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A note on fares in regulated and deregulated airline markets
Transport Policy, Vol. 3, No. 3, pp. 1233125, 1996 Copyright 0 1996 Elsevier Science Ltd Printed in Great Britain. All rights reserved 0967-070X/96 $15.00 + 0.00
Pergamon S0967_070X(%)00014-5
A note on fares in regulated and deregulated airline markets A comparison of Spain and the UK*
0 Betancor University 35017,
of Las Palmas
Canary
Islands,
Departamento
de Economia
Aplicada
15 Stratford
Place,
Saul0
Toron 4, Tafira Baja, Las Palmas de G.C.
Spain
JD Jorge-Calderh National
Economic
Research
Associates,
London
WlN
9AF,
UK
This note reports on a comparison of fares policy in international scheduled airline passenger services between deregulated markets in the UK and regulated markets in Spain, for the period extending from 1986 to 1991. The comparison looks at the range of fare types available; the extent to which fare types are made available across routes; and the discount rate for selected fare types. The methodology used to compare fare levels controls for exogenous factors such as differing distances and trafftc densities. The study concludes that whereas the discounts offered for particular fare types need not he greater in deregulated markets, these markets display a wider range of available discounts. The likely resulting effect is that yields (revenue per passenger) are lower in deregulated markets. Copyright 0 1996 Elsevier Science Ltd Keywords: airline,
fares
In 1993, the third and final European Union (EU) package of deregulatory measures was introduced, aimed at achieving a free market in air transport within the Union’s borders by 1997. Other previous experiences, particularly that of the USA, had shown that this type of reform increases consumer welfare through the availability of a wider range of pricequality combinations in the airline product. Within the European Union, some countries had liberalised some of their international markets, to differing extents, by re-drafting their bilateral air service agreements with other nations, a movement pioneered by the UK and the Netherlands in 1985 (Caves and Higgins, 1993). These liberalisations led to changes in the key price and
quality variables, affecting the range of products available to consumers. This note draws on this early experience of deregulation in Europe, and reports on the extent to which liberalised markets reflect different pricing patterns than markets under regulated environments. A comparison is made between the most liberal UK bilaterals-those with the Netherlands and Belgium’and a set of international intra-European routes from Spain. The exercise is carried out over a period extending from 1986, when deregulation in the two British markets was well in place, to 1991, the last year for which data are available.* The appendix includes details on the sample and data sources.
*The results reported in this article are taken ‘Efectos de la desregulacion del transporte Herce and G. de Rus (ed.) La regulacidn de FEDEA; Civitas: Madrid, 1996. The authors Gin& de Rus from the University of comments.
‘The markets to Ireland and Luxembourg attained similar levels of liberalisation. However, these are left out due to data insufficiencies. ‘During this time period some relaxation was introduced in the Spanish routes through the two EC multilateral liberalising packages of 1987 and 1990. However, tight limits were still in place regarding the extent to which capacity and pricing could be altered.
from the research project aereo en Espafia’ in J.A. 10s transportes en Esparia. are grateful to Professor Las Palmas for helpful
123
Regulated and deregulated airline markets: 0 Betancor and J D Jorge-Calderdn
Comparison of fares patterns Pricing policies can, in principle, be compared along four different dimensions: the range of fare types marketed; the proportion of routes in which each type of fare is made available; the actual price discount offered in such fares; and the extent to which each fare type has been made available to the public, as proxied by the number of seats offered under each type of fare. Studying this latter element, however, would require access to data which is not made readily available by airlines because of its strategic value. The comparison is therefore restricted to the first three. Regarding the range of fare types offered, it was found that deregulated markets performed considerably better than the Spanish markets. This is illustrated in Table 1, which displays a cross-sectional comparison of the range of restricted fares offered in each of the routes included in the analysis as in November 1991, the latest year in the sample. The table shows the maximum discount over the unrestricted economy fare offered for each fare type. As discussed below, no significant differences were found on the price of the unrestricted economy fare between regulated and deregulated markets. Spanish routes have a maximum of three different types of discount fares, which compares with up to six in deregulated routes, on which in no case are there less than three on offer. Moreover, one additional aspect not shown in the table is that, whereas on the Spanish routes each fare type is offered at the same discount across all airlines in the route, in the deregulated routes there is some variation across competing airlines. Hence the effective number of options open to passengers in deregulated markets is actually greater than that suggested in Table 1. Table I Restricted
fare availability,
included
as percentage
of discount
PX
spx
ex
50
51 54 55 53
40 36 31 36 34
68 62
34 40
Barcelona-Lyon Barcelona-Marseille Barcelona-Milan Barcelona-Nice Madrid-Bordeaux Madrid-Lisbon Madrid-London Madrid-Paris
49 55 49 48 46 64 53
London-Amsterdam London-Brussels Leeds-Amsterdam Manchester-Amsterdam Manchester-Brussels Tees Side-Amsterdam
53 46 47 50 31 50
59 59 63 62
31
60
31
To make the remaining two comparisons-the proportion of routes on which the fare is made available, and the actual discounts offered for a given fare type-the exercise focused on the unrestricted economy, pex and superpex fares, as these were widely available in both regulated and deregulated markets, enabling a direct comparison. Regarding availability across routes, it was found that, for the whole sample, the unrestricted economy fare was available on all markets, regulated or not. As for the two discounted fares, liberalised markets performed better. Pex fares were available in 100% of observations in deregulated markets, and in 91.6% in regulated ones. For the Superpex fares the figures were 86.1% and 33.3%, respectively. The third dimension for comparison, the actual price of the fares, was studied through econometric analysis. Regressions were run for each fare type on a dummy variable distinguishing regulated from deregulated markets. Other independent variables included were the distance, controlling for the effect on fares through distance-related costs; traffic volumes and load factors, both controlling for economies of density on the route. Initial estimations, not reported here, showed that there was no significant difference between regulated and deregulated markets on the unrestricted economy fare. The discounted fares are defined by the percentage of discount compared with the unrestricted economy fare, and observations where the fare type modelled was not marketed are excluded (i.e. there are no 0% discount observations). The regressions were run on a semi-log specification, in which the quantitative (i.e. non-dummy) explanatory variables are defined as logs and the dependent variable linearly. over the unrestricted
economy
fare, as in November
eb
ve
ws
ip
31 19 16 15 16 II5
56 67 68
62
44
apx
63
57 68
Notes: PX: ‘Pex’. Full payment when booking. Spend Saturday night abroad. Limits on number of days away. SPX: ‘Superpex’. Similar to PEX, but usually with restrictions on combining with other trips. EX: ‘European Excursion’. Spend Saturday night abroad. EB: ‘Eurobudget’. Full payment when booking. VE: ‘Visit Europe’. Full payment when booking and limits on the number of days abroad. WS: Weekend fare. IP: ‘IPEX’. Booking must be made the last working day previous to departure. Full payment when booking. APX: ‘European APEX’. Reservation must be made 14 days before departure. Full payment when booking. Spend Saturday night abroad. Source: ABC World Airline Guide, November 1991. 124
1991
Limits on the number
of days abroad.
Regulated Table 2 Results of regressions
of Pex and Superpex
fares
Variable
Pex Coeff.
t-ratio
Superpex COeff.
t-ratio
Constant Distance Traffic L factor Regulation Observations R-Sqrd. Adj.-R-Sqrd. F (4, 61) F (4, 30)
-11.12 5.88 0.06 2.26 12.32
-0.41 2.11 0.10 0.35 5.37
-16.96 2.85 2.70 4.94 5.61
-0.63 0.94 4.27 0.76 2.12
66 0.66 0.56 22.01
35 0.57 0.51 10.14
The results are reported in Table 2. It was found that discounts were larger on the Spanish routes for pex, by 12.3 percentage points, and on the superpex by 5.61 percentage points. These results are in contrast with the other two previous comparisons in the comparative exercise, in which deregulated markets out-performed those subject to regulation.
Summary and conclusions The comparative analysis of fares in regulated international European in Spain and markets deregulated in the UK has shown that there is scope for lower yields (revenue per passenger) in a deregulated environment. But interferences about this magnitude can only be made indirectly, through the observation of published fares. Deregulated airline markets do not necessarily bring about higher discounts on specific types of fares. In fact, the results here reported show that discounts were significantly greater in regulated markets. The difference between regulated and deregulated environments centre on the
and deregulated
airline markets:
0 Betancor and J D Jorge-Calderdn
overall availability of discounted fares, as determined by both the number of fare types marketed, and the number of markets in which discounted fares are made available. This phenomenon points in the direction of a higher number of seats offered at a discount in deregulated markets, although the data used do not permit an unequivocal conclusion on this issue.
References Betancor, 0. and Jorge-Calderon, J.D. (1996) ‘Efectos de la desregulacion del transporte aereo en Espafia, in Herce, J.A. and de Rus, G. La regulacidn de 10s transportes en Esparia, FEDEA, Editorial Civitas, Madrid. Caves, R. and Higgins, C. (1993)‘The consequences of the liberalized UK-Europe bilateral air service agreement’, International Jounal of Transport Economics, 20(I) 3-25. Hsiao, C. (1986) Analysis of Panel Data, Cambridge University Press, Cambridge.
Appendix Sample and data sources The sample includes a total of 14 routes (those included in Table 1) over 6 years. Data on fares were obtained from the ABC World Airline Guide. For each year, November published fares were taken, which avoid the summer and Christmas traffic peaks. All fares were deflated to constant 1986 pesetas. UK fares were converted into pesetas at November exchange rates. Data on yearly traffic and load factors were obtained from the ‘Traffic by Flight-Stage Survey’ published annually by the International Civil Aviation Organization. Only traffic from airlines which were members of any of the countries at each end of the route were considered, since third country airlines would carry mainly transfer traffic.
125
Pergamon S0967_070X(%)00014-5
A note on fares in regulated and deregulated airline markets A comparison of Spain and the UK*
0 Betancor University 35017,
of Las Palmas
Canary
Islands,
Departamento
de Economia
Aplicada
15 Stratford
Place,
Saul0
Toron 4, Tafira Baja, Las Palmas de G.C.
Spain
JD Jorge-Calderh National
Economic
Research
Associates,
London
WlN
9AF,
UK
This note reports on a comparison of fares policy in international scheduled airline passenger services between deregulated markets in the UK and regulated markets in Spain, for the period extending from 1986 to 1991. The comparison looks at the range of fare types available; the extent to which fare types are made available across routes; and the discount rate for selected fare types. The methodology used to compare fare levels controls for exogenous factors such as differing distances and trafftc densities. The study concludes that whereas the discounts offered for particular fare types need not he greater in deregulated markets, these markets display a wider range of available discounts. The likely resulting effect is that yields (revenue per passenger) are lower in deregulated markets. Copyright 0 1996 Elsevier Science Ltd Keywords: airline,
fares
In 1993, the third and final European Union (EU) package of deregulatory measures was introduced, aimed at achieving a free market in air transport within the Union’s borders by 1997. Other previous experiences, particularly that of the USA, had shown that this type of reform increases consumer welfare through the availability of a wider range of pricequality combinations in the airline product. Within the European Union, some countries had liberalised some of their international markets, to differing extents, by re-drafting their bilateral air service agreements with other nations, a movement pioneered by the UK and the Netherlands in 1985 (Caves and Higgins, 1993). These liberalisations led to changes in the key price and
quality variables, affecting the range of products available to consumers. This note draws on this early experience of deregulation in Europe, and reports on the extent to which liberalised markets reflect different pricing patterns than markets under regulated environments. A comparison is made between the most liberal UK bilaterals-those with the Netherlands and Belgium’and a set of international intra-European routes from Spain. The exercise is carried out over a period extending from 1986, when deregulation in the two British markets was well in place, to 1991, the last year for which data are available.* The appendix includes details on the sample and data sources.
*The results reported in this article are taken ‘Efectos de la desregulacion del transporte Herce and G. de Rus (ed.) La regulacidn de FEDEA; Civitas: Madrid, 1996. The authors Gin& de Rus from the University of comments.
‘The markets to Ireland and Luxembourg attained similar levels of liberalisation. However, these are left out due to data insufficiencies. ‘During this time period some relaxation was introduced in the Spanish routes through the two EC multilateral liberalising packages of 1987 and 1990. However, tight limits were still in place regarding the extent to which capacity and pricing could be altered.
from the research project aereo en Espafia’ in J.A. 10s transportes en Esparia. are grateful to Professor Las Palmas for helpful
123
Regulated and deregulated airline markets: 0 Betancor and J D Jorge-Calderdn
Comparison of fares patterns Pricing policies can, in principle, be compared along four different dimensions: the range of fare types marketed; the proportion of routes in which each type of fare is made available; the actual price discount offered in such fares; and the extent to which each fare type has been made available to the public, as proxied by the number of seats offered under each type of fare. Studying this latter element, however, would require access to data which is not made readily available by airlines because of its strategic value. The comparison is therefore restricted to the first three. Regarding the range of fare types offered, it was found that deregulated markets performed considerably better than the Spanish markets. This is illustrated in Table 1, which displays a cross-sectional comparison of the range of restricted fares offered in each of the routes included in the analysis as in November 1991, the latest year in the sample. The table shows the maximum discount over the unrestricted economy fare offered for each fare type. As discussed below, no significant differences were found on the price of the unrestricted economy fare between regulated and deregulated markets. Spanish routes have a maximum of three different types of discount fares, which compares with up to six in deregulated routes, on which in no case are there less than three on offer. Moreover, one additional aspect not shown in the table is that, whereas on the Spanish routes each fare type is offered at the same discount across all airlines in the route, in the deregulated routes there is some variation across competing airlines. Hence the effective number of options open to passengers in deregulated markets is actually greater than that suggested in Table 1. Table I Restricted
fare availability,
included
as percentage
of discount
PX
spx
ex
50
51 54 55 53
40 36 31 36 34
68 62
34 40
Barcelona-Lyon Barcelona-Marseille Barcelona-Milan Barcelona-Nice Madrid-Bordeaux Madrid-Lisbon Madrid-London Madrid-Paris
49 55 49 48 46 64 53
London-Amsterdam London-Brussels Leeds-Amsterdam Manchester-Amsterdam Manchester-Brussels Tees Side-Amsterdam
53 46 47 50 31 50
59 59 63 62
31
60
31
To make the remaining two comparisons-the proportion of routes on which the fare is made available, and the actual discounts offered for a given fare type-the exercise focused on the unrestricted economy, pex and superpex fares, as these were widely available in both regulated and deregulated markets, enabling a direct comparison. Regarding availability across routes, it was found that, for the whole sample, the unrestricted economy fare was available on all markets, regulated or not. As for the two discounted fares, liberalised markets performed better. Pex fares were available in 100% of observations in deregulated markets, and in 91.6% in regulated ones. For the Superpex fares the figures were 86.1% and 33.3%, respectively. The third dimension for comparison, the actual price of the fares, was studied through econometric analysis. Regressions were run for each fare type on a dummy variable distinguishing regulated from deregulated markets. Other independent variables included were the distance, controlling for the effect on fares through distance-related costs; traffic volumes and load factors, both controlling for economies of density on the route. Initial estimations, not reported here, showed that there was no significant difference between regulated and deregulated markets on the unrestricted economy fare. The discounted fares are defined by the percentage of discount compared with the unrestricted economy fare, and observations where the fare type modelled was not marketed are excluded (i.e. there are no 0% discount observations). The regressions were run on a semi-log specification, in which the quantitative (i.e. non-dummy) explanatory variables are defined as logs and the dependent variable linearly. over the unrestricted
economy
fare, as in November
eb
ve
ws
ip
31 19 16 15 16 II5
56 67 68
62
44
apx
63
57 68
Notes: PX: ‘Pex’. Full payment when booking. Spend Saturday night abroad. Limits on number of days away. SPX: ‘Superpex’. Similar to PEX, but usually with restrictions on combining with other trips. EX: ‘European Excursion’. Spend Saturday night abroad. EB: ‘Eurobudget’. Full payment when booking. VE: ‘Visit Europe’. Full payment when booking and limits on the number of days abroad. WS: Weekend fare. IP: ‘IPEX’. Booking must be made the last working day previous to departure. Full payment when booking. APX: ‘European APEX’. Reservation must be made 14 days before departure. Full payment when booking. Spend Saturday night abroad. Source: ABC World Airline Guide, November 1991. 124
1991
Limits on the number
of days abroad.
Regulated Table 2 Results of regressions
of Pex and Superpex
fares
Variable
Pex Coeff.
t-ratio
Superpex COeff.
t-ratio
Constant Distance Traffic L factor Regulation Observations R-Sqrd. Adj.-R-Sqrd. F (4, 61) F (4, 30)
-11.12 5.88 0.06 2.26 12.32
-0.41 2.11 0.10 0.35 5.37
-16.96 2.85 2.70 4.94 5.61
-0.63 0.94 4.27 0.76 2.12
66 0.66 0.56 22.01
35 0.57 0.51 10.14
The results are reported in Table 2. It was found that discounts were larger on the Spanish routes for pex, by 12.3 percentage points, and on the superpex by 5.61 percentage points. These results are in contrast with the other two previous comparisons in the comparative exercise, in which deregulated markets out-performed those subject to regulation.
Summary and conclusions The comparative analysis of fares in regulated international European in Spain and markets deregulated in the UK has shown that there is scope for lower yields (revenue per passenger) in a deregulated environment. But interferences about this magnitude can only be made indirectly, through the observation of published fares. Deregulated airline markets do not necessarily bring about higher discounts on specific types of fares. In fact, the results here reported show that discounts were significantly greater in regulated markets. The difference between regulated and deregulated environments centre on the
and deregulated
airline markets:
0 Betancor and J D Jorge-Calderdn
overall availability of discounted fares, as determined by both the number of fare types marketed, and the number of markets in which discounted fares are made available. This phenomenon points in the direction of a higher number of seats offered at a discount in deregulated markets, although the data used do not permit an unequivocal conclusion on this issue.
References Betancor, 0. and Jorge-Calderon, J.D. (1996) ‘Efectos de la desregulacion del transporte aereo en Espafia, in Herce, J.A. and de Rus, G. La regulacidn de 10s transportes en Esparia, FEDEA, Editorial Civitas, Madrid. Caves, R. and Higgins, C. (1993)‘The consequences of the liberalized UK-Europe bilateral air service agreement’, International Jounal of Transport Economics, 20(I) 3-25. Hsiao, C. (1986) Analysis of Panel Data, Cambridge University Press, Cambridge.
Appendix Sample and data sources The sample includes a total of 14 routes (those included in Table 1) over 6 years. Data on fares were obtained from the ABC World Airline Guide. For each year, November published fares were taken, which avoid the summer and Christmas traffic peaks. All fares were deflated to constant 1986 pesetas. UK fares were converted into pesetas at November exchange rates. Data on yearly traffic and load factors were obtained from the ‘Traffic by Flight-Stage Survey’ published annually by the International Civil Aviation Organization. Only traffic from airlines which were members of any of the countries at each end of the route were considered, since third country airlines would carry mainly transfer traffic.
125