrium: Monopolistic Competitive Market 199
6.4 Market Share of the Top American Airlines, 1977–2022 205
6.5 Commercial Jet Engine Manufacturing Market Share by Engine Deliveries 207
6.6 Commercial Jet Engine Manufacturing Market Share by In-Service Engines 208
6.7 Price Competition and Market Reaction for Oligopoly 210
6.8 Kinked Demand Curve 211
6.9 Initial Output Decision for the Dominant Firm 212
6.10 First-Round Cournot Theory 213
6.11 Marginal Revenue and Marginal Cost Curves 216
6.12 Total Revenue, Cost, and Profit 216
7.1 Forecasting Methods 239
7.2 Sample Market Survey, Airport Passenger Intercept Questionnaire 241
7.3 Computing Average in Excel 248
7.4 Computing Variance in Excel 248
7.5 Computing Standard Deviation in Excel 249
7.6 Scheduled Revenue Passenger Miles, 2009–2022 251
7.7 Trendline for RPM: All US Airlines, 2009–2022 251
7.8 Scheduled Revenue Passenger Miles, Q1 2009–Q1 2022 253
7.9 Random Effect of COVID-19 on RPMs and ASMs 254
7.10 Graphical Representation of Trendline for the Time Series 262
7.11 Graphical Perfect Relationship between Consumption and Income 267
7.12 Graphical Strong Relationship between Consumption and Income 268
7.13 Weak Relationship between Consumption and Income, with Trendline 269
7.14 Residuals of the Regression Plotted against Time from Microsoft Excel 277
8.1 Consumer Surpluses under Uniform Pricing 303
8.2 Pricing Policy and Price Discrimination 310
8.3 Linear Demand Curve 312
8.4 Uniform Pricing for DirectJet Flight 313
8.5 Multiple Pricing for DirectJet Flight 313
8.6 Distinct Fare Control 319
8.7 Serial Nesting 319
8.8 Parallel Nesting 320
8.9 Actual Booking 321
8.10 Spillage (Rejected Demand) 321
8.11 Overbooking 322
8.12 Cumulative Probability Distribution for Fare Classes 1 and 2 323
8.13 Expected Marginal Seat Revenue ($500 and $400) 324
8.14 Optimal Booking Limit and Protection Level in Two Nested Fare Classes 325
8.15 Decision Tree 325
8.16 Optimal Booking Limit and Protection Level in Three Nested Fare Classes 329
8.17 Spoilage Costs 332
8.18 Overbooking Costs 332
8.19 Combined Overbooking and Spoilage Costs 333
9.1 LCC Seats to Total Seats, Worldwide 345
9.2 LCC Share vs NWC Share, Worldwide 346
9.3 LCC Market Share by Region, March 2022 346
9.4 Cockpit Costs per Block Hour, 2022 349
9.5 Aircraft Utilization (Block Hours per Day), 2021 356
9.6 Average Aircraft Stage Length in Miles, 2022 356
9.7 Correlations between Operating CASM and Aircraft Utilization, 2021 357
9.8 Correlation between Operating CASM and Departures per
Aircraft per Day, 2020 358
9.9 Correlation between Operating CASM and Fuel Efficiency, 2021 358
9.10 CASM, Airbus A320-200 Operators in the United States, 2006–2022 359
9.11 CASM Comparison between LCCs and Legacy Carriers 360
9.12 Average Departures per Aircraft per Day, 2020 362
10.1 US Fatalities per Billion Miles Traveled, 2022 373
10.2 Commercial Aircraft Accidents per Million Flight Hours in the United States 374
10.3 Number of Fatalities per 100 Million Aircraft-Miles 375
10.4 Commercial Aviation Fatality Rate per Million Aircraft Miles in the United
States with Five-Year Moving Average 375
10.5 Commercial Aircraft Hull Loss by Aircraft per Million Departures between
1959 and 2022 383
10.6 Commercial Jet Flight Exposure by Phase of Flight 386
10.7 Worldwide Commercial Accidents and Fatalities Categorized by Phase of Flight 386
10.8 Fatality Rate 387
10.9 Average Hull Losses per Million Flight by Region, 2013–2021 388
11.1 Current Account Balances, 1982–2021 399
11.2 World Merchandise Trade by Region (Percentage), 2022 402
11.3 Imports and Exports in the United States (in Million), 1970–2022 406
11.4 Production Possibility Curve 408
11.5 China/US Production Capabilities without Trade 410
11.6 China/US Production Capabilities with/without Trade 411
11.7 The Effects of International Trade Barriers on a Domestic Market 413
11.8 The Effects of Trade Quotas on a Domestic Market 414
11.9 Demand for Dollars Causes the Value of US Dollar to Rise, Exchange Rate Increases 421
11.10 Surplus in Dollars Causes the Value of US Dollar to Drop, Exchange Rate Decreases 421
12.1 Freedom of Air Passage 434
12.2 Oneworld Alliance Members, 2023 445
12.3 SkyTeam Alliance Members, 2023 446
12.4 Star Alliance Members, 2023 446
12.5 Global Airline Alliances: Countries Served as of 2022 448
12.6 Global Airline Alliances: Destinations Served as of 2021 448
12.7 Global Airline Alliances: Aircraft Fleet as of 2022 449
12.8 Concentration of 10 Global Airports by Alliance in Terms of Concentration 449
13.1 Short-Term Economic Effects of Air-Traffic Delay 459
13.2 The Cost of Delay with Inelastic Supply 460
13.3 Costs of Delay over Time 461
13.4 Market Reaction to Changes in Supply 462
13.5 Demand for Airport Services 468
13.6 Levels of Airport Privatiozation 473
14.1 Historic CO2 Emissions from Air Transport 483
14.2 Emissions and Climate Effects from Air Transport 484
14.3 A Measure of the Impact on the Climate of Air Transport Greenhouse Gas
Emissions 485
14.4 Comparing the SCC or Marginal Benefit with an Estimated Marginal
Abatement Cost Curve for Global Commercial Air Transport 487
14.5 An Example of Marginal Abatement Costs and Allowance Price in an ETS 491
14.6 An Example of the Gains from Trade in an ETS 491
14.7 The Costs of a Carbon Tax Compared to a Command and Control Regulation 492
Tables
1.1 World Airlines Passenger and Cargo Traffic, 2021 4
1.2 International Passengers and Cargo Traffic, 2021 5
1.3 Number of Aircraft in Service 6
1.4 Airport Passenger Traffic, 2021 6
1.5 Cargo Traffic at Major International Airports, 2021 7
1.6 Scheduled Airlines Financial Performance 9
1.7 Top 10 Airlines by Revenue, 2020 and 2021 10
1.8 US Airline Industry Domestic Market Share, 2004–2021 12
1.9a Major US Airports Concentration (with Enplanements by Operating Carrier) 15
1.9b Major US Airports Concentration (with Enplanements by Operating Carrier) 16
1.10 The Economic Impact of Selected Airports 22
1.11 Regional Economic Growth Forecast, 2019–2041 23
2.1 Hub Dominance before and after Deregulation: 1977, 2017–2021 48
3.1 Hypothetical Demand Schedule for JFK–LAX 56
3.2 Average Fares for Route JFK–LAX 63
3.3 Demand Schedule for JFK–LAX 69
3.4 Supply Schedule for New York to Los Angeles 84
3.5 Relation between Price Changes, Total Revenue, and Elasticity 107
3.6 Estimated Price Elasticities of Demand for Various Goods and Services 107
4.1 Average Cost and Revenue for US Airlines, 2022 118
4.2 Average Cost and Revenue for US Airlines, 2022 119
4.3 Cost Classifications 126
4.4 Cost Classifications 130
4.5 Effects of Operating Leverage on the Income Statement 139
4.6 Airline CASM Breakdown, 2021 141
4.7 US Airline Operating Leverage, 2022 155
5.1 Market Continuum 162
5.2 Total Revenue, Average Revenue, and Marginal Revenue 165
5.3 Airline and Airport Development Costs 174
5.4 Profit-Maximizing Price for Various Price Elasticities 179
6.1 Market Continuum 195
6.2 Aircraft Manufacturers’ Market Share (Deliveries) 206
6.3 Cournot Market Share Theory 213
6.4 Market Share of Car Rental Companies, 2022 224
6.5 Total US Airline Industry Output by Domestic ASM (Millions) 225
xii Tables 6.6 Four-Firm Concentration Ratio 226
6.7 US Domestic Airlines Herfindahl Index 227
6.8 US Airlines, Pre-Merger Market Share 228
6.9 US Airlines, Post-Merger Market Share 228
7.1 Advantages and Limitations of Qualitative Forecasting 240
7.2 Advantages and Limitations of Quantitative Forecasting 245
7.3 Scheduled Revenue Passenger Miles, All US Airlines 246
7.4 Variance Calculation of RPM, 2017–2021 247
7.5 Time-Series Data of Bookings for a DirectJet Flight 255
7.6 Three-Day and Five-Day Moving Average Forecasts 257
7.7 Three-Day Weighted Moving Average Forecast 258
7.8 Exponential Smoothing Forecasts with Two Different Smoothing Constants 259
7.9 Expanded Dataset for DirectJet 260
7.10 Mean Squared Error Calculation for Moving Average Forecasts 263
7.11 Mean Squared Error Calculation for Weighted Moving Average Forecasts 264
7.12 Mean Squared Error Calculation for Exponential Smoothing 264
7.13 MAD Calculation for Moving Average Forecasts 265
7.14 MAD Calculation for Weighted Moving Average Forecasts 265
7.15 MAD Calculation for Exponential Smoothing Forecasts 265
7.16 Dataset for Perfect Relationship between Consumption and Income 267
7.17 Dataset for Strong Relationship between Consumption and Income 268
7.18 Residual Values for Forecasts of Consumption 270
7.19 Coefficient of Determination Calculation 272
7.20 Dataset for Weak Relation between Consumption and Income 272
7.21 Dataset for Forecasting Demand for Orlando to Los Angeles Flight 274
7.22 SPSS Model Summary of Demand Forecast MCO-LAX 275
7.23 ANOVA for Demand Forecast for MCO-LAX from SPSS 278
7.24 SPSS Coefficients Significance for Demand Forecast, MCO-LAX 279
7.25 Correlation Matrix for Independent Variables from SPSS 281
8.1 Top Domestic City Pairs for Volatile Airfare Prices 294
8.2 Advantages and Disadvantages of Markup Pricing 296
8.3 Effect of Elasticity on Optimum Markup and Price 298
8.4 Consumer Surplus under Uniform Pricing 303
8.5 People Express’ Breakeven Load Factor, 1984–1986 315
8.6 Fare Class Restrictions 316
8.7 Fare Class Frequent Flyer Mileage Credit 317
8.8 Historical Demand for DirectJet’s Three Fare Classes 327
8.9 Mean and Standard Deviation 327
8.10 Optimal Booking Limit for DirectJet’s Three Fare Classes 328
8.11 Optimal Booking Limit and Protection Level in Three Nested Fare Classes 329
9.1 Low-Cost Carrier Capacity Share by Total Seats and Region, 2007–2021 344
9.2 Low-Cost Carrier Operating Revenue and Passenger Numbers, 2021 347
9.3 Select Airline Fleets as of September 2022 352
9.4 Common-Size Income Statement Comparison, LCC vs Legacy Carrier 361
10.1 Number of “Serious” Runway Incursions, 2017–2022 372
10.2 US Fatality Rates by Mode of Transportation, 2022 373
10.3 Safety Record of US Air Carriers 381
10.4 Fatalities by Occurrence Categories, Worldwide 2012–2022 382
11.1 Top 10 Exporters in World Merchandise Trade, 2020 400
11.2 Top 10 Importers in World Merchandise Trade, 2020 401
11.3 World Merchandise Exports by Region (Percentage), 1948–2020 401
11.4 World Merchandise Imports by Region (Percentage), 1948–2020 401
11.5 Top 15 US Trading Partners in 2021 ($Billions) 402
11.6 Production Possibilities 409
11.7 Opportunity Cost 409
11.8 China/US Comparative Production Possibilities 411
11.9 Production Costs without Trade 412
11.10 Production Costs with Trade 412
12.1 Global Airline Alliance Statistics 447
13.1 Largest Global Airport Groups 469
13.2 UAVs Classification According to the US Department of Defense 475